TOPIC 3
PUBLIC BUDGET-
PUBLIC REVENUE
Definition and objectives of taxation
Characteristics of a good tax system
Types of taxes
Sources of taxes in Malaysia
Definition and objectives of borrowing
Sources of borrowing
Public debt and it’s implication
SYLLABUS CONTENT
DEFINITION OF TAXATION
Taxation as imposition of compulsory levies on individuals or
entities by governments. Taxes are levied in almost every country
of the world, primarily to raise revenue for government
expenditures, although they serve other purposes as well (Maria,
Fritz & Charles, 2019)
The compulsory payments associated with certain activities
(Hyman, 2011).
Is a financial charge or other levy imposed on an individual or a
legal entity by the government.
Taxes are levied by governments primarily as a means of raising
revenues to finance operations of government
Examples: income tax, corporate tax, sales tax
OBJECTIVES OF TAXATION
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most
governmental activities must be financed by taxation. But it is not the only goal. In other words,
taxation policy has some non-revenue objectives.
o Economic Development: One of the important objectives of taxation is economic development.
Economic development of any country is largely conditioned by the growth of capital formation.
It is said that capital formation is the kingpin of economic development.
o Full Employment: Second objective is the full employment. Since the level of employment
depends on effective demand, a country desirous of achieving the goal of full employment must
cut down the rate of taxes. Consequently, disposable income will rise and, hence, demand for
goods and services will rise. Increased demand will stimulate investment leading to a rise in
income and employment through the multiplier mechanism.
o Price Stability: Thirdly, taxation can be used to ensure price stability—a short run objective of
taxation. Taxes are regarded as an effective means of controlling inflation. By raising the rate of
direct taxes, private spending can be controlled. Naturally, the pressure on the commodity
market is reduced.
OBJECTIVES OF TAXATION
o Control of Cyclical Fluctuations: Fourthly, control of cyclical fluctuations—
periods of boom and depression—is considered to be another objective of
taxation. During depression, taxes are lowered down while during boom taxes
are increased so that cyclical fluctuations are tamed.
o Reduction of BOP Difficulties: Fifthly, taxes like custom duties are also used to
control imports of certain goods with the objective of reducing the intensity of
balance of payments difficulties and encouraging domestic production of
import substitutes.
o Non-Revenue Objective: Finally, another extra-revenue or non-revenue
objective of taxation is the reduction of inequalities in income and wealth. This
can be done by taxing the rich at higher rate than the poor or by introducing
a system of progressive taxation.
CHARACTERISTICS OF A GOOD TAX SYSTEM
Certainty
It is necessary that the tax laws are clear and the taxpayer is therefore able to predict, with
reasonable certainty what his tax liability is likely to be.
Compliance and collection costs
A tax which is difficult to collect and involves the taxpayer keeping complicated records is
undesirable. It will not only be unpopular to the taxpayer but costly and administratively
difficult to the government.
Enforceability
It is essential that taxes are imposed which are possible to enforce. In developing countries with
a high level of illiteracy, it would be unsatisfactory to establish a tax system which was beyond
the comprehension of the tax paying community, in terms of understanding the laws and
keeping the necessary records.
CHARACTERISTICS OF A GOOD TAX SYSTEM
Flexible
The rate imposed is not rigid
Ability to pay
According to the economic or financial status of individual
Simple and easy
Understandable and easy to pay
Motivating
Not become a burden to the public
TYPES OF TAX
Progressive tax Regressive tax Proportional tax
•Taxes assessed under a •Low-income individuals pay •A proportional tax system,
progressive system are a higher amount of their also referred to as a flat tax
based on the taxable incomes in taxes compared system, assesses the same
amount of an individual's to high-income earners tax rate on everyone
income. under a regressive tax regardless of income or
•They follow an accelerating system because the wealth.
schedule, so high-income government assesses tax as •It's meant to create equality
earners pay more than low- a percentage of the value between marginal tax rates
income earners. of the asset that a taxpayer and average tax rates paid.
•Tax rate, along with tax purchases or owns. •Proponents of proportional
liability, increases as an •This type of tax has no taxes believe they stimulate
individual's wealth increases. correlation with an the economy by
•The overall outcome is that individual's earnings or encouraging people to work
higher earners pay a higher income level. more because there's no tax
percentage of taxes and •Regressive taxes include real penalty for earning more.
more money in taxes than estate property taxes and •They also believe that
do lower-income earners. excise taxes on businesses are likely to spend
•This sort of system is meant to consumables, such as and invest more under a flat
affect upper-class people gasoline or airfare. tax system, putting more
more low- or middle-class •Excise taxes are fixed and dollars into the economy.
individuals to reflect the they're included in the price
presumption that they can of the product or service.
afford to pay more.
Chargeable income (RM) YA 2019/2020
Tax (RM) % on excess
5,000 0 1
20,000 150 3
35,000 600 8
50,000 1,800 14
70,000 4,600 21
100,000 10,900 24
250,000 46,900 24.5
400,000 83,650 25
600,000 133,650 26
1,000,000 237,650 28
2,000,000 517,650 30*
*With effect from (w.e.f) YA 2020
EXAMPLE: CHARGEABLE INCOME (RM) AND RATE OF INCOME TAX
SOURCES OF TAXES IN MALAYSIA
Direct taxes
o Direct taxes are primarily taxes on natural persons (e.g., individuals),
and they are typically based on the taxpayer’s ability to pay as
measured by income, consumption, or net wealth.
o Individual income taxes are commonly levied on total personal net
income of the taxpayer (which may be an individual, a couple, or a
family) in excess of some stipulated minimum.
o They are also commonly adjusted to take into account the
circumstances influencing the ability to pay, such as family status,
number and age of children, and financial burdens resulting from
illness. The taxes are often levied at graduated rates, meaning that
the rates rise as income rises.
o Personal exemptions for the taxpayer and family can create a
range of income that is subject to a tax rate of zero.
SOURCES OF TAXES IN MALAYSIA
Indirect taxes
o Indirect taxes are levied on the production or consumption of goods and
services or on transactions, including imports and exports.
o Examples include general and selective sales taxes, value-added taxes (VAT),
taxes on any aspect of manufacturing or production, taxes on legal
transactions, and customs or import duties.
o General sales taxes are levies that are applied to a substantial portion of
consumer expenditures.
o The same tax rate can be applied to all taxed items, or different items (such as
food or clothing) can be subject to different rates.
DEFINITION OF BORROWING
Public borrowing is a long term debt instrument through which
money is raised by the central and state governments, public
sector organisations and local self institutions to finance various
projects undertaken by them (Mishra, 2017).
Total debt of central government either from internal or external
sources (Shaari & Jomo)
Is a debt incurred by government from public, local and foreign
banks (Affandi)
Loans taken by government from various sources for funding or
financing public programs and activities
OBJECTIVES OF BORROWING
To fill the gap between the revenue and expenditure; to cover budget
deficit. E.g. if public revenue is RM100b while public expenditure is
RM101b, to cover the deficit amounting to RM1b, government will
need to raise loans.
To implement or carry out development projects in the country for the
benefit of the people. E.g. highway projects, enhancing infrastructure,
electricity supply and water supply projects. (as a means of financing
economic development)
To fight depression in which government will borrow money to create
job opportunities to resolve the problem of unemployment.
OBJECTIVES OF BORROWING
To carry out mega infrastructures such as MSC, mega railways, highways
etc.
To wage or prosecute war. In a war, a country needs financial assistance
to buy equipment and finance the war activities.
To improve defense system for example need to buy more weapons to
beef up the existing defense system to meet the increasing security
demand. e,g Europe allocated high funds to improve its military system
To encourage the development of money and capital market – in a case
where financial institutions do not have sufficient money and no source to
borrow
o Capital Market = market where capital is available for development project
SOURCES OF BORROWING
Internal sources External sources
Internal debt is the part of the total External debt (or foreign debt) is the
debt in a country that is owed to total debt a country owes to foreign
lenders within the country. creditors.
Internal debt's complement is
external debt. Commercial banks,
other financial institutions etc. The debtors can be the government,
constitute the sources of funds for corporations or citizens of that country.
the internal debts.
The debt includes money owed to private
commercial banks, other governments, or
international financial institutions such as
the International Monetary Fund (IMF) and
World Bank.
PUBLIC DEBT AND IT’S IMPLICATION
•PB will maintain the balance between revenue and expenditure. Act as balancing role.
•In terms of external loan advantage, it is a long term maturity = the repayment period is
longer and the interest rate is lower thus it will not affect the domestic cash flow and
Positive implications very much suitable as source of fund to finance mega and long term projects.
•Other than that, although the loan is for the development project, it also can be
considered as technical assistance
•In terms of market loans – the fluctuations in international exchange rates will burden
the government in repaying the loans. This is because, the exchange rate is volatile
and when the government borrow money, the rate is not fixed.
•Outflows of funds will affect the balance of payment which in turn could affect the our
foreign reserved, national income, productivity and economic status of the country.
•Increase taxation for loan servicing will affect the willingness of taxpayers to work and
save.
•The burden to repay the loan is on the people as they need to pay taxes, bills and
Negative implications adversely affected should the government face difficulties in repaying the loans.
•PB could increase inequalities of income (as distribution of income could be affected
due to over burden of the debt)
•Public borrowing affects productions if huge loans are taken. Subsidies may be cut and
financial assistance is reduced.
•Individual consumption is affected by public debt as necessities to be consumed will
be less.
•The government is subject to control of foreign government or institutions; lack of
freedom in administration and subject to control policy of the money supplier.
TUTORIAL DISCUSSION
Discuss on the issues in taxation
With relevant examples, analyse on the current situation on
government debt.
