1 The Public Sector Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College Publishing

2 What will I learn in this chapter? What decisions public- sector politicians, government bureaucrats, voters, and special interest groups make

3 What puzzles will I learn to solve?  How does the tax burden in the U.S. compare to other countries?  How does the Social Security tax favor the upper-income worker?  Should we replace the income tax with a national sales tax?

4 What about the size of government? Since the 1950’s, government expenditures have grown from about one-quarter to over one third of GDP

5 10 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Total government expenditures Government Expenditures State & Local Gov. Expenditures Federal government expenditures

6

7

8

9

10 How do taxes in the U.S. compare to taxes in other countries? U.S. citizens are among the most lightly taxed people in the industrialized world

11 GermanyItalyU.K.U.S.CanadaJapanSweden France 56% 54% 50% 45% 40% 46% 36% 34%

12

13

14 GermanyItalyU.K.U.S.CanadaJapanSweden France 59% 51% 45% 42% 41% 44% 32%

% 10% 15% 20% 25% 30% 35% 40% 45% 50% Total government taxes Federal government taxes Growth in Taxes in the U.S., State & Local Gov. Taxes

16 What are two types of taxes? Benefits received Ability to pay

17 What is the benefits received principle? Those who benefit from government expenditures should pay the taxes that finance their benefits

18 What is the ability to pay principle? Those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of the benefits

19 Which principle dominates in the U.S.? The ability-to-pay principle dominates the benefits- received principle

20 What is a progressive tax? A tax that charges a higher percentage of income as income rises

21 What is the average tax rate? Total tax due divided by total taxable income

22 What is the marginal tax rate? The change in taxes due divided by the change in taxable income

23 What is a regressive tax? A tax that charges a lower percentage of income as income rises

24 What is a proportional tax? A tax that charges the same percentage of income, regardless of the size of income

25 What is a flat rate tax? Same as a proportional tax

26 319,100 5% 10% 15% 20% 25% 30% 35% Federal government taxes 145,76070,36029,0507,150 10% 15% 25% 28% 35% 33% 17% Flat-rate tax The Progressive Income Tax versus a Flat Tax

27 What is public choice theory? The analysis of the government decision- making process to allocate resources

28 Who is James Buchanan? The founder of public choice theory which applies economic analysis to politics

29 What is the benefit - cost analysis? The comparison of the additional rewards and costs of an economic alternative

30 What is the basic rule of benefit-cost analysis? A firm will produce additional units as long as marginal benefit exceeds the marginal cost

31 Why might government be inefficient in solving society’s problems? Majority rule problem Special interest effect Rationale ignorance Bureaucratic inefficiency Shortsightedness effect

32 What is the majority rule problem? Voting can lead to a rejection of projects with marginal total benefits exceeding the marginal cost

33 Can majority rule lead to inefficient solutions? Yes, “one person one vote” cannot measure the intensity of voters’ preferences as well as the market

34 What is the special- interest group effect? Special-interest groups can create government support for programs with costs out-weighing their benefits

35 Why can special- interest v oting be inefficient? A small group within the society can benefit while the whole society pays the costs

36 What is rational ignorance? The voters choose to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it

37 What is bureaucratic inefficiency? The bureaucracy may become more powerful than elected officials

38 What is the shortsightedness effect? Democracy has a bias toward programs offering clear benefits and hidden costs

39 END