CHAPTER 5

PUBLIC
FINANCE
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 Government
Revenue
Economics Government
Function Expenditure

PUBLIC
FINANCE

Types of Budget Government Policy

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GOVERNMENT REVENUE
Types of
Government
Revenue

Non Tax Non Revenue

Tax Revenue
Revenue Receipts

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1. TAX REVENUE
i. Tax is the major sources of government revenue

ii. Tax is compulsory contribution by an individual or a

firm to the government to be in the common interest
of all

iii. Tax acts as a government sources in providing the

necessary administrative services to govern the
country

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DIRECT TAX VS INDIRECT TAX

Direct tax Indirect tax

 A direct tax is paid by  This is the tax where the

the person on whom it burden of taxes can be
is levied and cannot be passed on to other
passed to another parties. They are
person. sometimes called the
expenditures tax.
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1. TAX REVENUE..CONT

Types of
Taxes

Direct Tax Indirect Tax

 Individual income tax  Includes import duties

 Companies’ income tax  Excise duties
 Property tax  Sales tax 6
 Inheritance tax  Service tax and
 Stamp duties  Gaming tax
2. NON-TAX REVENUE
Non-tax revenue
 Non-tax revenues are revenues which arise
from other sources besides tax
 Includes:
1. License and permit
2. Treasury bills, bonds and loans
3. Petroleum royalty
4. Interest and return on investment
5. Fees and penalties
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3. NON-REVENUE RECEIPTS
Non- revenue receipts

 Includes refund of expenditure and receipts from

government agencies

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TYPES OF TAX STRUCTURE

Types of Tax
Structure

Progressive Proportional Regressive

Tax Tax Tax

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1. PROGRESSIVE TAX
Progressive tax
This is where the rate of tax increase as
income increase. It impose a greater portion
of tax on higher income group than the lower
income group. This is the most effective way
of redistributing the income among the
population. This form is practiced in personal
income tax.

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1. PROGRESSIVE TAX..CONT
% Tax
Higher the income Higher the tax rates

Income

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2. PROPORTIONAL TAX
Proportional Tax
The rate of tax remains constant as
income changes. The example is the
corporation tax.

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2. PROPORTIONAL TAX..CONT
% Tax

Tax rate is constant and unaffected by level of income

Income

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3. REGRESSIVE TAX
Regressive tax

This structure will make the lower income group bear

a higher proportion of tax than the higher income
group does. An example of this structure is the
payment of toll . A toll may be a small charge to a
person whose income is RM5000 per month, but it
can be a great burden to an individual whose income
is RM900 per month.

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3. REGRESSIVE TAX..CONT
% Tax
Higher the income Lower the tax rates

Income

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GOVERNMENT EXPENDITURE
There are two (2) types of government expenditure:
i) Operating expenditure
Allocated to cover the expenses of operating and
administering government departments. Operating
expenditure consists of emoluments, pensions and
gratuities, debts, subsidies.

ii) Development Expenditure

Development expenditure is government expenditure
for investment purposes to improve facilities in the
basic physical infrastructure.
Development expenditure consists of economic
services, social services, general administration 16
GOVERNMENT BUDGETS
1. Deficit Budget

i. A deficit budget is where the government plan

to spend more than its receipts.
ii. It can be done by raising the government
expenditure and reduce tax.
iii. The government will used this budget when
the economy is having the problem of
recession.
iv. A decrease in tax will make individuals have
more money in their hands and able to spend
more. 17
GOVERNMENT BUDGETS…CONT
2. Surplus Budget
The surplus budget will be adopted by the
government to overcome the problem of
inflation. It can be done by raising the tax and
reduce government expenditure.

3. Balanced budget
The government will adopt this type of budget
when it does not want to change the level of
economic activities. In other words, the
economy is nearly or reached at full
employment.
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PUBLIC FINANCE IN ISLAM
Sources of Government Revenue in Islamic Economics

1. The Islamic state encompass of two kinds of citizens namely

Muslim and non-Muslim, and as such different kind of tax
are levied on them.
2. The purpose of the imposition tax in Islam is for the human
welfare and the development of a country and it is not for the
interest of a particular person.

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THE COMPONENTS OF STATE REVENUE IN
ISLAMIC ECONOMICS ARE AS FOLLOWS:
i) Zakat
The prime source for an Islamic economy is zakat. Payment of zakat
is a religious duty and one of the pillars in Islam
ii) Al-Fai
Refers to the property or wealth surrendered by non- believers at war
but without fighting. Such property will go to the central fund of the
state (Baitulmal)
iii) Jizyah
It was a tax imposed on the non-Muslim in lieu of the guarantee to
them by an Islamic state for the protection of their lives, properties.
iv) Kharaj
It is a tax on land or agricultural land owned by non-Muslim in the
Islamic state
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v) Taxation
The right of the Islamic state to imposed taxes is
derived from the fact that Islamic government is
responsible for the fulfillment of the basic needs of
its citizen in accordance with the level of socio-
economics status of the country concerned
vi) Waqaf
Is a property donation, which is donated by an
individual for the use of certain group of Muslims
such as orphans and the poor
vii) Sadaqah
It is a voluntary charity. There is no such
requirement on when and how much to donate
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GOVERNMENT EXPENDITURE IN
ISLAMIC ECONOMICS
The priority of the public expenditure in Islamic
state should be based on the hierarchy of needs
such as Dharuriyyat, Hajiyyat and Kamaliyyat.
The main expenditure of Islamic state are:
i) Defence
ii) Law and order
iii) Public administration
iv) Basic needs fulfillment
v) Da’wah

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FISCAL POLICY
 Fiscal policy refers to the government’s
management of the economy by varying the size
and the type of the economy, the type of
taxation, public debt, government expenditure
and government revenue.
Types of Fiscal Policy:
i) Contractionary fiscal policy
ii) Expansionary fiscal policy

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CONTRACTIONARY FISCAL POLICY
(BUDGET SURPLUS)
 This policy implemented to overcome inflation
 Increase tax to reduce spending

 Decrease government expenditure

 Decrease wages of government officials

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EXPANSIONARY FISCAL POLICY
(BUDGET DEFICIT)
 This policy implemented to overcome during
recession and high rate of unemployment
 Decrease tax to increase spending
 Increase government expenditure

Tools of Fiscal Policy

i) Government expenditure
ii) Taxes

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