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Chapter 1 Individuals and Government Copyright © 2002 Thomson Learning, Inc. Thomson Learning™ is a trademark used herein under license. ALL RIGHTS RESERVED. Instructors of classes adopting PUBLIC FINANCE: A CONTEMPORARY APPLICATION OF THEORY TO POLICY, Seventh Edition by David N. Hyman as an assigned textbook may reproduce material from this publication for classroom use or in a secure electronic network environment that prevents downloading or reproducing the copyrighted material. Otherwise, no part of this work covered by the copyright hereon may be reproduced or used in any form or by any means—graphic, electronic, or mechanical, including, but not limited to, photocopying, recording, taping, Web distribution, information networks, or information storage and retrieval systems—without the written permission of the publisher. Printed in the United States of America ISBN 0-03-033652-X Copyright © 2002 by Thomson Learning, Inc. Government Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services. Copyright © 2002 by Thomson Learning, Inc. Political Institutions Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed. Copyright © 2002 by Thomson Learning, Inc. Examples of Political Institutions Majority rule Representative government Copyright © 2002 by Thomson Learning, Inc. The Allocation between Private and Government Resources Private Food Housing Cars Clothing Government National Defense Public Schools Police Copyright © 2002 by Thomson Learning, Inc. Government Goods and Services per Year Figure 1.1 A Production-Possibility Frontier C G2 G1 B A X2 X1 M 0 Private Goods and Services per Year Copyright © 2002 by Thomson Learning, Inc. Distribution of Government Goods and Services Nonmarket rationing: Prices and willingness to pay those prices are not applicable to goods such as national defense. Copyright © 2002 by Thomson Learning, Inc. The Mixed Economy Markets and Politics Pure Market Economy Virtually all goods and services are supplied by for-profit private firms. Supply and demand determine price. Copyright © 2002 by Thomson Learning, Inc. Figure 1.2 Circular Flow in the Mixed Economy Goods & Services Output Market Dollars Households Income Support & Subsidies Taxes, fees, charges Government Services Dollars Resources Copyright © 2002 by Thomson Learning, Inc. Goods & Services Dollars Government Input Market Subsidies Taxes, fees, charges Government Services Dollars Resources Firms Government Expenditures in the United States Government purchases of labor land capital Government Transfer Payments Welfare Social Security Copyright © 2002 by Thomson Learning, Inc. Growth in Government Expenditures Table 1.1 (abbreviated) Year GDP Federal Government State and Local Government Total Government Percentage of GDP Total 1930 91.3 2.5 7.5 10.0 10.95 1945 223.0 84.7 8.5 93.2 41.79 1960 527.4 85.8 34.1 119.9 22.73 1975 1635.2 345.4 152.1 497.5 30.42 1999 9256.1 1755.8 863.7 2619.5 28.30 Copyright © 2002 by Thomson Learning, Inc. International Comparisons Country Government Current Expenditures as a Percentage of GDP 2001 Denmark 53.5 France 50.5 Germany 46.2 Canada 40.7 United Kingdom 39.5 Japan 38.2 United States 29.7 Copyright © 2002 by Thomson Learning, Inc. Figure 1.3 Total Government Expenditure as a Percentage of GDP 1929-1999 Percentage of GDP 45 40 35 30 25 20 15 10 5 0 Year Copyright © 2002 by Thomson Learning, Inc. Structure of Federal Government Expenditures Purchases of Goods and Services Transfer Payments Grants in Aid to State and Local Governments Net Interest Paid Copyright © 2002 by Thomson Learning, Inc. Federal Expenditure by Category, 1999 Table 1.2 Category Percentage of Total Federal Expenditures Transfer Payments 42.97 Purchases 27.04 Interest 14.97 Grants to State and Local 12.84 Other 2.18 Copyright © 2002 by Thomson Learning, Inc. Percentage of Total Federal Expenditure Figure 1.4 The Distribution of Federal Expenditure, 19661999 70 Government Purchases 60 50 Transfer Payments 40 30 Grants to State and Local Governments 20 10 Net Interest 0 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 93 95 97 99 Year Copyright © 2002 by Thomson Learning, Inc. Federal Government Expenditure by Function All other 5% Veteran’s Benefits 3% Transportation 3% Education 4% Social Security 23% Health 9% Net Interest 11% Medicare 12% Copyright © 2002 by Thomson Learning, Inc. National Defense 16% Income Security 14% The Structure of State and Local Government Expenditure in the United States Education Civilian Safety Transportation Executive, Legislative, and Judicial Income Security Health and Hospitals Recreational and Cultural Activities Copyright © 2002 by Thomson Learning, Inc. State and Local Government Expenditure Recreational and Cultural Activities 2% Other 7% Health and Hospitals 3% Income Security 5% Education 42.71% Executive Legislative and Judicial 11% Transportation 13% Copyright © 2002 by Thomson Learning, Inc. Civilian Safety 16% Financing Government Expenditures in the US Taxes: Income (Corporate and Personal) Payroll Excise Customs Copyright © 2002 by Thomson Learning, Inc. Federal Revenues Customs Duties 1% Excise Taxes 4% Corporate Profits Taxes 12% Payroll Taxes 35% Copyright © 2002 by Thomson Learning, Inc. Other 1% Income Taxes 47% State and Local Government Revenues Other 8% Sales Taxes 27% Property Taxes 21% Corporate Profit Taxes 3% Payroll Taxes 1% Nontaxes 3% Federal Grants 20% Income Taxes 17% Copyright © 2002 by Thomson Learning, Inc. Implications of a Graying America Social Security Medicare Medicaid Copyright © 2002 by Thomson Learning, Inc. How Much Government is Enough? The question of how much government is enough is an important one in any society. It is the tradeoff between public and private goods. When government gets bigger, it comes at the expense of less private consumption. Copyright © 2002 by Thomson Learning, Inc.