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Transcript of CHAPTER 1 Introduction Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved....
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 – see definition above
• Public Economics – see definition above
• What is not part of public finance?
1-3
Public Finance and Ideology
• Organic view of government
• Mechanistic view of government
1-4
The Legal Framework
• Federal government– Federal Constitutional provisions
• Article 1, Section 8
• Article 1, Section 9
• 16th Amendment
• 5th Amendment
1-5
The Legal Framework
• State governments– Federal constitutional provisions
• 10th amendment
– The State constitutions
• Local governments– Derive power to tax and spend from the States– Fiscal independence of local governments
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
1-7
State, Local, and Federal Government Expenditures (selected years)
1 2 3 4
Total Expenditures
(billions)
2008 Dollars (billions)*
2008 Dollars per capita
Percent of GDP
1960 123 714 3,950 23.3%
1970 295 1,308 6,379 28.4%
1980 843 1,905 8,367 30.2%
1990 1,873 2,804 11,210 32.2%
2000 2,887 3,527 12,487 29.4%
2008 4,723 4,723 15,488 33.1%
*Conversion to 2008 dollars done using the GDP deflatorSource: Calculations based on Economic Report of the President, 2009 [pp. 282,286,325,381].
Adjusting for Inflation
Adjusting for Population
Relative to Economy
1-8
Government Expenditures as a Percentage of GDP (2008)
UnitedStates
Source: Organization for Economic Cooperation and Development [2008a].
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].
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
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 othertaxes have become
less important
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)
1-13
Changes in the Real Value of Debt
• Inflation tax
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
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
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