- Explain the economic growth.
Economic growth is an increase in the capacity of an economy to produce goods and services, compared from one period of time to another. It can be measured in nominal or real terms, the latter of which is adjusted for inflation. Traditionally, aggregate economic growth is measured in terms of gross national product (GNP) or gross domestic product (GDP), although alternative metrics are sometimes used. In simplest terms, economic growth refers to an increase in aggregate productivity. Often, but not necessarily, aggregate gains in productivity correlate with increased average marginal productivity. This means the average labourer in a given economy becomes, on average, more productive. It is also possible to achieve aggregate economic growth without an increased average marginal productivity through extra immigration or higher birth rates. There are only a few ways to generate economic growth. The first is a discovery of new or better economic resources. An example of this is the discovery of gasoline fuel; prior to the discovery of the energy-generating power of gasoline, the economic value of petroleum was relatively low. Gasoline became a "better" and more productive economic resource after this discovery.
Another way to generate economic growth is to grow the labour force. All else equal, more workers generate more economic goods and services. During the 19th century, a portion of the robust U.S. economic growth was due to a high influx of cheap, productive immigrant labour.
A third way to generate economic growth is to create superior technology or other capital goods. The rate of technical growth and capital growth is highly dependent on the rate of savings and investment, since savings and investment are necessary to engage in research and development.
The last method is increased specialization. This means labourers become more skilled at their crafts, raising their productivity through trial and error or simply more practice. Savings, investment and specialization are the most consistent and easily controlled methods.
The real economic growth rate measures economic growth, in relation to gross domestic product (GDP), from one period to another, adjusted for inflation - in other words, expressed in real as opposed to nominal terms. The real economic growth rate is expressed as a percentage that shows the rate of change for a country´s GDP from one period to another, typically from one year to the next. Another alternate economic growth measure is gross national product (GNP), which is sometimes preferred [if a nation´s economy is substantially dependent on foreign earnings.
- Discuss the Welfare state in terms of Labours.
Labour welfare is a flexible and elastic concept. Its meaning and implications differ widely with times, regions, industries, countries, social values and customs, the general economic development of the people and the political ideologies prevailing at particular moments. As such, a precise definition is rather difficult. According to Balfour committee, “Labour welfare refers to the efforts made by the employers to improve the working and living conditions over and above the wages paid to them. In its widest sense it comprises all matters affecting the health, safety, comfort and general welfare of the workmen, and includes provision for education, recreation, thrift schemes, convalescent homes”. It covers almost fields of activities of workers e.g., social, economic, industrial and educational.
According to Labour Investigation Committee, “Anything done for the intellectual, physical, moral and economic betterment of the workers, whether by the employers, by the government or by other agencies over and above what is laid down by law or what is normally expected on the part of the contractual benefits for which worker may have bargained.” Labor welfare implies the setting up of minimum desirable standards of the provision of facilities like health, food, clothing, housing, medical assistance, education, insurance, job security, recreation etc. Such facilities enable the worker and his family to lead a good working life, family life and social life.
Labor Welfare thus embraces in its fold all efforts which have their object of improvement of health, safety welfare and general well-being of the workers. It is confined to those activities which are undertaken statutorily or otherwise, inside the industrial premises or outside by any agency, government, employers which do not come under social insurance conditions, and which lead to improvement in health, efficiency and happiness of industrial workers and their families e.g. recreational, medical, educational, washing, bathing, transport facilities canteens and crèches, etc. Thus, the term labor welfare covers not only the workers but also their families.
- What do you understand by Social Welfare Function? Explain.
A social welfare function is a function that ranks social states (alternative complete descriptions of the society) as less desirable, more desirable, or indifferent for every possible pair of social states. Inputs of the function include any variables considered to affect the economic welfare of a society. In using welfare measures of persons in the society as inputs, the social welfare function is individualistic in form. One use of a social welfare function is to represent prospective patterns of collective choice as to alternative social states.
The social welfare function is analogous to the consumer theory of indifference-curve/budget constraint equilibrium for an individual, except that the social welfare function is a mapping of individual preferences or judgments of everyone in the society as to collective choices, which apply to all, whatever individual preferences are for (variable) constraints on factors of production. One point of a social welfare function is to determine how close the analogy is to an ordinal utility function for an individual with at least minimal restrictions suggested by welfare economics, including constraints on the amount of factors of production.
Social welfare functions have occupied the center stage of welfare economics since the philosopher Jeremy Bentham (1748-1832) and other utilitarian theorists advocated that humans should seek the greatest total welfare, understood as the sum of individual utilities. The noted economists Abram Bergson (1914-2003) and Paul A. Samuelson (b. 1915) generalized the concept. Following the seminal work of the economic theorists Kenneth J. Arrow (b. 1921) and Amartya K. Sen (b. 1933), the theory of social choice has examined the various possible forms of such functions in detail.
In the most standard form, a social welfare function is a mapping that determines the level of social welfare as a function of individual levels of welfare. In fact, a numerical measure of social welfare is not really needed for the evaluation of social situations; the only relevant part of a social welfare function is how it ranks social situations from the best to the worst.
The theory of social choice analyses two important features of a social welfare function. The first feature is its degree of aversion to inequalities between individual levels of welfare. For instance, the utilitarian function, computed as the sum of individual indices of welfare, is indifferent to inequalities because only the total matters. In contrast, the maxim in function, which identifies social welfare with the welfare of the worst-off individuals in the population, displays an infinite aversion to inequalities since it gives absolute priority to the worst off. There are countless intermediate possibilities between these two extreme functions. The second important feature of a social welfare function is the information about individual indices that is used by the function. For instance, the utilitarian function focuses on individual gains and losses when it compares two situations: A situation is better than another if the sum of welfare gains when one moves to it is greater than the sum of losses.
The Earned Income Tax Credit
The Earned Income Tax Credit (EITC) was introduced into the tax system in 1975as a small tax subsidy for the working poor with children. It has been expanded several times and now includes benefits for low-income earners without children, with one child, with two children, and with three or more children. The credit is refundable; after the credit has reduced a filer´s tax liability to zero, the filer is eligible to receive the remainder as a check from the government. The refundable part is technically classified as an outlay in federal budget documents, but people determine the entire credit on their tax forms. The JCT notes that its measure of the tax expenditure includes both the non-refundable and (much larger) refundable portions.
The EITC has three phases. In the first, each added dollar of earned income receives a federal matching credit, which sharply lowers the marginal tax rates of filers whose incomes are within that range. In the second phase, extra earned income has no effect on the credit´s size and no effect on marginal tax rates for filers whose incomes are on the plateau. In the third phase, extra income reduces the credit, which means that the phase-out sharply raises the marginal tax rates of filers whose incomes are within the phase-out range.
For example, in 2012, a single parent with three or more children received a 45 percent match on each dollar of earned income from zero to $13,090 (a marginal tax rate, or tax subsidy, of minus 45 percent), a constant EITC of $5,891 if earned income was in the range $13,090 to $17,090 (no marginal tax rate effect), and lost the credit at a rate of 21.06 cents for each extra dollar of income over the range $17,090-$45,060 (an effective marginal tax rate spike of 21.06 percent). The phase-in powerfully encourages people with very low incomes to work. The phase-out strongly discourages the larger number of people with somewhat higher incomes from working more. It is an empirical question what the net effect on the nation´s labour supply is.
When the Tax Foundation´s Taxes and Growth model is run under the conventional static revenue estimation assumption that all macroeconomic aggregates are fixed, it appears that eliminating the EITC would lift federal revenue by $56 billion. This is close to the Joint Committee on Taxation´s estimate that the EITC was a $59.0 billion tax expenditure in 2012.
When our model is rerun under the dynamic assumption that marginal tax rate changes alter aggregate investment, employment, and economic activity, the model estimates that the negative impact of the phase-out depresses the labour supply by more than the phase-in bolsters the labour supply. Once the economy has adjusted, GDP would be $34 billion higher without the EITC. Because of the growth effect, the model further estimates that the dynamic revenue increase, $64 billion, would exceed the static estimate.
The growth could be enhanced if the added revenue financed a cut in marginal tax rates. Chart 2, below, shows the outcome if the size of the rate cut were geared to the conventional static revenue estimate. Individual income tax rates could be dropped 5.7 percent (for instance, the current 25 percent rate would become 23.6 percent). The model estimates that as a result of trading the EITC for an across-the-board tax rate reduction, GDP would be a net $125 billion larger than otherwise and federal revenue would be a net $29 billion higher.
We believe that, on net, the EITC probably reduces total hours worked as people who are already in the labour force react adversely to the phase-out. However, several studies have found that the EITC encourages some people to enter the work force that otherwise would not at a rate greater than this model assumes. On the other hand, a second effect outside the model cuts in the other direction. A long series of studies by government watchdog agencies have found a considerable amount of EITC fraud, with over 20 percent of payments being improper. In cases where people have filed tax returns claiming phony work and phantom earned income in order to receive real EITC payments, the credit could be removed with no reduction in work effort in any area except for tax fraud investigation.
Finally, we determined the impact of these scenarios on employment and wages.
We found that eliminating the EITC would increase employment by the equivalent of about 274,000 full-time workers with little change in the hourly wage. With the rate cut offset, employment would increase by the equivalent of about 783,000 full-time workers and hourly wages would rise by 0.1 percent.
Eliminating the EITC would:
Increase tax revenues by $56 billion on a static basis;
Increase GDP by $34 billion; and
Produce slightly more revenues ($64 billion) on a dynamic basis;
Increase employment by the equivalent of approximately 274,000 full-time workers; and
Produce little change in hourly wages.
Eliminating the EITC and trading the static revenue gains for individual rate cuts would:
Allow for an across-the-board rate cut of 5.7 percent;
Boost GDP by $125 billion per year; and
Boost federal revenues by $29 billion on a dynamic basis;
Increase employment by the equivalent of approximately 783,000 full-time workers; and
Increase hourly wages by 0.1 percent
In these reports, Tax Foundation economists use our macroeconomic model to answer two questions lawmakers are considering:
- What effect does eliminating these expenditures have on GDP, jobs, and federal revenue?
Eliminating the deduction for charitable contributions would:
- Increase tax revenues by $39 billion on a static basis;
- Reduce GDP by $40 billion; and
- Generate slightly less revenues ($30 billion) on a dynamic basis;
- Reduce employment by the equivalent of approximately 131,000 full-time workers; and
- Reduce hourly wages by 0.2 per cent.
- Eliminating the deduction for charitable contributions and trading the static revenue gains for individual rate cuts would:
- Allow for an across-the-board rate cut of 3.7 per cent;
- Boost GDP by $19 billion per year; and
- Boost federal revenues by $4.5 billion on a dynamic basis;
- Increase employment by the equivalent of approximately 200,000 full-time workers; and
- Reduce hourly wages by 0.1 per cent.
The income tax´s charitable deduction serves the valuable purpose of encouraging private giving. Private charities are often more cost conscious, responsive, better targeted, and invite greater citizen participation than government outlay programs. The deduction also recognizes that people contributing to charities are transferring part of their incomes to others, which reduces their ability to pay taxes out of what remains. The Joint Committee on Taxation and the Treasury, however, classify the charitable deduction as tax expenditure because it would not be included in what they regard as a normal, broad-based income tax.
In the dynamic simulation that includes growth effects, our model also estimates that disallowing the charitable deduction would lower GDP by $40 billion, which would trim the revenue gain to $30 billion. The growth slowdown occurs in the model because the loss of the deduction increases people´s taxable incomes, pushing more of them into higher tax brackets. This may understate the harm because the model does not estimate the benefits mentioned above for charitable activities, some of which may have a favourable impact on growth.
- What would be the effect on GDP, jobs, and federal revenue if the static savings were used to finance tax cuts on a revenue neutral basis?
A corporate tax rate cut to 25 percent with no offsets would increase GDP and labor income by 1.97 percent, boost the capital stock (plant, equipment, and buildings) by 5.75 percent, and create the equivalent of 391,000 full-time jobs.
* Paying for the roughly $1.3 trillion static cost of cutting the tax rate, ignoring the growth effects, would require eliminating nearly every corporate tax expenditure in the code and would require further tax increases or spending cuts elsewhere.
* While eliminating some tax preferences has no negative economic effects, the majority of corporate tax preferences serves to lower capital costs and thus tend to negate the benefits of the lower rate when eliminated.
* In the most favorable case we simulated, eliminating most corporate tax breaks for a 25 percent rate would result in no growth.
* Ways to pay for the corporate rate cut in a pro-growth fashion include: (1) offsetting some of the base broadening measures by accounting for the dynamic revenue gains from the rate cut and/ or income shifting; (2) indexing longer depreciation schedules to inflation and the time value of money; (3) offsetting any revenue shortfalls from the rate cut by eliminating wasteful business subsidies on the spending side of the budget; phasing in the rate cut over time.
* This analysis was conducted prior to the release of Chairman Camp´s proposal and is based on the general goals for domestic corporate tax reform that have been widely discussed over the past year in both the House and Senate. Changes to international and individual tax provisions are excluded.
Tax Expenditures Used to Fund Rate Reduction
Cutting the corporate tax rate clearly raises GDP. However, paying for a rate cut by eliminating tax expenditures may negate the growth. The economic effect of eliminating tax expenditures depends on the nature of the tax expenditures.
Tax expenditures with small impact on economic growth
Some corporate tax expenditures do nothing at the margin to add to the incentive to produce additional output. These tax expenditures are often subsidies that primarily shift production from one set of firms to another, or substitute one type of input for another, with little impact on total production economy-wide. Some may so distort the mix of assets and products that they do more economic harm than good. Repealing those items would not reduce GDP (and might increase it); using the revenue to reduce the corporate tax rate would boost GDP. Examples include charitable contributions by businesses, the treatment of some financial businesses as cooperatives instead of taxable corporations, and subsidies that encourage the substitution of ethanol for gasoline or of hybrid cars for conventionally-powered vehicles.
Tax expenditures with large impact on economic growth
Many other tax expenditures, in our judgment, clearly affect the cost of producing additional national output. These include provisions that are deductions of the real costs of producing additional output or are alternative means of accounting for production expenses, including certain credits and allowances such as those related to amortization, depletion, and immediate expensing of capital assets for small businesses.9 Most of these "at the margin" tax provisions are in the tax code to offset situations in which the pure income tax would undercount costs and overstate income or in some other manner involve double taxation of income.10 They are roughly equivalent in their economic effect to a tax rate reduction; repealing them would be equivalent to a tax rate increase. Repealing them in isolation would reduce GDR Repealing them to pay for a portion of a tax rate reduction would neutralize the economic benefits of that portion of the tax rate cut.
Question No. 1 Marks - 10
For bad debts to be deductible, the following requisites must concur, except:
- There must be a valid a subsisting debt
- The debt must be connected with the taxpayer’s trade or business
- The debt must be actually worthless
- The debt must be partially charged-off within the taxable year
Question No. 2 Marks - 10
The gradual diminution of the useful value of tangible property resulting from ordinary wear and tear:
Question No. 3 Marks - 10
Under present law, a family with six children will have a maximum tax exemption of:
- P 200,000.00
- P 96,000.00
- P 150,000.00
- P 250,000.00
Question No. 4 Marks - 10
The following Resident Foreign Corporations are subject to preferential tax rates, except:
- Regional Operating Headquarters
- International Carriers
- Regional Area Headquarters
- Offshore Banking Units
Question No. 5 Marks - 10
A resident Filipino citizen who became an Overseas Contract Worker is taxed as follows:
- On income derived without the Philippines only
- On income derived within and without the Philippines
- On income derived within the Philippines only
Question No. 6 Marks - 10
The following may be considered De Minimis Benefits, except:
- Laundry Allowance
- Rice subsidy
- Expenses for Foreign Travel
- Medical benefits
Question No. 7 Marks - 10
The following are exempt from improperly accumulated earnings tax, except:
- Closely-held corporations
- Publicly-held corporations
- Insurance companies
Question No. 8 Marks - 10
The Withholding Tax System was devised for the following reasons, except:
- To provide the taxpayer a convenient manner to meet his probable income tax liability
- To ensure the collection of the income tax
- To improve the government’s cash flow
- To do away with the filing of income tax returns
Question No. 9 Marks - 10
The following property of a resident alien is subject to estate tax upon death:
- Real and Personal Property situated within the Philippines
- Real and Personal Property wherever situated
- Real and Personal Property outside the Philippines
- Only Real Property in the Philippines
Question No. 10 Marks - 10
Which is not included in the Gross Estate subject to Estate Tax?
- Transfers in contemplation of death
- Revocable Transfers
- Transfers for public use
- Transfers for Insufficient consideration
Question No. 11 Marks - 10
Which of the following is an Indirect Tax?
- Income Tax
- Entertainment Tax
- Profit Tax
- Wealth Tax
Question No. 12 Marks - 10
Which of the following is a Direct Tax?
- Sales Tax
- Income Tax
- Value Added Tax
- Entertainment Tax
Question No. 13 Marks - 10
Which of the following is a Revenue Receipt?
- Loan from the IMF
- Grant Received from the World Bank
- Borrowing from the Public
- Sale of the shares held by the government in HMT
Question No. 14 Marks - 10
Which of the following is a Capital Receipt?
- Profit Tax
- Railway Ticket Fare
- Fee of the Government Hospital
- Borrowing from the public
Question No. 15 Marks - 10
Pick the Odd one out from the following:
- Borrowing from the public
- Borrowing from the International Financial Organizations
- Borrowing from the RBI
- Recovery of Loans
Question No. 16 Marks - 10
Which of the following is not Capital Expenditure:
- Salary paid to the government employees
- Purchase of a machine from Korea
- Repayment of loan taken from the IMF
- Interest paid on National Debt
Question No. 17 Marks - 10
Which one of the following is not the form of Tax Revenue?
- Income Tax
- Sales Tax
- License Fee
- Excise Duty
Question No. 18 Marks - 10
Identify the Revenue Expenditure:
- Loan given to the State Government
- Repayment of loans
- Construction of a school building
Question No. 19 Marks - 10
Identify the Capital Receipts:
- Corporation Tax
- Dividends on Investments made by the government
- Sale of a Public Sector Undertaking
Question No. 20 Marks - 10
Firm’s investment decisions would generally include...................
- All of the above
Question No. 21 Marks - 10
The primary budget deficit refers to:
- The debt of the federal government
- Government expenditures plus transfers net of tax revenues
- Interest payment on government debt
- The reported budget deficit minus interest payments on government debt
Question No. 22 Marks - 10
If government expenditures are $454 billion, transfers $713 billion, tax receipts $1,490 billion, then the reported budget deficit is:
- $323 billion
- $1,167 billion
- $1,749 billion
- Cannot calculate, since we need figures for interest payments
Question No. 23 Marks - 10
Under a balanced budget policy, the government sets its reported deficit equal to zero. This implies that the government must run:
- A primary budget deficit equal to the interest payment on its outstanding debt
- A primary budget surplus equal to the interest payment on its outstanding debt
- A zero primary budget deficit
- A reported budget surplus
Question No. 24 Marks - 10
The government budget deficit is:
- A stock variable
- A flow variable
- Neither a flow nor a stock variable
- Always increasing over time
Question No. 25 Marks - 10
Suppose the government has outstanding debt obligations of $400 billion from last year, and it runs a deficit of $85 billion this year. If the nominal interest rate is 5%, then the reported deficit this year is:
- $65 billion
- $85 billion
- $105 billion
- Cannot calculate, need growth rate of nominal GDP.
Question No. 26 Marks - 10
The steady-state value of b for the difference equation bt = 0.2 + 1.10 bt–1 is:
- Does not exist since it is unstable
Question No. 27 Marks - 10
The steady-state of the difference equation 3xt = 6 + 1.5 xt–1 is:
- 4/3, which is stable
- 4/3, which is unstable
- 4, which is stable
- 4, which is unstable
Question No. 28 Marks - 10
Consider the difference equation yt = 4 + 0.5 yt–1. Which of the following statements about the long-run behaviour of y is true, if it starts from 0:
- yt diverges away from the steady-state value
- yt does not change over time
- yt converges to a steady-state value of 8/3
- yt converges to a steady-state value of 8
Question No. 29 Marks - 10
Let Bt denote the nominal value of government debt in the year t, i denote the interest rate, and Dt denote the primary budget deficit that the government runs in the year t. Which of the following equations describes the law of motion of government debt accurately:
- (1+ i)Bt = Bt 1 + Dt − .
- Bt = Bt−1 + (1+ i)Dt .
- Bt = (1+ i)Bt 1 + Dt − .
- Bt (1 i)Bt−1 Dt−1 = + +
Question No. 30 Marks - 10
The steady state of a difference equation is unstable, if
- The state variable always increases over time irrespective of the starting value.
- The state variable always decreases over time irrespective of the starting value.
- The state variable always moves towards the steady state, no matter where it starts out from.
- The state variable always moves away from the steady state if it does not start exactly at the steady state.
Question No. 31 Marks - 10
If the nominal rate of interest is 5%, the growth rate of GDP 7%, and the government runs a budget deficit equal 3% of GDP every year, what is the value of the steady-state debt-to-GDP ratio?
Question No. 32 Marks - 10
Since 1979, the debt-to-GDP ratio started to increase in U.S. because:
- The GDP growth rate was bigger than the nominal interest rate
- The nominal interest rate was bigger than the GDP growth rate
- The government cut down on its budget deficits
- The U.S. started to run trade surpluses
Question No. 33 Marks - 10
Fiscal Policy is controlled by:
- The Federal Reserve Board
- Congress and the President
- The Supreme Court
- Private banks
Question No. 34 Marks - 10
The purpose of fiscal policy is to:
- Alter the direction of the economy
- Change people´s attitudes toward government
- Educate people as to the importance of economics
- Offer insight into the way things work
Question No. 35 Marks - 10
Fiscal policy is purposeful movements in ................... designed to direct an economy.
- Interest rates
- Legal structures
- Government regulations
- Government spending and taxes
Question No. 36 Marks - 10
Discretionary Fiscal Policy differs from Nondiscretionary Fiscal Policy in that: The former deals with interest rates and the latter deals with tax policy The former is built into the system whereas the latter requires timely decisions (c ) The former requires timely decisions whereas the latter is built into the system The former deals with tax policy and the latter deals with interest rates 5. Discretionary Fiscal Policy differs from Nondiscretionary Fiscal Policy in that:
- The former deals with government spending and the latter deals with tax policy
- The former is chosen by Congress while the latter is chosen by the President
- The former is always stabilizing, while the latter is never stabilizing
- The former often takes years to enact, while the latter takes effect automatically
Question No. 37 Marks - 10
Replacement of a progressive income tax system with a single income tax rate would be an example of:
- Nondiscretionary fiscal policy
- Discretionary fiscal policy
- Mandatory spending policy
- Interest rate policy
Question No. 38 Marks - 10
An example of discretionary fiscal policy would be:
- The operation of the welfare state
- The operation of the progressive federal income tax
- A tax cut adopted to stimulate consumption
- An interest rate cut implemented to stimulate consumption
Question No. 39 Marks - 10
An example of discretionary fiscal policy would be:
- The operation of the welfare state
- The operation of the progressive federal income tax
- A tax increase adopted to control inflationary pressures
- An interest rate increase implemented to control inflationary pressures
Question No. 40 Marks - 10
An example of discretionary fiscal policy would be:
- The existence of the welfare state
- The existence of the progressive federal income tax
- A federal jobs program adopted to stimulate consumption
- an interest rate cut implemented to stimulate consumption