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CHAPTER 1

INTRODUCTIONINTRODUCTION

1-2

Defining the Field of Study

Public Finance/Public Sector Economics/Public Economics

– the field of economics that analyzes government taxation and spending policies

1-3

Public Finance and Ideology

Organic view of government Mechanistic view of government

1-4

The Legal Framework

Federal government Federal Constitutional provisions – may

effectively undertake any expenditure it wishes and use debt and taxes to finance them.

16th Amendment empowers the federal government to tax personal income.

1-5

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

1-6

State, Local, and Federal Government Expenditures (selected years)

1 2 3 4

Total Expenditures

(billions)

2005 Dollars (billions)*

2005 Dollars per capita

Percent of GDP

1960 123 655 3,627 24.3%

1970 295 1,201 5,858 28.4%

1980 843 1,749 7,679 30.2%

1990 1,873 2,574 10,289 32.2%

2000 2,887 3,237 11,461 29.4%

2005 3,876 3,876 13,066 31.1%

*Conversion to 2005 dollars done using the GDP deflatorSource: Calculations based on Economic Report of the President, 2006 (Washington, DC: US Government Printing Office, 2006), pp. 280,284,323,379

Adjusting for Inflation

Adjusting for Population

Relative to Economy

Source: Organization for Economic Cooperation and Development [2006]. Figures are for 2005.

Figure 1.1: Government expenditures as a percentage of Gross Domestic Product (2005, selected countries)

0

0.1

0.2

0.3

0.4

0.5

0.6

Sweden France Germany United Kingdom Canada Japan Australia

UnitedStates

Figure 1.2: Composition of federal expenditures (1965 and 2005)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 2005

Other

Net interest

Social security

Income security

Medicare

Health

Defense

Source: Economic Report of the President [2006, p. 377].

Note decline in Defense

Note increase in Social Security, Medicare and

Income Security

Figure 1.3 Composition of state and local expenditures (1965 and 2002)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 2002

Other

Public welfare

Highways

Education

Source: Economic Report of the President [2006, p. 383].

Decline in highways

Increase in public

welfare

Figure 1.4: Composition of federal taxes (1965 and 2005)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 2005

Other

Social insurance

Corporate tax

Individual incometax

Source: Economic Report of the President [2006, p. 377].

Social insurance and individual income

tax have become more important

Corporate and othertaxes have become

less important

Figure 1.5: Composition of state and local taxes (1965 and 2002)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1965 2002

Other

Grants fromfederalgovernmentCorporationtax

Inidividualincome tax

Sales tax

Property tax

Source: Economic Report of the President [2006, p. 383].

Individual tax more important

Property tax less important

1-12

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

1-13

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

1-14

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