PUBLIC FINANCE, FISCAL ADMINISTRATION AND REVENUE

MANAGEMENT

Macroeconomics

PUBLIC FINANCE - branch of economics which deals with the revenues

and expenditures of governments and their impact on the economy.
PUBLIC FISCAL ADMINISTRATION - the formulation, implementation and
evaluation of policies and decisions on taxation and revenue administration;
resource allocation, budgeting and public expenditure; public borrowing
and debt management; and accounting and auditing.

Role of Public and Private Sectors in

the Economic System
THE "MIXED ECONOMY"

1. Free Enterprise

2. Centrally Planned Economies

FREE ENTERPRISE - the economy is theoretically characterized by perfect

competition in the market by the capitalist. However, government
intervention through regulation is still necessary in running the economy.
CENTRALLY PLANNED - the economy of production, distribution,
consumption and full employment are not left to the operation of the price
system but are managed through centralized state planning.

DEVELOPMENT OF PUBLIC
FINANCE: Theories of Fiscal Policy
STAGES OF DEVELOPMENT:

Primitive Societies

Slave States

Feudal Systems

Capitalist

Socialist Systems

ADAM SMITH - his book became the primary authority on matters of

taxation, budgeting and borrowing. He is against the large scale borrowing
and deficit spending and advocated the concept of balanced budget.
DAVID RICARDO - he is credited for his theory of distribution of tax burden
- as bases for the institution of equality and uniformity in modern taxation
and the progressive tax structure.

ADOLF WAGNER - eliminate the inequalities of wealth thru fiscal measures;

use of fiscal policies for distributive goals.
JOHN STUART MILL - correlate the functions of the state to public
expenditures - government would interfere as little as possible with the
private affairs of the people.

Four Functions of Public Finance

Allocation
Distribution
Stabilization
Growth

Allocation
An organized society requires the consumption of public goods and services that
would be unprofitable to produce privately
Public goods include:
1. Defense,
2. Law and order, justice
3. Infrastructure
4. Taxation is used to raise funds to pay for production of these goods and services

Redistribution
Very difficult to do in a short period of time
Redistributing wealth does not change individual incomes much.
Redistribution is impossible to do via the tax system alone.
Redistribution through expenditure system is much more promising.
Redistribution should be related to the role of governments in promoting
growth.

Only through growth can people in developing countries be lifted out of

economic backwardness
Public education, health services
Rural roads, rural telephone, electricity and public water supplies all ways
that people can change their position in life overtime
Important to consider changing income distribution between generations

Stabilization
A short run objective
Outgrowth of the Keynesian revolution in economics.
The main objective to keep actual level of income close to its potential.
The target is full employment and price stability.
Inflation extremely damaging to poor and reduces the efficiency of market
system.

Growth
Probably the most important objective when per capita incomes are low
Sources of Per Capita growth

Capital accumulation, Human capital (education, health), and Productivity change

Tools of taxation and public expenditure need to be focused on how to promote growth
Need policies that encourage investors to reinvest their business surpluses not take
them out of country
Government budget surplus important for providing savings for private sector to borrow

Twelve Lessons of Economic Policy

Avoid false technicism in economic policymaking.
Keep budgets under adequate control.
Keep inflationary pressures under reasonable control.
Take advantage of international trade.
Recognize that some types and patterns of trade restrictions are far worse than others,
and work both to liberalize and rationalize them. (For example, uniform tariff rates are
not as damaging as import quotas)
If import restrictions are excessive, and reducing them is politically impossible, mount
an indirect attack on the problem by increasing incentives to export.

Make tax systems simple, easy to administer, and (as much as possible) neutral
and non-distorting with respect to resource allocation.
Avoid excessive income tax rates 35 to 40% are representing a plausible
marginal rate that should not be exceeded).
Avoid excessive use of tax incentives to achieve particular objectives.
Use price and wage controls sparingly, if at all.
Rarely can an economic justification be found for quotas, licenses, and similar
quantitative restrictions on output, imports, exports, etc.
The borderline of public-sector and private-sector activity should be clear and
well-defined. When the two compete in a given area, the same rules should
govern their operations.

The Crisis of Capitalism: Keynesian

Public Finance
John Maynard Keynes insisted that the government could and should
influence the prices of goods and services, the amount of consumption, the
degree of employment and the distribution of national income thru taxation,
borrowings and the purchase and sale of commodities and labor. He
developed the concept of fiscal policy as a tool for correcting imbalances in
the economy.

Development Finance: The Changing

Meanings of Development
THREE OBJECTIVES OF DEVELOPMENT ARE IDENTIFIED:
1. To increase the availability and widen the distribution of basic life sustaining
goods such as food, shelter, health and protection;
2. To raise levels of living including, in addition to higher incomes, the provision of
more jobs, better education and greater attention to cultural and humanistic
values, all of which will serve not only to enhance material well-being but also to
generate greater individual and national self-esteem;
3. To expand the range of economic and social choice to individuals and nations
by freeing from them servitude and dependence, not only in relation to other
people and nation-states, but also to the forces of ignorance and human misery.

The Concept of Sustainable

Development
It implies a new concept of economic growth - "one that provides fairness
and opportunity for all the world's people, not just the privileged few,
without further destroying the world's finite natural resources and carrying
capacity."
It is a process in which economic, fiscal, trade, energy, agricultural,
industrial and all other policies are so designed as to bring about
development that is economically, socially and ecologically sustainable.

Measuring Development: The Human

Development Index
The GNP has long been criticized as an incomplete or insufficient indicator
of development. Economic Growth may not necessarily bring about a better
quality of life for people.
The HDI integrated life expectancy, adult literacy and income in an
innovative way, resulting in a yardstick more comprehensive than the GNP.

Current Strategies in Development

Finance
THE ROLE OF TAXATION - main instrument which is relied upon for
revenue generation.
NON-TAX REVENUE - includes capital revenue (sale of assets) and extraordinary income (GOCC like PAGCOR)
GRANTS FROM MULTILATERAL AND BILATERAL PARTNERS contributions from international institutions and other countries.
BORROWINGS - the core of development finance

Issues and Problems in the

Development of Public Finance (Activity)
Borrowing is occupying an increasingly larger role in development finance,
Should this be encouraged? Why No? Why Yes?
Should borrowing play a vital role to the development of the financial aspect
of the country? Or is it better to be a supportive mechanism of the
government in developing the financial aspect of the country?Why?
How can you evaluate a good tax system?What should you consider in
evaluating a tax system?

The Constitutional and Legal

Basis of Public Finance

TAXATION
BUDGETING
ACCOUNTING AND AUDITING

Taxation and Revenue Operations

Public Finance, Fiscal Administration and Revenue Management

History of Taxation

Taxation Defined
The inherent power of the state
- exercised through the legislature

To impose burdens
- upon subjects and objects
- within its jurisdiction

For the purpose of raising revenues

To carry out the legitimate objectives of the
government

Nature of Taxation
Inherent
Legislative in character

Theory of Taxation
Lifeblood Theory
- Without revenue raised from
taxation, the government will not survive, resulting in
detriment to society
- Performance of governmental functions
redounds to the benefit of the populace in
general
- Revenues could be raised to defray
expenditures for public purposes

Taxation in the Philippines

Tax law in the Philippines covers national and local
taxes:
National taxes: refer to national internal revenue taxes
imposed and collected by the national government
through the Bureau of Internal Revenue (BIR)
Local taxes: refer to those imposed and collected by
the local government.

Taxation in the Philippines

The 1987 Philippine Constitution sets limitations on the
exercise of the power to tax:
The rule of taxation shall be uniform and equitable.The
Congress shall evolve a progressive system of taxation.
(Article VI, Section 28,
paragraph 1)

Taxation in the Philippines

The Constitution expressly grants tax

exemptions:

Charitable institutions, churches, parsonages or convents

appurtenant thereto, mosques, and non-profit cemeteries and all
lands, buildings and improvements actually, directly and
exclusively used for religious, charitable or educational
purposes.
(Article VI, Section 28, paragraph 3)

Taxation in the Philippines

National Internal Revenue Law: codifies all tax

provisions, the latest of which is embodied in Republic Act No.

8424 (The Tax Reform Act of 1997)
- Taxpayer: any person subject to tax whose sources of income is
derived from within the Philippines
- Taxpayer Identification Number (TIN) is required for any
individual taxpayer

Assignment 1

What are the different National Taxes being observed in the country? Define
each.
What are the different Local Taxes being observed in the country? Define
each.

Kinds of Taxes
Value-added Tax (VAT)
- Tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines and on importation of
goods into the Philippines

Capital Gains Tax

- Tax imposed on the gains presumed to have been realized by the
seller for the sale, exchange or other disposition of real property located
in the Philippines

Kinds of Taxes
Excise Tax
- Tax applicable to specified goods manufactured in
the Philippines for domestic sale or consumption

Documentary Stamp Tax

- Tax on documents, instruments, loan agreements
and papers, agreements evidencing the acceptance,
assignments, sale or transfer of an obligation, rights
or property incident thereto

Problems and Issues in Taxation and Revenue Administration

Tax Avoidance
The exploitation by the taxpayer of legally permissible
alternative rates or methods of assessing taxable
property or income to
reduce or entirely avoid tax
liability
- Availing of all deductions allowed by law of refraining
from engaging in activities subject to tax

Tax Evasion
A scheme used outside those lawful means and when
availed of, it usually subjects the taxpayer to further or
additional civil or criminal liabilities:
- Under-declaration of income
- Non-declaration of income and other items subject to tax
- Under-appraisal of goods subject to tariff
- Over-declaration of deductions

Problems
Addressing structural weaknesses in tax system
Excise taxes as percent of GDP declining due to nonindexation.
Plug leakages (tax evasion, smuggling)
Reduce distortions (less of redundant incentives or
unproductive government subsidies).
Anticipated decline in BOC revenues due to smuglling

Issues and Challenges

Providing fiscal support while ensuring fiscal
sustainability

Imperative of building a stronger and more

robust economy
Enhance international competitiveness and
attract investments
Step up infrastructure development and
social spending to achieve inclusive growth

Issues and Challenges

Close monitoring of continuing threats to growth
Monitor developments that may affect growth prospects
Global developments
Climate change and disaster mitigation
Volatile commodity price movements

Other issues identified by WB and IMF

Mining/petroleum taxation regime

Excise taxation of telecommunications services
Reforming real property taxation
Transfer pricing issues

Current Reform Efforts

Current Reform Efforts

Intensify implementation of tax and other
administrative measures.
Push for passage of laws rationalizing fiscal
incentives as well as simplifying taxation on alcohol
and tobacco.
Increase non-tax revenues.

Current Reform Efforts

Step-up the fear factor ( i.e. move from filing of
cases to prosecution and conviction)
Run After Tax Evaders (RATE)
Run After The Smugglers (RATS)
Lifestyle check

Current Reform Efforts

Enhance collection efficiencies
Anti-smuggling campaign
Improved taxpayer service

Intensify collection of non-tax revenues

including dividends from GOCCs and GFIs.
Tighten implementing rules and regulations of
enacted revenue eroding measures to avoid
leakages and curb abuse.

BUDGETING
The budget is defined as the financial plan of
the government. It is designed to
accomplish the political, economic, and
social objectives of the government as well
as to carry out its administrative policies.
The budget is more than a financial
document. It has been regarded as a system
of policy-making decisions for the allocation
of scarce financial resources among
competing needs, a system by which
policies are implemented and for which
execution controls, both administrative and
legislative, are established.

The content and structure of the budget document is

related to the various functions the budget performs:
It is a legal document, an act of the legislative department whereby the
Executive is authorized to incur certain expenditures and to levy taxes, with its
own requirements for content and structure.
It is a political document setting forth the financial policies of the government.
It is a management tool and the basis for accounting, specifying for each
department and each agency how much they can spend and for what purpose.
Finally, it is a document indicating the economic significance of the
government's policies and programs.

National Budget Process or Cyle (Four

Phases)
BUDGET PREPARATION
BUDGET LEGISLATION
BUDGET EXECUTION
BUDGET ACCOUNTABILITY

The Local Government Budget

Process (Five Phases)
BUDGET PREPARATION
BUDGET AUTHORIZATION
BUDGET REVIEW
BUDGET EXECUTION
BUDGET ACCOUNTABILITY

ACCOUNTING AND AUDITING

ACCOUNTING is the art of recording, classifying and summarizing, in a
significant manner, and in terms of money, transactions and events which
are, in part at least of a financial character and interpreting the results
thereof.
AUDITING is the examination of information by a third party other than the
preparer or user with the intention of establishing its reliability, and the
reporting of the results of this examination with the expectation of increasing
the usefulness of the information to the user.

LEGAL FRAMEWORK - the constitutional basis for accounting and auditing

as a component of public finance is Article IX (D), Section 2 of the
Constitution.
The Commission on Audit shall have the power, authority, and duty to
examine, audit, and settle all accounts pertaining to the revenue and
receipts of, and expenditures or uses of funds and property, owned or held
in trust by, or pertaining to, the Government, or any of its subdivisions,
agencies, or instrumentalities, including government-owned or controlled
corporations with original charters, and on a post-audit basis.

Auditing plays an important role in public finance. Under the declaration of

policy in the Auditing Code, it is stated that all resources of government
shall be managed, spent and utilized in accordance with law and
regulations; and safeguarded against loss or wastage through illegal or
improper disposition, with a view to ensuring efficiency, economy and
effectiveness in the operations of government.
The responsibility to uphold the above policy faithfully rests directly with the
chief or head of the government agency concerned. This is the so-called
fiscal responsibility which is to be shared to the greatest extent by all those
exercising authority over the financial affairs, transactions, and operations of
the government agency.

Principles to Evaluate a Good Tax

System
Revenue Adequacy

The taxes introduced should be sufficient

to finance and fund the government
expenditure requirements over time.

Deficit financing by domestic borrowing

leads to the crowding out of private sector
credit given by commercial banks.

Tax revenues should increase at a rate

equal to or greater than the growth of GNP.

Deficit financing by foreign borrowing is

limited and economically expensive.

The entire tax system should evolve as the

economy changes.

Deficit financing by Central Bank borrowing

leads to inflation.

Inadequate revenues will force the

government to resort to borrowing, selling
state assets or printing money (inflation).

High inflation usually leads to financial

crises.

Stability

The stability of tax revenues is important for good government.

Revenue instability will cause new programs to be poorly implemented.

Stability in the tax rules and rates over time allows the private sector to make long term
plans more efficiently.

For the stability of a tax system, it is necessary that:

the legislation be well written to eliminate unintended tax exemptions or deductions

(loopholes)

the statutory rates of tax for each of the taxes are not so high as to create powerful
incentives to promote tax avoidance schemes or to stimulate tax evasion activity

the tax revenue is adequate and grows in a consistent fashion

the tax system is simple and the combined cost of administration and compliance is
low

Simplicity

A Tax system should be simple so that it is easy to comply with by taxpayers.

Simplicity must apply to the administration of the law as well as its legal structure.

A complex tax system imposes high level of compliance costs on tax payers and a high cost of
administration on the government.

Tax neutrality

Growth comes about primarily through the expansion of savings and expansion of investment into
high return activities.

The tax system should not create major distortions in consumption and production behavior.

A tax should not change the investment decisions by favoring one set of investments over the others.

The tax system should not create a disincentive to work.

Well-designed tax systems should encourage competitive growth in all sectors of the economy.

Economic Efficiency

A tax is efficient if the dead weight loss or efficiency cost is small.

High differential tax rates create larger economic efficiency costs.

The economic efficiency of a tax is an important consideration when

designing a tax system.

Estimates of efficiency cost range from 5 to 150 percent of additional tax

revenues.

Low Administration and Compliance Costs

A good tax system has low administration and compliance costs. These
costs are part of the economic cost of having a tax system.