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CHAPTER 1 INTRODUCTION McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Defining the Field of Study Public Finance/Public Sector Economics/Public Economics – the field of economics that analyzes government taxation and spending policies 1-2 Public Finance and Ideology Organic view of government Mechanistic view of government 1-3 The Legal Framework Federal government Federal Constitutional provisions – may effectively undertake any expenditure it wishes and use debt and taxes to finance them. 16th Amendment empowers the federal government to tax personal income. 1-4 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 1-5 State, Local, and Federal Government to AdjustingRelative for Expenditures (selected years) Adjusting for Economy Inflation Population 1 2 3 4 2005 Dollars (billions)* 2005 Dollars per capita Percent of GDP 1960 Total Expenditures (billions) 123 655 3,627 24.3% 1970 295 1,201 5,858 28.4% 1980 843 1,749 7,679 30.2% 1990 1,873 2,574 10,289 32.2% 2000 2,887 3,237 11,461 29.4% 2005 3,876 3,876 13,066 31.1% *Conversion to 2005 dollars done using the GDP deflator Source: Calculations based on Economic Report of the President, 2006 (Washington, DC: US Government Printing Office, 2006), pp. 280,284,323,379 1-6 Figure 1.1: Government expenditures as a percentage of Gross Domestic Product (2005, selected countries) 0.6 0.5 0.4 0.3 0.2 0.1 United States 0 Sweden France Germany United Kingdom Canada Japan Australia Source: Organization for Economic Cooperation and Development [2006]. Figures are for 2005. Figure 1.2: Composition of federal expenditures (1965 and 2005) 100% 90% Note increase in Social Security, Medicare and Income Security 80% 70% Other Net interest 60% Note Social security decline in Defense Income security 50% Medicare Health 40% Defense 30% 20% 10% 0% 1965 2005 Source: Economic Report of the President [2006, p. 377]. Figure 1.3 Composition of state and local expenditures (1965 and 2002) 100% 90% 80% Increase in public welfare Decline in highways 70% 60% Other Public welfare 50% Highways Education 40% 30% 20% 10% 0% 1965 2002 Source: Economic Report of the President [2006, p. 383]. Figure 1.4: Composition of federal taxes (1965 and 2005) Social insurance and individual income tax have become more important Corporate and other taxes have become less important 100% 90% 80% 70% 60% Other Social insurance 50% Corporate tax 40% Individual income tax 30% 20% 10% 0% 1965 2005 Source: Economic Report of the President [2006, p. 377]. Figure 1.5: Composition of state and local taxes (1965 and 2002) 100% 90% Individual tax more important 80% Other 70% Grants from federal government Corporation tax 60% 50% Inidividual income tax 40% Sales tax 30% Property tax 20% 10% Property tax less important 0% 1965 2002 Source: Economic Report of the President [2006, p. 383]. 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 1-12 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 1-13 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 1-14