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CHAPTER
1
Introduction
McGraw-Hill/Irwin
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.
Defining the Field of Study
• Public Finance – the field of economics that
analyzes government taxation and spending
policies
• Public Sector Economics or Public
Economics use of real resources rather than
money.
• What is not part of public finance?
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Public Finance and Ideology
• We analyze not only effects of actual
government taxing and spending activities but
also what these activities ought to be.
• Our opinions are influenced by ideological
views concerning the relationship between
individual and state.
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Public Finance and Ideology
• Organic view of government
Society is conceived of as a natural organism.
The community is stressed above the individual.
For example, an activity of a citizen is desirable only if
it leads to a just society. (plato)
• Mechanistic view of government
Government is not an organic part of the society, rather
it is something created by individuals to better achieve
their individual goals.
The individual rather than the group is at the center
stage.
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The Legal Framework
• State governments
– Federal constitutional provisions
• 10th amendment
– The State constitutions
• Local governments
– Derive power to tax and spend from the States
– Fiscal independence of local governments
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Mechanistic View of Government
• Libertarians
They believe in a very limited government and
argue against any further economic role of
government.
In Adam Smith’s words, “every man, as long as
he does not violate the laws of justice, is
perfectly free to pursue his own interest his
own way”
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• Social Democrats
• Substantial government intervention is needed
for the good of individuals.
• These interventions take the form of safety
regulations in workplace, banning sexual and
racial discrimination, welfare payments to the
poor.
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The Size of Government
• How to measure the size of government
– Number of workers
– Annual expenditures
• Types of government expenditure
– Purchases of goods and services
– Transfers of income
– Interest payments
• Budget documents
– Unified budget
– Regulatory budget
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State, Local, and Federal Government
Relative
to
Adjusting
for
Adjusting for
Expenditures (selected
years)
Economy
Inflation
Population
1
2
3
4
2008 Dollars
(billions)*
2008 Dollars
per capita
Percent of
GDP
1960
Total
Expenditures
(billions)
123
714
3,950
23.3%
1970
295
1,308
6,379
28.4%
1980
843
1,905
8,367
30.2%
1990
1,873
2,804
11,210
32.2%
2000
2,887
3,527
12,487
29.4%
2008
4,723
4,723
15,488
33.1%
*Conversion to 2008 dollars done using the GDP deflator
Source: Calculations based on Economic Report of the President, 2009 [pp. 282,286,325,381].
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Government Expenditures as a Percentage
of GDP (2008)
United
States
Source: Organization for Economic Cooperation and
Development [2008a].
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Composition of Federal Expenditures
(1965 and 2008)
Note
decline in
Defense
Note increase in
Social Security,
Medicare and
Income Security
Source: Economic Report of the President, 2009 [p. 379].
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Composition of State & Local Expenditures
(1965 and 2008)
Increase in
public
welfare
Decline in
highways
Source: Economic Report of the President 2009, [p. 389].
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Composition of Federal Taxes
(1965 and 2008)
Social insurance
and individual income
tax have become
more important
Corporate and other
taxes have become
less important
Source: Economic Report of the President [2009, p. 379].
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Composition of State And Local Taxes
(1965 and 2005)
Individual tax
more important
Property tax
less important
Source: Economic Report of the President [2009, p. 385].
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Doing Research in Public Finance
• Public Finance journals
–
–
–
–
–
International Tax and Public Finance
Journal of Public Economics
National Tax Journal
Public Finance
Public Finance Quarterly
• General-interest journals
–
–
–
–
–
American Economic Review
Journal of Economic Perspectives
Journal of Political Economy
Quarterly Journal of Economics
Review of Economics and Statistics
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Doing Research in Public Finance
• Other sources
–
–
–
–
–
Journal of Economic Literature
Brookings Institution’s Studies of Government Finance
Congressional Budget Office reports
National Bureau of Economic Research working papers
Tax Foundation’s Facts and Figures on Government Finance
• U.S. Government Printing Office publications
–
–
–
–
–
Statistical Abstract of the United States
Economic Report of the President
Budget of the United States
U.S. Census of Governments
Historical Statistics of the United States from Colonial Times to 1970
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Doing Research in Public Finance
• Public Finance data available on Internet
– Resources for Economists on the Internet
– U.S. Census Bureau
– University of Michigan’s Office of Tax Policy
Research
– Urban-Brookings Tax Policy Center
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