Economics 8774 PUBLIC FINANCE IN DEVELOPING COUNTRIES

Spring 1990

James Alm 112 Economics (492-8291) Office Hours: 2:00-3:00 pm

COURSE OBJECTIVES

Neil Bruce 109 Economics (492- 8737 )

Office Hours: MW 1:00-2 : 00. pm

Economics 8774 is part of a year-long seminar in economic deve lopment. This course examines the principles of public finance, as they are applied in developing countries. Two broad areas of public economics are discus s ed: government expenditures and taxation .

COURSE REQUIREMENTS

There will be two examinations: a .midterm exam worth one-third of t he fina l grade, and a comprehensive final examination also worth one-third of · the final grade . You will also be required to write an original research pape r on a topic of your choice; the paper .will be worth one-third of your fina l grade. Details of the paper will be discussed in class.

There will also be student presentations and assignments . We encourage you to work together on the assignments. Although the assignments will no t be

.collected and graded, questions from them may appear on the exams .

TEXTBOOKS

There are three required textbooks :

Richard Goode, Government Finance in Developing Count ries (Washington, D.C.: The Brookings Institut ion , 1984).

L. Squire and H. van der Tak, Economic--Analysis of Proj ects (Wash i ngton, D.C.: The World Bank , 1975) .

World Development Report. 1988 (Washington, D.C.: The World Bank , 1988).

A recommende d textbook is:

Joseph E. Stiglitz, Economics of the Public Sector, . Second Editi on (New York, N.Y.: W.W. Norton and Company , 1988) .

A reading packet of articles will also be required.

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COURSE OUTLINE

I. Facts About Government in Developing Countries

II. Welfare Economics, Market Failure, and the Need for Government

III. Analysis of Public Expenditure A. Expenditure Structure and Growth B. Public Goods and Public Choice C. Benefit-Cost Analysis

IV. Analysis of Taxation A. Basic Principles of Taxation

1. The Fairness of Taxation 2. Taxation and Household Decisions 3. Taxation and Production Decisions 4. The Impact on the Market: Partial Equilibrium 5. The Impact on the Market: General Equilibrium 6. The Timing of Taxation

B. Revenue Sources 1. Taxes on Household Income 2. Taxes on Business Income 3. Taxes on Consumption 4. Taxes on Property 5. Agricultural Taxes 6 . Fees, User Charges, and Special Assessments 7 . Taxes on International Trade 8. Taxation of Natural Resources

C. The Theory of Tax Design and Tax Reform

V. Tax and Expenditure Administration

VI. Public Finance in a Federal System

READING LIST

All readings are required . Starred(*) readings are available in a reading packet.

I. Facts About Government in Developing Countries Goode, Chapters 1, 2, 3. WDR, pp. 1-10, and 43-54 . *Vito· Tanzi, "Quantitative Characteristics of the Tax Systems in

Developing Countries," in D. Newberry and N. Stern, eds., The Theory of Taxation for Developing Countries (New York, NY: Oxford University Press, 1987).

II . Welfare Economics, Market Failure, and the Need for Government Stiglitz, Chapters 1, 3, 4.

III. Analysis of Public Expenditure

A. Expenditure Structure and Growth WDR, pp. 105-153. *D.C . Mueller, "The Growth of Government: A Public Choice

Perspective," IMF Staff Papers, 1987, 115-149.

B. Public Goods and Public Choice Stiglitz, Chapters 5, 6, 7, 8. *D.C. Mueller, "Public Choice: A Survey," Journal of Economic

Literature, 1976, 395-433.

C. Benefit-Cost Analysis 1. General

Stiglitz, Economics of the Public Sector, Chapter 10. Squire and van der Tak, Introduction and Chapters 1 and 2. Goode, pp. 62-74.

2. Measuring Welfare Boadway, R. and N. Bruce, Welfare Economics, Blackwell,

1984, Chapters 7-9. Squire and van der Tak, Chapters 6 and 7.

3. Benefit-Cost Criteria Squire and van der Tak, Chapters 4 and 5.

4. General Theory of Shadow Prices Boadway and Bruce, Chapter 10 Squire and van der Tak, Chapter 3

5 . The Shadow Wage Squire and van der ·Tak, Chapters 8 and 11. Harris, J.R. and M. Todaro, "Migration, Unemployment and

Development: A Two-Sector Analysis," American Economic Review, 1970, 136-142.

6. The Public Sector Discount Rate *Harberger, A.G., "On Measuring the Social Opportunity Cos t

of Public Funds," Project Evaluation (Chicago, IL: University of Chicago Press, 1972).

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*Feldstein, M., "The Inadequacy of Weighted Discount Rates, " in R. Layard, ed. , Cost-Benefit Ana lysis (Baltimore , MD: Penguin Education, 1972).

7. Traded Goods Squire and van der Tak, Chapters 9 and 12. *Dinwiddy, C. and F. Teal, "Project Appraisal Procedures and

the Evaluation of Foreign Exchange, " Economica , 1986, 97-107.

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8 . Uncertainty and Risk Squire and van der Tak, Chapter 5 *Arrow, K. and R. Lind, "Uncertainty and the Evaluation of

Public Investment Decisions," in Layard . *Graham, D. "Cost-Benefit Analysis Under Uncertainty,"

American Economic Review, 1981, 715-725.

9. Non-Market Goods *Brookshire, D. S. et . al. , "Valuing Public Goods: A

Comparison of Survey and Hedonic Approaches," American Economic Review, 1982, 165-177.

Jones-Lee , M.W., The Value of a Life, University of Chicago Press, 1976, Chapters 2 and 7.

IV. Analysis of Taxation

A. Basic Principles of Taxation

1. The Fairness of Taxation WDR, pp. 55-78 . Stiglitz, Chapters 16 and 19. Goode, Chapters 4, 10, and 12. *Joseph E. Stiglitz, "Pareto Efficient and Optimal Taxation

and the New Welfare Economics," Chapter 15 in Handbook of Public Economics, Volume II, Alan Auerbach and Martin Feldstein, eds . (North Holland, 1987).

2 . Taxation and Household Decisions Stiglitz, Chapter 18. *Alan Auerbach, "The Theory of Excess Burden and Optimal

Taxation," Chapter 2 in Handbook of Public Economics Volume I, Alan Auerbach and Martin Feldstein, Eds. (North Holland, 1985) .

*Edward K. Browning, "The Marginal Cost of Public Funds , " Journal of Political Economy, 1976, 283-298.

*N. Stern, "The Theory of Optimal Commodity and Income Taxation," Chapter 2 in Newberry and Stern .

3. Taxation and Production Decisions Robin Boadway and Neil Bruce, "A General Proposition on the

Design of a Neutral Business Tax," Journal of Public Economics, 1984, 231-239.

4 . The Impact on the Market: Partial Equilibrium Stiglitz, Chapter 17.

5 . The Impact on the Market : General Equilibrium *Charles E. McLure, "General Equilibrium Incidence

Analysis," Journal of Public Economics, 1975, 125-161. *L. Kotlikoff and L. Summers, "Tax Incidence," Chapter 16 in

Handbook of Public Economics, Volume II .

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6. The Timing of Taxation *Robert J. Barro, "On the Determination of the Public Debt,"

Journal of Political Economy, 1979, 940-971. *I. Hansson and C. Stuart, "The 'Welfare Costs of Deficit

Finance," Economic Inquiry, 1987, 479-496 . Goode, pp. 195-211 .

B. Revenue Sources

1. Taxes on Household Income Goode, pp. 101-110. Stiglitz, Chapters 13 and 23 . . *J .A. Hausman, "Taxes and Labor Supply," Chapter 4 in ·

Handbook of Public Economics. Volwne I. *Agnar Sandmo, "The Effects of Taxation Savings and Risk

Taking," Chapter 5 in Handbook of Public Economics, Volwne I.

*Matthew N. Murray, "Payroll Taxes and Benefits in Developing Countries," University of Tennessee working Paper, 1989.

*James Alm, Roy Bahl, and Matthew N. Murray, "The Erosion of the Tax Base in Developing Countries," Georgia State University 'Working Paper, 1989.

2. Taxes on Business Income Goode, pp. 110-133 .

3 . Taxes on Conswnption Goode, pp. 133-140 .

4. Taxes on Property Goode, pp. *Roy Bahl, "The Practice of Urban Property Taxation in Less

Developed Countries," in Roy Bahl, Ed., The Taxation of Urban Property in Less Developed Countries (Madison, 'WI: University of 'Wisconsin -Press, 1978) .

*Charles E. McLure, "The Relevance of the New View of Property Tax Incidence for Less Developed Countries," in Bahl, Ed., The Taxation of Urban Property in Le ss Developed Countries.

5. Agricultural Taxes *James Alm, "Incidence and Economic Impact of Agricultura l

Land Taxes," Associates in Rural Development, 1987 .

6. Fees, User Charges, and Special Assessments

7. Taxes on International Trade Goode, pp. 146-152, 167-180.

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8. Taxation of Natural Resources Goode, pp. 180-194.

C. The Theory of Tax Design and Reform WDR, pp. 79-104, 182-185. Stiglitz, Chapter 25. *Martin Feldstein, "On the Theory of Tax Reform," Journal of

Public Economics, 1976, 77-104. *Roy Bahl, "Tax Reform in Jamaica," in Malcolm Gillis, Ed . *Boadway Robin and Neil Bruce, "Theoretical Issues in Tax Reform,"

in D. Laidler Ed., Approaches to Economic Well-Being (Knoxville, TN: University of Tennessee Press, 1981).

V. Tax and Expenditure Administration Goode, Chapters 2 and 13 .

VI . Public Finance in a Federal System WDR, pp . 154-167. Stiglitz, Chapters 26 and 27.