Principles of Economics With Agrarian Reform and Taxation

LESSON 1: INTRODUCTION Economics: An Introduction Economics deals with the problem of scarcity. If society’s resources are abundant and unlimited rather than scarce, then there would be no problem to study. Society would simply produce anything and everything it needs at any point in time and everyone would have as much of everything he desires. But this is not the case, for there is a basic and continuing problem of scarcity that man and society are confronted with. Scarcity alone does not explain completely the economic problem. Paired with a shortage of resources are the multiple wants and desires of human beings. Human beings have multiple wants and desires, resources have alternative uses. Scarce resources need to be allocated among different needs. If human beings have only one requirement (say food), coping with scarcity would require only how to get the most food out of existing resources. However, since men need many more material items other than food, there arises the problem of determining the optimum use of resources to satisfy competing needs. To summarize, scarcity of resources plus multiplicity of human wants equals economics. It is obvious to anyone that, at any given time, at least some resources (e.g. land or capital) are scarce and that human wants are almost unlimited. Thus, it is hard to deny the importance of economics both today and in the future. Definition: 1. Economics is the study of how societies use scarce resources to produce valuable commodities and distribute them among different people. 2. Economics may be defined as a science that deals with the activities of man in obtaining wealth for the satisfaction of his wants. 3.

Economics is the art of making a living.

4. Economics is the proper allocation and efficient use of available resources for the maximum satisfaction of human wants. 5. Economics is the branch of social science that deals with the production and distribution and consumption of goods and services and their management.

6. Economics is the science that deals with the production, distribution, and consumption of wealth, and with the various related problems of labor, finance, taxation, etc. (Webster's New World) 7. Economics is the study of choice and decision-making in a world with limited resources. 8. Right and prudent administration of assets, Public wealth, set of services and economic interests. 9.

The study of the choices people make to cope with scarcity.

10. Economics is the study of how to use our limited resources to satisfy our unlimited wants as fully as possible. Division of Economics: Microeconomics is that branch of economics that deals with the economic behavior of individual units such as consumers, firms and the owners of the factors of production, for example, the price of rice, the number of workers of PLDT, the income of Mr. Dorig, etc. Micro means small, thus microeconomics deals with the study of the small units of the economy. Macroeconomics is that branch of economics that deals with the economic behavior of the whole economy such as government, business and household. Examples of macroeconomic studies are national income, employment and inflation. Microeconomics and macroeconomics are closely related, for example, compared with the human body, the microeconomic units are the heart, kidney, lungs and other parts. The macroeconomic unit is the human body. A defect in part of the human body affects the whole body. The same is true in the operation of economics. History of Economics: It has started to be known when Adam Smith’s book Wealth of Nations was published in 1776. Prior to that, economics has been integrated into other fields such as religion, philosophy and political science. That book became the bible of economics for more than a century. Adam Smith was responsible for the recognition of economics as a separate body of knowledge. Economics have been as old as mankind. It started when God drove Adam and Eve away from the Garden of Eden. Economic thoughts appeared in biblical teachings, philosophy and politics. The primitive people invented ways and means of food gathering

and hunting. Such art of making a living among the ancient tribes represented a form of economics. The word “economics” has been derived from the Greek word oikonomia. It means household management. The housekeeper has to see to it that there is enough food, clothing and shelter; that the house is kept in order; that the necessary duties and responsibilities are performed by the members of the household; and that their products are distributed according to necessity. To the ancient Greeks, the term oikonomos applied more on the proper management of the city-states. As a science, economics emerged only in 1776 Basic Economics Problem: 1. What goods and services to produce and how much? A society must determine how much of each of the many possible goods and services it will make, and when they will be produced. Will we produce frozen pizzas or shirts today? A few high-quality shirts or many cheap shirts? Will we use scarce resources to produce many consumption goods (like frozen pizzas)? Or will we produce fewer consumption goods and more investment goods (like pizza-making machines, which will boost production and consumption tomorrow. 2. How to produce the goods and services? It has to do with production and technology. As a general rule, goods and services must be produced in the most efficient manner. This means maximum output with minimum input without sacrificing quality. The application of modern technology has increased output and decreased cost of production. The use of advanced technology will create more unemployment. 3. For whom are the goods and services? One key task for any society is to decide who gets to eat the fruit of the economy’s efforts. How is the national product divided among different households? Are many people poor and a few rich? Do high incomes go to managers or workers or landlords? Do the sick or elderly eat well, or are they left to fend for themselves? Economic System Model: Economic system is a set of economic institutions that dominates a given economy. An institution is a set of rules of conduct, established ways of thinking, or ways of doing things.

The purpose of an economic system is to solve the basic economic problems. The main goal of economic system is high standard of living for all its citizens. 1. Capitalism Here, the factors of production and distribution are owned and managed by private individuals or corporations. We can use different terms like market economy, free-enterprise economy, or laissez faire economy for capitalism. The essential characteristics of capitalism are:    

Private property Economic freedom Free competition Profit motive

2. Communism It is the opposite of capitalism. The factors of production and distribution are owned and managed by the state. It is also known as the command economy or classless economy. The essential characteristics of communism are:     

No private property No economic freedom Presence of central planning No free competition No profit motive.

3. Socialism It is a combination of capitalism and communism. The major industries are owned and managed by the state while the minor industries belong to the private sector. How to Judge a Economic System: The vital criteria to judge an economic system is as follows: 1. Abundance 2. Growth 3. Stability 4. Security 5. Efficiency 6. Justice and equity 7. Economic freedom

The Goals of Economics: 1. 2. 3. 4. 5. 6.

Economic growth Full employment Price stability Economic freedom Equitable distribution of wealth and income Economic security

LESSON 2: THEORY OF WANTS Demand and Consumer Behavior Demand is the schedule of various quantities of commodities which buyers are willing and able to purchase at a given price, time and place. It is determined by factors such as: 1. 2. 3. 4. 5.

Income Population Taste and preferences Price expectation Prices of related goods

Table: Individual demand schedule showing the inverse relationship between price and quantity. Price 5 4 3 2 1

Quantity Demanded 1 2 3 4 5

Individual demand curve showing a down slopping curve. The position of the demand curve indicates the inverse relationship between price and quantity demanded.

Law of Demand states that consumers are most likely to buy more goods and services as price decreases, and buy less goods and services as price increases.

Validity of the Law of Demand The law of demand states: as price increases, quantity demanded decreases, and as price decreases, quantity demanded increases. Such theory is only true if the assumption of ceteris paribus is applied. It means “all other things equal or constant.” The law of demand is correct if the determinants of demand are held constant. That is there is no change in income, taste or population. Elasticity of Demand Demand elasticity refers to the reaction or response of the buyers to changes in price of goods and services. There are five types of demand elasticity to price changes of goods and services: 1. Elastic demand. A change in price results to a greater change in quantity demanded. For example, a 10% change in price (increase or decrease) creates a 20% change in quantity demanded (increase or decrease). This means that the buyers are very sensitive to price. 2. Inelastic demand. A change in price results to a lesser change in quantity demanded. For example, a 20% change in price creates a 5% change in quantity demanded. This means that buyers are not sensitive to price change. 3. Unitary demand. A change in price results to an equal change in quantity demanded. For example, a 10% change in price results to a 10% change in quantity demanded. 4. Perfectly elastic demand. Without change in price, there is an infinite change in quantity demanded. Such situation occurs in a purely competitive market. 5. Perfectly inelastic demand. A change in price creates no change in quantity demanded. Determinants of Demand Elasticity 1. Number of good substitutes. Demand is elastic for a product with many substitutes. An increase in the price of such product induces the buyers to look for good substitutes. 2. Price increase in proportion to income. If the price increase has very little effect on the income or budget of the buyers, demand is inelastic. But if the price increase involves a substantial amount in proportion to the income of consumers, demand is elastic. 3. Importance of the product to the consumers. Luxury goods are not very important to majority of the people. On the other hand, the essential goods are very important to people. Rice is important to Filipinos, Electricity is important to factory owners and gasoline is important to transportation industry. All of these are inelastic. Theory of Consumer Behavior 1. Law of diminishing marginal utility. The law states that as the amount of the good consumed increases, the marginal utility of that good tends to diminish. Marginal utility

refers to the additional satisfaction of a consumer whenever he consumes one more unit of the same good. For example, the first unit of a good like ice cream gives you a certain level of satisfaction or utility. Now imagine consuming a second unit. Your total utility goes up because the second unit of the good gives you some additional utility. What about adding a third or fourth unit of the same good? Eventually if you eat enough ice cream, instead of adding utility, it makes you sick. This leads us to the fundamental economic concept of marginal utility. 2. Indifference curve. The word “indifference” means showing no bias, or neutral. Suppose there are five combinations of two products (like meat and fish). The first combination can be 5 kilos of meat and 1 kilo of fish while another combination is composed of 5 kilos of fish and 1 kilo of meat, and so on. Since all the combinations give the same level of satisfaction or utility, the consumer would be indifferent as to which combination he receives. It means any combination would be desirable for him. By definition, an indifference curve is a curve that shows different combination of two goods which yield the same level of satisfaction. Indifference curves are useful in the sense that they indicate the degree of substitution of one good for another. The ability to substitute one good for another is an important scope in consumer behavior. Such concept is illustrated by the marginal rate of substitution. It indicates the rate at which a consumer would exchange units of one product for additional units of another product. Table: An indifference schedule showing the various combinations of meat and fish Combinations A B C D E

Kilos of Meat 5 4 3 2 1

Kilos of Fish 1 2 3 4 5

A consumer’s indifference curve: Every point on an indifference curve indicates a combination of two products that provides same level of satisfaction. Budget Line A budget line indicates the various combinations of two products that can be purchased by the consumer with his income, given the prices of the products. A consumer has a fixed budget, so he has to spend his money wisely to able to maximize his satisfaction. He has several combinations of two products to choose, but at the same time his choice is limited due to the budget. For example, the unit price of both products is P25. The total budget of

the consumer is P150. It is possible for him to buy 5 units of A and 1 unit of B, or 5 units of B and 1 unit of A. Just have a look at the table to find the various options of the consumer. Table: Budget line schedule showing the various combinations of two products with a fixed budget of P150 and the unit price of both the products is P25. Units of product A 5 4 3 2 1

Units of product B 1 2 3 4 5

Total Expenditures P 125 + P 25 = P 150 P 100 + P 50 = P 150 P 75 + P 75 = P 150 P 50 + P100 = P 150 P 25 + P125 = P 150

A graphical illustration of budget line. Supply and Pricing in Competitive Markets Supply is the schedule of various quantities of commodities which producers are willing and able to produce and offer at a given price, place and time. Its determinants are: 1. Technology 2. Cost of production 3. Number of sellers 4. Prices of other goods 5. Price expectations 6. Taxes Table: Individual supply schedule showing the direct relationship between price and quantity. An Individual supply curve showing an upward slope. The position of the supply curve indicates a direct relationship between price and quantity supplied. Law of Supply As price increases, quantity supplied also increases, and as price decreases, quantity supplied also decreases. This direct relationship between price and quantity supplied is the law of supply. However, the law of supply is only correct if we apply the assumption of ceteris paribus. This means the law of supply is valid if the determinants of supply are held constant.

Elasticity of Supply Supply elasticity refers to the response of the sellers/ producers to price change of goods. There are five types of elasticity of supply or types of responses of producers to price changes: 1. Elastic supply. A change in price results to a greater change in quantity supplied. This means that producers are very responsive to price change. For example, with a 10% increase in price, they increase their quantity supplied by 20%. 2. Inelastic supply. A change in price results to a lesser change in quantity supplied. This shows that producers have very weak response to price change. 3. Unitary supply. A change in price results to equal change in quantity supplied. 4. Perfectly elastic supply. Without change in price, there is an infinite change in quantity supplied. 5. Perfectly inelastic supply. A change in price has no effect on quantity supplied. Determinant of Supply Elasticity The determinant of supply elasticity is the time involved in the ability of producers to response to price changes. If it takes a short time to produce the products to take an advantage of an increase in price, then supply is elastic. On the other hand, if it takes a long time to produce the products, then supply is inelastic. Agriculture or farm products are highly inelastic. The Law of Supply and Demand The law of supply and demand states that when supply is greater than demand, price decreases. When demand is greater than supply, price increases. When supply is equal to demand, price remains constant. This is the market price or the equilibrium price. It means that both sellers and buyers have mutual agreement.

LESSON 3: ANALYSIS PRICE SYSTEM Analysis of the Price System One favorable argument for the price system is its efficiency in distributing goods and services. On the part of the producers, they tend to produce those products that give them maximum profits. On the other hand, the consumers are inclined to purchase those products that provide them maximum satisfaction. In the process of free competition, the best methods of production and marketing are developed and used in order to increase output and reduce unit cost of production. Thus the goal of profit maximization becomes attainable. At the same

time, the welfare of the consumers is enhanced because they are the beneficiaries of quality products at low prices. Another argument in favor of price system is the presence of personal freedom. Producers are free to produce any product to satisfy their own economic interests as long as those do not conflict with legal and moral traditions. Other freedoms include the free choice of workers or employees. Employees are also free to choose their employers. Buyers are also free to purchase any product that gives them maximum satisfaction. Criticisms against the Price System As a matter of fact, the free competition does not exist long enough. Self-interests of businessmen force them to drive away their rivals through competition. Another strategy is to merge their companies for market advantage. The small ones find it difficult to compete with the big ones. In the process of competition, the big companies become the price leaders. Another case against the price system is the unfair distribution of goods and services. Only the very few rich can have a decent life under the price system. Moreover, social goods like anti-pollution, rural electrification, irrigation, or highways cannot be allocated efficiently through the price system. Usually these require a huge financing, and yet the returns of investment take a long time and profits may not be attractive. Hence, only the government is willing to undertake such projects. The Role of the Government Keeping in mind the limitations of the price system, the government has to regulate and supervise production, distribution and consumption of goods and services. The government provides incentives in the production of goods and services that greatly contribute to the socio-economic development of the country. The government interferes in the allocation of the goods and services in order to protect the welfare of the poor. At the same time, the government has to control the consumption of goods and services that are wasteful and detrimental to the growth of the economy. In developing countries, the role of the government is more active. Infrastructures like roads, bridges, communication facilities, electrification, schools and hospitals have to be set up. These speed up the process of economic growth. Economic growth means more employment, production and income. And this situation leads to the high standards of living.

LESSON 4: PRODUCTION Production Production is the creation of goods and services to satisfy human wants. The factors of production are called the inputs of production, and the goods and services that have been created by the inputs are called the outputs of production. The factors of production are classified as fixed factor (fixed input) and variable factor (variable input). A fixed factor remains constant regardless of the volume of production. In case of variable factor, it changes in accordance with the volume of production. The process of transforming both fixed and variable inputs into finished goods and services is called the theory of production. The technical relationship between the application of inputs and the resulting maximum obtainable output is known as the production function. Kinds of Utilities in Production Form Utility. Utility could be increased in a certain commodity by changing its form. Raw materials are indeed useful, but they could be made more useful by reshaping them. Trees in the forest serve man in one way or another, but they are of little use to him unless the lumberman cuts them down and saws them into boards. Fresh fish can satisfy our want for food better if it is properly cooked to suit our taste. Coal and iron extracted from the bowels of the earth keep us warm and provide us with the raw materials for our tools and machinery. Lumbering, fishing, mining, all of these so-called extractive industries create form utility. Agriculture is another industry that creates form utility. The farmer, by careful preparation and fertilization of the soil, produces all sorts of crops. Place Utility. Goods can be made more desirable by moving them about. Matter in the wrong place is dirt, but in the right place it is wealth. After harvesting the crop, it is of little use to the farmer unless it is brought to town and sold to the people who consume it. Possession Utility. The rice in the granary of the farmer, after satisfying his needs for that commodity will not be as useful as when it is brought to market and sold to the final consumers. Similarly, an automobile in the shop of the dealer is not as useful as in the hands of the person who needs a car. The selling of the rice or of the car is an activity that creates what is known as possession utility. Time Utility. Time is an important factor that influences the utility of goods. There are some utilities that cannot be kept for a long time and wait to satisfy the maximum need for them. During the mango or lansones season, great quantities of these fruits go to waste or command a very low price. They can be more useful when they are preserved in their natural state for consumption after the harvest season. Fish does not keep long after being taken off the water; it is a very perishable commodity. The same may be said of meat, vegetables and

other commodities. The development of cold storage and refrigeration has partly solved the problem of preserving these perishable commodities until such time as they are more useful. Service Utility. Production is not only confined to material goods but also to immaterial goods or services. There are many persons who never handle material goods but are considered productive because they create certain utilities by rendering valuable and necessary services to the community; they are engaged in service production. The people engaged in the socalled learned professions and those who render personal services create service utility. The services of professors, lawyers, doctors, priests and ministers, singers, dancers, government officials and also those of servants, cooks, waiters, and housemaids are included in service production. Economic Costs 1. Total cost – is the sum total cost of production. It is composed of wages, rents, interests and normal profits. 2. Fixed cost – is a kind of cost that remains constant regardless of the volume of production. Even if there is no production, there is still cost. Examples are the expenditures on machines and buildings. 3. Variable cost – is a kind of cost that changes in proportion to volume of production. If there is no production, there is no cost. More production means more costs. Examples are wages and raw materials. 4. Average cost – is also called unit cost. It is equivalent to total cost divided by quantity. AC =TC Q 5. Marginal cost – is the additional or extra cost brought about by producing one additional unit. It is obtained by dividing change in total cost by change in quantity. MC= ΔTC ΔQ 6. Explicit cost – is also called expenditure cost. These are payments to the owners of the factors of production like wages, interests, electric bills, and so forth. 7. Implicit cost – also called non-expenditure cost. The factors of production belong to the users. 8.

Opportunity cost – is a foregone opportunity or alternative benefit.

Short Run and Long Run Period Short run refers to a period of time that is too short to allow an enterprise to change its plant capacity, yet long enough to allow a change in its variable resources. Long run refers to a period of time that is long enough to permit a firm to alter all its resources or inputs Economies of Scale Economies of scale may be classified as internal and external economies of scale. Internal economies of scale are the factors inside the firm that contribute to the efficiency of the firm. Examples of such factors are division of labor, human resource development, managerial specialization, proper use of machines and equipment, favorable management policies, effective utilization of by-products, and modern techniques of production. External economies of scale refers to those factors that are outside the firm, but they contribute to the efficiency of the firm in terms of increased output and decreased unit cost of production. Examples are government policies, electrification, and transportation and communication facilities. Appropriate Techniques of Production Labor-intensive technology means more labor inputs and less capital inputs. Capital-intensive technology means more machines and less labor. Poor countries should use labor-intensive technology and advanced countries should use capital-intensive technology. Conclusion In the production of goods and services one must always consider the type of products that one is to produce, for whom the products are to be produced , how are these products to be produced and how long will it take to produce the products. Thus one must take into consideration the cost of producing the product , the techniques in production, the length of time and the utility of the products that are to be produced. References: 1. Principles of Macroeconomics by Case and Fair 2. Economics by Samuelson and Nordhaus 3. Principles of Economics by Roberto Medina

LESSON 5: BUSINESS ORGANIZATION Business Organizations The main economic activity is production. Almost all production activity is done by specialized organizations. There are different forms of business organizations, from very simple to complex. The choice of a form of business organization depends on one’s resources, objectives, and perceptions. There are three most common forms of business organizations in a capitalist economy. These are single/sole proprietorship, partnership and corporation. Single/sole proprietorship. This is the oldest and simplest form of business organization. It is also the easiest to put up. This is owned and usually managed by one person. Advantages: 1. It is easy to form and dissolve. It requires a small capital and there are no legal papers needed except the usual business license from the Department of Trade and Industry and a business permit from the city/municipal government. 2. All profits belong to the business owner. This is the greatest advantage to the entrepreneur as there is no one else to share the profit with. 3. The owner is the boss. He makes his own decisions and executes them the way he likes. For example, he can change his business hours, products, prices, or style of management. 4. Tax advantage and less government regulation. Usually the owner pays only the income tax. The government regulation is almost nil. The only time the sole proprietor deals with the government is when he pays the license, permit, and tax. Disadvantages: 1. Unlimited liability. In case of business loss, the owner assumes all the financial obligations. He is liable to the extent of his personal properties including saving. 2. Lack of stability. If the owner dies, it is the end of the business unless members of the family or relatives can continue the business. 3. Limited amount of capital. Sometimes the proprietor meets difficulty in securing the capital for a large scale enterprise. Unless the proprietor has large resources of his own, this proves a distinct disadvantage. 4. Difficulties of management. The owner assumes the responsibility for such diverse tasks as purchasing, merchandising, extending credits, financing, employing personnel, and so forth. He may be capable of handling some of these functions but not all.

Partnership Article 1967 of the Civil Code defines partnership as an organization where “two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves. There are two types of partners: general and limited. The liability of a general partner extends up to his personal properties while a limited partner is only liable to the extent of his contribution in the business. Advantages: 1. It is easy to organize. The partnership is much easier to form than a corporation. The legal requirements include articles and by-laws of partnership to be submitted to the SEC, verification of business name with SEC, registration of business name with the Bureau of Commerce, Bureau of Internal Revenue for a TIN (tax identification number), business permit from the city/municipal hall and a registration of employees with SSS. 2. Availability of more capital and credit. Partners can pool their resources – properties, equipment, and others – and use these for security in obtaining bank loans. Suppliers are more willing to extend more credit to a partnership than to a single proprietorship. 3. The partners get all the profits. This stimulates them to improve their business. 4. More and better knowledge and skills. Each partner contributes his knowledge and skills to the organization. It is said that two heads are better than one. This kind of combination provides better management in terms of planning, decision-making, and implementation compared with sole proprietorship. Disadvantages: 1. Unlimited liability. Each general partner is personally responsible for all the debts of the business. 2. Lack of stability. In most of the cases the partnership is terminated by the death, withdrawal, or legally declared insanity of any of the partners. 3. Management disagreement. If the management do not work in unity, conflicts arise. Suspicion or distrust may crop up among the partners. Such negative attitude and unfair often takes place. 4. Idle investment. It is easy to invest money in partnership, but sometimes it is difficult to get it out. For example, when a partner decides to leave the organization, the remaining partners may not buy his share. And if the leaving partner decides to sell his share to an outsider, the problem might arise that the existing partners may not agree Kinds of Partnerships: 1. Universal-refer to all present property or to all profits 2. Particular- has for its objects determinate things their use or fruits, or specific undertakings, or the exercise of a profession or vocation

3. General- liabilities of partners extend to their individual properties after the assets have been exhausted 4. Limited-at least one general partner and the others are limited partners Kinds of Partners: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

General-liable for partnership obligations to the extent of their private properties Limited-those who cannot be held for partnership obligations Capitalist- contributes money or property Industrial- contributes expertise, ,skills and services Managing-administers the operation and manages the business directly Liquidating-handles affairs of dissolution of the business Ostensible-publicly makes known his connection with the partnership Secret-identity is not publicly made known Dormant- both a secret and silent partner Nominal- partner in name only

Corporation It is an artificial being created by operation of law, having the right of succession, and the powers, attributes, and properties expressedly authorized by law or incident to its existence. The shares or certificates of ownership of a corporation are called stocks. The owners of stocks are called stockholders or shareholders. There are two types of corporations: private or close corporation and open corporation. Advantages: 1. Limited liability. The stockholders have a limited liability. In case the corporation becomes a failure, the creditors can lay their claim on the assets of the corporation and not on the assets of the stockholders. 2. Easy to raise capital. A corporation can sell shares of stock to the public for addition funds. 3. Perpetual life. The life of a corporation does not end with the withdrawal or death of key owners. It can exist for 50 years and is subject to renewal. 4. Specialized management. A corporation can hire professionals. It has funds to develop its human resources. Disadvantages: 1. Difficult to organize. Sometimes it requires the services of a lawyer and an accountant to prepare the legal documents. The legal requirements include submission of articles of

incorporation and by-laws to SEC, registration with BIR and DOLE, acquisition of a business permit from city/ municipal hall and a license from the DTI. It also has to get approval from other agencies like Central Bank, Food and Drug Administration and many others depending on the nature of the products and services. 2. Strictly regulated and supervised by the government. Corporations have to submit their financial reports every year to concerned government agencies. They have to comply with government laws, policies and regulations. Government regulation and supervision on corporations are close compared with the other forms of business organizations. 3. Some corporations are socially irresponsible. They sell substandard goods and pollute the environment. 4. Formal and impersonal employer-employee relationship. A corporation has several layers of management. The top management seldom or do not associate with the workers or clerks of the corporation. Cooperatives The cooperative code defines a cooperative as a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve a lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with the universally accepted principles of cooperation, which include the following: 1. Open and voluntary membership 2. Democratic control 3. Limited interest on capital 4. Division of net surplus 5. Cooperative education 6. Cooperation with other cooperatives Objectives of Cooperatives. 1. To encourage savings among members; 2. To generate funds and extend credit to the members for productive purposes; 3. To encourage among members systematic production and marketing; 4. To provide goods and services and other requirements to the members; 5. To develop expertise and skills among its members; 6. To acquire lands and provide housing benefits for the members; 7. To promote and advance the economic, social, and educational status of the members; and 8. To establish, own, lease, or operate cooperative banks, cooperative wholesale and retail complexes, insurance and agricultural/industrial processing enterprises, and public markets.

Types of Cooperatives 1. Credit cooperative. Create funds in order to grant loans for productive purposes. 2. Consumer’s cooperative. Procures and distributes commodities to its members and non-members. 3. Producer’s cooperative. Undertake joint production in agriculture and industry. 4. Marketing cooperative. Engages in the supply of production inputs to members and markets their products. 5. Service cooperative. Undertakes medical and dental care, hospitalization, transportation, insurance, housing, labor, electric light and power, communication, and other services. 6. Multipurpose cooperative. Combines two or more of the business activities of different types of cooperatives. Conclusion The study of the four types of business organization provided a significant guide on the individual as regards the advantages and disadvantages of each type. Such knowledge gives the individual the benefit of determining which business organization may be most useful in producing the goods and providing the services to people in society. The notes are taken from the books: 1. Management by Feliciano Fajardo. 2. Business organization and management by Gutierrez, Pura and Garcia.

LESSON 6: MACROECONOMICS CONCEPTS Macroeconomic Concepts Macroeconomics is the study of the behavior of the economy as a whole. It examines the overall level of a nation’s output, employment, and prices. Fundamental concerns of macroeconomics policy: 1. Why do output and employment sometimes fall, and how can unemployment be reduced? 2. What are the sources of price inflation, and how can it be kept under control? 3. How can a nation increase its rate of economic growth? All market economies show patterns of expansion and contraction known as business cycles. During business-cycle downturns, such as the recession, production of goods and services fall, and millions of people lose their jobs. For much of the postwar period, one key

goal of macroeconomic policy has been to use monetary and fiscal policy to reduce the severity of business-cycle downturns and unemployment. Sometimes countries experience periods of high unemployment, which persist even when their economies are expanding. Macroeconomics examines the sources of such unemployment and after diagnoses, can even suggest possible remedies such as reforming labor market institutions through reducing the incentives not to work or increase wage flexibility. The lives of millions of people depend upon whether macroeconomics can find the right answers to these questions. When it comes to second question, economists have learned that high rates of price inflation have a corrosive effect on market economies. A market economy uses prices as a yardstick to measure economic values and as a way to conduct business. During periods of rapidly rising prices, the yardstick loses its value: people become confused, make mistakes, and spend much of their time worrying about inflation eating away their incomes. That’s why macroeconomics has increasingly emphasized price stability as a key goal. When taking under consideration question three, the macroeconomics is also concerned with the long-run prosperity of a country. Over a period of decades and more, the growth of a nation’s productive potential is the central factor in determining the growth in its real wages and living standards. Over the past years, rapid growth in Asian countries such as Japan, South Korea, and Taiwan sent average incomes for their citizens soaring. Countries want to know the ingredients in a successful growth recipe. Does running a big budget deficit or a big trade deficit have harmful long-run effects on growth? What is the role of investment in physical capital, in research and development, and in human capital? Should the government nourish key industries through subsidies and industrial policy, or does a handsoff policy work better? A complication in considering the three central issues is that there are inevitable tradeoffs among these goals. Reducing the budget deficit may mean accepting slower growth in the short-run. Increasing the rate of growth of output over the long run may require greater investment in knowledge and capital; this investment lowers current consumption of food, clothing and recreation. Of all the macroeconomic dilemmas, the most agonizing is the choice between low inflation and low unemployment. There are no simple formulas for resolving these dilemmas, and macroeconomics differ on the proper approach to take when confronted with high inflation, rising unemployment, or stagnant growth. But with sound macroeconomic understanding, at least the inevitable pain that comes from choosing the best route can be minimized. The Theory of Economic Growth Economic growth is the product of economic development. Economic development is a progressive process of improving human conditions, such as the reduction or elimination of poverty, unemployment, illiteracy, inequality, disease and exploitation. As a process, it involves the interaction of economic and non-economic factors. Economic growth is the increase in the volume of goods and services produced by an economy. It is generally a

factor in an increase in the income, of a nation. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Stages of economic growth One theory in determining the stages of economic growth is based on exchange systems. That is from barter economy to money economy, and finally to a credit economy. Another approach is based on the dominant productive sectors of the economy. According to this theory as stated by British economist Colin Clark, there are three stages of economic growth: 1. Agriculture is the main source of employment and income. 2. Manufacturing industry becomes the major economic activity as a country develops. 3. Service industries grow to be the dominant feature of the economy as a country further develops. Another theory of classifying the stages of growth is the doctrine of Rostow, an American economic historian. In his book Stages of Economic Growth, the transition of a country’s economy from underdevelopment to development passes through several stages such as: 1. 2. 3. 4. 5.

Traditional society Pre-conditions for take-off Take-off Drive to maturity Age of high mass consumption

Some economic growth models: 1. Ricardian model. - Here the key factor is land. This means agriculture is the first priority in the attainment of economic growth. 2. Harrod-Domar. - The key factor in this model is physical capital like machines, buildings, equipment, and so forth. According to this model, the input is capital, and its efficiency is determined by the number of output it can produce. 3. Kaldor model. - Here the key factor is technology, which is embodied in physical capital. Japan is an example which has achieved economic growth through technology. Inflation There is inflation when there is a rising general level of prices. Increase in prices is inflation or we can say that it is decrease in the value of money. Demand for goods and services decrease when prices increase. Inflation creates more inflation. When prices keep on

increasing, people are inclined to spend their money before it loses its value. Inflation encourages more consumption and less saving. Types of inflation: 1. Demand-pull inflation. - This type of inflation occurs when demand for goods and services exceed supply. This is based on the law of supply and demand. Another cause of demand – pull inflation is the excess money supply. When money supply increases without corresponding increase in production of goods and services, prices rise. 2. Cost-push inflation. - An increase in the cost of production results to an increase in prices. Cost increases whenever there is an increase in wages, oil prices, or prices of raw materials. 3. Structural inflation. - This view explains that the inability of some sectors of our economy to response immediately to demand for goods and services. When supply cannot meet demand, prices increase. If there are no obstacles or constraints (financial, physical or institutional), whenever prices rise, producers are encouraged to enter the market. This increases supply, and therefore prices fall. However, there are instances where supply cannot be increased, at least in a short period. Since supply falls, prices of such scarce products rise. And this is inflation for such particular products.

LESSON 7: BUSINESS CYCLES Business Cycles Understanding the business cycles will be useful in understanding the phases which an economic system undergoes to bring about the use of the resources. Phases of the business cycles 1. Prosperity: This is the peak of the business cycle. There is full employment, and the national output is at full capacity. Output can no longer be increased because productive resources are at full capacity or fully employed. 2. Recession: Both production and employment are falling down. 3. Depression: Both production and employment are at their lowest levels. Under such condition, no businessman is willing to invest because the demand for goods and services is also at its lowest point. 4. Recovery: Both production and employment rise towards full employment Business Cycle Theories 1. Exogenous theory: Forces outside the economic system create the business cycles. Examples of these forces are wars, political developments, natural disasters, or major innovations. Typhoons and floods can easily wipe out in a week's time the output of an agricultural country. Civil wars have destroyed the economies of all countries which have

been afflicted with said human misunderstandings or greediness for political powers among the leaders. 2. Endogenous theory: Forces within the economic system cause the fluctuations in the economy. Examples are accelerators, multipliers, innovations or monetary policies. Full employment When there is an available job for every person who is willing and able to work, it is full employment. Theories of employment 1. Classical theory of employment states that employment increases at lower wages. Employers are willing to hire more workers at lower wages because it is more profitable. Keynes did not agree with such theory. He said that during depression, workers are willing to accept any wage but could not find jobs. He argued that high wage could not be the main cause of unemployment. 2. The Keynesian theory of employment - which is the modern theory of employment states that employment is determined by aggregate or total demand for goods and services. Unemployment and its types Disguised unemployment is a situation where individuals are actually working but they do not contribute to production. Types of Unemployment 1. Frictional unemployment is caused by interruptions in production for technical reasons, or when workers are temporarily laid off due to renovation works. 2. Structural unemployment: A change in technology renders the skills and talents of some workers obsolete. 3. Cyclical unemployment: This is caused by the fall of business activities in the economy. When aggregate demand decreases, production declines. Some workers have to be laid off. 4. Seasonal unemployment: During slack periods, many workers in farming and construction are laid off. Conclusion The concepts of recovery, recession, expansion, depression are terms we have encountered since time immemorial. These concepts dealt with how we have attained levels of growth in relation to the employment and unemployment of our resources. As we understand the concepts, we are also made aware of the different effects of the same in our society Reference 1. Principles of Macroeconomics by Case and Fair 2. Economics by Samuelson and Nordhaus

LESSON 8: MEASURING NATIONAL OUTPUT AND INPUT Measuring National Outputs & Income Gross National Product - It is the total market value of all final goods and services produced by citizens in one year. The real economic achievements of any country are measured by the number of goods and services its citizens have produced in a given year. If we depend on the market value of final goods and services, it is not most of the time accurate because of price fluctuations. In case of inflation (high prices), the market value of GNP naturally increases. In case of deflation (low prices), the market value of GNP is low. GNP at current prices is money GNP. It is obtained by multiplying the number of final products and services by prevailing market prices. It is expressed as: P X Q = GNP. Measuring GNP GNP can be measured in at least two different ways, both of which yield the same result. One way of measuring the GNP is from the buyer's point of view, or in terms of aggregate demand. Also known as the expenditure approach to measuring GNP, this method calculates the value of the GNP as the sum of the four components of GNP expenditures: consumption, investment, government purchases, and net exports. The expenditure method accounts for the source of the monetary demand for products and services. The largest component, consumption, includes the value of all the goods and services purchased by consumers during the year. The investment category includes the production of buildings and equipment as well as the net accumulation of inventories. Financial investments, which involve only transfer payments rather than the production of capital goods, are not counted. Government purchases include only expenditures for goods and services, not transfer payments such as Social Security. Net exports include the value of all goods produced in the country but sold abroad, minus the value of goods produced abroad and imported into the country. Since every transaction involves a buyer and a seller, the GNP can also be calculated from the seller's point of view, which focuses on where money payments go. The method, also known as the income approach, measures GNP as the sum of all the incomes received by all owners of resources used in production. Such income payments are known as factor payments, because they are paid to various factors involved in the production of goods and services. These include employee compensation, rental income, proprietary income, corporate profits, interest income, depreciation, and indirect business taxes.

Employee compensation includes all payments relating to labor, including fringe benefits and taxes paid on labor. Rental income is paid for the use of capital goods. Proprietary income represents payments to owners of business firms. Corporate profits are earned by the shareholders of a business. Interest income is received for lending financial resources. Depreciation is a charge against assets used in production. The indirect business tax refers to sales tax, which represents part of the payments for goods and services that are not paid to any of the income recipients. The measurement of GNP is fairly complex and follows a set of rules that, while generally agreed upon, may nevertheless appear somewhat arbitrary. For example, housing is treated in a manner that protects GNP calculations from changes in the rate of home ownership. All occupant-owned housing, as opposed to rental housing, is treated in the GNP accounts as if rented. Thus, the rental value of occupant-owned housing is included as a service in the GNP along with the rental value of houses that are actually rented. GNP measures the value of final products and services, so it is necessary to avoid doublecounting the many intermediary products that are bought and sold in the economy. Products and services are counted as part of the GNP when they reach their final form. Some important final products are actually excluded from the GNP. Many household activities are excluded, as are all illegal goods and services. In the case of housework, the services of a hired maid are considered part of the GNP, but not if the same services are performed by a member of the household. The exclusion of domestic chores has a greater effect on the calculation of the GNP of lesser-developed countries, where households may produce their own food and clothing to a greater extent. The treatment of government expenditures also affects GNP calculations. All government expenditures are considered final; there is no attempt to categorize them as intermediate and final. The effect of this rule is an upward bias in the GNP. In addition, all government expenditures are considered as current consumption rather than as investments; they are measured only once, in the year in which they occur. Finally, government goods and services, which are usually not sold in the marketplace, are valued at cost in the GNP. Limitations of GNP 1. It does not show the allocation of goods and services among the members of society. It only shows the number of goods and services produced by citizens in a given period. An increase in GNP does not necessarily mean that the economic and social welfare of the masses has improved. In a society where there is a widespread mal-distribution of wealth, an increase in GNP only benefits the very rich who own the productive resources.

2. GNP accounting in less developed countries in understated. There are many economic transactions especially in the rural areas that are not registered in the market. For example, backyard poultry, fishing and other small-scale income-producing activities whose products are only intended for family consumption. Only market transactions are reflected in the GNP. 3. The evils of economic growth like pollution, congestion and dirty environment are not reflected in the GNP. The cost of such destruction to the health of human beings, and to the balance of nature is very high. And this is not subtracted from the GNP. 4. GNP only measures the number of goods and services but not the quality of goods and services. Needless to say, quality is an important feature as it affects the well-being of people. 5. Income or products from illegal sources are not included in the GNP. Examples are gambling, unlicensed money lending, and narcotics business. Price Index When newspapers tell us “inflation is rising,” they are really reporting the movement of a price index. A price index is a measure of the general price level; more precisely, it is a weighted average of the prices of a number of goods and services. The most important price indexes are the consumer price index, the GDP deflator, and the producer price index. The Consumer Price Index (CPI) In economics, a Consumer Price Index (CPI, also retail price index) is a statistical measure of a weighted average of prices of a specified set of goods and services purchased by wage earners in urban areas. It is a price index which tracks the prices of a specified set of consumer goods and services, providing a measure of inflation. The CPI is a fixed quantity price index and a sort of cost-of-living index. The CPI can be used to track changes in prices of all goods and services purchased for consumption by urban households. User fees (such as water and sewer service) and sales and excise taxes paid by the consumer are also included. Income taxes and investment items (like stocks, bonds, life insurance, and homes) are not included. For example assume that consumers buy three commodities: food, shelter, and medical care. Using 1995 as the base year, we reset the price of each commodity at 100 so that differences in the units of commodities will not affect the price index. This implies that the CPI is also 100 in the base year. [= (0.20 X 100) + (0.50 X 100) + (0.30 X 100)]. Next, we calculate the consumer price index. Suppose that in 1996 food prices rise by 2 percent to 102, shelter prices rise 6 percent to 106, and the medical care prices are up 10 percent to 110. We recalculate the CPI for 1996 as follows: CPI (1996) = (0.20 X 102) + (0.50 X 106) + (0.30 X 110)

= 106.4 In other words, if 1995 is the base year in which the CPI is 100, then in 1996 the CPI is 106.4. Gross Domestic Product It is the total market value of all final goods and services produced within the territories of a country in one year. Incomes derived from investments or wealth in foreign countries is excluded. In a country whose economy is dominated by multinational corporations or foreigners, the GDP is bigger than GNP. GDP is used for many purposes, but the most important one to measure the overall performance of an economy.

LESSON 9: INTERNATIONAL TRADE International Trade and Theory of Comparative Advantage International trade refers to exchange of goods and services between one country and other countries. Because of geographical conditions and technological monopoly, countries produce various products, and no one country can create all kinds of products. With free international trade, countries can exchange their goods with one another. Hence, each country has the opportunity to purchase all the goods and services from other countries which it cannot produce. Free international trade appears more in theory. For economic and political reasons, there have been trade barriers on the movement of goods and services among countries. Bases of International Trade 1. Distribution of economic resources. The distribution of natural resources, labor and capital goods among countries is not even. When a top Japanese government official saw the United States, he said God has not been fair in the distribution of natural resources. The arable land of Japan is only about 15 percent of its total land area. And during winter, half of this is covered with snow. Countries which have abundant skilled labor are most efficient in the production of labor-intensive goods. 2. Technological efficiency. All other things being equal, a country which has the most efficient technology can produce goods at the lowest price, with the best quality, and the highest quantity. Difference in technological efficiency results to difference in quality and price of products.

The Importance of International Trade International economics is concerned with allocation of economic resources among countries. Such allocation is done in the world markets by means of free trade; the best products are produced and sold in a free competitive market. One fundamental principle in international trade is that one should buy goods and services from a country which has the lowest price, and sell his goods and services to a country which has the highest price. This is good for the buyers and the sellers. Another thing is that no country in the world can be economically independent without a decline in its economic growth. Even the richest countries buy raw materials for their industries form the poor countries. Barriers to International Trade In theory, free trade benefits everybody and every country. It has been said that tariffs and other trade barriers only encourage inefficiency, restrict commerce, and reduce the general standard of living. But the theory of free trade came from a world which is no longer relevant with existing realities. During the time of Adam Smith, Great Britain was the leading industrial power, and was greatly benefited from free trade. Free trade prospered because there were abundant world markets and only a few key countries. Former Harvard professor Henry Kissinger pointed out that today’s world economy, by contrast, contains many trading nations of widely different cultural backgrounds with great variations in labor costs and standards of living, each claiming sovereign control over its economic decisions. In such conditions, competition becomes more ruthless and its impact more drastic. Other Arguments for Trade Barriers 1. Military self-sufficiency. There is a need to protect industries which manufacture goods and materials for national defense and security. Strategic military goods are not sold to enemies. 2. Local standard of living. To a country with a high standard of living, it is argued that tariffs are needed to protect such living standard. The inflow of cheap foreign products will reduce the prices of the local goods, and ultimately wages and the level of living will also fall. 3. Local employment. It is contended that be restricting imports, the level of employment rises. This will stimulate production in the local economy in view of the absence of foreign competition. Of course, more production requires more workers. Exchange Rates

A foreign exchange is the price of foreign money relative to the local money. For example, the price of $1 is ₱53. In other words it requires 53 units of our peso to buy 1 unit of U.S. dollar. Under a floating exchange rate, the price of a dollar relative to our peso is determined by the market forces of demand and supply. This means exchange rate between the dollar and the peso fluctuates. In case the price of a dollar increases, let us say to ₱55 to $1, then the dollar has appreciated and the peso has depreciated. Depreciation can also be called currency devaluation. Strictly speaking, devaluation refers to the increase of price of gold relative to a currency. For example, one ounce of gold is worth $60. Supposing it has become $600, this means the value of the U.S. dollar has decreased 10 times. An exchange rate can be overvalued or undervalued. The value of a U.S. dollar relative to peso is determined by the demand and supply of dollars. Supposing the real market value of a dollar is ₱53. If the official rate of the government (Central Bank) is ₱50, then our peso is overvalued. Overvalued because it requires only ₱50 and not ₱53 to buy a dollar. It is cheaper to buy goods and services from a country with undervalued currency than from the one with an overvalued currency. Determinants of Exchange Rates Without government restrictions or regulations on the buy and sell of dollars, the price of the dollar is determined by market forces such as: 1. Relative income changes. An increase in the purchasing power of the Filipinos tends to raise the imports of the U.S. goods. This means demand for U.S. dollars also increases. As a result, the price of the dollar rises, and the value of our peso depreciates. Conversely, a rise in the purchasing power or real income of the Americans tends to increase imports of Philippine goods. Such situation increases the value of the peso relative to the dollar, because the supply of dollars in the Philippines increases. 2. Relative price changes. In case prices of goods and services are much higher in the Philippines than in the United States, Filipinos are inclined to buy from the United States because of cheaper prices. This results to a greater demand for dollars, and so its price increases. This means the value of the peso declines. On the other hand, a fall in the prices of goods in the Philippines increases demand for Philippine products from the U.S. residents. This reduces the exchange rate of the dollar. 3. Relative interest rates. Supposing interest rates are higher in the Philippines than in the United States. These attract U.S. investments and reduces Filipino investments in the U.S. These results to an increase in the supply of dollars in the Philippines while the demand for dollars declines. So, the exchange rate of dollar falls. Trade Protection for the Less Developed Countries

The theory of free trade is basically based on the concept of comparative advantage. Industrial countries should sell finished products while agricultural countries should sell raw materials. In this case, the agricultural countries will have no chance to industrialize their economies which is the best way to achieve high economic growth. Agricultural economies have remained poor because the prices of their products in the world markets are low while those of the industrial countries are high. The most widely used trade barriers are tariffs and import quotas. A tariff is an excise tax on imported goods while an import quota limits the number of goods to be imported. Nations built trade barriers to give their infant industries a chance to develop and grow. During the formative industrial development of United States, Germany, Canada, and other countries in Western Europe, they protected their infant industries against the industrial goods of Great Britain. Conclusion The word had indeed become smaller due to the development in technology. This is most true in the field of telecommunication and transportation. Thus the relations among countries have become more intense. In this regard, the most important concern remains to be economic. The exchange of goods and services would always be a major concern for counties have different needs and different levels of productivity responsible for different products. Thus the knowledge of international trade remains crucial in order that individual players in the international scene or market may be guided accordingly References: 1. Principles of Economics by Roberto G. Medina 2. Principles of Macroeconomics by Karl E. Case and Ray C. Fair 3. Economics by Feliciano Fajardo Questions: 1. What are the bases of international trade? 2. What are the barriers to international trade 3. What is exchange rate? 4. What are the factors that affect exchange rates?

LESSON 10: FISCAL POLICY Fiscal Policy Fiscal policy refers to the revenue and expenditure measures of the public budget. By fiscal policy we mean the process of shaping taxation and public expenditure to help dampen the

swings of the business cycle and contribute to the maintenance of a growing, highemployment economy, free from high or volatile inflation. In formulating fiscal policies, the voters, the President and his cabinet (executive branch) and the legislative body (congress or general assembly) are involved. In a true democratic society, the welfare of the people is promoted through the budget. The most important needs of the economy and the people are given top priority. However, in not a few cases, political interests of government officials are the first considerations. For instance, many government projects appear immediately before the election time. The objectives of fiscal policy are: 1. Provision for social goods 2. Equitable distribution of wealth and income 3. Maintain high employment 4. Ensure price stability; and 5. Sustain a satisfactory rate of economic growth 6. The national budget contains specific provisions for the funding of projects and programs geared toward the attainment of the aforementioned policy objectives. The budget is focused towards the promotion of the welfare of the poor masses. It is the President of the Republic, together with the cabinet members, who prepare the national budget. The proposed budget is submitted to the legislature for discussion and approval. Discretionary Fiscal Policy A discretionary fiscal policy is one in which the government changes tax rates or spending programs, usually by passing new legislation. The principal weapons of discretionary fiscal policy are public works, other capital programs, public-employment projects, and changes in tax rates. Public works include creating jobs, building hospitals, schools, and roads as well as other infrastructures needed for a growing economy. Other public works investments, such as electrification, proved enormously beneficial to underdeveloped areas, and transportation projects. At the other extreme from highly capital-intensive, long-duration public works projects are public-employment projects. The idea behind these programs is simple: If the problem is high unemployment, why not just create jobs directly? Public-employment projects are designed to hire unemployed workers for a short time in public jobs, after which people can move to regular jobs in the private sector. A third approach to discretionary fiscal policy is making temporary changes in income taxes. Tax cuts can keep disposable incomes from falling and prevent an economic decline from snowballing into a deep recession. Varying tax rates can be used to either stimulate or

restrain an economy. Many advocates of discretionary stabilization policy see varying tax rates as the ideal fiscal weapon. Once taxes have been changed, consumers react quickly; a tax cut is spread widely over the population, stimulating spending on consumption goods and including an economic upturn. Shortcomings of Fiscal Policies Many government programs and projects are very good. They are always intended for the good of the people, especially the poor masses. However, when it comes to results, it is already different. Such projects are not properly managed or implemented. Either the implementers or managers are inefficient or some very powerful groups have hampered the success of such programs for economic or business reasons. For example, the land reform program in most of the less developed countries is a failure. Fiscal policy is very effective during economic depression. The government has to spend more money on public works in order to create employment. This results to more income and consumption that stimulate the private sector to produce goods and services. And this is the beginning of economic recovery. However, during a period of economic boom, the government finds it politically difficult to increase taxes and reduce government expenditures. Many people do not understand why the government should increase taxes and reduce government expenditures at the time when the economy is prosperous. They do not know that such fiscal measures are designed to prevent inflation. Fiscal Functions There are three major fiscal functions: 1. Allocation function. Private goods like rice, soap, or cake are allocated in the market. Those who have the money and they are willing to acquire such goods can purchase them. They just exchange their money with such goods. However, in the case of most social goods it is not efficient to allocate them through the market system. For example, Ayala avenue is a public or social good. If all those who use the street, including pedestrians, have to pay, then there would be a great delay in the movement of persons and transportation facilities. Another example is the anti-malaria or anti-pollution project in a community. It is not economically feasible to exclude those houses that do not like to buy the project. Whether they pay or not they get the benefits of the project. So, there is no need to sell the project to the community. If it is the felt need of the community, then the government should clean the community through health and sanitation programs. Such programs are funded by taxes paid by the people. The government also sells private goods at a lower price, and in many countries in Europe and America, such goods are even free for those who cannot afford to buy them in the market. They are given free food, clothing and shelter, medicare and education. In the Philippines, there are also goods and services sold by the government at a lower price or even free. But these are limited due to our inadequate financial resources. 2. Distribution function. The issue of the fair distribution of wealth and income has been a problem from ancient times to modern times. Some economists believe that just distribution of wealth and income is only for politicians, philosophers and poets. In economics, income

distribution is determined by the prices of factor ownership, like land, labor, capital, and entrepreneurship ability. This economic theory appears good but in countries where there is no just distribution of the factors of production, only very few have high incomes while the great masses have very low incomes. In less developed countries, most of the peoples own only labor. Because of very limited economic activities, there is a surplus of labor supply. Thus, wages are very low. This means most people in countries live below poverty line. Social reforms fight for distributive justice. They claim that the productive resources of society should be fairly distributed among its members. If this is done, the gap between the rich and poor is narrowed. Economic opportunities are available to all regardless of religion, race or belief. Such situations exist only in the richest countries of the world. Even a poor country, through its fiscal policies can contribute to distributive justice. Progressive taxation is a good example. This is based on the ability to pay. 3. Stabilization function. One goal of fiscal policy is the attainment of economic stability. When there are no problems of unemployment and inflation, then the economy is said to be stable. The government through the fiscal tools of taxation, borrowings, and expenditures can minimize or eliminate the problems of unemployment and inflation. The government should give top priority to projects which are very efficient in generating jobs and incomes for the people. Such productive projects do not only reduce unemployment but also inflation rate. More supply of goods means lower prices. This is the law of supply and demand. In the same manner, taxation can help in reducing inflation rate. If the kind of inflation is caused by oversupply of money in relation to the number of goods available in the economy, the solution of the government is increase taxes in order to reduce the disposable income of the buyers. Most individuals are not happy about such fiscal policy. They believe that taxes should be lowered during inflation because their purchasing power falls. What they do not understand is that when there is an oversupply of money, demand for goods and services increases. Since supply is limited, prices go up. The tax increase should only be temporary just enough to control the demand for goods and services while efforts are being done by the government in increasing supply of goods and services.

LESSON 11: TAXATION General Principles of Taxation Taxation is a means of raising funds for the operations of the government, especially its public services. Taxes are very important as they constitute the life of our economy and society. It is not possible for a government to exist permanently if it has no funds. Most of our programs and projects are financed by tax revenues. The rest are funded by local and foreign loans. Essential Characteristics of Tax

1. It is an enforced contribution. A tax is not a voluntary payment or donation and its imposition is in no way dependent upon the will or assent of the person taxed. 2. It is generally payable in money. 3. It is proportionate in character. A tax is laid by some rule of apportionment according to which persons share the public burden. It is ordinarily based on the ability to pay. 4. It is levied of persons or property. A tax may also be imposed on acts, transactions, rights or privileges. In each case, however, it is only a person who pays the tax. 5. It is levied by the state which has jurisdiction over the person or property. The object to be taxed must be subject to the jurisdiction of the taxing state. This is necessary in order that the tax can be enforced. 6. It is levied by the law-making body of the state. The power to tax is a legislative power which under the constitution only Congress can exercise through the enactment of tax statutes. 7. It is levied for public purpose or purposes. Taxation involves, and a tax constitutes, a charge or burden imposed to provide income for public purposes – the support of the government, the administration of the law, or the payment of public expenses. Classification of Taxes They are classified: 1. As to subject matter or object: a. Personal, poll, or capitation. Tax of a fixed amount imposed on persons residing within a specified territory, whether citizens or not, without regard to their property or the occupation or business in which they may be engaged. Example: Community (formerly residence) tax. b. Property. Tax imposed on property, whether real or personal, in proportion either to its value, or in accordance with some other reasonable method of apportionment. Example: Real estate tax. c. Excise. Any tax which does not fall within the classification of a poll tax or property tax. It is said that an excise tax is a charge imposed upon the performance of an act, the enjoyment of a privilege, or the engaging in an occupation, profession or business. Examples: Income tax, value-added tax, estate tax Note: This tax is not to be confused with excise tax imposed on certain specified articles manufactured or produced in, or imported into, the Philippines, “for domestic sale or consumption or for any other disposition.” 2. As to who bears the burden: a. Direct. Tax which is demanded from the person who also shoulders the burden of the tax; or tax for which the taxpayer is directly liable or which he cannot shift to another. Example: Corporate and individual income taxes.

b. Indirect. Tax that is demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another. Examples: Value-added tax; excise taxes on certain specific goods; customs duties. 3. As to determination of amount: a. Specific. Tax of a fixed amount imposed by the head or number, or by some standard of weight or measurement; it requires no assessment (valuation) other than a listing or classification of the objects to be taxed. Examples: Taxes on distilled spirits, wines, fireworks, and others. b. Ad valorem. Tax of a fixed proportion of the value of the property with respect to which the tax is assessed; it requires the intervention of assessors or appraisers to estimate the value of such property before the amount due from each taxpayer can be determined. Examples: Real estate tax; excise taxes on cigarettes, gasoline and others; customs duties 4. As to purpose: a. General, fiscal, or revenue. Tax imposed for the general purposes of the government i.e., to raise revenue for governmental needs. Examples: Income tax; value-added tax, and almost all taxes. b. Special or regulatory. Tax imposed for a special purpose, i.e., to achieve some social or economic ends irrespective of whether revenue is actually raised or not. Example: Protective tariffs or customs duties on imported goods. 5. As to scope: a. National. Tax imposed by the national government. Examples: National internal revenue taxes; customs duties and national taxes imposed by special laws. b. Municipal or local. Tax imposed by municipal corporations or local government units. Examples: Real estate tax; professional tax. 6. As to graduation or rate: a. Proportional. Tax based on a fixed percentage of the amount of the property, receipts, or other bases to be taxed. Examples: Real estate taxes; value-added tax; and other percentage taxes. b. Progressive or graduated. Tax the rate of which increases as the tax base or bracket increases. Examples: Income tax; estate tax; donor’s tax. c. Regressive. Tax the rate of which decreases as the tax base or bracket increases, i.e., the tax rate and the tax base move in opposite directions. We have no regressive taxes. Tax Distinguished from other Terms 1. Toll – It has been defined as a sum of money or the use of something, generally applied to the consideration which is paid for the use of a road, bridge or the like, of a public nature.

a. A toll is a demand of proprietorship, while a tax is a demand of sovereignty; b. A toll is paid for the use of another’s property, while tax is paid for the support of the government. c. The amount of toll depends upon the cost of construction or maintenance of the public improvement used, while there is generally no limit on the amount of tax that may be imposed; and d. A toll may be imposed by the government or private individuals or entities, while a tax may be imposed only by the government. 2. Penalty – It is any sanction imposed as a punishment for violation of law or acts deemed injurious. Thus, the violation of tax laws may give rise to imposition of penalty. a. A penalty is designed to regulate conduct, while a tax is generally intended to raise revenue; and b. A penalty may be imposed by the government or private individuals or entities, while a tax may be imposed only by the government. 3. Special assessment – It is an enforced proportional contribution from owners of lands especially benefited by public improvements. a. A special assessment is levied only on land; b. It is not a personal liability of the person assessed, i.e., his liability is limited only to the land involved; c. It is based wholly on benefits; and d. It is exceptional both as the time and place. A tax, on the other hand, has general application. 4. License or permit fee – It is a charge imposed under the police power for the purposes of regulation. License is rather in the nature of a special privilege, of a permission or authority to do what is within its terms. a. License fee is the legal compensation or reward of an officer for specific services, while tax is an enforced contribution assessed by sovereign authority to defray public expenses; b. It is imposed for regulation, while a tax is levied fro revenue; c. It involves an exercise of police power, while a tax involves the exercise of the taxing power; d. Its amount should be limited to the necessary expenses of inspection and regulation, while there is generally no limit on the amount of tax that may be imposed; e. It is imposed on the right to exercise a privilege, while a tax is imposed also on persons and property; and f. Failure to pay a license fee makes the act or business illegal while failure to pay a tax does not necessarily make the act or business illegal.

5. Debt – A tax is not a debt in the ordinary sense. a. A debt is generally based on contract, express or implied, while tax is based on law; b. A debt is assignable, while a tax cannot generally be assigned; c. A debt may be paid in kind, while a tax is generally payable in money; d. A debt may be the subject of set-off or compensation, while a tax is generally not; e. A person cannot be imprisoned for the non-payment of debt, while imprisonment is a sanction for non-payment of tax; f. A debt draws interest when it is so stipulated or when there is default, while a tax does not draw interest except only when delinquent. Requirements of a good tax system: 1. The distribution of the tax burden should be equitable. This means that a person has to pay tax based on his ability to pay. 2. Taxes should not ruin the efficient market system. 3. Taxes should serve as tools in facilitating economic stability and economic growth. Taxes can greatly help solve or minimize the economic problems of inflation and unemployment. 4. Tax administration should be efficient. This refers to the productivity of tax collection. 5. The cost of tax administration and its compliance should be economical. Approaches to Equitable Taxation Good citizens have the responsibility to contribute a fair share to the cost of government. Certainly, the payment of tax is a burden to all those who have the duty to pay because of their income and wealth. But such burden can be made less painful by the government trough the concepts benefit received and ability to pay. 1. Benefits received: People pay their taxes in accordance with the benefits they received from government projects. It is like buying goods and services in the market. Those who do not receive benefits do not pay taxes. However, there are government projects in which it is not possible to exclude those who do not pay, like antipollution project. Moreover, there are spillover benefits whose payments are difficult to determine. 2. Ability-to-pay: Such ability is determined by their income and wealth. Those who have more incomes or wealth pay more taxes than those with less incomes or wealth. Tax Structures The following tax structures show the relationship between rates and incomes: 1. Progressive tax – is one whose rate increases as income increases.

2. Regressive tax – is when its rate decreases as income increases. Actually, there are no regressive taxes. Our tax system is said to be regressive because the main portion of our tax revenues comes from indirect taxes. 3. Proportional tax – is one whose rate remains constant regardless of the size of the income. Exemptions from Taxation It has been the policy of the government to give tax exemptions to certain economic activities in order to encourage and promote their growth such as cooperatives, cottage industries, infant industries and rural banks among others. In addition, organizations or institutions which are engaged in non-profit undertakings, together with some specific financial benefits or incomes, are exempted by the Tax Code and special laws. Examples are: 1. Corporations or associations organized and operated solely for religious, charitable, scientific, athletic, or cultural purposes. 2. Benefits received by members from GSIS. 3. Social security benefits, retirement gratuities, pensions, and other similar benefits received by retired employees. 4. Benefits received from the U.S. government through the U.S. Veterans Administration. 5. Donations to special welfare, cultural and charitable institutions.

LESSON 12: INCOME TAXATION Income Taxation In General Income Tax • Income tax has been defined as a tax on all yearly profits arising from property, profession, trade or business, or as a tax on a person’s income, emoluments, profits and the like. • It is generally regarded as an excise tax. It is not levied upon persons, property, funds or profits but upon the right of a person to receive income or profits. Purposes of income taxation 1. To provide large amounts of revenues. 2. To offset regressive sales and consumption taxes. 3. Together with estate tax, to mitigate the evils arising from the inequalities in the distribution of income and wealth, which are considered deterrents to social progress, by imposing a progressive scheme of taxation. Income • Income, in its broad sense, means all wealth which flows into the taxpayer other than as a mere return on capital. [Section 36, Revenue Regulations 2] • Income means accession to wealth, gain or flow of wealth.

• Conwi v. CTA [213 SCRA 83]: Income may be defined as an amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit from investment. • Commissioner v. BOAC [149 SCRA 395]: Income means “cash received or its equivalent.” It is the amount of money coming to a person within a specific time. It is distinct from capital for, while the latter is a fund, income is a flow. • Fisher v. Trinidad [43 Phil 973]: Stock dividend is not an income. It merely evidences the interest of the stockholder in the increased capital of the corporation. An income may be defined as the amount of money coming to a person or corporation within a specified time, whether as payment for services, interest, or profit for investment. Income v. capital • Capital is a fund or property existing at one distinct point of time while income denotes a flow of wealth during a definite period of time. • The essential difference between capital and income is that capital is a fund or property existing at one distinct point of time; income is a flow of services rendered by that capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time. Capital is wealth, income is the service of wealth. [Madrigal v. Rafferty, 38 Phil 414] • Capital is the tree while income is the fruit. Sources of Income What produces income? • The term “source of income” is not a place but the property, activity or service that produced the income. In the case of income derived from labor, it is the place where the labor is performed; in the case of income derived from the use of capital, it is the place where the capital is employed; and in the case of profits from the sale or exchange of capital assets, it is the place where the sale or transaction occurs. • Commissioner v. BOAC: The source of an income is the property, activity or service that produces the income. For the source of income to be considered as coming from the Philippines, it is sufficient that income is derived from activity within the Philippines. Sources of income 1. Sources within the Philippines 2. Sources without the Philippines 3. Sources partly within and partly without the Philippines Taxable income • The term “taxable income” means the pertinent items of gross income specified in the NIRC, less the deductions and/or personal and additional exemptions, if any, authorized by such types of income by the NIRC or other special laws.

Requisites for income to be taxable 1. There must be a gain or profit. 2. The gain must be realized or received. 3. The gain must not be excluded by law or treaty from taxation. Gain must be realized or received • This implies that not all economic gains constitute taxable income. Thus, a mere increase in the value of property is not income but merely an unrealized increase in capital. When is income considered received? 1. actual receipt 2. constructive receipt Income constructively received • Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case, the income must be credited to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made. [Section 52, Revenue Regulations 2] Examples of constructive receipt 1. Interest coupons which have matured and are payable, but have not been cashed. 2. Defaulted coupons are income for the year in which paid. 3. Partner’s distributive share in the profits of a general professional partnership is regarded as received by the partner, although not yet distributed. Are the following items income? • Found treasure - YES • Punitive damages - YES • Damages for breach of promise or alienation of affection - YES • Worthless debts subsequently collected - YES • Tax refund – NO (but yes if the tax was previously allowed as a deduction and subsequently refunded or credited, as benefit accrued to the taxpayer; see discussion on tax as a deductible item) • Non-cash benefits - YES • Income from illegal sources - YES • Psychological benefits of work - NO • Give away prizes – YES

• Scholarships/fellowships – YES • Stock dividends - NO Tests to determine realization of income 1. Severance test As capital or investment is not income subject to tax, the gain or profit derived from the exchange or transaction of said capital by the taxpayer for his separate use, benefit and disposal is income subject to tax. 2. Substantial alteration of interest test • Income is earned when there is a substantial alteration of the interest of a taxpayer, i.e. increase in proportionate share of a stockholder in a corporation. • Income to be returnable for taxation must be fully and completely realized. Where there is no separation of gain or profit, or separation of increase in value from capital, there is no income subject to tax. • Thus, stock dividends are not income subject to tax on the part of the shareholder for he had the same proportionate interest in the assets of the corporation as he had before, and the stockholder was no richer and the corporation no poorer after the declaration of the dividend. • However, if the pre-existing proportionate interest of the stockholder is substantially altered, the income is considered derived to the extent of the benefit received. • Moreover, if as a result of an exchange of stocks, the person received something of value which are essentially and fundamentally different from what he had before the exchange, income is realized within the meaning of the revenue law. 3. Flow of wealth test The essential difference between capital and income is that capital is a fund whereas income is the flow of wealth coming from such fund; capital is the tree, income is the fruit. Income is the flow of wealth other than as a mere return of capital. Classes of Income Kinds of taxable income or gain 1. Capital gains - Capital gains are gains or income from the sale or exchange of capital assets. These include: a. Income from dealings in shares of stock of domestic corporation whether or not through the stock exchange; b. Income from dealings in real property located in the Philippines; and c. Income from dealings in other capital assets other than (a) and (b). 2. Ordinary gains - Ordinary gains are gains or income from the sale or exchange of property which are not capital assets.

a. Business income • Income from trading, merchandising, manufacturing or mining • Income from practice of profession • Note: The term “trade or business” includes the performance of the functions of a public office. [Section 22(S), NIRC] b. Passive income • Passive income from Philippine sources subject to final tax • Passive income from Philippine sources not subject to final tax • Passive income from sources outside the Philippines c. Passive income again • Interest income • Rentals/Leases • Royalties • Dividends • Annuities and proceeds of life insurance/other types of insurance • Prizes and winnings, awards, and rewards • Gifts, bequests, and devises d. Other types of passive income Approaches in income recognition 1. Schedular system • The schedular system is one where the income tax treatment varies and is made to depend on the kind or category of taxable income of the taxpayer. 2. Global system • The global system is one where the tax treatment views indifferently the tax base and generally treats in common all categories of taxable income of the taxpayer. Schedular system v. global system 1. Under the schedular treatment, there are different tax rates, while under the global treatment, there is a unitary or single tax rate. 2. Under the schedular treatment, there are different categories of taxable income, while under the global treatment, there is no need for classification as all taxpayers are subjected to a single rate. 3. The schedular treatment is usually used in the income taxation of individuals while the global treatment is usually applied to corporations. Approach used in the Philippines • Partly schedular and partly global. The schedular approach is used in the taxation of individuals while the global approach is used in the taxation of corporations.

Classes of Income Taxpayers Basis of classification of taxpayers 1. corporations v. individuals 2. nationality 3. residence Classes of income taxpayers 1. Individuals a. Resident citizens b. Non-resident citizens c. Resident aliens d. Non-resident aliens i. engaged in trade or business in the Philippines, or ii. not engaged in trade or business in the Philippines iii. Note: A non-resident alien individual who shall come to the Philippines and stay therein for an aggregate period of more than one hundred eighty (180) days during any calendar year shall be deemed a non-resident alien doing business in the Philippines. [Section 25(A)(1), NIRC] 2. Corporations a. Domestic corporations b. Resident foreign corporations c. Non-resident foreign corporations 3. Special a. Proprietary educational institutions and hospitals that are non-profit b. Insurance companies c. General professional partnerships d. Estates and trusts Note: Estates and trusts are treated as individual taxpayers. Who is a non-resident citizen? The term “non-resident citizen” means: 1. A citizen of the Philippines who established to the satisfaction of the Commissioner the fact of his physical presence abroad with a definite intention to reside therein. 2. A citizen of the Philippines who leaves the Philippines during the taxable year to reside abroad, either as an immigrant or for employment on a permanent basis. 3. A citizen of the Philippines who works and derives income from abroad and whose employment thereat requires him to be physically present abroad most of the time during the taxable year.

4. A citizen who has been previously considered as a non-resident citizen and who arrives in the Philippines at any time during the taxable year to reside permanently in the Philippines. Corporation • A corporation, as used in income taxation, includes partnerships, no matter how created or organized, joint stock companies, joint accounts (cuentas en participacion), and associations or insurance companies. • However, it does not include: a. a general professional partnership; and b. a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the government. Resident foreign corporation - The term applies to a foreign corporation engaged in trade or business within the Philippines. Non-resident foreign corporation - The term applies to a foreign corporation not engaged in trade of business in the Philippines. General professional partnership v. Ordinary business partnership General professional partnerships • General professional partnerships are partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business. [Section 22(B), NIRC] • Persons engaging in business as partners in a general professional partnership shall be liable for income tax only in their separate and individual capacities. [Section 26, NIRC] • For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the same manner as a corporation. [Section 26, NIRC] • Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership. [Section 26, NIRC] • Income of a general professional partnership are deemed constructively received by the partners. [Section 73(D), NIRC] Ordinary business partnership • An ordinary business partnership is considered as a corporation and is thus subject to tax as such. • Partners are considered stockholders and, therefore, profits distributed to them by the partnership are considered as dividends.

The essential elements of a partnership are: (1) an agreement to contribute money, property, or industry to a common fund; and (2) an intent to divide the profits among the contracting parties. Unregistered partnership v. co-ownership for tax purposes • If the activities of co-owners are limited to the preservation of the property and the collection of the income therefrom, in which case, each co-owner is taxed individually on his distributive share in the income of the co-ownership. • If the co-owners invest the income in business for profit, they would be constituting themselves into a partnership taxable as a corporation. General Principles of Income Taxation in the Philippines 1. A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines. 2. A non-resident citizen is taxable only on income derived from sources within the Philippines. 3. An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income from sources within the Philippines. Provided, that a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker. 4. An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines. 5. A domestic corporation is taxable on all income derived from sources within and without the Philippines. 6. A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines. Some rules on taxation of the various taxpayers Who are taxed on their global income? 1. Resident citizens 2. Domestic corporations Who are taxed only on their income from sources within the Philippines? 1. Non-resident citizen 2. Overseas contract workers 3. Alien individual, whether a resident or not of the Philippines 4. Foreign corporation, whether engaged or not in trade or business in the Philippines Who are taxed based only on their net income?

1. Resident and non-resident citizens 2. Resident alien and non-resident alien engaged in trade or business in the Philippines 3. Domestic corporation 4. Resident foreign corporation Who are taxed based on their gross income? 1. Non-resident alien not engaged in trade or business in the Philippines 2. Non-resident foreign corporation Treatment of some special items 1. Forgiveness of indebtedness The cancellation and forgiveness of indebtedness may, dependent upon the circumstances, amount to: a. a payment of income; b. a gift; or c. a capital transaction. • If, for example, an individual performs services for a creditor who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his service. • If, however, a creditor merely desires to benefit a debtor and without any consideration thereof cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income. • If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of payment of a dividend. [Section 50, Revenue Regulations 2] 2. Recovery of amounts previously written off • Considered as income Guide Questions in Determining Taxable Income 1. Is there a gain or income? 2. Is the gain or income taxable? Is it excluded or exempt? 3. What type of income is it: income includible in the gross income, passive income, capital gains, income derived from other source? 4. To what class does the taxpayer belong: individual or corporate, citizen or not or domestic or foreign, resident or not, engaged in trade or business or not? Tax on Individuals Preliminary points on taxation of individuals How taxed? • An individual citizen, both resident and non-resident, and an individual resident alien are taxed similarly.

• A non-resident alien engaged in trade or business shall be subject to the same income tax rates as a citizen and a resident alien. • Thus, only a non-resident alien who is not engaged in trade or business is taxed differently from the other individual taxpayers. On what income taxed? • A resident citizen is taxed on all income from sources within and outside the Philippines. The tax base is net income. • A non-resident citizen is taxed only on income from sources within the Philippines. The tax base is net income. • An alien, whether resident or not, is taxed only on income from sources within the Philippines. However, the tax base for a resident alien and non-resident alien engaged in trade or business is net income while the tax base for a non-resident alien not engaged in trade or business is gross income. Types of income taxed 1. Items of income included in the gross income 2. Passive income 3. Capital gains from sale of shares of stock not traded in the stock exchange 4. Capital gains from the sale or exchange of real property Tax on Individual Citizen (Resident and Non-Resident) and Individual Resident Alien Items of income included in the gross income • A schedular rate of five percent (5%) to ₱125,000 + 32% of excess over ₱500,000.00 by 01 January 2000 is imposed on items of income of an individual citizen and individual resident alien which are properly includible in the gross income. Rates of tax on certain passive income 1. Interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements – 20% 2. Royalties, except on books, as well as other literary works and musical compositions – 20% 3. Royalties on books, literary works and musical compositions – 10% 4. Prizes over ₱10,000.00 – 20% Note: Prizes less than ₱10,000.00 are included in the income tax of the individual subject to the schedular rate of 5% up to ₱125,000 + 32% of excess over ₱500,000.00) 5. Other winnings, except PCSO and lotto, derived from sources within the Philippines – 20% 6. Interest income derived by a resident individual (Note: non-resident citizen not included) from a depository bank under the expanded foreign currency deposit system – 7.5%

7. Interest income from long-term deposit or investment evidenced by certificates prescribed by BSP a. Exempt if investment is held for more than five years b. If investment is pre-terminated, interest income on such investment shall be subject to the following rates: 20% - if pre-terminated in less than 3 years 12% - if pre-terminated after 3 years to less than 4 years 5% - if pre-terminated after 4 years to less than 5 years 8. Cash and/or property dividends Ten percent (10%) final tax by 01 January 2000 on the following: a. Cash and or property dividend actually or constructively received from a domestic corporation or from a joint stock company, insurance or mutual fund companies and regional operating headquarters of multinational companies b. Share of an individual in the distributable net income after tax of a partnership except a general professional partnership of which he is a partner c. Share of an individual in the net income after tax of an association, joint account, or a joint venture or consortium taxable as a corporation of which he is a member or a coventurer Capital gains from the sale of shares of stock not traded in the stock exchange 1. Not over ₱100,000 – 5%

LESSON 13: AGRARIAN REFORM Agrarian Reform The Comprehensive Agrarian Reform Program (CARP) was a land reform law mandated by Republic Act No. 6657, signed by President Corazon Aquino on June 10, 1988. It was the fifth land reform law in fifty years, following the land reform laws of Presidents Manuel Quezon, Ramon Magsaysay, Diosdado Macapagal and Ferdinand Marcos. Overview The existing agrarian reform law implemented nationwide is Republic Act No.6675, otherwise known as “the Comprehensive Agrarian Reform Law” or CARL, signed into law by then president Corazon Aquino, and implementing to that effect the government program known as “Comprehensive Agrarian Reform Program” or CARP It is called comprehensive because it covers not only private lands, but also public lands and other lands of the public domain which are classified as agricultural, regardless of the crops planted thereon, the growing fruit trees, farm products and other farm activities and practices performed and or done by persons, whether natural or juridical.

It is the policy of the state to implement such a program pursuant to the mandate of the 1987 Constitution which states that: “….the state shall promote comprehensive rural development and agrarian reform...” (Art. II Sec. 21 of the 1987 Constitution) Brief History of Land Reform Spanish Period For loyalty and faithful service to the Spanish crown, lands (enconmiendas) were granted to special persons who were allowed to exact tributes from peasants. Big tracts of lands were owned by religious orders. The rest of the farmers possessed lands under the so called share tenancy. American Period Church lands were subdivided as a measure of land reform and sold to farmers basically to resolve peasants’ unrest. This set-up enabled a number of Filipino farmers to amass big tract of lands which later on became the haciendas. Diosdado Macapagal’s Land Reform A land Reform Code was passed in 1963 during the term of Pres. Diosdado Macapagal, ensuring a more definite transition from tenancy to owner- operated farms. The said land reform, however, applied only to rice lands. Marcos Land Reform In 1972, President Marcos issued a decree declaring the whole country as a land reform area. It was a seemingly ambiguous term: thus, another law explaining the former enacted (P.D. No. 27). This later Law was enacted to remove the ambiguity brought about by the old law. Under this Agrarian Law, tenants were allowed to own five (5) hectares through amortization covering lands planted to rice and corn. Existing Land Reform The 1987 Land reform Act is comprehensive in its coverage as compared to the previous land reforms the government had implemented. It covers almost all crops planted on agricultural lands, and includes in its coverage lands of public and private domain. Beneficiaries, however, are entitled only up to three hectares payable under installment. Retention limit is

pegged at five (five hectares), and another three hectares for every child aged fifteen and above. Lands Covered by CARP The lands covered by CARP are the following: 1. All alienable and disposable lands of the public domain devoted to or suitable for agriculture. 2. All lands of the public domain in excess of the specific limits as determined by Congress 3. All lands owned by the government devoted to or suitable for agriculture 4. All private lands devoted to or suitable for agriculture regardless of the agricultural products raised and can be raised (R.A 6657, Sec. 4) Lands Exempted from CARP The following lands are exempted from CARP namely: 1. Lands actually, directly and exclusively used for parks, wildlife, forest reserves, reforestation, fish sanctuaries and breeding grounds, watersheds and mangroves. 2. Private lands actually, directly and exclusively used for prawn farms and fishponds 3. Lands actually, directly and exclusively and found to be necessary for national defense, school sites and campuses, experimental farm stations, church sites, mosques, cemeteries and penal colonies Retention Limit The retention limit of the area pf the land left to the land owner after the taking of the property by the government pursuant to the mandate of the Carp shall not exceed five (5) hectares. Another three (3) hectares may be awarded to each child of the land owner; provided, he is at least fifteen (15) years of age, and would actually till or cultivate the land Ancestral Lands The right of the indigenous cultural community to their ancestral lands shall be protected to ensure their economic, social and cultural well being. Registration by Land Owners Within (180) days upon implementation of the CARP, landowners shall file a sworn statement in the proper assessor’s office, stating the following information: 1. The description and area of the property 2. The average gross income from the property for at least three (3) years

3. The names of all tenants and farm workers therein 4. The crops planted therein 5. The terms of mortgages, leases, and management contracts subsisting 6. the latest declared market value of the land as determined by the city or provincial assessor Registration of the Beneficiaries The DAR in coordination with the BARC shall register all lessees, tenants and farm workers who are qualified as beneficiaries of the CARP and shall provide the following data: • Names and members of their immediate farm household • Location and area of the land they till • Crops planted • Their share in the harvest or amount of rental paid or wages received Procedure for Acquisition of Private lands: The procedure to acquire private lands are as follows: 1. The DAR shall send notice to the landowner, copy furnished to the tenants 2. Within (30) days from receipt of said notice, the landowner shall inform the DAR of his acceptance or rejection of the offer 3. If the landowner accepts the offer of the DAR, the LBP shall pay the land owner the purchase price within (30) days. 4. In case of rejection or failure to reply, the DAR shall conduct summary administrative proceeding (determining the just compensation) 5. Upon receipt by the land owner of the payment, the DAR shall take immediate possession of the land and shall request the RD to issue TCT in the name of the Republic of the Philippines 6. The DAR shall thereafter proceed to the redistribution of the land to the beneficiaries, three (3) hectares for every tenant. Determinants of Just Compensation The factors to be considered in determining the just compensation are: 1. Cost acquisition 2. The current Value 3. Its nature, actual use and income 4. The sworn valuation of the owner 5. The assessment of the government

Modes of Compensation The LBP shall compensate the owner under the following modes: • 50 hectares and above- 25% cash, the balance to be paid by negotiable instrument • 24 hectares to 50 - 30% cash, the balance to be paid by negotiable instrument • 24 hectares and below- 35% cash, the balance to be paid in negotiable instrument Payment may be made also in the form of shares of stocks in government owned or controlled corporation. Definition of Terms Agrarian Reform - means the redistribution of lands regardless of crops or fruits produced to farmers and farm workers Agriculture - the activity and/ or cultivation of the soil, planting crops or growing of fruit trees and other farm activities Agricultural lands - the lands devoted to agricultural activity Agricultural dispute - any controversy relating to tenurial arrangements, whether leasehold, tenancy, stewardship or otherwise. Idle or Abandoned Land - any agricultural land not activated, tilled or developed Farmer - a natural person whose primary livelihood is cultivation of land or the production of agricultural crops Farm Workers - a natural person who renders services for value as an employee or laborer Regular Farm Worker - A natural person who is employed on a permanent basis by an agricultural enterprise or farm Season Farm Worker - A natural person who is employed on a recurrent, periodic or intermitted basis by an agricultural enterprise or farm Cooperatives - refer to organizations composed primarily of small agricultural producers, farmers, farm workers, or other agrarian reform beneficiaries

Conclusion: The Comprehensive Agrarian Reform Program (CARP) was a land reform law mandated by Republic Act No. 6657 was the fifth land reform law in fifty years CARP aims “for a more equitable distribution and ownership of land” and meant to distribute lands to farmers in a span of 10 years SOURCE: Department ofAgrarian Reform website, http://www.dar.gov.ph