CHAPTER 1

INTRODUCTION

Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

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

1-2
Public Finance and Ideology
 Organic view of government
 Mechanistic view of government

1-3
The Legal Framework
 Federal government
 Federal Constitutional provisions
 Article 1, Section 8
 Article 1, Section 9
 16th Amendment
 5th Amendment

1-4
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

1-5
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)InflationEconomyAdjusting for
Adjusting Relative
for to
Population

1 2 3 4
Total 2005 Dollars 2005 Dollars Percent of
Expenditures (billions)* per capita GDP
(billions)
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 deflator
Source: Calculations based on Economic Report of the President, 2006
(Washington, DC: US Government Printing Office, 2006), pp.
280,284,323,379 1-7
 Figure 1.1: Government expenditures as a percentage of
Gross Domestic Product (2005, selected countries)

0.6

0.5

0.4

0.3

0.2
United
States
0.1

0
Sweden France Germany United Kingdom Canada Japan Australia

Source: Organization for Economic Cooperation and Development [2006]. Figures are for 2005.
 Figure 1.2: Composition of federal expenditures (1965
and 2005)

100%

90%
Note increase in
80% Social Security,
Medicare and
Income Security
70%
Other
Net interest
Note
60%
decline in Social security
Defense Income security
50%
Medicare
Health
40%
Defense

30%

20%

10%

0%
1965 2005

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

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

100%

90%

80%
Increase in
public
70% welfare
Decline in
highways
60%
Other
Public welfare
50%
Highways

40% Education

30%

20%

10%

0%
1965 2002

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

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

Social insurance 100% Corporate and other

and individual income
taxes have become
tax have become
90% less important
more important

80%

70%

60%
Other

50% Social insurance

Corporate tax
40%
Individual income
tax
30%

20%

10%

0%
1965 2005

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

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

100%

90%

80% Other

70% Grants from

Individual tax
more important federal
60% government
Corporation
tax
50%
Inidividual
income tax
40%
Sales tax
30%

Property tax
20%

10%
Property tax
less important 0%
1965 2002

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

Changes in the Real Value of Debt
 Inflation tax

1-13
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

1-14
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

1-16