Chap01 Introduction.ppt

1 Chapter1 Introduction PublicEconomics 2 PublicFinanceDefined Publicfinanceisaboutthetaxingandspendingactivitiesofthegovernment Alsoknownas publicsectoreconomics or publiceconomics Focusisonmicroeconomicfunctionsofgovernment policesthataffectoverallunemploymentorpricelevelsareleftformacroeconomics Scopeofpublicfinanceunclear governmenthasroleinmanyactivities butfocuswillbeontaxesandspending 3 PublicFinanceandIdeology Howshouldagovernmentfunctionineconomicsphere Organicview communitystressedaboveindividual Goalsofsocietysetbythestate Mechanisticview governmentisacontrivancecreatedbyindividualstobetterachievetheirindividualgoals Individual notgroup isatcenterstage Thisistheviewpointtakeninthetextbook 4 GovernmentataGlance LegalframeworkFederalgovernmentNorealconstraintsonspendinginConstitutionTaxesmustcomeoriginateinHouseofRepresentatives Equaltaxratesacrossstates Incometaxcamefrom16thamendmenttoConstitution CanrunbudgetdeficitsStateandlocalgovernmentCanimposespending taxingrestrictionsonitself Manystatescannotrunbudgetdeficits 5 GovernmentataGlance Sizeofgovernment howtomeasure NumberofgovernmentemployeesAnnualexpendituresPurchasesofgoodsandservices transfers andinterestpaymentsUnifiedbudget In2001 1 6trillionspentatfederallevel andanother 1 3trillionatstateandlocallevels 6 GovernmentataGlance Thesenumbersignoreactivitiesthatdonothaveexplicitoutlays butsubstantialeffectsonresourceallocation Regulations forexample Conceivably couldconstructa regulatorybudget toaccountforthesecosts butdifficulttocompute 7 GovernmentExpenditure SomenumbersAnnualexpenditureshavegrownbyafactorof290from1929 2001 Inflation populationalsochanging Real per capitaexpenditurestill10timesaslarge AspercentageofGDP governmentexpenditurewas9 6 in1929 and29 3 in2001 Table1 1 9 GovernmentExpenditure UnitedStatesversusotherdevelopedcountries U S publicsectorisquitesmallcomparedtoSwedenorFrance andsmallerthanallthecountrieslisted Althoughlarge theU S governmentissmallinrelativeterms Morerelianceonprivatesector Table1 2 11 GovernmentExpenditure In1965NationaldefensealmosthalfoffederalexpenditureSocialsecuritysmall Medicarenon existentDebtpaymentsroughlyconstant In2001Defensewaslessthanone fifthSocialsecuritynowlargestspendingitem Medicarelarge growing Figure1 1 13 GovernmentExpenditure Muchofthegovernmentbudgetconsistsofentitlementprograms programswithcostsdeterminedbynumberofpeoplewhoqualify SocialSecurity Medicare welfareThree quartersofthefederalbudgetisrelativelyuncontrollable becauseoftheseentitlements 14 GovernmentExpenditure Federalgovernmentresponsibleforabout51 ofdirectexpenditure Stategovernmentsresponsiblefor21 Localgovernmentsresponsiblefor28 State localgovernmentsprimarilyresponsibleforpolice fireprotection education transportation andsomewelfareprograms 15 GovernmentRevenues Federaltaxesmainlyconsistofindividualincometaxes payrolltaxes andcorporatetaxes Personalincometax46 ofcollections State localtaxesmainlyconsistofpropertytaxes salestaxes individualincometaxes andgrantsfromfederal