“CHẮC CHẮN Ư?
TRÊN ĐỜI KHÔNG CÓ GÌ LÀ CHẮC CHẮN, TRỪ CÁI CHẾT VÀ THUẾ”
BENJAMIN FRANKLIN, 1706 - 1790
Questions
2
• What are characteristics of Budget Revenues?
Introduction • What are characteristics of Taxation?
to taxation
• What are the various ways in which tax systems affect economic
efficiency?
CHAPTER 8: TAXATION Effect of
taxation
AND ECONOMIC
EFFICIENCY Principles of
• What are the five key attributes that a good tax system should have?
• What are the difficulties in determining what is a “fair” tax system?
taxation
1. Budget Revenue 1. Budget Revenue
3 4
1.1. Budget Revenue in Vietnam 1.1. Budget Revenue in Vietnam
25,6% GDP
12,2%
78,8% Tot.Bud.Rev
11,45%
Nguồn: VERP, Vienam Annual Economic Report 2020. Nguồn: VERP, Vienam Annual Economic Report 2020.
1. Budget Revenue 1. Budget Revenue
5 6
1.1. Budget Revenue in Vietnam 1.1. Budget Revenue in Vietnam
Nguồn: VERP, Vienam Annual Economic Report 2020. Nguồn: VERP, Vienam Annual Economic Report 2020.
1
1. Budget Revenue 1. Budget Revenue
7 8
1.1. Budget Revenue in Vietnam 1.2. Nature of Budget Revenue
Government uses public power to centralize social
wealth which forms the budget revenue financing the
public expenditure
Budget revenue is formed by compulsion based on the
political power
Budget revenue is the devision of financial responsibility
between Government and other sectors
Sources: (See Ex.1)
Nguồn: VERP, Vienam Annual Economic Report 2020.
→ What are factors that impact amount of budget revenue?
1. Budget Revenue 1. Budget Revenue
9 10
1.3. Impact factors 1.3. Impact factors
Economy’s performance
Investment’s performance
International relationship
Inspectors’ organizational structure and effectiveness
(720 out of 870 FDI enterprises have violated tax law)
Public expenditure
Nguồn: VERP, Vienam Annual Economic Report 2020.
1. Budget Revenue 1. Budget Revenue
11 12
1.3. Impact factors 1.3. Impact factors
Nguồn: VERP, Vienam Annual Economic Report 2020. Nguồn: VERP, Vienam Annual Economic Report 2020.
2
2. Taxation 2. Taxation
13 14
2.1. Nature of Taxation 2.1. Nature of Taxation
Taxation is compulsory, inevitably painful, non-refundable:
Why should Government mobilize financial resources?
contributions to support public services need to be compulsory
because of the free rider problem: unless support for public
goods is made compulsory, no one will have an incentive to
contribute
all individuals may be made better off by being compelled to
contribute to the support of public goods
Government has ability to compel individuals’ support of public
goods, is also enable to compel individuals’ support of special
Source: https://www.ac2news.com/2014/04/government-auctions-off-west-pennsylvania-widows- interest groups (it can force one group to give up its resources to
home-for-owing-6-in-taxes/
another group)
2. Taxation 2. Taxation
15 16
2.1. Nature of Taxation 2.2. Forms of Taxation
Function: Tax system: value added tax, excise tax, export and import
tax, corporate income tax, personal income tax, agricultural
Supporting for public goods and services
land use tax, natural resource tax, environment tax,
Redistributing incomes among fields, regions, and environment fee, registration fee,…
groups of residence
Caterogies:
Managing and regulating the economy
Direct taxes (on individuals and corporations): individual income
tax, payroll tax, corporation income tax, estate and gift tax,...
Indirect taxes (on a variety of goods and services): customs
duties, excise taxes, sales tax, value-added tax,...
2. Taxation 2. Taxation
17 18
2.2. Forms of Taxation 2.2. Forms of Taxation
Tax revenue in Vietnam (2017): Tax revenue in Vietnam (2000-2018):
Source: FETP Source: FETP
3
2. Taxation 2. Taxation
19 20
2.2. Forms of Taxation 2.2. Forms of Taxation
Tax revenue in some countries (% GDP): Tax revenue
in some countries
(% total revenues,
2009):
Source:
Stiglitz and Rosengard, 2015,
Source: FETP p.511
2. Taxation 3. Principles of Taxation
21 22
2.2. Forms of Taxation 5 desirable characteristics of tax system
Tax reform in Vietnam (Decision 732/QĐ-TTg) Designing tax systems has always been a subject of
considerable controversy:
Domestic revenues/revenues: >70% (2015), >80%
(2020) most people would like to see their own taxes reduced
others should pay more
Budget revenues/GDP: 23%-24% (2011-2015)
Governments decide how best to raise the revenue they require
Growth: 16%-18%/year
Five accepted properties of a “good” tax system: Economic
efficiency, Administrative simplicity, Flexibility,
Transparent political responsibility, Fairness
Source: FETP
3. Principles of Taxation 4. Economic Efficiency (Impacts of Taxation)
23 24
5 desirable characteristics of tax system Distortion of taxation: behavioral effect of taxation
Economic efficiency: the tax system should not be distortionary; if
Effect of tax borne by consumers:
possible, it should be used to enhance economic efficiency
Price of good increases due to tax
Administrative simplicity: the tax system should have low costs of
administration (direct costs) and compliance (indirect cost) → tax shifts the budget constraint
down, the equilibrium changes
Flexibility: the tax system ought to be able to respond easily,
automatically, to changed economic circumstances from E to E*
Substitution effect: the amount by which the individual’s
Transparent political responsibility: the tax system should be
consumption of the taxed good is reduced because he or she is
designed so that individuals can ascertain what they are paying, and
worse off
evaluate how accurately the system reflects their preferences
Income effect: the extent to which consumption of the taxed
Fairness: the tax system ought to be fair in its relative treatment of good is reduced because of the increased relative price
different individuals
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4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
25 26
Distortion of taxation Distortion of taxation
Effect of tax borne by consumers: Effect of tax borne by consumers:
Price of good increases due to tax
Distortions: tax transfers purchasing power from the individual
to the government, individuals reduce their consumption of
something
Deadweight loss: the extra loss in welfare
A doubling of the tax rate more than doubles the deadweight loss
An increase in the elasticity of the demand curve increases the
deadweight loss
→ The deadweight loss of a tax increases with the elasticity of the
compensated demand curve and with the square of the tax rate
4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
27 28
Distortion of taxation Distortion of taxation
Effect of tax borne by producers: Effect of tax borne partially by consumers and partially by
Price of good increases due to tax producers
Distortions
Deadweight loss
4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
29 30
Distortion of taxation Distortion of taxation
Effect of tax borne partially by consumers and partially by Effect of tax borne partially by consumers and partially by
producers producers
5
4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
31 32
Distortion of taxation Distortion of taxation
Taxation of savings: price of good increases due to tax → the Taxation of labor income: wage of labor decreases due to tax →
individual allocates his or her income between consumption this taxes on labor reduce the return to working. The substitution effect
period and next period leads individuals to
work less (enjoy more
leisure), whereas the
income effect leads
individuals to work
more. The two effects
are offsetting
4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
33 34
Incidence of tax: financial effect of taxation Incidence of tax
Incidence of tax / Tax incidence / Burden of tax / Tax Wages might fall or prices might rise
burden: Wages fall: the tax shifted backward (to a factor of production,
Distinguishing between those who bear the burden of a tax and labor). If wages fall by the full amount of the tax, it means they
those on whom a tax is imposed or levied have been fully shifted; if wages fall by less than the amount of
Tax burden: the economic weight of a tax. It is the difference the tax, it means partially shifted
between the individual’s real income before and after the tax has Prices rise: the tax shifted forward (to consumers)
been imposed, taking full account of how wages and prices may
have adjusted.
The actual incidence of the tax may differ markedly from the
intended incidence
4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
35 36
Incidence of tax Incidence of tax
Tax incidence:
The incidence of a tax describes who actually bears the tax. It
does not depend on who writes the check to the government
It makes no difference whether a commodity tax is levied on
producers or consumers
It makes no difference whether payroll tax is paid half by the
employer and half by the employee, or entirely paid by one or
the other
In a competitive market, the incidences of an ad valorem tax and
an equivalent specific tax are identical
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4. Economic Efficiency (Impacts of Taxation) 4. Economic Efficiency (Impacts of Taxation)
37 38
Incidence of tax
Tax incidence in competative market:
In competitive markets, incidence depends on the
elasticity of demand and supply
A commodity tax is not borne at all by consumers if the
demand curve is perfectly elastic, or by producers if the
supply curve is perfectly elastic. It is borne completely
by consumers if the demand curve is perfectly
inelastic, or by producers if the supply curve is
perfectly inelastic
5. Administrative Efficiency 5. Administrative Efficiency
39 40
Source: VERP, Vietnam Annual Report 2020 Source: VERP, Vietnam Annual Report 2020
6. Vertical and Horizontal Equity 6. Vertical and Horizontal Equity
41 42
o (FTM 2020) o Horizontal equity: individuals who are identical (or in
essentially similar economic circumstances) should be
treated the same, and pay the same taxes
o Vertical equity: individuals who have greater ability to pay
or who are better off or receive greater benefits from
government services should pay more taxes
o Income is most often used as a basis of taxation, but it is an
indirect and imperfect measure of both ability to pay and
economic well-being
o Consumption may be “fairer”, it measures what one takes
Source: VERP, Vietnam Annual Report 2020 out of society rather than what one contributes
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7. Assessing taxation
43
Economic efficiency and social equity
Economic efficiency:
Tax revenues – Expenses
Time costs, Economic cost
Administrative costs
Other costs related to abiding tax (violating tax)
Using tax revenues effectively, avoiding redistribution from low to
high income groups
Ensuring sustainable tax revenues
Social equity:
Horizontal equity
Vertical equity
