Fiscal Policy

&
Tax System
 Fundamental Issues of
Fiscal Policy
 Fiscal policy refers to government actions that
affect total government spending, tax rates and
revenues, and the government budget surplus or
deficit.
 Therefore, the overall management of
Government’s revenue and expenditure is
fundamentally guided by the fiscal policy.
Questions:
 Why does government spend and impose taxes in
the economy?
 What are the types of tax and distribution of tax?
 What are the components of government
spending?
 What are the types of budget and the size of
budget?
 What Fiscal Policy Does?
 Fiscal policy determines the level of public revenue
and public expenditure and directs the measures
required to maintain balance between the two.
 Formulation and implementation of a sound fiscal
policy is one of the most important functions of the
government.
 It lays emphasis on maintaining macroeconomic
stability through harmonizing public expenditure
management.
 Sound fiscal policy is also fundamental to fostering
economic growth.
 Why the Government Spending?
 Government direct provision
 Government creates and maintains public
goods
 Provide welfare supports
 Provide supports for the low income
households or unemployed people.
 Redistribution of income
 Government spend for the development of
poor households that reduce the scale of
relative poverty
 Control of Aggregate demand
 Government spending (G) is used as a tool to
control the Aggregate Expenditure or indirectly
the AD.
FISCAL Policy :Bangladesh
Fiscal Policy can be divided into two broad
categories
 Government Revenues
 Public Expenditure
In Bangladesh Government Revenue can also be
divide into two broad categories:
 Tax Revenue and
 Non-Tax Revenue
Revenue Management :
Formulation of tax policy and its execution
responsibilities are performed by the National
Board of Revenue (NBR) under the Internal
Resource Division.
FISCAL Policy :Bangladesh
Public Expenditure management is an integral part of fiscal
management. Total public expenditure includes:
 Non-development Expenditure: Expenditures in the
nature of consumption such as Defense, interest payments,
expenditure on law and order, public administration, do not
create any productive asset which can bring income or returns
to the government are non-development expenditure.
Development Expenditure : All expenditures that promote
economic growth and development are termed as
development expenditure.
Expenditure on infrastructure development, public enterprises
or development of agriculture increase productive capacity in
the economy and bring income to the government.
:
Development Expenditure :ADP
Annual Development Programme (ADP) is an
organised list of projects in various sectors and
allocations for them for a year out of a five-year
plan period for implementation of the government's
development policies, programmes and investments
in the plan.
The ADP is prepared on the basis of the year's
development BUDGET approved by the parliament.
While preparing an ADP, fields and projects related
to national economic development get more priority
and concentration. Funds are allocated to
implement development projects included in the
ADP.
The planning commission formulates the ADP of the
government of Bangladesh in the light of basic
objectives and goals stated in a Five-Year Plan.
Development
Expenditure :ADP
 The draft is then placed for the approval of
the Executive Committee of the National
Economic Council (ECNEC).
 Both internal (domestic) and external (aid)
funds are used to finance projects. Potential
availability of funds often becomes a major
consideration in preparing the ADP, which
has historically remained dependent upon
FOREIGN AID.
 Current ADP Projects include: Padma Malti-
purpose Bridge, Ruppur Nuclear Power Plant,
Dhaka-Chittagong 4 lane Highway etc.
THREE COMPONENTS OF GOVERNMENT
SPENDING
 Current Government Spending
 Government spend on the state-provided goods
and services like health, education, etc.
 Government employee wages
 Purchases of goods/ services from private sector
 Capital Spending
 Government spend on infrastructural
development on building new roads, hospital,
prison cells, etc.
 Transfer Payment
 Government spend for the welfare of the
recipients such as Subsidy, Freedom Fighter’s
pension scheme, etc.
 Government pay without taking any goods/
services
What is a Budget?
 A government budget is a government document
presenting the government's proposed revenues and
spending for a financial year that is often passed by the
legislature, approved by the chief executive or president
and presented by the Finance Minister to the nation.
 A plan for how the government spends our money
 Based on Needs, priorities, estimates
 A plan for how the government will pay for its activities
 Based on Estimates and impacts
 Budgeting as a rational means to provide for the efficient,
effective, and equitable distribution of the nation’s wealth
to achieve publicly desired purposes.
 The Budget of Bangladesh is prepared by the Ministry of
Finance and it is presented by the Finance Minister to the
Parliament at the end of the each Financial Year in June.
BUDGET of Bangladesh: Revenue
Earning
BUDGET of Bangladesh: Public
Expenditure
 Three Types of Budget & Fiscal
Policy
 Balanced Budget (Neutral fiscal policy) :
 Implies a balanced budget where government spending is
fully funded by the tax revenue.
 Deficit Budget (Expansionary fiscal policy):
 Involves an increase in government spending (G > T)
through a rise in government spending or through a fall in
tax revenue.
 This policy is associated with a budget deficit that pumps
money into the economy
 Budget deficit helps to reduce unemployment and
promote GDP growth
 Surplus Budget (Contractionary fiscal policy):
 Involves a decrease in government spending (G < T)
either through higher taxation or reduction of government
spending.
 This policy is associated with a budget surplus that is
enacted to reduce GDP if the economy has more GDP than
full employment level.
Why does the Government Tax?
 Revenue collection
 To raise revenue to finance for government
spending
 Managing Aggregate Demand
 To help meet the government’s macroeconomic
objectives like stable inflation and economic growth.
 Changing distribution of income and wealth
 A taxation can help bringing better equality in
wealth and income among households
 The government may intervene directly through
fiscal policy to on grounds on equity
 Market failure and environmental targets
 Taxes can control negative externalities by tax that
can be a good way to control the supply of illegal or
harmful goods in the market.
TYPES OF TAX:
Direct and Indirect Tax
 Direct Tax
 Is imposed on income, wealth and profit.
 Direct taxes includes
 Income tax
 National Insurance contributions
 Capital gain tax
 Corporation tax
 The burden of direct taxes cannot be shifted
 The direct taxes are shifting towards indirect taxes in
almost all the economy.
TYPES OF TAX :
Direct and Indirect Tax
 Indirect Tax
 Indirect taxes are imposed on spending by the
consumers on goods and services.
 Indirect taxes includes
 VAT
 Car tax
 Excise duties on some fuel and alcohols
 TV licenses, etc
 Tariff
 The burden of indirect taxes of producers might be
shifted to the consumers; depending on the price
elasticity of demand and supply.
Details of Revenue Receipts
(PARTIAL)
Description Budget 2015-16 Budget
(taka in Crore ) 2014-15
Tax Revenue 2,08,449 1,82,954
National Board 1,76,370 1,49,720
of Revenue
(NBR) Tax
Taxes on Income 64,971 56,086
& Profit
Import Duty 18,753 14,590
Export Duty 37 33
Non-NBR Tax 5,874 5,572
Land Revenue 829 738
Taxes on Vehicles 1,297 1,248
Non-Tax 26,199 27,662
Revenue
Dividend and 5,201 4,932
Profit
 Tax Revenue
 In the following Table the partial  In the next Figure (2.1.3) Direct
revenue receipt of Bangladesh and Indirect Taxes as a
has been discussed. proportion to Total Tax revenue
have been showed.
 In 2015-16 National Budget the
 Indirect taxes (VAT, customs)
target of revenue earning has
been set to 2,08,449 crore taka represent the largest
which is 14,506 crore tk more components of tax revenues.
than Tax revenue earned in  It averaged around 85% until the
2014-16. 2001-2005 period and currently
 Also the Tax revenue is divided represents about 80% of the
total tax revenues.
into two broad categories NBR &
non-NBR tax.  Up to the 1990s, the share of
direct taxes, i.e. income tax was
 Both Direct and Indirect taxes below 15% of total tax revenues.
are included in this two broad
sectors.  It started to increase and
crossed 20% mark during 2006-
 The government also receives 2008 period. However, it
payment from domestic & remains the lowest in the south
foreign sources as Non-Tax Asian region.
revenue .
TAXATION: COST AND EFFICIENCY
 Cost of the Tax System to Taxpayers
 Tax amount reduces the disposable income of
Taxpayers
 Tax create a Deadweight Loss because it reduces the
economic well-being of Taxpayers,
 Complex and time consuming procedures in tax
payer rules creates administrative burden to
Taxpayers
 Two objectives in designing a tax system
 Increasing Efficiency :
 A tax system is more efficient than another if it
raises the tax revenue with smaller cost to
taxpayers
 Maintaining Equity:
 A tax system is more equitable than another if it
is operated based on Income groups and Benefit
recipients of services
Two Principles In Taxation
 Benefits Principle
 The benefits principle is the idea that people
should pay taxes based on the benefits they
receive from government services.
 An example is a gasoline tax:
 Tax revenues from a gasoline tax are used to
finance for highway system development.
 Peoplewho drive the most also pay the most
amount of tax for the maintenance of roads.
 Ability-to-pay Principle
 The ability-to-pay principle is the idea that taxes
should be imposed according to how well a
person can take burden.
 Ability-to-pay principle is based on
two types
of equity:
 Vertical equity is the idea that taxpayers with
a greater ability to pay should pay larger
amount of taxes.
 For example, people with higher incomes
should pay more than people with lower
incomes.
 Horizontal equity is the idea that different
taxpayers with similar abilities should pay
same amount of taxes.
 For example, two families with same
number of dependents and same income,
should pay the same amount of taxes.
Types of Vertical Equity Tax
System
Proportional tax
 High-income and low-income taxpayers pay the same
percentage of tax from their income.
 Regressive tax
 High-income taxpayers pay a smaller percentage of their
income than do the low-income taxpayers.
 Progressive tax
 High-income taxpayers pay a larger percentage of their
income than do the low-income taxpayers.