Chapter 5:

Public Finance

Cawangan
Kelantan
Kampus
Machang
Learning 01 Sources of Government
Revenue (Conventional)
Outcome Types of Government
By end of this chapter, students should be able to
02
Expenditure (Conventional)
explain:

03 Types of Tax Structure

04 Types of Government
Budget

05 Fiscal Policy (Types & Tools)

06 Sources of Government
Revenue (Islamic)
Learning Outcome 1
Sources of Government Revenue (Conventional)
 SOURCES OF GOVERNMENT REVENUE (CONVENTIONAL)

a) Taxes b) Non-Taxes c) Non- revenue receipts

▪ Tax is the major sources of ▪ Non-tax revenues are revenues ▪ Includes refund of expenditure
government revenue which arise from other sources and receipts from government
besides tax agencies.

▪ Tax is compulsory contribution by an ▪ Includes license and permit,

individual or a firm to the government petroleum royalty, interest and
to fund various public expenditure. return on investment, fees and
penalties

▪ There are two types of taxes which

are direct taxes and indirect taxes.
 TYPES OF TAX
TAX REVENUES
Direct tax Indirect tax
▪ A direct tax is paid by the person on whom it is levied and ▪ This is the tax where the burden of taxes can be
cannot be passed to another person. passed on to other parties. They are also called
the expenditures tax.

▪ Examples of direct taxes are: ▪ The main indirect taxes are:

• Income tax • Sales tax

• Corporate tax • Service tax
• Property tax
• Road tax • Import duties
• Stamp duty tax • Excise tax
Learning Outcome 2
Types of Government Expenditure (Conventional & Islamic)
TYPES OF GOVERNMENT EXPENDITURE (CONVENTIONAL & ISLAMIC)
Government Expenditure Government Expenditure
(Conventional) (Islamic)
i) Operating expenditure ▪ The priority of the public expenditure in Islamic
Allocated to cover the expenses of operating and state should be based on the hierarchy of needs
administering government departments. such as Dharuriyyat, Hajiyyat and Kamaliyyat.
Operating expenditure consists of emoluments,
pensions and gratuities, debts, subsidies.

ii) Development Expenditure ▪ The main expenditure of Islamic state are:

Development expenditure is government
expenditure for investment purposes to improve i) Defence
facilities in the basic physical infrastructure. ii) Law and order
Development expenditure consists of economic iii) Public administration
services, social services, general administration iv) Basic needs fulfillment
v) Da’wah
Learning Outcome 3
Types of Tax Structure
 TYPES OF TAX STRUCTURE

personal
PROGRESSIVE
income tax

TAX
PROPORTIONAL corporate tax
STRUCTURE

REGRESSIVE toll
 TYPES OF TAX (CONT…)
Progressive tax Proportional tax Regressive tax
▪ This is w here the rate of tax ▪ The rate of tax remains constant as ▪ This structure w ill make the low er
increase as income increase. income changes. income group bear a higher proportion
▪ It impose a greater portion of ▪ If the government announced the of tax than the higher income group
tax on higher income group corporation tax as 25%, then it w ill tax does.
than the low er income group. a fixed proportion of the companies ▪ An example of this structure is the
▪ This is the most effective w ay of profit regardless of the amount of payment of toll . A toll may be a small
redistributing the income profit stated by the companies. charge to a person w hose income is
among the population. RM5000 per month, but it can be a
▪ This form is practiced in great burden to an individual w hose
personal income tax. income is RM900 per month.
Learning Outcome 4
Types of Government Budget
 TYPES OF GOVERNMENT BUDGET

Deficit budget Surplus Budget Balanced budget

(G > T) (G < T) (G = T)
▪ A deficit budget is where the ▪ The surplus budget will be adopted ▪ The government will adopt this type
government plan to spend more by the government to overcome the of budget when it does not want to
than its receipts. It can be done problem of inflation. change the level of economic
by raising the government ▪ It can be done by raising the tax activities.
expenditure and reduce tax. and reduce government ▪ In other words, the economy is
▪ The government will used this expenditure. nearly or reached at full
budget when the economy is employment.
having the problem of
recession.
▪ A decrease in tax will make
individuals have more money in
their hands and able to spend
more.
Learning Outcome 5
Fiscal Policy (Types & Tools)
 FISCAL POLICY (TYPES & TOOLS)

FISCAL POLICY
▪ Refers to the government’s management of the economy by varying the size and the type of the
economy, the type of taxation, public debt, government expenditure and government revenue.

▪ Fiscal policy refers to the regulation of the level of government spending, taxation and public
debt

▪ Types of fiscal policy:

a) Contractionary fiscal policy
b) Expansionary fiscal policy
 FISCAL POLICY (TYPES & TOOLS) (CONT..)
TYPES OF FISCAL POLICY

EXPANSIONARY FISCAL POLICY CONTARCTIONARY FISCAL POLICY

▪ It is adopted to overcome unemployment or ▪ Is adopted to overcome inflationary problems
recession problems

▪ In recession, the economy suffers from rising ▪ During inflation, the general price level increase
unemployment, falling income and shrinking continuously
economic activity
▪ The government will increase public spending and ▪ There is a situation where the aggregate spending
reduces taxes. increases
▪ This is a situation where ‘too much money chasing for
few good’
▪ The effect of tax cuts would increase the amount ▪ The government will increase taxes and reduce the
of disposable income of individuals and business government spending.
firms
 FISCAL POLICY (TYPES & TOOLS) (CONT..)
TOOLS OF FISCAL POLICY

Government expenditure Taxes

▪ There are two types of government expenditure: ▪ To control unemployment problems, the government
operating expenditure and development would cut tax rates to increase disposable income.
expenditure.

▪ The government will increase its expenditure to ▪ Government will increase taxes during inflation to
control unemployment during recession. reduce disposable income thus reducing aggregate
spending.

▪ During inflation, the government would reduce its

expenditure.
Learning Outcome 6
Sources of Government Revenue (Islamic)
 SOURCES OF GOVERNMENT REVENUE (ISLAMIC)

PUBLIC FINANCE IN ISLAM

▪ The Islamic state encompass of two kinds of citizens namely Muslim and non- Muslim, and as
such different kind of tax are levied on them.

▪ The purpose of the imposition tax in Islam is for the human welfare and the development of a
country and it is not for the interest of a particular person.
 SOURCES OF GOVERNMENT REVENUE (ISLAMIC)
Zakat Al-Fai
▪ The prime source for an Islamic economy is zakat. ▪ Refers to the property or wealth surrendered by non-
Payment of zakat is a religious duty and one of the believers at war but without fighting. Such property will
pillars in Islam go to the central fund of the state (Baitulmal)
Jizyah Kharaj
▪ It was a tax imposed on the non-Muslim in lieu of ▪ It is a tax on land or agricultural land owned by non-
the guarantee to them by an Islamic state for the Muslim in the Islamic state
protection of their lives, properties.
Taxation Waqaf
▪ The right of the Islamic state to imposed taxes is ▪ Is a property donation, which is donated by an individual
derived from the fact that Islamic government is for the use of certain group of Muslims such as
responsible for the fulfillment of the basic needs orphans and the poor
of its citizen in accordance with the level of socio-
economics status of the country concerned
Sadaqah
▪ It is a voluntary charity. There is no such requirement on when and how much to donate
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Questions?