Q.
(a) Explain the following characteristics in relation to real estate market and perfect competition market.
(i) Numbers of buyers and sellers
(ii) Types of products
(iii) Knowledge of the market (15 marks)
(b) State any FOUR (4) objectives of taxation. (10 marks)
(25 marks, 2016 Q7)
A.
Interaction with real estate market and perfect competition market.
(i) Numbers of buyers and sellers
For real estate market, perfect competition market is not likely to happen. This can be seen with the limited numbers of buyers and sellers at any time. Buying and selling property is not a daily thing. People cannot buy and sell property like eating fast food. There are many reasons and limitations to that which can be due to complexity of the transaction and its cost. Hence, perfect competition is not realistic in real estate market. In the ideal world, perfect competition means there is many sellers and buyers to compete for the best price of the product. In real estate, it is unlikely to happen because people do not buy and sell properties like a share market. One transaction takes a long time to process, by the time it has been completed, the spectrum of buyers and sellers has changed.
(ii) Types of products
Perfect competition usually occur when types of products are homogeneous and of the same type. For example, commodity like rubber, palm oil and cocoa. One rubber is the same as like another rubber. Similar for palm oil and cocoa. However, for property, each and every property is distinct and non-replaceable. Once a property is being sold, it cannot be replaced with another property for the next buyer. Each property is unique in itself. Even when a housing project with hundred of units of same type of property, each unit is different from the next. They are different in location, in land size or parcel, direction facing, angle or feng shui. Therefore, one property cannot be replaced by another to the same exact price. Despite many similarities, each individual unit is in itself a distinct unit of its own. Furthermore, it is legally a separate entity as title is an individual title. Due to this effect, the products cannot be interchanged to have the same price for perfect competition.
(iii) Knowledge of the market
Perfect competition means every buyer or seller is unrestricted to knowledge of market. The pricing information is transparent and live, meaning immediately published for public knowledge. An example is Stock Market - Bursa Malaysia. However, real estate market is unlikely to have unrestricted knowledge of the market because transactions are kept private. Buyers and sellers do not publish the actual transacted price. Although the valuation agency like JPPH - Jabatan Perkhidmatan Penilaian Hartanah and NAPIC (National Property Information Centre) publish the transacted price, it is many a time not the true price. People have undeclared cash transactions. For example, buyer pays a bigger down payment. The truth is buyer and seller collude to reduce the taxes, by conducting the transaction with undeclared cash payment. For example, the transacted price was RM1mio, but the buyer declared at RM900K by out front RM100k cash payment. As a result, the seller reduces its RPGT and the buyer probably reduces the Stamp Duty payable as well.
Ref:
Own account.
b) 4 objectives of taxation
The primary purpose of taxation is to raise revenue to meet huge public expenditure. Most governmental activities must be financed by taxation. But it is not the only goal. In other words, taxation policy has some non-revenue objectives.
Truly speaking, in the modern world, taxation is used as an instrument of economic policy. It affects the total volume of production, consumption, investment, choice of industrial location and techniques, balance of payments, distribution of income, etc.
1. Economic Development
2. Full Employment
3. Price Stability
4. Control of Cyclical Fluctuations
5. Reduction of BOP Difficulties
6. Non-Revenue Objective
Objective # 1. Economic Development:
One of the important objectives of taxation is economic development. Economic development of any country is largely conditioned by the growth of capital formation. It is said that capital formation is the kingpin of economic development. But LDCs (Less Developed Countries) usually suffer from the shortage of capital.
To overcome the scarcity of capital, governments of these countries mobilize resources so that a rapid capital accumulation takes place. To step up both public and private investment, government taps tax revenues. Through proper tax planning, the ratio of savings to national income can be raised.
By raising the existing rate of taxes or by imposing new taxes, the process of capital formation can be made smooth. One of the important elements of economic development is the raising of savings- income ratio which can be effectively raised through taxation policy.
However, proper care has to be taken, regarding investment. If financial resources or investments are channelized in the unproductive sectors of the economy the economic development may be jeopardized, even if savings and investment rates are increased. Thus, the tax policy has to be employed in such a way that investment occurs in the productive sectors of the economy, including the infrastructural sectors.
Second objective is the full employment. Since the level of employment depends on effective demand, a country desirous of achieving the goal of full employment must cut down the rate of taxes. Consequently, disposable income will rise and, hence, demand for goods and services will rise. Increased demand will stimulate investment leading to a rise in income and employment through the multiplier mechanism.
Thirdly, taxation can be used to ensure price stability—a short run objective of taxation. Taxes are regarded as an effective means of controlling inflation. By raising the rate of direct taxes, private spending can be controlled. Naturally, the pressure on the commodity market is reduced.
But indirect taxes imposed on commodities fuel inflationary tendencies. High commodity prices, on the one hand, discourage consumption and, on the other hand, encourage saving. Opposite effect will occur when taxes are lowered down during deflation.
Fourthly, control of cyclical fluctuations—periods of boom and depression—is considered to be another objective of taxation. During depression, taxes are lowered down while during boom taxes are increased so that cyclical fluctuations are tamed.
Objective # 5. Reduction of BOP (Balance of Payment) Difficulties:
Fifthly, taxes like custom duties are also used to control imports of certain goods with the objective of reducing the intensity of balance of payments difficulties and encouraging domestic production of import substitutes.
Finally, another extra-revenue or non-revenue objective of taxation is the reduction of inequalities in income and wealth. This can be done by taxing the rich at higher rate than the poor or by introducing a system of progressive taxation.