CHAPTER 1

Introduction

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

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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

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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].

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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].

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Source: Economic Report of the President 2009, [p. 389].

Composition of State & Local Expenditures(1965 and 2008)

Increase in public

welfare

Decline in highways

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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

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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

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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

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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