Exercises: Public spending and taxation

Make a list of six things paid for with public money that you have used this month (high school, the local health clinic, street lighting, the library, the park, the police) and explain what would happen if each was paid for directly per user: who could afford high school or an operation?

Direct taxes tax what you earn or own; indirect taxes tax what you spend. Classify these taxes as direct or indirect: (a) income tax (ISR) deducted from a paycheck; (b) VAT on a video game; (c) corporate tax, paid by a company on its profits; (d) VAT on bread; (e) vehicle tax for a car. Then explain the difference in your own words.

The figure shows how the municipality of Puebla allocates its budget across its four main categories, as percentages. The figure for culture and sports is covered.

1. a) Calculate what percentage of the budget goes to culture and sports, knowing that the four categories total $100\ \%$.
2. b) If the total budget is $\$40\,000\,000$, calculate how many pesos go to each of the four categories.

A game console costs $\$7\,000$ excluding VAT, and the standard rate for this tax is $21\ \%$.

1. a) Calculate how many pesos of VAT are paid and the final price of the console.
2. b) In another store, the same console displays $\$8\,470$ with VAT already included: calculate what portion of that price is VAT.

An imaginary tax operates in brackets: $10\ \%$ is paid on the first $\$20\,000$ of monthly salary, and $20\ \%$ on anything above $\$20\,000$. Ana earns $\$18\,000$ per month and Alberto, $\$40\,000$.

1. a) Calculate how much each person pays per month.
2. b) Calculate what percentage of their total salary each person pays and explain why this tax is called progressive.
3. c) Compare this with a flat-rate (proportional) tax of $15\ \%$ for everyone: who would win and who would lose?

Here is the simplified payslip for Teo's mother: gross salary $\$28\,000$, Social Security contributions $\$1\,900$, income tax (IRPF) withholding $\$2\,800$.

1. a) Calculate the net salary, the amount that actually enters the bank account.
2. b) Explain what the contributions are used for (unemployment, pensions, healthcare) and what the income tax withholding pays for.
3. c) Her work colleague earns the same gross salary but has $\$3\,600$ withheld for income tax: give a possible explanation (family situation, number of children) and calculate the difference in net salary between them.

The municipality of Puebla spends $200$ million pesos per year: $80$ on education, $50$ on healthcare, $30$ on public services (cleaning, police), $20$ on culture and sports, and $20$ on debt and maintenance. It collects $184$ million in taxes and fees.

1. a) Calculate the annual deficit (the overspending) and explain how it can cover it.
2. b) A political party proposes reducing taxes by $10\ \%$ without changing spending: calculate the new tax revenue and the new deficit.
3. c) Present two options to close that gap (spend less, raise other taxes, take on more debt) and defend your choice with arguments.

"VAT is the most unfair tax: a rich person and a poor person pay the exact same when buying sneakers."

1. a) Explain what truth lies in this statement (it is proportional: the same $21\ \%$ for everyone) and why it weighs more heavily on those with lower incomes.
2. b) Qualify it: in Mexico, basic foodstuffs and medicines have a reduced or preferential rate of VAT, and income tax is progressive; explain how this partially compensates.
3. c) State a reasoned position: would you change anything about VAT? State what and why.

The Ministry of Finance is considering introducing an excise duty of $20\ \%$ on sugary drinks to correct the healthcare costs associated with diabetes and childhood obesity (negative externalities).

1. a) Relying on the concept of price elasticity of demand, predict what will happen to tax revenue and to changes in consumption habits if the demand for these soft drinks is highly elastic versus if it is highly inelastic. In which case is the revenue-raising objective better achieved, and in which is the public health objective better achieved?
2. b) Argue why various analysts consider that this type of tax can be regressive, analyzing the expenditure structure of households with lower income levels.
3. c) Design an alternative comprehensive public policy that uses the revenue generated by this tax to promote healthy habits, justifying what specific destination you would allocate the revenue to in order to offset the regressive impact on vulnerable families.