1. CHAPTER 1 Introduction Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 1-2 Defining the Field of Study Public Finance – the field of economics that analyzes government taxation and spending policies Public Sector Economics – see definition above Public Economics – see definition above What is not part of public finance?

3. 1-3 Public Finance and Ideology Organic view of government Mechanistic view of government

4. 1-4 The Legal Framework Federal government –Federal Constitutional provisions Article 1, Section 8 Article 1, Section 9 16 th Amendment 5 th Amendment

5. 1-5 The Legal Framework State governments –Federal constitutional provisions 10 th amendment –The State constitutions Local governments –Derive power to tax and spend from the States –Fiscal independence of local governments

6. 1-6 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

7. 1-7 State, Local, and Federal Government Expenditures (selected years) 1234 Total Expenditures (billions) 2008 Dollars (billions)* 2008 Dollars per capita Percent of GDP 19601237143,95023.3% 19702951,3086,37928.4% 19808431,9058,36730.2% 19901,8732,80411,21032.2% 20002,8873,52712,48729.4% 20084,723 15,48833.1% *Conversion to 2008 dollars done using the GDP deflator Source: Calculations based on Economic Report of the President, 2009 [pp. 282,286,325,381]. Adjusting for Inflation Adjusting for Population Relative to Economy

8. 1-8 Government Expenditures as a Percentage of GDP (2008) United States Source: Organization for Economic Cooperation and Development [2008a].

9. 1-9 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].

10. 1-10 Source: Economic Report of the President 2009, [p. 389]. Composition of State & Local Expenditures (1965 and 2008) Increase in public welfare Decline in highways

11. 1-11 Source: Economic Report of the President [2009, p. 379]. 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

12. 1-12 Source: Economic Report of the President [2009, p. 385]. Individual tax more important Property tax less important Composition of State And Local Taxes (1965 and 2005)

13. 1-13 Changes in the Real Value of Debt Inflation tax

14. 1-14 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

15. 1-15 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

16. 1-16 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