Public Finance

1. Explain the economic growth.

2. Discuss the Welfare state in terms of Labours.    

3. What do you understand by Social Welfare Function? Explain.    

Case Detail:  
Case Study:

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.
Key Points:
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:

Question
1. What effect does eliminating these expenditures have on GDP, jobs, and federal revenue? 

2. 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?

Question No.  1    Marks - 10
For bad debts to be deductible, the following requisites must concur, except:    

Options    
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:    

Options    
Depletion    
Depreciation    
Declination      
Deduction
A 2
Question No.  3    Marks - 10
Under present law, a family with six children will have a maximum tax exemption of:    

Options    
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:    

Options    
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:    

Options    
Tax-exempt    
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:    

Options    
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:    

Options    
Closely-held corporations    
Banks    
Publicly-held corporations      
Insurance companies
Question No.  8    Marks - 10
The Withholding Tax System was devised for the following reasons, except:    

Options    
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:    

Options    
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?    

Options    
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?    

Options    
Income Tax    
Entertainment Tax    
Profit Tax      
Wealth Tax
Question No.  12    Marks - 10
Which of the following is a Direct Tax?    

Options    
Sales Tax    
Income Tax    
Value Added Tax      
Entertainment Tax
Question No.  13    Marks - 10
Which of the following is a Revenue Receipt?    

Options    
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?    

Options    
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:    

Options    
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:    

Options    
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?    

Options    
Income Tax    
Sales Tax    
License Fee      
Excise Duty
Question No.  18    Marks - 10
Identify the Revenue Expenditure:    

Options    
Subsidies    
Loan given to the State Government    
Repayment of loans      
Construction of a school building

Question No.  19    Marks - 10
Identify the Capital Receipts:    

Options    
Penalty    
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...................    

Options    
Expansion    
Acquisition    
Modernization      
All of the above
Question No.  21    Marks - 10
The primary budget deficit refers to:    

Options    
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:    

Options    
$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:    

Options    
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:    

Options    
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:    

Options    
$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:    

Options    
–2    
2    
1.3      
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:    

Options    
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:    

Options    
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:    

Options    
(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    

Options    
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?    

Options    
0.031.    
0.04    
1.605      
53.5
Question No.  32    Marks - 10
Since 1979, the debt-to-GDP ratio started to increase in U.S. because:    

Options    
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:    

Options    
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:    

Options    
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.    

Options    
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:    
Options    
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:    

Options    
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:    

Options    
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:    

Options    
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
A3
Question No.  40    Marks - 10
An example of discretionary fiscal policy would be:    

Options    
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
A3