Economics, Taxation, Land Reform and Cooperatives: LET Reviewer

Economics, Taxation, Land Reform and Cooperatives

Licensure Examination for Teachers (LET) Handout Reviewer

Prepared and Compiled by: Mr. Rhey Mark H. Diaz, T1

BSEd Social Studies, Lic. No. 1334242

Economics Definition

•       A Social Science dealing with how societies and individuals allocate scarce resources to satisfy their unlimited needs and wants

•       is the social science that studies economic activity to gain an understanding of the processes that govern the production, distribution and consumption of goods and services in an economy

•       A social science dealing with how societies and individuals make their choices

•       Oikonomia - Oikonomia (also spelled oikonomeia, economia or economy) literally means "household management," the "law of the house," or "house building,"

Basic Economic Questions

•       What to produce

–      what goods and services to produce with its land labor and capital

•       How to produce

–      how to produce each good or service – determining what mix of land, labor, and capital to use in production methods to employ

•       For whom to produce

–      must decide which members of society will receive how much of the goods and services produced – the process of allocating income.

Famous Economists

1.       Adam Smith (Scotland) – Father of Economics

–      Capitalism, Laissez Fair, Wealth of the Nations

–      Specialization

–      Division of Labor - process whereby workers perform only a single or a very few steps of a major production task

–      Absolute Advantage - argued that a country has an absolute advantage in the production of a product when it is more efficient than any other country in producing it

2.       Karl Marx

–      (Communism), Communist Manifesto (with Fredriech  Engels)

–      Das Kapital – studies the system of Captalism

–      Labor Theory of Value – states that the value of a product depends on the amount of labor needed to produce the product

3.       John Maynard Keynes

–      Advocated increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression

–      Supported government intervention during times of economic turmoil

–      General Theory - was that economies are chronically unstable and that full employment is only possible with a boost from government policy and public investment.

–       It was up to the government to bridge the gap between the economy’s potential and its actual output during a financial crisis, even if that meant taking on debt

Role of the Government

–      Is to stimulate demand through spending in times of economic slack.

–       Policy makers should manipulate government expenditures to achieve a desirable level of aggregate demand. 

–      In times of economic downturn, this can be achieved either through lowering tax rates or increasing government expenditures.

–      According to Keynes, governments should incur deficits and borrow money in times of downturn;

–      These debts can be repaid through higher taxation in times of economic growth.

4.       David Ricardo

•       Advocated the International Trade specifically the Theory of Comparative Advantage

–      The theory of comparative advantage (1817) - countries should specialize in the production of those goods they produce most efficiently and buy goods that they produce less efficiently from other countries

–      even if this means buying goods from other countries that they could produce more efficiently at home

–      Law of Diminishing Return

5.       Alfred Marshall

•       Law of Supply and Demand

•       Consumers Behavior Theory

–      Cardinal and Ordinal Utility

–      The Law of Diminishing Marginal Utility

–      It is a psychological fact that when a person acquires more and more units of the same commodity during a particular time, the utility he derives from the successive units will diminish. In other words, the additional satisfaction derived from the additional units of a commodity goes on decreasing.

Divisions of Economics

•       Microeconomics

–       The branch of economics concerned with individual decision units--firms and households--and the way in which their decisions interact to determine relative prices of goods and factors of production and how much of these will be bought and sold. The market is the central concept in microeconomics.

•       Macroeconomics

–      The branch of economics that considers the relationships among broad economic aggregates such as national income, total volumes of saving, investment, consumption expenditure, employment, and money supply.

Opportunity Costs

•       Opportunity Cost, or Economic Cost

–      is the cost of something in terms of an opportunity forgone(and the benefits which could be received from that opportunity),

–      or the most valuable forgone alternative(or highest-valued option forgone)

–      i.e. the second best alternative.

Economic Measures of Development

•       Gross National Product (GNP)

–      is the total market value of all final goods and services produced by citizens in one year.  (Including outside the country)

•       Gross Domestic Product (GDP)

–      The sum of the money values of all final goods and services produced in the domestic economy along a specified period of time, usually one year (within the geographical territory)

•       Stock Exchange

–      A measure of the performance of an economy based from the portfolio investment, that is, indirect form of investment.

•       Portfolio investment is foreign capital inflow by foreign investors into shares and financial securities. It is the ownership and management of production and/or marketing facilities in a foreign country.

•       Foreign Exchange Rates

–      State the value of one currency in terms of another and this reference the patterns of world trade in important ways.

Economic Systems

•       Economic system:

–      how society uses resources to satisfy people’s wants

•       Three basic systems:

–      Traditional

–      Command

–      market economies

•       Traditional Economy

–      centers on families, clans, or tribes

•       decisions are based on customs and beliefs

–      Good of the group always comes before individual desires

Characteristics of Traditional Economies

•       Advantages and Disadvantages

–      Advantages: little disagreement over goals, roles

•       methods of production, distribution determined by custom

–      Disadvantages: as result of resistance to change, less productive

•       do not use new methods; people not in jobs they are best suited for

•       low productivity results in low standard of living

•       Command Economy

–      (centrally planned economy) government makes economic decisions

•       determines what to produce; how to produce; who gets products

•       determines who is employed, work hours, pay scales

–      Wants of individual consumers rarely considered

–      Government owns means of production: resources and factories

Government Controls

•       Socialism and Communism

–      Karl Marx influenced some societies to adopt command economies

•       Socialism—government owns some of the factors of production

•       Communism—no private property; little political freedom

–      Authoritarian system requires total obedience to government

•       communism is authoritarian socialism

•       Karl Marx: Economic Revolutionary

•       A New View of Economics

–      Marx lived during Industrial Revolution

–      Argued factory owners used workers as resource

•       exploited workers by keeping wages low to increase profits

•       workers would rebel, establish classless society

–      Wrote The Communist Manifesto (with Friedrich Engels), Das Kapital

•       Command Economies Today

No pure command economies today

•       modern telecommunications bringing about change

–      Some economies still have mostly command elements

•       North Korea

–      Communist North Korea used resources for military, not necessities

•       built large army; nuclear weapons program

•       In 1990s and early 2000s, millions died of hunger, malnutrition, production decreased and economy shrank

•       Since 2003, some market activity allowed

•       Impact of Command Economies

–      In theory, command systems fair to everyone; In practice, many disadvantages

•       central planners do not understand local conditions

•       workers have little motivation to be productive or conserve resources

•       artificially low prices lead to shortages

•       people sacrificed to carry out centrally planned policies

•       Market Economy

–      driven by choices of consumers and producers

•       consumers spend money, go into business, sell their labor as they wish

•       producers decide how to use their resources to make the most money

–      Consumers, producers benefit each other when they act in self-interest

Fundamentals of a Market Economy

•       Private Property and Markets

•       Limited Government Involvement

–      Laissez faire —government should not interfere in economy

–       Capitalism —system having private ownership of factors of production

•       says producers will create products consumers demand

–      Actual market economies all have some government involvement

•       Voluntary Exchange in Markets

–       Voluntary exchange— traders believe they get more than they give up

–      Competition and Consumer Sovereignty

–      Consumer sovereignty —buyers choose products, control what is produced

–      Competition controls self-interested behavior

•       sellers offer low price or high value to please consumers, make profit

•       Specialization and Markets

–      Specialization —people concentrate their efforts in the activities they do best

•       encourages efficient use of resources

•       leads to higher-quality, lower-priced products 

•       Circular Flow in Market Economies

•       KEY CONCEPTS

–      Circular flow model illustrates how interactions occur in a market

–      Represents the two key decision makers: households, businesses

–      Shows the two markets where households and businesses meet

•       goods and services

•       resources

Factor Markets

–      market for the factors of production

•       land, labor, capital, entrepreneurship

Product Markets

–      market where goods and services bought and sold

•       includes all purchases by individuals from businesses 

Circular flow model shows how market economies operate

•       outside arrow shows flow of money

•       inside arrow shows flow of resources and products

•       Impact of Market Economies

•       Advantages

–      Individuals free to make economic choices, pursue own work interests

–      Less government control means political freedom

–      Locally made decisions mean better use of resources, productivity

–      Profit motive ensures resources used efficiently, rewards hard work

•       resulting competition leads to higher-quality, more diverse products

•       Disadvantages

–      Pure market economy has no way to provide public goods and services

–      Does not give security to sick or aged

–      During U.S. industrial boom, business owners rich, workers low pay

–      Businesses did not address problems caused by industrialization

–      Industrialized societies adopt some government control of economy

Today’s Mixed Economies

•       Mixed economy

–      has elements of traditional, command, market systems

•       most common type of economic system

–      Traditional, command, market economies adopt elements from others

•       Life in a Mixed Economy

–      Family farming in U.S. serves as example of mixed economy

•       traditional: all members of family help bring in harvest

•       command: affected by government—public school, roads, Social Security

•       market: own land, sell their products in competitive market

•       Types of Mixed Economies

–      U.S. basically has market system

–      European countries greater mix of market and command elements

•       France—government controls some industries; provides social services

•       Sweden—state owns part of all companies; lifelong benefits, high taxes

•       Namibia—traditional; state supports market, foreign investment

Trends in Modern Economies

•       Changes in Ownership

–      Nationalize is to change from private to government ownership

–      Privatize is to change from government to private ownership

Production

•       The act of making goods and services to satisfy human wants and to maximize profits

•       Refers to;

–      Manufacturing of goods

–      Distributing the goods produced

–      Providing services

Factors of Production

•       Land (natural resources)

•       Labor (Human factor)

•       Capital (man-made)

•       Entrepreneur (Management)

Land

•       Includes;

–      Raw materials such as copper, timber and rubber

–      Land such as mountains, valleys and hills

–      Pot such as natural harbor

–      Climatic conditions such as rain and snow

–      Geographical Location such as continents and islands

Labor

•       Defined as any kind of work, either mental or manual in nature, which the sole purpose of receiving rewards

Capital

Defined as wealth used for production

•       Types:

–      Working Capital – refers to the raw materials, semi-finished product that can be used for the final product to be produce

–      Fixed Capital – defines as the physical asset or durables, examples, machineries and utilities

–      Social Capital – refers to the labor force, educational background, medical, housing and recreational facilities

Entrepreneur

•       Is usually the organizer in a company, responsible for arranging how production should take place

•       The Manager of the business

•       Inputs and Outputs in Economics

•       Inputs

–      Are commodities or services that are used to produce goods and services.

–      Examples are the Factors of Production: Land, Labor, Capital, Entrepreneur

•       Outputs

–      Are various useful goods or services that result from production process and either consumed or employed in further production.

–      Examples are the Rent, Wages, Income and ideas.

What is a Demand?

•       Is the desire to buy goods and services with the ability to pay.

•       Simple, demand is the willingness and the ability to pay for goods and services.

•        Demand in this context would refer to effective demand

Law of Demand

•       When Price increases, Demand decreases, When Price decreases, Demand increases.

•        Price is the independent variable quantity Demand is the dependent variable.

                Price é Demand ê (P é - D ê)

                Price ê Demand é (P ê - D é)

Factors affecting demand include

–      Fashion, Taste and Demand

–      Changes in Income

–      Changes in Population

–      Changes in the Price of Related Goods

–      Advertisement

–      Introduction of New Product

–      Festive Seasons

–      Emergency Situation

Exceptional Demand Curve

•       Giffen Goods – are normally of poor quality and they constitute a large part of the poor man’s expenditure (ex. Salted fish, broken rice)

•       Festive Seasons

•       Goods with snob appeal (ex. Jewelry and cars)

•       When relate price and quality

•       Emergency Situation

•       Speculation

Other Related Demand

•       Complementary/ Joint Demand – are goods that are demanded together to fulfill one’s satisfaction. (ex. When there is an increase in the demand of Good X , the demand for good Y will also increase.

•       Competitive Demand – goods that can be substituted for one another. (The increase in the Demand of Good X will lead to fall in the demand for God Y)

•       Derived Demand – Goods are demanded not for what they are but to help in the production process (ex. Production of other goods)

•       Composite Demand – Goods are demanded because they have alternative uses. (ex. Water)

What is Supply?

•       Supply can be defined as the quantity of any good and service offered for sale at a given price.

•       Simply, it is the willingness and ability of seller to sell goods and services at different prices

Law of Supply

•       When price increases, supply increases. When price decreases, supply decreases.

•        Price is the independent variable quantity, supply is the independent variable.

                                Price é Supply é (P é - S é)

                                Price ê Supply ê (P ê - S ê)

•       Factors affecting supply include:

–      Climatic Condition

–      Cost of Production

–      Technological Advancement

–      Government Policies

–      Time Period

–      Price of Related Goods

Related Supply

•       Joint Supply – the supply of one good will automatically increase the supply of another good

•       Competitive Supply – an increase in the supply of one product will bring about a reduction in the supply of another good.

•       Equilibrium

–      Refers to a situation in which the price has reached the level where quantity supplied equals quantity demand.

•       Equilibrium Price

–      The price that balances quantity supplied and quantity demanded.

–      On a graph, it is the price at which the supply and demand curves intersect.

•       Equilibrium Quantity

–      The quantity supplied and the quantity demanded at the equilibrium price.

–      On a graph it is the quantity at which the supply and demand curves intersect.

Elasticity

•       Elasticity - a measure of how much buyers and sellers respond to changes in market conditions, allows us to analyze supply and demand with greater precision

1. Price elasticity of Demand

–      measures how much the quantity demanded responds to a change in price

–      Demand for a good is said to be elastic if the quantity demanded responds greatly to changes in the price (greater than 1)

–      Demand is said to be inelastic if the quantity demanded responds only slightly to changes in the price (less than 1)

–      Demand is said to be unit elastic if the quantity demanded responds a relatively larger changes in the price (exactly 1)

Ed

•       Necessities tend to have inelastic demands

•       Luxuries have elastic demands

–      Goods with close substitutes tend to have more elastic demand because it is easier for consumers to switch from that good to others.

–      For example, butter and margarine are easily substitutable. A small increase in the price of butter, assuming the price of margarine is held fixed, causes the quantity of butter sold to fall by a large amount.

•       By contrast, because eggs are a food without a close substitute, the demand for eggs is probably less elastic than the demand for butter.

•       Demand is inelastic when the elasticity is less than 1, so that quantity moves proportionately less than the price.

•       If the elasticity is exactly 1, so that quantity moves the same amount proportionately as price, demand is said to have unit elasticity.

•       Demand is Elastic if it is greater than 1

2. Income Elasticity of Demand

•       Measures how the quantity demanded changes as consumer income changes.

•       The income elasticity is the percentage change in quantity demanded divided by the percentage change in income.

•       Normal goods

–      Higher income raises quantity demanded.

–      Because quantity demanded and income move in the same direction,

–      normal goods have positive income elasticities

–      the income elasticity of demand is exactly 1.

•       Necessities

–      such as food and clothing, tend to have small income elasticities

–      because consumers, regardless of how low their incomes, choose to buy some of these goods

–      the income elasticity of demand is less than 1.

•       Luxuries

–      such as caviar and furs, tend to have large income elasticities

–      because consumers feel that they can do without these goods altogether if their income is too low

–      the income elasticity of demand is greater than 1

•       Inferior goods

–      Higher income lowers the quantity demanded.

–      Because quantity demanded and income move in opposite directions

–      inferior goods have negative income elasticities

3. Cross-Price Elasticity of Demand

•       Measures how the quantity demanded of one good changes as the price of another good changes.

•       It is calculated as the percentage change in quantity demanded of good 1 divided by the percentage change in the price of good 2

•       Cross-price elasticity is a positive or negative number depends on whether the two goods are substitutes or complements

•       Substitutes are goods that are typically used in place of one another, such as hamburgers and hot dogs.

–      An increase in hot dog prices induces people to grill hamburgers instead.

–      Because the price of hot dogs and the quantity of hamburgers demanded move in the same direction, the cross-price elasticity is positive.

•       Conversely, complements are goods that are typically used together, such as computers and software.

–      In this case, the cross-price elasticity is negative, indicating that an increase in the price of computers reduces the quantity of software demanded.

4. Elasticity of  Supply

•       Measures how much the quantity supplied responds to changes in the price

•       Supply of a good is said to be elastic if the quantity supplied responds substantially to changes in the price ((greater than 1)

•       Supply is said to be inelasticif the quantity supplied responds only slightly to changes in the price  (less than 1)

•       Supply is said to be unit elastic if the quantity supplied responds relatively larger to changes in the price  (exactly 1)

Surplus

•       when price greater than equilibrium price, then quantity supplied greater than quantity demand

•       There is excess supply or a surplus

•       Suppliers will lower the price to increase sales, thereby moving toward equilibrium

Shortage

•       When the price is less than equilibrium price, then quantity demanded greater than the quantity supplied

•       There is excess demand or a shortage

•       Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium

 Market Structures

•       Perfect or Pure Competition

–      Pure or perfect competition is rare in the real world

–      But the model is important because it helps analyze industries with characteristics similar to pure competition.

–      Examples of this model are stock market and agricultural industries

Characteristics

1.       Many sellers: there are enough so that a single seller’s decision has no impact on market price.

2.       Homogenous or standardized products: each seller’s product is identical to its competitors’.

3.       Firms are price takers: individual firms must accept the market price and can exert no influence on price.

4.       Free entry and exit: no significant barriers prevent firms from entering or leaving the industry

5.       There are many buyer in the market but they cannot control the prices (depend only on Demand and Supply)

6.       All sellers and buyers treated equally

•       Monopolistic Competition

•       Refers to a market situation with a relatively large number of sellers offering similar but not identical products.

•       Examples are fast food restaurants and clothing stores.

Characteristics

1.       A lot of firms: each has a small percentage of the total market.

2.       Differentiated products: variety of the product makes this model different from pure competition model. Product differentiated in style, brand name, location, advertisement, packaging, pricing strategies, etc.

3.       Easy entry or exit.

•       Oligopoly

•       Oligopoly exists where few large firms producing a homogeneous or differentiated product dominate a market.

•       Examples are automobile and gasoline industries.

Characteristics

1.       Few large firms: each must consider its rivals’ reactions in response to its decisions about prices, output, and advertising.

2.       Standardized or differentiated products.

3.       Entry is hard: economies of scale, huge capital investment may be the barriers to enter.

•       Cartel

•       An organization of producers seeking to limit or eliminate competition among its members

•       Most often by agreeing to restrict output to keep prices higher than would occur under competitive conditions.

•       Cartels are inherently unstable because of the potential for producers to defect from the agreement and capture larger markets by selling at lower prices.

•       Pure Monopoly

–      Pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes.

–      Examples are public utilities and professional sports leagues.

Characteristics

1.       A single seller: the firm and industry are synonymous.

2.       Unique product: no close substitutes for the firm’s product.

3.       The firm is the price maker: the firm has considerable control over the price because it can control the quantity supplied.

4.       Entry or exit is blocked.

Business Organization

•       Sole Proprietorship

•       is the simplest business form under which one can operate a business.

•       sole proprietorship is not a legal entity

•       It simply refers to a person who owns the business and is personally responsible for its debts.

•       Partnership

•       A business organization in which two or more individuals manage and operate the business.

•       Both owners are equally and personally liable for the debts from the business.

•       Cooperatives

•       Cooperatives are businesses governed on the principle of one member, one vote.

•       There are several common types of co-ops (as well as hybrids—which combine more than one type)

•       Corporation

•       A legal entity owned by stockholders whose liability is limited to the value of their stock

Inflation

•       A sustained and continuous increase in the general price level.

Types of Inflation

•       Demand Pull Inflation

–      Occurs when demand for goods and services exceeds supply

•       Cost-push Inflation

–      Increase in the cost production results in price increases

Unemployment

•       The situation in which people are willing and able to work at current wage rates, but do not have jobs.

Kinds of Unemployment

•       Frictional Unemployment – short-run job/skill match problems that last for few weeks

•       Cyclical Unemployment - swings of Business Cycle

•       Structural Unemployment -fundamental change in the operations

•       Seasonal Unemployment

•       Technological Unemployment

•       Labor force - That group of people 16 years of age and older who are either employed or unemployed.

Money

•       Money is any good that is widely accepted in exchange of goods and services, as well as payment of debts. Most people will confuse the definition of money with other things, like income, wealth, and credit

Functions of Money

•       Medium of exchange: Money can be used for buying and selling goods and services. If there were no money, goods would have to be exchanged through the process of barter (goods would be traded for other goods in transactions arranged on the basis of mutual need).

•       Unit of account: Money is the common standard for measuring relative worth of goods and service.

•       Store of value: Money is the most liquid asset (Liquidity measures how easily assets can be spent to buy goods and services). Money’s value can be retained over time. It is a convenient way to store wealth.

Monetary Policy

·         Monetary policy is how central banks manage liquidity to create economic growth. Liquidity is how much there is in the money supply. That includes credit, cash, checks and money market mutual funds. The most important of these is credit. It includes loans, bonds and mortgages.

·         Objectives: The primary objective of central banks is to manage inflation. The second is to reduce unemployment, but only after they have controlled inflation.

Expansionary Monetary Policy

•       Expansionary monetary policy is when a central bank uses its tools to stimulate the economy.

•       That increases the money supply, lowers interest rates and increases aggregate demand.

•       That boosts growth as measured by gross domestic product. 

•       It usually diminishes the value of the currency, thereby decreasing the exchange rate. It is the opposite of contractionary monetary policy.

•       Expansionary monetary policy is used to ward off the contractionary phase of the business cycle.

Contractionary Monetary Policy

•       Contractionary monetary policy is when the Federal Reserve slows economic growth to prevent inflation.

•       The Fed must do this without pushing the economy into a recession.

•       The Fed's target for inflation is 2% for the core inflation rate. That's year-over-year price increases except volatile food and oil prices.

•       A contractionary monetary policy is an macroeconomic strategy used by a central bank to decrease the supply of money in the market in an effort to control inflation.

•       The Federal Reserve and the government control the money supply by adjusting interest rates, purchasing government securities on the open market, and adjusting government spending.

Business Cycle

•       Business cycle is the downward and upward movement of levels of gross domestic product (GDP) and refers to the period of expansions and contractions in the level of economic activities (business fluctuations) around its long-term growth trend.

•       Expansion (Boom) – peak , A state of economic prosperity

•       Recession (Slump) – from a peak down to a through

Causes of Business Cycle

•       Changes in Capital Expenditures

•       Inventory Adjustments

•       Monetary Factors

Fiscal Policy

•       Fiscal policy is the government spending and taxation that influences the economy. Elected officials should coordinate with monetary policy to create healthy economic growth.

Expansionary Fiscal Policy

•       Expansionary fiscal policy is when the government uses its budgeting tools to add capital to the economy.

•       These tools are either increased spending or tax cuts.

•       They provide consumers and businesses with more money to spend.

•       To increase spending, the government can increase discretionary spending, including military expenditures.

•       It can also raise payments in mandatory programs such as Social Security, Medicare or welfare programs.

•       Sometimes these payments are called transfer payments because they reallocate funds from taxpayers to targeted demographic groups.  

•       For example, one transfer payment that's not a mandatory program is expanded unemployment benefits.

•       The government has many tax cuts to choose from. They include taxes on income, capital gains and dividends. It can also cut small business, payroll and corporate taxes.

Purpose

•       The purpose of an expansionary fiscal policy is to boost growth to a healthy economic level during the contractionary phase of the business cycle.

•       The government wants to reduce unemployment, increase consumer demand and avoid a recession.

•       If a recession has already occurred, then it seeks to end the recession and prevent a depression.

Contractionary Fiscal Policy

•       Contractionary fiscal policy is a form of fiscal policy that involves increasing taxes, decreasing government expenditures or both in order to fight inflationary pressures.

•       Due to an increase in taxes, households have less disposal income to spend. Lower disposal income decreases consumption.

•       An increase in taxes also reduces profits available to businesses and they cut down their investment expenditures. Consumption and private investment are part of GDP, so GDP falls as a result. However, this fall is magnified by the multiplier effect.

Purpose

•       The purpose of contractionary fiscal policy is to slow growth to a healthy economic level. That's between 2 percent to 3 percent a year. An economy that grows more than 3 percent creates four negative consequences.

Exchange Rates

•       Depreciation

•       fall in the price of a nation’s currency relative to foreign currencies

•       Appreciation

•       is a rise in the price of nations currency relative to foreign currencies

•       Devaluation

•       government policy that lowers the nations exchange rate

International Trade

•       Imports

•       are goods and services brought by people in one country that are produce in other countries

•       Exports

•       are goods brought from our country to other country

•       Tariff

•       is a government imposed tax on imports

•       Dumping

•       takes place when a firm or an industry sells products on the world market at prices below the cost of production

Taxation

•       It is an inherent power of the state to impose and collect revenues to defray the necessary expenses of the government.

•       It is compulsory contribution imposed by a public authority irrespective of the amount of services rendered to the payer in return.

•       It is compulsory level on private individuals and organization by the government to raise revenue to finance expenditure on public goods and services.

Purpose of Taxation

•       To collect revenue for the government

•       To redistribute income

•       To combat inflation

•       To correct an adverse balance of payment

•       To check consumption of goods which are considered undesirable

•       To protect local infant industries

•       To influence population trend

•       To improve unfavorable terms of trade

•       To reallocate resources to create a sense of identity

Sources and Origin of Taxation

•       The Constitution

•       Statutes or Presidential Degrees

•       Bureau of Internal Revenue regulations

•       Judicial Decision

•       Provincial, Municipal and Barrio Ordinances

•       Observance of International Agreement

•       Administrative Ruling and Opinions

Classification of Tax System

•       Progressive Income Tax

•       The Higher the income the higher the tax rate.

•       Proportional Tax

•       The tax rate is constant and unaffected by the level of income.

•       Regressive Tax

•       The higher the income the lower the tax rate.

Classification: As to who bears the burden

•       Direct Taxes

•       The burden cannot be shifted  to the third party

•       Direct taxes are based on income and wealth

•       In most cases, direct taxes are progressive in nature

•       Direct taxes are compulsory in nature

•       Examples: income tax, residence tax, real state, immigration tax, estate/gift/inheritance tax.

•       Indirect Taxes

•       The tax burden can be shifted to the third party

•       Indirect taxes are based on expenditure and consumption

•       All indirect taxes are regressive in nature

•       Indirect taxes are optional in the sense that they can be avoided

•       Examples: sales tax, import tax, VAT/EVAT

Classification: As to Scope/ Authority

•       National Taxes – imposed by the National Government under the National Internal Revenue Code and other laws particularly the Tariff and Customs Code

•       Local Taxes – imposed by the local government to meet particular needs under the Local Government Code, such as Real Property Tax and the Community Tax

Classification: As to purpose

•       General – as a whole

•        and Specific – per product

Classification: As to determination of the amount

•       Specific –one imposed and based on weight, volume capacity, length, number or any other physical unit of measurement.

•       Ad valorem – one imposed and based on selling price or other specified value of the article

Classification: As to the subject matter

•       Personal Property

•       Capitation or Poll Tax

•       Property Tax

•       Excise Tax – are taxes imposed on certain specified goods manufactured or produced in the Philippines for domestic sale or consumption

Other Taxes

•       Estate Tax – is a tax on the right of the deceased person to transmit his estate to his heirs or beneficiaries.

•       Inheritance Tax – is a tax on the right of the heirs or beneficiaries to receive the estate of the deceased person. It is no longer imposed.

•       Donation Tax – is an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another who accept it.

•       Gift Tax – is a tax imposed on the transfer without consideration of property or money between two or more persons who are living at the time the transfer is made.

•       Value-Added Tax (VAT) - is a percentage tax imposed on every sale, barter, exchange, or lease of goods or properties or sale of services

•       Documentary Stamp Tax – is a tax on documents, instruments and papers evidencing the acceptance, assignment, sale or transfer of an obligation, right or property incident thereto

•       Customs Duties – are taxes levied by a government on the importation or exportation of goods in or out of the country

•       Tariff – means a book of rates; a schedule of fees imposed on goods imported into a country

Personal Exemption for Individual Taxpayer

•       For single individual or married individual judicially decreed as legally separated with no qualified dependents P20,000

•       For Head of Family P25,000

•       For each married individual P32,000

•       In the case of married individuals where only one of the spouses is deriving gross income, only such spouse shall be allowed the personal exemption.

•       an additional exemption of Eight

•       thousand pesos (P8,000) for each dependent not exceeding four (4)

The following individuals
are required to file an income tax return:

•       (a) Every Filipino citizen residing in the Philippines;

•       (b) Every Filipino citizen residing outside the Philippines, on his income from sources within the Philippines;

•       (c) Every alien residing in the Philippines, on income derived from sources within the Philippines; and

•       (d) Every nonresident alien engaged

The following individuals shall not be required to file an income tax return:

•       (a) An individual whose gross income does not exceed his total personal and additional exemptions

•       (b) An individual earning from a single employer pure compensation income not exceeding Php 60,000.00 the income tax on which has already been correctly withheld by the employer, are no longer required to file the annual income tax returns

•       (c) An individual whose sole income has been subjected to final withholding tax

•       (d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or special.

Characteristics of a Sound Tax System

•       Efficiency

•       Must generated revenue greater than the amount of money the government must spend to collect taxes.

•       Equity

•       Individual and groups belonging to the same income bracket must be taxed equally while belonging to different income groups must be taxed differently.

•       Convenience

•       to set up measures and procedures that will make it more convenient for taxpayers to pay.

•       Stability

•       tax system must not be too often or it will encourage tax payers to withhold tax payment until a more preferred system is put in place

Agrarian Reform

•       Republic Act No. 6657

•       The Comprehensive Agrarian Reform Law of 1988 which was signed into law by Pres. Corazon Aquino

•       Meaning

•       The redistribution of lands, regardless of crops or fruits produced to farmers

•       and regular farm workers who are landless, irrespective of tenurial arrangement to include the totality of factors and support services

•       designed to lift their economic status of the beneficiaries and all other arrangements alternative to physical redistribution of lands,

•       such as production, profit sharing, labor administration and the distribution of shares of stocks.

Principles of Agrarian Reform

•       The policy of the state to pursue a comprehensive Agrarian Reform Program (CARP) to:

•       To promote social justice

•       To move the nation toward sound rural development and industrialization

•       To establish owner-cultivatorship of economic sized farms as basis of Philippine agriculture.

Coverage of CARP

•       All alienable and disposable lands of the public domain devoted to or suitable for agriculture

•       All lands of the public domain in excess of the specific limits as determined by the Congress

•       All other lands owned by the governments devoted to or suitable for agriculture

•       All public lands devoted to or suitable for agriculture regardless of the agricultural products raised or can be raised.

Retention Limits

•       Five hectares for land owners

•       Three hectares to be awarded to each child of the landowner subject to the following qualification:

•       At least 15 years old

•       Actually tilling the soil or directly managing the farm

Beneficiaries

•       Agricultural lessees and share tenants

•       Regular farm workers

•       Seasonal farm workers

•       Other farm workers

•       Actual tillers or occupants of public lands

•       Collectives or cooperatives

•       Other directly working on the land

Salient Features of CARP

•       CARP covers all agricultural lands and not only devoted to rice and corn

•       CARP covers not only those privately owned tenanted lands but also that of agricultural land owned by Multinational Corporations and commercial farms.

•       Lower retention limits of three hectares

•       Rights of indigenous communities, to their ancestral lands are protected to ensure their economic, social and cultural well being

•       In determining just compensation, the cost of acquisition of the land, the current value of like properties, its nature, actual use and income,

•       the sworn valuation of the owner, the tax declarations and the assessment made by the government assessors shall be considered.

•       Lands awarded to beneficiaries shall be paid to the Land Bank of the Philippines in 30 annual amortization at six percent interest per annum.

Cooperatives

•       New Cooperative Laws

•       Cooperative Code of the Philippines (RA 6938),

•       Cooperative Development Authority (RA 6939) and

•       Executive Order 95 and 96 issued by President Fidel Valdes Ramos.

Definition

•       A free association of persons voluntarily joined together

•       With common bond of interest

•       Legally constituted

•       Purpose of conducting an economic enterprise

•       Owned, controlled and administered democratically

•       Making equitable contributions to the capital required

•       Accepting a fair share of the risks and benefits

•       Organized in accordance with generally accepted principles

Universal Principles of Cooperativism

1. Open and Voluntary Membership - No artificial discrimination against individuals because of their race, creed or political affiliation, freedom of entry and exit of any member of the cooperative

2. Democratic Control – In order for members to gain entry to the cooperatives, they must purchase shares of the cooperative, obtain the right to govern the organization, voting rights of the owner are on the basis of one person, one vote.

3. Limited Interest on Capital – Capital in a cooperative is like a loan because the owners of the capital can expect to received a rate of return not exceeding that of the prevailing market interest rates on investing.

4. Division on Net Surplus – Net surplus should be distributed as follows:

                                Item                        % allocation

General Reserve Fund                      At least 10%

Education/Training Fund                   At Least 10%

Optional Fund                                      At Least 10%

Dividend/Patronage Refund             Remaining Balance of Savings

               

Education/Training Funds – for members and Management trainings

Optional Funds – discretion of cooperatives for purposes of acquiring land construction of a building or community development

Dividends/Patronage Refunds – the volume of transaction that members have with the cooperative

5. Continuing Membership

–      Pre-membership education seminar as required for entry to the cooperative

–      Special trainings for the cooperative leadership and members

6. Cooperation Among Cooperative – interlending and pooling of funds

Typologies of Cooperative

According to Level of Cooperatives

•       Primary – members of which are natural

•       Secondary – members of which are primaries

•       Tertiary – members of which are secondary upward to one or more apex organization

According to Services Rendered

•       Credits

–      is one, which promotes thrift among its members, and creates funds in order to grant loans for productive and provident purposes.

•       Consumer

–      is one wherein the primary purpose is to procure and distribute commodities to members and non-members.

•       Producers

–      is one which undertakes joint production whether agricultural or industrial;

•       Marketing Cooperative

–      is one which engages in the supply of production inputs to members and in turn market their products.

•       Service

–      is one engages in medical and dental care, hospitalization, transportation, insurance, housing, labor, electricity, communications and other services.

•       Multipurpose

–      is one which combines two or more activities o these different types of cooperatives

According to Scope of Membership

•       Institutional

–      Members are employees of a specific institution or corporation

•       Associational

–      Members are those who have their own enterprise and belong to specific sector or organization.

•       Community-Level

–      Members are based on a defined geographical area.

Sources:

•       MET LET Reviewer Social Science 2011

•       Philippine Normal University LET Reviewer, 2006

•       Cooperative Code of the Philippines

•       Revenue Code of the Philippines

•       Comprehensive Agrarian Reform Program Law

•       St. Louie Review Center LET Reviewer for Social Science: Economics, 2014

•       Textbook on Agrarian Reform and Taxation by Hector S. De Leon, 2000

•       https://www.thebalance.com/what-is-fiscal-policy-types-objectives-and-tools-3305844