1. Chapter1 Introduction CHENG Beinan PH.D
Public Finance
Chapter1 Introduction
CHENG Beinan PH.D

2. Topics in this chapter What is public finance
Public finance & ideology
Government at a glance

3. 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.

4. Topics in this chapter What is public finance
Framework of the book & our agenda
Public finance & ideology
Government at a glance

5. 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

6. Topics in this chapter What is public finance
Public finance & ideology
Government at a glance

7. 1.2 Public finance & ideology
Organic View
Mechanistic View
Libertarians
Social Democrats
Viewpoint of This Book

8. 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.

9. 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.

10. 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.

11. 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.

12. 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].

13. 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?

14. 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.

15. 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

16. 1.3.1 The legal framework
Federal
State
Local

17. 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

18. 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

19. 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) .

20. 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.

21. 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

22. 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)

23. 1.3.1 The legal framework
Federal
State
Local

24. 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)

25. 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.

26. 1.3.1 The legal framework
Federal
State
Local

27. U. S. A.- Local The power of tax and spend is granted by the states.
Meanwhile, it is full of fiscal autonomy.

28. 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

29. 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

30. 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.

31. 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

32. 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.

33. 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

34. 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%

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

36. 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.

37. 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

38. 1.3.3 Expenditures
Back

39. 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?

40. 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 $ trillion to $ trillion. Which increase in defense spending was larger relative to Gross Domestic Product?

41. 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

42. 1.3.4 Revenues
Back

43. 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.

44. 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

45. 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.