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Public Finance HKSAR
CE Public Finance
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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.
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So public finance is concerned
with
The revenue and expenditure of the
government
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The government is referred to as
the public sector
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The size of the public sector is
measured by the
amount of public expenditure ( 100% )
GDP
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Public expenditure as % of GDP of the
HKSAR
1997-98
1998-99
1999-2000 2000-01
2001-02
17.7%
21.2%
22.0%
21.6%
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21.1%
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Sources of government revenue
• tax
• non-tax
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Classification
of taxes
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Classification of taxes
According to the party who bears the tax
burden, taxes can be classified into:
________
direct taxes and ________
indirect taxes
According to how the tax payment changes
with income, taxes can be classified into:
__________,
proportional and
progressive ____________
regressive taxes
__________
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Tax revenue ( 1 )
• Direct tax
• Indirect tax
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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?
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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.
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Quiz 1
Types
Profits tax
Estate duty
Direct tax




Stamp duties
Betting duties
Property tax
Salaries tax
Indirect tax


Classify the above Hong Kong taxes into
direct and indirect taxes.
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Tax Revenue ( 2 )
• Progressive tax;
• Proportional tax; and
• Regressive tax
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Progressive, proportional and regressive taxes
rogressive tax:
Tax payment takes ____________________
an increasing percentage of
taxable income as income increases.
roportional tax:
Tax payment takes ____________________
the same percentage of
taxable income as income increases.
egressive tax:
Tax payment takes ____________________
a decreasing percentage of
taxable income as income increases.
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income
Tax payment
A
Average tax rate
Tax payment
B
Average tax rate
Tax payment
C
Average tax rate
$150,000
$200,000
$15,000
$15,000
10%
7.5%
$10,000
$15,000
6.7%
7.5%
$12,000
$16,000
8%
8%
Fill in the blanks
of average tax rate !
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income
Tax payment
A
$15,000
$15,000
10%
7.5%
$10,000
$15,000
6.7%
7.5%
$12,000
$16,000
8%
8%
Average tax rate
Tax payment
C
$200,000
Average tax rate
Tax payment
B
$150,000
Average tax rate
Which type of tax is a progressive tax?
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income
Tax payment
A
$15,000
$15,000
10%
7.5%
$10,000
$15,000
6.7%
7.5%
$12,000
$16,000
8%
8%
Average tax rate
Tax payment
C
$200,000
Average tax rate
Tax payment
B
$150,000
Average tax rate
Which type of tax is a regressive tax?
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Progressive, proportional and regressive taxes
A, B and C are three types of tax:
Taxable income
Tax payment
A
$15,000
$15,000
10%
7.5%
$10,000
$15,000
6.7%
7.5%
$12,000
$16,000
8%
8%
Average tax rate
Tax payment
C
$200,000
Average tax rate
Tax payment
B
$150,000
Average tax rate
Which type of tax is a proportional tax?
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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?
regressive tax. Since all
It is a _________
passengers pay the same amount
of tax, tax payment takes a
smaller proportion of income
_______
for the higher income group.
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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.
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Quiz 3
When the tax payment increases as the
income increases, is it a progressive tax ?
e.g.
Taxable
income
100,000
150,000
Tax
payment
10,000
12,000
Average
tax rate
10%
8%
Fill in the average tax rates !
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Quiz 3
When the tax payment increases as the
income increases, is it a progressive tax ?
e.g.
Taxable
income
100,000
150,000
Tax
payment
10,000
12,000
Average
tax rate
10%
8%
The tax payment increases as
the income increases, but it is a
regressive
_________
tax.
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Non-tax revenue
• Examples:
sale of land; fines and penalty; government
fees and etc.
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