Professional Documents
Culture Documents
Introduction to
Government Finance
1
Federal, State, and Local Revenue
$3 trillion annually
Sources:
Taxes:
Payroll
Income (Corporate and Personal)
Property
Sales and Excise
Estate
Tariffs
Fees
Tuition
Licenses
2
Purpose and Consequences of
Government Finance
Political Equilibrium
3
Taxes
Taxes are compulsory payments to
government
4
Tax Basics
Tax Base
The item or activity that is to be taxed
A general tax is one that taxes all of the components of the
economic base, with no exclusions, exemptions, or
deductions from the tax base.
7
Figure 10.1 A Proportional Tax Rate Structure
ATR = MTR
t
0
Tax Base (Dollars per Year)
8
Figure 10.2 A Progressive Tax Rate Structure
MTR
35
Tax Rate (Percent)
ATR
25
15
15.30
Tax Rate (Percent)
12.35
0 ATR
2.9
MTR
$76,200 $100,000
Annual Labor Earnings per Worker
10
Average Tax Rates in the US
Average Tax Rates
0-$4,000 0 0 0
$4000-$29,000 15 0 11
$29,000-$70,000 25 13 20
11
Average Tax Rates Throughout the World
12
How Should the Burden of Government
Be Financed?
Benefit Principle
Those who benefit the most from a
particular program should pay the most
for that program (Lindahl Tax principle at
work).
Ability-to-Pay Principle
Those who have the greatest ability to
pay should be required to pay the most.
13
Criteria for Evaluating Methods of Government Finance
Equity
The distribution of the government finance burden
should coincide with commonly held notions of fairness
and ability-to-pay.
Efficiency
The system of government finance should raise
revenues with the least loss in efficiency in the private
sector.
Administrative ease
A government finance system should be relatively easy
to administer consistently, without excessive costs to
collect, enforce, and comply with taxes and tax laws.
14
Horizontal and Vertical Equity
Horizontal equity is achieved when individuals of the
same economic capacity (measured, for example, by
income) pay the same amount of taxes per year (or
over their lifetimes).
16
Figure 10.4 Reducing Tax Evasion
A B
E
E
E2 1
C
MC2 MC
1
Cost and Benefit
E1
MB = MTR
D* D*
0
2 1
Unreported Income per Year (Dollars)
17
Alternatives to Taxation
18
Figure 10.5 Inflationary Finance
T
C
G2 I
Guns per Year
G1 A
0 B2 B1 T'
Butter per Year 19
More alternatives to Taxation
Donations
Money (but more usually time) is voluntarily given to
government. Military service or work in the Peace Corps
can be considered a donation when the compensation is
less than the market value of the time.
User Charges
Users of a government service can expect to pay for that
service. Examples include tuition, fees paid to enter state
parks, greens fees at publicly owned golf courses.
Earmarked Taxes
Taxes can be implemented to fund specific public goods.
Examples include gasoline taxes and tolls designed to
fund road and bridge repair.
20
Figure 10.6 User Charges and Efficiency
MSC
Z*
C* + S*
Charges
S*
C*
Z MSB = MPB + MEB
MPB
0 Q*
Trash Pickups per Year 21
User Charges and the Transportation
Infrastructure
22
User Charges and Efficiency
Roads and Bridges wear out when too much
weight is concentrated on too few axles.
23
Figure 10.7 User Charges for a Congestible
Government-Supplied Service
User Charges (Cents per Mile)
Lotteries
25
State Lotteries
38 states run or participate in lotteries.
26