CE Public Finance 1

Public Finance HKSAR

CE Public Finance 2

Public Finance

What is public finance?

Public finance means how the government raises funds and spends the money on various kinds of services for the economy.

CE Public Finance 3

So public finance is concerned with

The revenue and expenditure of the government

CE Public Finance 4

The government is referred to as

the public sector

CE Public Finance 5

The size of the public sector is measured by the

amount of public expenditure ( 100% )

GDP

CE Public Finance 6

Public expenditure as % of GDP of the HKSAR

1997-98 1998-99 1999-2000 2000-01 2001-02

17.7% 21.2% 22.0% 21.1% 21.6%

CE Public Finance 7

Sources of government revenue

• tax

• non-tax

CE Public Finance 8

Classification of taxes

CE Public Finance 9

According to how the tax payment changes with income, taxes can be classified into:

__________, ____________ and__________ taxes

Classification of taxes

direct indirect

progressive proportionalregressive

According to the party who bears the tax burden, taxes can be classified into:

________ taxes and ________ taxes

CE Public Finance 10

Tax revenue ( 1 )

• Direct tax • Indirect tax

CE Public Finance 11

Direct tax

• is a tax on income or wealth.

• the tax incidence or burden CANNOT be shifted.

• the tax rate is either progressive or proportional

• Examples in Hong Kong

• salaries tax• profit tax• property tax• estate duty• interest tax ?• dividend tax?

CE Public Finance 12

Indirect tax • is a tax on goods and

services• the tax incidence or

burden CAN be shifted ( usually to the consumers, depending on the elasticity of demand and supply )

• the tax rate is regressive

• Examples in H.K.• cigarettes tax; stamp

duty; general rates; vehicle import tax; airport departure tax; tax on alcoholic liquor; hotel accommodation tax; entertainment tax; betting tax and etc.

CE Public Finance 13

Types Direct tax Indirect tax

Profits tax

Estate duty

Stamp duties

Betting duties

Property tax

Salaries tax

Quiz 1

Classify the above Hong Kong taxes into direct and indirect taxes.

CE Public Finance 14

Tax Revenue ( 2 )

• Progressive tax;

• Proportional tax; and

• Regressive tax

CE Public Finance 15

rogressive tax:

Tax payment takes ____________________ of taxable income as income increases.

roportional tax:

Tax payment takes ____________________ of taxable income as income increases.

egressive tax:

Tax payment takes ____________________ of taxable income as income increases.

Progressive, proportional and regressive taxes

an increasing percentage

the same percentage

a decreasing percentage

CE Public Finance 16

Progressive, proportional and regressive taxes

Fill in the blanks of average tax rate !

A, B and C are three types of tax:

Taxable income $150,000 $200,000

Tax payment $15,000 $15,000A

Average tax rate

Tax payment $10,000 $15,000B

Average tax rate

Tax payment $12,000 $16,000C

Average tax rate

10% 7.5%

6.7% 7.5%

8% 8%

CE Public Finance 17

Progressive, proportional and regressive taxes

Which type of tax is a progressive tax?

A, B and C are three types of tax:

Taxable income $150,000 $200,000

Tax payment $15,000 $15,000A

Average tax rate

Tax payment $10,000 $15,000B

Average tax rate

Tax payment $12,000 $16,000C

Average tax rate

10% 7.5%

6.7% 7.5%

8% 8%

CE Public Finance 18

Progressive, proportional and regressive taxes

Which type of tax is a regressive tax?

A, B and C are three types of tax:

Taxable income $150,000 $200,000

Tax payment $15,000 $15,000A

Average tax rate

Tax payment $10,000 $15,000B

Average tax rate

Tax payment $12,000 $16,000C

Average tax rate

10% 7.5%

6.7% 7.5%

8% 8%

CE Public Finance 19

Progressive, proportional and regressive taxesA, B and C are three types of tax:

Taxable income $150,000 $200,000

Tax payment $15,000 $15,000A

Average tax rate

Tax payment $10,000 $15,000B

Average tax rate

Tax payment $12,000 $16,000C

Average tax rate

10% 7.5%

6.7% 7.5%

8% 8%

Which type of tax is a proportional tax?

CE Public Finance 20

Quiz 2

Suppose the government levies a tax of $10 on all passengers who depart HK by sea. What type of tax ( progressive / proportional / regressive ) is it?

It is a _________ tax. Since all passengers pay the same amount of tax, tax payment takes a _______ proportion of income for the higher income group.

regressive

smaller

CE Public Finance 21

Quiz 3

When the tax payment increases as the income increases, is it a progressive tax ?

____. No

A tax is progressive if the tax payments takes an increasing percentage of taxable income as income increases.

CE Public Finance 22

Quiz 3

When the tax payment increases as the income increases, is it a progressive tax ?

e.g.

Taxableincome

Taxpayment

Averagetax rate

100,000 10,000

150,000 12,00010%8%

Fill in the average tax rates !

CE Public Finance 23

Quiz 3

When the tax payment increases as the income increases, is it a progressive tax ?

e.g.

Taxableincome

Taxpayment

Averagetax rate

100,000 10,000

150,000 12,000

The tax payment increases as the income increases, but it is a _________ tax.regressive

10%8%

CE Public Finance 24

Non-tax revenue

• Examples:

sale of land; fines and penalty; government fees and etc.