Chapter1 Introduction CHENG Beinan PH.D 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 Introduction Positive Analysis Normative Analysis Basic Theory Public Goods Externalities Political Economy Education Cost-Benefit Analysis Expenditure The Health Care Market Social Security Government VS Market Income Distribution Antipoverty Tax & Income Distribution Tax & Efficiency Optimal Taxation Personal Income Tax Corporation Tax Revenue Personal Taxation & Behavior Deficit Finance Fundamental Tax Reform Multi-government Public Finance 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) (A1, S7, Constitution) Senate House Originate President Appropriations Law Majority Vote Sign Appropriations Bill

Revenue: (A1, S8, Constitution) Congress lay & collect Taxes, Duties, Imposts & Excises. House of Representatives Originate Senate House President Majority Vote Sign Bill of Raising Revenue Law of Raising Revenue

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: Unified budget Regulatory budget: 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 unconstitutional 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: Unified budget Regulatory budget: 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.

Indicators Problems Solutions: Regulatory budget Total Per capita 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: Unified budget Regulatory budget: 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.

Back 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 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%

Figure 1.1 Government Expenditures as Percentage of GDP in OECD (%) Back

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

1.3.3 Expenditures Back

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

1.3.4 Revenues 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: Unified budget Regulatory budget: 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.