Download Basic Theory Expenditure Revenue Introduction Positive Analysis

Public Finance
Chapter1 Introduction
CHENG Beinan PH.D
Topics in this chapter
 What is public finance
 Public finance & ideology
 Government at a glance
1.1 What is public finance?
 Public Finance :
 A subject focuses on the taxing and
spending activities of government and
their influence on the allocation of
resources and distribution of income.
Topics in this chapter
 What is public finance
 Framework of the book & our agenda
 Public finance & ideology
 Government at a glance
Framework & agenda
Basic Theory
Expenditure
Revenue
Multi-government
Public Finance
Introduction
Positive Analysis
Normative Analysis
Public Goods
Externalities
Political Economy
Education
Cost-Benefit Analysis
The Health Care Market Government VS Market
Social Security
Income Distribution Antipoverty
Tax & Income Distribution
Tax & Efficiency
Optimal Taxation
Personal Income Tax
Corporation Tax
Personal Taxation & Behavior
Deficit Finance
Fundamental Tax Reform
Public Finance in a Federal System
Topics in this chapter
 What is public finance
 Public finance & ideology
 Government at a glance
1.2 Public finance & ideology
 Organic View
 Mechanistic View
 Libertarians
 Social Democrats
 Viewpoint of This Book
 Organic View of Government
 In this view, society is conceived of as a
natural organism. Each individual is a part
of this organism, and the government can
be thought of as its heart.
 The community is stressed above the
individual.
 The goals of the society are set by the state.
 Mechanistic View of Government
 In this view, government is not an organic
part of society. Rather, it is a contrivance
created by individuals to better achieve their
individual goals.
 The individual rather than the group is at
center stage.
 Opinions within the mechanistic tradition
diverge
 Libertarians: A group of people who believe in a
very limited government, and argue against any
further economic role for the government. They
are extremely skeptical about the ability of
governments to improve social welfare.
 Social Democrats: A group of people who
believe hat substantial government intervention is
required for the good of individuals.
 Between the libertarian and social democratic
positions there is a continuum of views with
respect to the appropriate amount of government
intervention.
 Viewpoint of This Book
 Anglo-American economic thought has
developed along individualistic lines.
Thus, individuals and their wants are the
main focus in mainstream economics.
 However, within the individualistic
tradition there is much controversy with
respect to how active government should
be. The desirability of a given course of
government action inevitably depends in
part on ethical and political judgments.
Q1
 Indicate whether each of the following statements is
consistent with an organic or mechanistic view of
government:
 a. “A strong state for Russians is not an anomaly, not
something that must be fought against, but on the
contrary is … the initiator and main driving force of
all change” [Russian President Vladimir Putin].
 b. “Freedom of men under government is to have a
standing rule to live by, common to every one of that
society and made by the legislative power vested in it;
a liberty to follow my own will in all things, when the
rule prescribes not, and not to be subject to the
inconstant, unknown, arbitrary will of another man”
[British Philosopher John Locke].
Q2
 Obesity is perceived to be a national
health problem in the United States.
One suggestion to deal with this
problem is a “fat tax.” The idea is to
levy a tax on foods containing more
than a government prescribed
percentage of the daily minimal fat
intake. Is such a tax consistent with a
mechanistic view of government?
Q3
 Explain how you would expect a libertarian,
a social democrat, and someone with an
organic conception of the state to react to
the following laws:






a. A law prohibiting gambling
b. A law mandating seat belt use
c. A law mandating child safety seats
d. A law prohibiting prostitution
e. A law prohibiting polygamy
f. A law requiring all commercial signs be written
in the country’s native language.
Topics in this chapter
 What is public finance
 public finance & Ideology
 Government at a glance





The legal framework
The size of government
Expenditures
Revenues
Framework of the book & our agenda
1.3.1 The legal framework
 Federal
 State
 Local
U. S. A.- Federal
 Expenditure:
 Congress pay the debts, & provide for common
defense and general welfare of U. S. (A1, S8,
Constitution)
Appropriati
ons Bill
Originate
Senate
House Senate
Majority Vote
House
 (A1, S7, Constitution)
Appropriat
ions Law
President
Sign
 Revenue: (A1, S8, Constitution)
 Congress lay & collect Taxes, Duties, Imposts &
Excises.
Bill of
Raising
Revenue
Originate
House of
Representatives
House Senate
Law of
Raising
Revenue
President
Majority Vote
Sign
Tradition of Constraining
Governmental Taxing Power
 No discriminations among states:
 “All Duties, Imposts, and Excises shall be
uniform throughout the U. S.” (A1, S8,
Constitution) .
 The equity of direct tax:
 “No…direct Tax shall be laid, unless in
Proportion to the Census or Enumeration
herein before directed to be taken” (A1,
S8, Constitution) .
The Definitions
 Direct tax:
 A tax levied on a person as opposed to a
commodity.
 Unified budget
 The document which itemizes all the
federal government’s expenditures and
revenues.
 Regulatory budget:
 An annual statement of the costs
imposed on the economy by government
regulations.
 Adjustment according to specific
situations: (16th Amendment, 1913)
 ”Congress shall have power to levy and
collect taxes on incomes, from whatever
source derived, without apportionment
among the several states, and without
regard to census or enumeration.”
 The reason of such change:
Introduction
of federal
income tax
Supreme
Court
Declared
unconstit
utional
Congress
16th
Amendment
 Distinctions created by the tax law
must be reasonable:
 “No person shall be … deprived of life,
liberty, or property, without due process
of law; nor shall private property be
taken for public use, without just
compensation” (5th Amendment)
1.3.1 The legal framework
 Federal
 State
 Local
U. S. A.- State
 The authorization to spend & tax:
 From states’ own constitutions:
 Impose restrictions on themselves
 Recent trend: limit the size of the public sector
spending
 From federal constitution:
 Ensured:
 “The powers not delegated to the United States,
are reserved to the States respectively, or to
the people.” (10th Amendment)
 Constrained:
 “No state shall, without the consent of the
Congress, lay any Imposts or Duties on
Imports or Exports.” (A1, S10,Cconstitution)
 Various constitutional provisions have been
interpreted as requiring that the states not levy
taxes arbitrarily, discriminate against outside
residents, or levy taxes on imports from other
states.
1.3.1 The legal framework
 Federal
 State
 Local
U. S. A.- Local
 The power of tax and spend is
granted by the states.
 Meanwhile, it is full of fiscal autonomy.
Topics in this chapter
 What is public finance
 Public Finance & Ideology
 Government at a glance





The legal framework
The size of government
Expenditures
Revenues
Framework of the book & our agenda
1.3.2 The size of government
 How do we measure the size of
government?
 Number of workers in public sector
 Annual budget
 expenditure: Purchase of goods & services,
Income transfer, Interest payments.
 Revenue: tax, public debt.
 The way to know it: Unified budget
 Budget high=government is large
 Vise versa
The Definitions
 Direct tax:
 A tax levied on a person as opposed to a
commodity.
 Unified budget
 The document which itemizes all the
federal government’s expenditures and
revenues.
 Regulatory budget:
 An annual statement of the costs
imposed on the economy by government
regulations.
 Problems
 Some influential activities don’t need much
government expenditure
 Airbags & car costs
 Solutions: Regulatory budget
 New problem: difficult to compute
 Indicators




Total
Per capita
Indicators in real dollar
Comparative numbers
The Definitions
 Direct tax:
 A tax levied on a person as opposed to a
commodity.
 Unified budget
 The document which itemizes all the
federal government’s expenditures and
revenues.
 Regulatory budget:
 An annual statement of the costs
imposed on the economy by government
regulations.
Table 1.1 State, local, and federal government expenditures
(1)
(2)
(3)
(4)
Total Expenditures
(billions)
2005 Dollars
(billions)*
2005 Dollars
per capita
Percent of GDP
1960
123
655
3627
24.30%
1970
295
1213
5915
28.43%
1980
847
1771
7778
30.36%
1990
1880
2601
10398
32.40%
2000
2906
3275
11608
29.20%
2010
5262
4741
15325
36.22%
2011
5410
4774
15320
35.86%
Back
Table1.2 Government Revenues and Expenditures by Level, 2010
Total government
Federal Government
State and local government
Billions $
% GDP
Billions $
% GDP
Billions $
% GDP
Revenues
3,962.8
30.3%
2,429.6
18.6%
2,064.7
15.8%
Expenditures
5,261.8
40.2%
3,703.3
28.3%
2,090.0
16.0%
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Back
Ko
re
a
Figure 1.1 Government Expenditures
as Percentage of GDP in OECD (%)
60
50
40
30
20
10
Q4

In each of the following circumstances, decide whether the
impact of government on the economy increases or
decreases and why. In each case, how does your answer
compare to that given by standard measures of the size of
government?




a. Normally, when employers offer health insurance benefits to
their workers, these benefits extend to the spouses of the
workers as well. Several years ago, San Francisco passed a
law requiring firms that do business with the city to offer
health and other benefits to both same- and opposite-sex
unwed partners.
b. The federal government requires that automakers increase
the average number of miles per gallon of the passenger
vehicles they produce.
c. The ratio of government purchases of goods and services to
Gross Domestic Product falls.
d. The federal budget is brought into balance by reducing
grants-in-aid to state and local governments.
Topics in this chapter
 What is public finance
 public finance & Ideology
 Government at a glance





The legal framework
The size of government
Expenditures
Revenues
Framework of the book & our agenda
Figure1.2 Composition of federal expenditures (1945, 1965 and 2011)
100%
90%
1.3.3 Expenditures
80%
Other
70%
Net interest
60%
Social security
Income security
50%
Medicare
40%
Health
30%
International affairs
National defense
20%
10%
0%
1945.
1965.
2011.
Figure1.3 Composition of state and local expenditures (1965 and 2011)
100%
90%
80%
Subsidies
70%
60%
Interest payments
50%
40%
Government social benefit payments to
persons
30%
Consumption expenditures
20%
10%
Back
0%
1965.
2011 p.
Q5
 As noted in the text, in 1996 President
Clinton declared that the era of big
government is over. Has the size of
government fallen since then? Provide an
answer based on the following data: In
1996, federal government spending was $
1.56 trillion and Gross Domestic Product
was $7.82 trillion. In 2005, federal
spending was $2.47 trillion and GDP was
$12.48 trillion. During this period, prices
increased by about 24 percent. What
additional data would you seek to provide a
more complete answer to this question?
Q6
 From 1981 to 1985, the US federal
government increased defense spending
from $153.9 billion to $245.1 billion per
year, while over the same period Gross
Domestic Product Rose from $3.128 trillion
to $4.220 trillion. From 2001 to 2005, the
US federal government increased defense
spending from $290.3 billion to $474.2
billion, while over the same period Gross
Domestic Product rose from $10.128 trillion
to $12.479 trillion. Which increase in
defense spending was larger relative to
Gross Domestic Product?
Topics in this chapter
 What is public finance
 public finance & Ideology
 Government at a glance





The legal framework
The size of government
Expenditures
Revenues
Framework of the book & our agenda
Figure1.4 Composition of federal taxes (1945, 1965 and 2011)
100%
90%
1.3.4 Revenues
80%
Other
70%
60%
50%
Social insurance and retirement
receipts
Corporation income taxes
40%
30%
Individual income taxes
20%
10%
0%
1945.
1965.
2011.
Figure1.5 Composition of state and local receipts (1965 and 2010)
100%
Current surplus of government
enterprises
80%
Current transfer receipts
60%
Income receipts on assets
40%
Contributions for government social
insurance
Taxes on corporate income
20%
Taxes on production and imports
0%
Personal current taxes
1965.
-20%
2010.
Back
Q7
 During 2004, the inflation rate in the
United Kingdom was about 1.6
percent. At the beginning of that year,
the national debt of the United
Kingdom was about ₤420 billion.
Discuss the implications of these facts
for measuring government revenues
in that country during 2004.
Topics in this chapter
 What is public finance
 public finance & Ideology
 Government at a glance





The legal framework
The size of government
Expenditures
Revenues
Framework of the book & our agenda
The Definitions
 Direct tax:
 A tax levied on a person as opposed to a
commodity.
 Unified budget
 The document which itemizes all the
federal government’s expenditures and
revenues.
 Regulatory budget:
 An annual statement of the costs
imposed on the economy by government
regulations.