Public Economics: Week 7

Definitions to know:

 Differences between debt and deficit

 Baseline deficit
 Cyclically adjusted deficit
 Structural deficit
 Entitlement spending
 Discretionary spending
 Implicit Obligations
 Inter-temporary budget rule
 Ex-post Balanced Budget Rule
 Ex-ante Balanced Budget Rule
 Tax deductions and tax credits (and the differences between the two)
 Alternative Minimum Tax
 Marginal vs average tax rate
 Horizontal equity in taxation
 Vertical equity in taxation
 The benefit doctrine (FOR GRAD STUDENTS ONLY)
 The ability to pay doctrine (FOR GRAD STUDENTS ONLY)
 Haig-Simons taxation rule

Short answer questions:

Congress current faces a large deficit that many feel must be reduced. What are spending and
taxation instruments that Congress could use to reduce the deficit today? What instruments
could they not use today?

Which balanced budget rule gives government more flexibility in budgeting: an ex-post BBR or
an ex-ante BBR?

List three reasons why it may not be in government’s best interest to try and pursue a balanced
budget in the short run (especially during recessions).

In the medium term, economists have argued that it is beneficial for governments to pursue a
balanced budget. Why might a balanced budget over the medium term produce efficiency and
equity gains (hint: for efficiency gains, think about what persistent deficits do to the capital stock
as well as how this will influence capacity to borrow in the future)

Despite the advantages of medium term balanced budgets, many governments have failed to
achieve these. Outline four theories which outline political reasons why governments may be
incapable of balancing budgets.
What is tax avoidance, and how does it differ from tax evasion? What aspects of the US tax
code may promote tax avoidance?

Does a tax on cigarettes violate a vertical equity principle of taxation? Does it violate a
horizontal equity principle? If so, how, and if not, why not?

What are the equity and efficiency benefits of applying a Haig-Simon’s rule, and only a Haig-
Simon’s rule, for a US income tax?

How may variances in a “subsistence” level of income influence who gains and who loses under
a Haig-Simons tax rule?

The US government wishes to increase charitable giving in the US by introducing a tax

deduction. Using your knowledge of marginal vs intra-marginal impacts, how may this tax
credit introduce a “hole” in the government deficit without changing the level of charitable
giving?

A common criticism of the US tax code is that it is too complicated. Outline four reasons why
the US government may prefer to have complexity in its tax code rather than merely
implementing a proportional or progressive tax system.