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

1-2 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?

1-3 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.

1-4 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.

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

1-6 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”

1-7 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.

1-8 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

1-9 State, Local, and Federal Government Expenditures (selected years) 1234 Total Expenditures (billions) 2008 Dollars (billions)* 2008 Dollars per capita Percent of GDP , % ,3086, % ,9058, % 19901,8732,80411, % 20002,8873,52712, % 20084,723 15, % *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

1-10 Government Expenditures as a Percentage of GDP (2008) United States Source: Organization for Economic Cooperation and Development [2008a].

1-11 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].

1-12 Source: Economic Report of the President 2009, [p. 389]. Composition of State & Local Expenditures (1965 and 2008) Increase in public welfare Decline in highways

1-13 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

1-14 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)

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1-16 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

1-17 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

1-18 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