Public Finance, Taxation and Fiscal Policy
This section covers government revenue and spending, tax classification and fiscal policy, which the exam tests through budget definitions, tax calculations and policy effects. You should be able to distinguish direct from indirect taxes and explain how fiscal tools affect demand, output and debt.
Core rules
- Public finance studies government revenue, expenditure and debt. A budget deficit occurs when spending exceeds revenue; a surplus is the reverse.
- Direct taxes are levied on income and wealth, such as personal income tax and profit tax. Indirect taxes are levied on goods and services, such as VAT, sales tax and excise duty.
- Progressive tax: average tax rate rises with income. Proportional: rate constant. Regressive: average rate falls as income rises.
- Fiscal policy uses government spending and taxation. Expansionary policy raises spending or cuts taxes; contractionary policy does the opposite.
- Automatic stabilisers include unemployment benefits and progressive taxes. Crowding out may reduce private investment when government borrowing raises interest rates.
- Public debt is accumulated deficits; deficit is a flow, debt is a stock.
Worked example
An economy has MPC = 0.75, so the spending multiplier is 1 ÷ (1 - 0.75) = 4. If government spending rises by 200 billion kyat, equilibrium income rises by up to 800 billion kyat. If income is 2,000,000 kyat and a proportional tax rate is 10%, tax paid is 200,000 kyat. Under a progressive system, the marginal rate on the next slice may be higher than the average rate.
Traps
Do not call a deficit a debt; do not say all indirect taxes are regressive in every case; do not confuse progressive with proportional; do not assume fiscal expansion always raises real output if capacity is fully used.