CHAPTER 2

UNIT 6: PUBLIC FINANCE

- Public Finance refers to important financial decisions of the Government: how
to best raise and spend the Government budget.
- Income taxes are taxes paid by individuals
- Payroll taxes are taxes paid jointly by workers and employers
- Corporate income taxes are taxes paid by businesses
1. Major revenue sources for the US government budget
Main sources of government revenue are from taxation and borrowing.
First, Government revenue comes from many different kinds of taxes. The
three main sources are individual income taxes, payroll taxes and corporate
income taxes. And there are also a handful of other types of taxes like customs
duties and excise taxes
In addition, government revenue also comes from borrowing. This
borrowing is mainly achieved through issuing and selling bonds by the US Gov.
2. Federal Fund; Trust Fund
+ Federal funds are general revenues, meaning Congress and the President
can decide to spend them on just about anything when they conduct the annual
appropriations process
+ Trust funds are generated from payroll taxes. They are used for specific
programs such as Social security and Medicare
3. 2 kinds of the US government borrowings/public debts
They are debt held by federal accounts and debt held by the public.
Debt held by federal accounts is the amount of money that the US Treasury
borrows from surplus of Trust Funds.
Debt held by the public is the total amount the government owes to all of
its creditors in the general public. That includes international and domestic
investors, state and local governments, Federal Reserve and others.
------------------------------------------------------------------------------------------------
1.Public finance/be/concerned/how/government/ raise/ and spend/money
Public finance is concerned with how government raises and spends money
2.Trust funds/ be/use/pay/specific program/social security/medicare
Trust funds can be used to pay for specific programs such as social security and
Medicare
3.the Treasury/borrow/money/sell/ bond/ other/ type/securities
The Treasury borrows money by selling bonds and other types of securities.
UNIT 7: FISCAL POLICY
1. Fiscal policy? Its effect on the economy?
Fiscal policy is a macroeconomics policy. It involves the government's use
of spending and taxation to influence the economy.
Fiscal policy is a macroeconomics policy related to taxation and public
spending.
Government spending and taxation directly affect the overall performance
of the economy. For example, if the government increases spending to build a
new highway, construction of the highway will create jobs. Jobs create income
that people spend on purchase, and the economy tends to grow.
The opposite happens when the government increases taxes. Households
and businesses have less of their income to spend, they purchase fewer goods,
and the economy tends to shrink.
This policy aims to: promote economic growth, reduce unemployment,
and control inflation. For example, increasing government expenditure can create
jobs and stimulate AD, while raising taxes can restrict demand and cool an
overheating economy.
Fiscal policy also plays an important role in reallocating resources and
redistributing income within the economy.
2. Deficit spending? Is it helpful or harmful? Why?
C1: Deficit means when the Gov. spends more than receives.
C2: Deficit is the amount by which expenditures exceed revenues.
C3: Deficit spending happens when the government spends more than it
collects in revenue, often financed by borrowing or printing money.
C4: Deficit spending occurs when government expenditures exceed revenue.
And It is both helpful and harmful. It can be helpful for the economy when
unemployment is high, the government can undertake projects that use idle
workers. However, It is harmful for the economy when unemployment is low, a
deficit may result in rising prices or inflation.
3. Expansionary/ Contractionary fiscal policy? Their differences?
Expansionary, or loose, fiscal policy involves reducing taxation and
increasing public spending. It is used when unemployment is high or the economy
is slowing down. Its purpose is to push up economic growth, raise AD and create
more jobs.
While Contractionary, or tight, fiscal policy involves increasing taxation
and reducing public spending. It is used when inflation is high or the economy is
overheating. Its purpose is to cool the overheating economy, restrict demand and
control inflation

Expansionary: Contractionary

A fiscal policy is expansionary when A fiscal policy is contractionary

government spending is increased or when government spending is
taxation is reduced. reduced or taxation is increased

An expansionary fiscal policy should A contractionary fiscal policy should

be used when unemployment is high be used when inflation is high.
or the economy is slowing down.

It is used for pushing up economic It is used to cool the overheating

growth; raising AD and creating more economy; restrict demand and control
jobs. inflation.

4. The factors affecting fiscal policy decisions: Inside factor? Outside factor?
Inside factors influencing fiscal policy include macroeconomic indicators,
such as economic growth, inflation, unemployment, and the balance of payments,
government revenue sources, such as taxation, borrowing, and money printing,...
and Political considerations, such as public reaction or the role of Gov.
For instance, low economic growth or rising unemployment may prompt
the government to adopt an expansionary fiscal policy.
Additionally, revenue sources, such as taxation, borrowing, and money
printing, determine the government’s capacity to implement its fiscal measures.
Political considerations, such as public reaction or the role of Gov., can
also influence fiscal decisions, leading governments to prioritize popular policies
even if they are not always the most economically efficient.
Outside factors influencing fiscal policy include global economic
conditions, the fiscal policies of other countries, and international commitments
(IMF, WB, WTO, ASEAN,...).
 For example, if a major trading partner has a recession, the government
might spend more money to help with lower exports.
Commitments to organizations such as the IMF or WTO may also require
fiscal adjustments.
Additionally, external shocks, such as pandemics, natural disasters, or
geopolitical events, can force governments to prioritize emergency expenditures,
even if they result in higher deficits.
UNIT 8: TAXATION
Concepts:
- Tax evasion is illegal way of reducing tax payment
- Tax avoidance is legal way of reducing tax payment
- Tax - deductible refers to expenses that are allowed to be taken off the total
amount of taxable money.
- Tax havens/heavens are countries and places where people and company enjoy
low taxes
- Tax shelter is a way of using or investing money to avoid paying taxes on it.
- Progressive tax is the tax imposed at a higher rate on higher incomes
- Regressive tax is the tax imposed at a higher rate on lower incomes / A
regressive tax is a tax that takes a larger percentage of income from low-
income earners than from high-income earners.
- Capital gain tax is the tax imposed on profits made by selling assets.
- Customs duty is the tax imposed on imports or exports
- VAT= Value added tax is a kind of sales tax added to the prices of goods and services.
- Personal income tax is the tax imposed on income of individuals
- Corporate income tax is the tax imposed on income of company
- Excise tax is the tax imposed on some specific (harmful or luxury) goods to
limit their consumption or import.
- Direct tax, such as income or property tax, is the tax imposed directly on the
taxpayers.
- Indirect tax is the tax imposed on goods as addition to the market price paid by
consumers.
1. Functions of taxation
Taxes serve as an important tool for macroeconomic regulation There are many
functions of taxes. First,.... Second/Then/Additionally/Moreover,.... Finally,.
• Raise funds for Gov. spending, serve as the main source of the Gov. budget revenue.
• Redistribute wealth in the society, ensure social equality, reduce the gap between the
rich/poor
• Control supply & demand, production & consumption in the market, stabilize prices,
control inflation.
• Encourage or discourage investments in certain industries, adjust allocation of scarce
resources, regulate AD
• Affect foreign trade (raise export & limit import), ensure the balance of trade, protect
national production.
 2. Disadvantages of tax system
The tax system has three main disadvantages: double taxation, high marginal tax
rate and regressive sales tax.
Double taxation occurs when/ refers to a phenomenon where/ in which
business profits are generally taxed twice: companies pay tax on their profits and
the shareholders pay income tax on dividends.
High marginal tax rate means that the tax people pay on additional income
is always high, which discourages people from working and investing
Regressive sales rate is a tax that takes a larger percentage of income from
low-income earners than from high-income earners. Most sales taxes are slightly
regressive because poorer people need to spend a larger proportion of their
income on consumption than the rich.
3. Ways of tax avoidance by individuals / companies
- Ways of tax avoidance by individuals
• Employers pay more perquisites/perks/benefits for staff instead of taxable
money
• Individuals choose to live and work in tax heavens
• Making use of tax loopholes, tax shelters and tax deductible
• Doing charity
- Ways of tax avoidance by companies
• Making use of tax loopholes, tax shelters and tax deductible
• Doing charity
• Raising and bringing forward capital expenditure to reduce profits
• Using accelerated depreciation accounting
• Setting up head-offices in tax heavens
4. Ways of avoiding tax on salary/profit
- Ways of avoiding tax on salary
- To reduce income tax liability, some employers give highly-paid
employees lots of “perks” (short of perquisites) instead of taxable money, such
as company cars, free health insurance, and subsidized lunches.
- Life insurance policies, pension plans and other investments by which
individuals can postpone the payment of tax, are known as tax shelters.
- Donations to charities that can be subtracted from the income on which
tax is calculated are described as tax-deductible.
 - Ways of avoiding tax on profit
Companies can bring forward capital expenditure (on new factories,
machines, and so on) so that at the end of the year all the profits have been used
up; this is known as tax loss.
Multinational companies often set up their head offices in countries such
as Monaco, the Cayman Islands, and the Bahamas, where taxes are low; such
countries are known as tax heavens/ havens.

5. Ways of tax evasion

There are some ways of tax evasion. First,.. Second,... Finally,...
• Making wrong income declaration by undeclaring or underdeclaring taxable
income (esp. self-employed people as it's difficult to control their incomes)
• Making wrong accounting records and tax return
• Smuggling and trade fraud
• Laundering money
UNIT 10: INSURANCE
- Insurance in financial definition is a financial agreement that
redistributes the cost of unexpected losses.
- The insurance agreement involves the transfer of many different
exposure to loss to one insurance pool.
- Premium is the amount of money an insurer charges to provide coverage.
- Compensation is the amount of money the insurer pays to the insurer in
the event of loss.
1. Activities of insurance
INSURANCE – RIGHT&RESPONSIBILITY
The insured The insurer
- Take out/join/buy insurance - Offer/provide/sell insurance
- Pay insurance premium - Collect insurance premium
- In case of risks, send claim to the insurer - Settle the claim, pay compensation

The insurance system operates by collecting premiums from participants

and promising compensation if losses occur. It predicts losses in advance and
insures both corporate and private assets. The system redistributes the costs of
losses because very few insured individuals suffer unexpected losses. It also plays
a vital role in controlling losses and managing risks. Additionally, the insurance
system uses insurance pools for lending, buying securities, and investments to
meet the demand for funds.
=> • Play important role in loss control and risk management
• Use insurance pool to satisfy the demand for funds (by lending, buying
securities, investing)
• Collect insurance premiums, set up insurance pool; pay compensation in
case of risks, redistribute the costs of losses
• Predict losses in advance
• Insure corporate and private assets
2. Importance of insurance
Insurance enables the insured to cover financial losses. When people join
the insurance system, they are compensated if losses actually occur. Additionally,
insurance provides peace of mind by eliminating the anxiety of potential losses,
even when no loss happens during the year. It also supports individuals and
businesses by reducing emergency funds, creating opportunities for investments
and profits. Furthermore, insurance limits risks for both insurers and insured,
helping to reduce economic waste. Lastly, it mobilizes idle funds in the economy,
making them available for productive use.
=> • Provide the insured the peace of mind
• Support people and firms by reducing the funds for emergency, raising
chance for investments and profits
• Enable the insured to cover the financial losses
• Limit risks, (which benefits both the insurer and the insured), reduce
economic wastes
• Mobilize idle funds in the economy
→ Existence of INSURANCE SYSTEM is essential for any successful economy