RESUME
CONSUMPTION, SAVING, AND TAXATION
Made in
Order to Fulfill the Assignment University Subjects Macroeconomics
Lecturer:
Irvan
Yoga Pardistya, SE., MM., Ak
Witten
by:
Lydia
Nur Athifah
1610631030167
ACCOUNTING
FACULTY
OF ECONOMICS AND BUSINESS
UNIVERSITY
OF SINGAPERBANGSA KARAWANG
October
2016
PREFACE
Alhamdulillah
with permission of Allah SWT I can finish this assignment. Sorry if there is a
mistakes and is not perfect, because perfection belongs only to Allah SWT.
Hopefully
in the next assignment would be better than this and fix the mistakes earlier.
Karawang,
9th October 2016
Lydia Nur Athifah
Table of Contents
CONSUMPTION, SAVING,
AND TAXATION
Preface.....................................................................................................................................
·
Factors Affecting the Level of Consumption....................................................................
·
Keynesian Consumption Model........................................................................................
·
Definition of Saving..........................................................................................................
·
Saving in Economic..........................................................................................................
·
Saving Function................................................................................................................
·
Determinants of Saving Function.....................................................................................
·
Consumption Tax..............................................................................................................
·
Types of Consumption Tax...............................................................................................
·
Definition of Taxation.......................................................................................................
·
Priciples of a Good Tax System........................................................................................
·
Direct and Indirect Method...............................................................................................
·
Benefit of Taxation............................................................................................................
References...............................................................................................................................
Definition of
Consumption
Consumption, in
economics, the use of goods and services by households. Consumption is distinct
from consumption expenditure, which is the purchase of goods and services for
use by households. Consumption differs from consumption expenditure primarily because durable goods, such as automobiles,
generate an expenditure mainly in the period when they are purchased, but they
generate “consumption services” (for example, an automobile provides
transportation services) until they are replaced or scrapped.
Consumption
expenditure such as government consumption, and household consumption. Basically, the main factors affecting the
level of household consumption is income, where
both correlation are positive, such as the higher the income level then
the consumption is higher too.
Factors Affecting the Level of
Consumption
Many
factors affecting the bigness household consumption expenditure. These factors
can be classified into three major :
1. Factors
of Economic
2. Factors
of Demografi
3. Factors
of Non Economic
Keynesian Consumption Model
Ø Relation
of Disposable Income and Consumption
If
disposable income increased, then consumption will increased too.
1. Riil variable
that is Keynes consumption function shows the relation between income with
consumption expenditure both expressed with using a constant price level, not
the relation between nominal income with a nominal consumption expenditure.
2. Current income,
not income earned previously , and not income that estimated to happened in the
future
3. Absolute Income,
not the relative income or permanent income, as stated by other economists
Table 3.1
Relation of Disposable Income and
Consumption
|
Disposable
Income
|
Consumption
|
∆
Disposable Income
|
∆
Consumption
|
|
0
|
200
|
-
|
-
|
|
1.000
|
1.000
|
1.000
|
800
|
|
2.000
|
1.800
|
1.000
|
800
|
|
3.000
|
2.600
|
1.000
|
800
|
|
4.000
|
3.400
|
1.000
|
800
|
|
5.000
|
4.200
|
1.000
|
800
|
Note
: ∆ = Alteration
At
the moment of disposable income level is
zero, the consumption level is 200. means autonomous consumption is 200. When
disposable income increased to 1.000, 2.000, 3.000, etc consumption is also
become 1.000, 1.800, 2.600, etc. The increased in consumption is due every
1,000 unit increase in disposable income many as 800 is used for consumption
additional.
Ø Marginal
Propensity to Consume
Marginal Propensity to Consume
is a concept which gives a description of how consumption will increase if
disposable income increased by one unit.
Ø Average
Propensity to Consume
Average Propensity to Consume is
the ratio between total consumption with disposable income total.
.
Table 3.2
Relation of Disposable Income and
Consumption
MPC and APC
|
Disposable
Income
|
Consumption
|
∆
Disposable Income
|
∆
Consumption
|
MPC
|
APC
|
|
0
|
200
|
-
|
-
|
-
|
-
|
|
1.000
|
1.000
|
1.000
|
800
|
0,80
|
1,00
|
|
2.000
|
1.800
|
1.000
|
800
|
0,80
|
0,90
|
|
3.000
|
2.600
|
1.000
|
800
|
0,80
|
0,87
|
|
4.000
|
3.400
|
1.000
|
800
|
0,80
|
0,85
|
|
5.000
|
4.200
|
1.000
|
800
|
0,80
|
0,84
|
Note : MPC = ∆ Consumption / ∆ Disposable Income
APC = Consumption / Disposable
Income
Definition of Saving
Saving is income not spent, or deferred consumption. Methods of saving include putting money
aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures,
such as recurring costs. In terms of personal finance, saving generally
specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher; in economics more broadly, it refers to any income not
used for immediate consumption.
Saving
in Economics
In Economics, Savings are
defined as income
minus consumption.
The rate at which people can be expected to do this is called the Marginal propensity to save or
Average
propensity to save. The rate of savings is directly related to
both the interest rate
and investment,
largely by way of the capitalmarkets.
It is worth noting that some investment is considered savings. If investment
merely replaces depreciated capital stock,
rather than increasing the capital stock and workforce, it is still considered
part of savings.
Saving function or the propensity to save expresses the
relationship between saving and the level of income. It is simply the desire of
the households to hoard a part of their total disposable income.
Symbolically, the functional relation between saving and
income can be defined as S= f(Y).
The equation shows that the remaining amount after the
deduction of total expenditure from total income is saving. Thus, saving is
that part of income which is not spent on consumption.
Each
additional disposable income will be allocated to increase the consumption and
savings. the bigness an additional of disposable income which become additional
savings called Marginal Prospensity to Save.While
the ratio between savings level with disposable income called Average Propensity to Save.
If
each additional of disposable income allocated as additional of consumption and
saving, then :
If
both sides of the equation are divided by Yd, then :
Table 3.3
Relation between MPC and MPS, APC
and APS
|
Disposable Income
|
Consumption
|
Saving
|
∆ Disposable Income
|
∆ Consumption
|
∆ Saving
|
MPC
|
MPS
|
APC
|
APS
|
|
0
|
200
|
-200
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
1.000
|
1.000
|
0
|
1.000
|
800
|
-
|
0,8
|
-
|
1,00
|
-
|
|
2.000
|
1.800
|
200
|
1.000
|
800
|
200
|
0,8
|
0,2
|
0,90
|
0,10
|
|
3.000
|
2.600
|
400
|
1.000
|
800
|
200
|
0,8
|
0,2
|
0,87
|
0,13
|
|
4.000
|
3.400
|
600
|
1.000
|
800
|
200
|
0,8
|
0,2
|
0,85
|
0,15
|
|
5.000
|
4.200
|
800
|
1.000
|
800
|
200
|
0,8
|
0,2
|
0,84
|
0,16
|
Note : MPC = ∆ Saving / ∆ Disposable Income
APS = Saving / Disposable Income
Determinants of Saving Function
The
determining factors that contribute to the saving function include Desire to
save, Ability to save, and Facilities to save.
o Desire to Save
The desire or
the willingness of an individual or household to save is the major driving
factor towards saving. The factors that affect the desire of an individual to
save are :
-
Level of income
Level of income
is an important determinant of saving in any economy or country. Higher the
level of income for any household or individual, higher the level of saving.
- Provisions for the future
The future
requirements of money is uncertain. So, in order to have a secured future
against any uncertain events, saving up at present helps to have a pool of
extra money. Savings can be taken as a precaution for any unforeseen needs in
the future.
o Ability to Save
In spite of
the willingness to save, one cannot save if they do not have the capacity or
the ability to save. Saving is only possible if an individual can meet all
their consumption expenditures and still save up, then it can be said that they
have the ability to save. Ability to save depends on the level of income and
consumption expenditure.
The factors
that determine the ability to save include :
a) Labor Efficiency
The ability or
power to save depends on the efficiency of labor. If an economy has an
efficient group of people, it increases production efficiency as well. This
results in increasing income and thus people can have more money that can be
saved, even after meeting the consumption expenditures.
b) Size of National Income
Higher the
national income, greater is the ability to save. Low national income in
developing and under-developed countries is the main reason for no saving being
made.
c) Developmental activities
The development
of various sectors like trade, industrial areas, agricultural sector, etc. is a
source of increased income level, as there will be more inflow of money into
the economy.
o Facilities to Save
Saving also
depends on the facilities availability. This includes :
1) Development of financial institutions
The development and expansion of financial institutions like banks, co-operatives, etc. encourage people to save more with their effective marketing strategies. They also provide attractive interest rates on savings.
2) Rate of interest
Attractive
interest rates encourage people to save more. When the interest rates are high
in the market, people save more, and when the rates are low, they withdraw and
spend on consumption.
3) Social security system
The provision
of security system such as old age pensions, medical insurance, unemployment
allowance, etc. reduces the rate of saving in a country. When there is adequate
provision of social security in the society, people feel secured about their
future and they spend more of their income on consumption.
4) Taxation Policy
Progressive
taxes reduce saving as taxes increase with the increase in income. People with
higher income save less because of the taxes they need to pay. But if the taxes
on expenditure are higher then, they are encouraged to spend less and save
more.
5) Fiscal policy
The fiscal
policy of the government affects the level of saving in a country. If taxes are
imposed on necessary commodities, people cannot save more. The reduction of
taxes on basic goods leads to an increase in the level of saving. Also, if
taxes are high on luxury goods, people are enticed to save more than to
purchase luxury goods.
Consumption Tax
A
consumption tax is a tax
on spending on goods and services. The tax base
of such a tax is the money spent on consumption. Consumption taxes are
usually indirect, such as a sales tax
or a value added tax.
Types of Consumption
Tax
· Value Added Tax
A value added tax
(VAT) applies to the market value added to a product or material at each stage
of its manufacture or distribution. For example, if a retailer buys a shirt for
$20 and sells it for $30, this tax would apply to the $10 difference between
the two amounts. A simple VAT would be prpotional
to consumption but also be regressive
on income at higher income levels (as consumption falls as a percentage of
income). Savings and investment are tax deffered
until they become consumption. A VAT may exclude certain goods, to try to make
it less regressive. The tax is used in countries within
the European Union.
In Australia, Canada, New Zealand and Singapore this form of
national tax is called a Goods and Services Tax (GST). In Canada it is
also called Harmonized Sales Tax (HST) when combined with a
provincial sales tax.
· Sales Tax
A sales tax
typically applies to the sale of goods, less often to the sales of services.
The tax is applied at the point of sale. Laws may allow sellers to itemize the
tax separately from the price of the goods or services, or require it to be included
in the price (tax inclusive). The tax amount is usually
calculated by applying a percentage rate to the taxable price of a sale.
When a tax on goods or services is paid to a governing body directly by a
consumer, it is usually called a use tax. Often laws provide for the exemption
of certain goods or services from sales and use tax.
· Excise Tax
An excise tax
is a sales tax that applies to a specific class of goods, typically alcohol,
gasoline (petrol), or tourism. The tax rate varies according to the type of
good and quantity purchased and is typically unaffected by the person who
purchases it.
· Expenditure Tax
A direct,
personal consumption tax may take the form of an expenditure tax or an income tax that deducts savings and investments, such as the Hall–Rabushka flat tax.
A direct consumption tax may be called an expenditure tax, a cash-flow tax, or
a consumed-income tax and can be flat or progressive.
Expenditure taxes have been briefly implemented in the past in India and Sri Lanka.
This form of
tax applies to the difference between an individual's income and
increase/decrease savings. Like the other consumption taxes, simple personal
consumption taxes are regressive with respect to income. However, because this
tax applies on an individual basis, it can be made as progressive as a
progressive personal income tax. Just as income tax rates increase with
personal income, consumption tax rates increase with personal consumption.
Definition
of Taxation
Taxation is the transfer of a portion of the
national products from the hands of individuals to those of the government, for
the purpose of meeting public consumption or expenditure. Whatever be the
denomination it bears, whether tax, contribution, duty, excise, custom, aid,
subsidy, grant, or free gift, it is virtually a burden imposed upon
individuals, either in a separate or corporate character, by the ruling power
for the time being, for the purpose of supplying the consumption it may think
proper to make at their expense; in short, an impost, in the literal sense.
- Efficient - A tax system should raise enough revenue such that government projects can be adequately sponsored, without burdening the economy too much (not particularly the tax payer), as not to become a disincentive for performance (internal and external investment, work returns and savings).
- Understandable - The system should not be incomprehensible to the layperson, nor should it appear unjust or unnecessary complex. This is to minimize discontent and costs.
- Equitable - Taxation should be governed by people's ability to pay, that is, wealthier individuals or firms with greater incomes should pay more in tax while those with lower incomes should pay comparatively less.
- Benefit Principle - Those that use a publicly provided service (which is funding primarily through taxation) should pay for it!
- Direct taxation
Direct taxation are paid by taxation on
the income of the wage earner. This form of taxation is unavoidable, and for
simplicity usually collected before the worker collect his/her wages.
- Indirect taxation
Indirect
taxation is often avoidable and is not taken from wages. An example
of indirect taxation is VAT (Value Added Tax) or sales tax placed on goods and
services. This is tax, but not all people have to pay it, and can choose
not to.
An indirect tax may increase the price of a good to raise
the price of the products for the consumers. Examples would be fuel, liquor,
and cigarette taxes. An excise duty on
motor cars is paid in the first instance by the manufacturer of the cars;
ultimately, the manufacturer transfers the burden of this duty to the buyer of
the car in the form of a higher price. Thus, an indirect tax is one that can be
shifted or passed on. The degree to which the burden of a tax is shifted
determines whether a tax is primarily direct or primarily indirect. This is a
function of the relative elasticity of the supply and demand of the goods or
services being taxed. Under this definition, even income taxes may be indirect.
Excise duty is
a governmental tax meant for producers and manufacturers on certain goods.
Manufacturers are considered to be :
- Entities who manufacture goods themselves.
- Entities who outsource manufacturing, but manufacturing takes place from their name
To cover these costs, manufacturer
adds them to COGS (cost of goods sold), where the buyer ends up paying for
these costs. Thus, it is considered to be an indirect tax.
Benefit
of Taxation
Taxes are the main source of state revenue.
Without the tax, most of the activities of state is difficult to be
implemented. The usage of tax money includes ranging from personnel expenditure
until to finance various development projects. Development of public facilities
such as roads, bridges, schools, hospitals, police stations funded by using
money from taxes.
Tax money is also used for financing in
framework to provide security for the whole society. Taxes are also used to
subsidize goods that communities need and also to pay debts to foreign
countries. It is thus clear that the role of tax revenue for a country to be
very dominant in supporting the wheels way of government and development
financing. Besides budgetary functions (receiving function), tax also carry out
the redistribution function of income from the communities that have higher
economic capabilities to communities whose capabilities is lower. Therefore,
the level of tax obedience in implementing the taxation obligations properly
and correctly is a absolute condition for the achievement of income
redistribution function. So in the end the inequalities of economic and social
that exist in society can be decreased tothe maximum.
References
Rahardja, Prathama., and Manurung, Mandala, Teori
Ekonomi Makro (5th ed.). Jakarta: Lembaga Penerbit Fakultas
Ekonomi Universitas Indonesia, 2014.
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https://en.wikipedia.org/wiki/Indirect_tax-
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