(eBook PDF) Public Finance 10th

Edition by Harvey S Rosen

Visit to download the full and correct content document:
https://ebooksecure.com/download/ebook-pdf-public-finance-10th-edition-by-harvey-s
-rosen/

HARVEY S. ROSEN
Harvey S. Rosen is the John L. Weinberg Professor
of Economics and Business Policy at Princeton
University. Professor Rosen, a Fellow of the
Econometric Society and a Research Associate
of the National Bureau of Economic Research, is
well known for his contributions to the fields of
Public Finance, Labor Economics, and Applied
Microeconomics. From 1989 to 1991, he served as
Deputy Assistant Secretary (Tax Analysis) at the
US Treasury. During a second stint in Washington
from 2003 to 2005, he served on the President’s
Council of Economic Advisers, first as a Member
and then as Chairman. In this capacity, he provided
advice to the White House on a wide variety of
policy issues, including tax reform, Social Security,
health care, energy, the federal budget, and
financial market regulation. In 2007 he received
from the National Tax Association its most
prestigious award, the Daniel M. Holland medal
for distinguished lifetime contributions to the study
and practice of public finance.
About the Authors
TED GAYER
Ted Gayer is the co-director of the Economic
Studies program and the Joseph E. Pecham
Senior Fellow at the Brookings Institution.
He was formerly on the faculty of Georgetown
University’s Public Policy Institute. Professor
Gayer has published research in environmental
economics, housing, regulation, and education
policy. From 2003 to 2004, he served as a
Senior Economist on the President’s Council
of Economic Advisers, where he worked
primarily on environmental and regulatory
policy. From 2007 to 2008, he served as
Deputy Assistant Secretary (Microeconomic
Analysis) at the US Treasury. In this capacity,
he helped develop policies relating to a wide
variety of issues, including housing, credit
markets, agriculture, health care, energy,
insurance, and the environment. He was
also responsible for guiding the Treasury’s
participation in the Social Security and
Medicare Trustees working groups.
vii
Preface
The British philosopher and mathematician Bertrand Russell wrote, “Change is one
thing, progress is another.” In this Tenth edition, we continue to make substantive
changes that reflect progress made in the field of public finance. Yet we have been
careful to stay focused on the central mission of the book, which is to explain as
clearly as possible how the tools of economics can be used to analyze government
expenditure and tax policies.
The field of public finance is constantly developing. New applications of experi-
mental and quasi-experimental techniques measure the impact of public policies, and
new insights provided by economic theory into the roles of government spending
and taxation.
This book incorporates recent developments and along the way takes its readers
to the frontiers of current research and policy. While the information presented is
cutting edge and reflects the work of economists currently active in the field, our
approach makes it accessible to undergraduates whose only prior exposure to eco-
nomics is at the introductory level.
Each chapter of this Tenth edition has something new. Rather than provide a long
list of changes, we will instead highlight some of the key innovations.

new worlds to explore

Changes to Tax Law
On January 1, 2013, Congress passed the American Taxpayer Relief Act of 2012.
Although most of the public discussion of this contentious piece of legislation
focused on the increase in tax rates on high-income taxpayers, the law also embodied
significant changes in the taxation of capital gains and dividends, the estate tax, and
the Alternative Minimum Tax. Chapters 17, 19, and 21 have been updated to reflect
these changes.

Taxation of Multinational Corporations

As the pace of globalization accelerates, the question of how to tax multinational
corporations becomes a more pressing policy question. In particular, there has been
a vigorous debate about how the United States should tax corporate profits earned
abroad by domestic firms. The chapter on corporation tax (Chapter 19) now includes
an expanded discussion of this issue, with an evaluation of two alternative systems:
global taxation and territorial taxation of corporate profits.

Health Care
In 2010, President Obama signed into law the Affordable Care Act (ACA), which
significantly overhauled the government’s role in the health care market. The chapter
on government and the market for health care (Chapter 10) now includes a discussion
of the ACA, with a particular focus on the mandate that everyone purchase health
insurance.
viii
 Preface ix

Federal Debt
Recent years have seen a considerable increase in the size of US government debt as
a proportion of the Gross Domestic Product. This has raised the question of whether
high levels of debt can lead to a fiscal crisis. This issue is now taken up in Chapter 20
on deficit finance.

Improved Graphical Analysis

Recent years have seen a considerable increase in federal government spending.
Understanding the scope of government activity is therefore becoming ever more
important. New graphics in Chapter 1 provide a succinct and convenient overview.
All of the changes in this Tenth edition were made to further our goal of providing
students with a clear and coherent view of the role of government spending and taxation.
Our years of policy experience have convinced us that modern public finance provides
a practical and invaluable framework for thinking about policy issues. In this textbook,
we have tried to do just what we did when we worked in Washington—to emphasize
the links between sound economics and the analysis of real-world policy problems.

Harvey S. Rosen and Ted Gayer

up-to-date tools
and supplements
Animated PowerPoint Slides
Thoroughly updated and comprehensive PowerPoint presentations, prepared by Donna
Anderson of University of Wisconsin La Crosse, feature animated graphs and figures to
help clarify difficult concepts for students.

Test Bank
Public Finance has been known for its strong, rigorous test bank questions, and the
Tenth edition continues this tradition. The test bank has been expertly updated to
reflect the cutting-edge changes in the text. New questions in every chapter provide
additional opportunities to test student knowledge.

Instructor’s Manual
Revised by Tori Knight of Carson-Newmann University, the instructor’s manual provides
a number of instructor resources along with detailed solutions to the end-of-chapter
questions.
x Preface

Online Learning Center www.mhhe.com/rosen10e

In the Online Learning Center, students can access PowerPoint slides, and interesting
Web links, while instructors can also access the password-protected ancillaries to access
downloadable versions of the instructor resources.

CourseSmart is a new way for faculty to find and review eTextbooks. It’s also a
great option for students who are interested in accessing their course materials digi-
tally. CourseSmart offers thousands of the most commonly adopted textbooks across
hundreds of courses from a wide variety of higher education publishers. It is the
only place for faculty to review and compare the full text of a textbook online. At
CourseSmart, students can save up to 50 percent off the cost of a print book, reduce
their impact on the environment, and gain access to powerful Web tools for learning
including full text search, notes and highlighting, and e-mail tools for sharing notes
between classmates. Complete tech support is also available for each title.
Finding your eBook is easy. Visit www.CourseSmart.com and search by title,
author, or ISBN.
 Acknowledgments
It is a pleasure to acknowledge the people who have helped in the preparation of
Public Finance. Across all the editions of this book, nearly 400 academic colleagues
who teach public finance have responded to surveys that provided useful material
on how they focus their courses. The input afforded insights about their needs and
those of their students.
We have been the beneficiaries of numerous suggestions for improvements over
the previous edition. We are very thankful to Jean Marie Callan for her research support.
In addition, a number of people helped with particular issues in this edition.
They include:

Henry Aaron Jonathan Meer

Brookings Institution Texas A&M University
Gary Burtless Clifford Winston
Brookings Institution Brookings Institution
Amanda Kowalski
Yale University

We also appreciate the people who reviewed and made useful suggestions to earlier
editions of this text. They include:

Roy D. Adams Alex M. Brill

Iowa State University House Ways and Means Committee
James Alm Eleanor Brown
University of Colorado Pomona College
Donna Anderson Robert Brown
University of Wisconsin, La Crosse California State University, San Marcos
Gary M. Anderson Neil Bruce
California State University, Northridge Queens University
Gerald Auten Lawrence P. Brunner
US Treasury Central Michigan University
Charles L. Ballard Leonard Burman
Michigan State University Urban Institute
Kevin Balsam Rachel Burton
Hunter College Georgetown University
Thomas Barthold Stuart Butler
Joint Committee on Taxation Heritage Foundation
Marco Bassetto Donald E. Campbell
University of Minnesota, Minneapolis College of William and Mary
Anne Louise Berry Adam Carasso
Stanford University The Urban Institute
Douglas Blair Kai Chan
Rutgers University Princeton University
Rebecca Blank Sewin Chan
University of Michigan New York University
Serguey Braguinsky Howard Chernick
SUNY Buffalo Hunter College
Genevieve Briand Ron Cheung
Eastern Washington University Florida State University
xii Acknowledgments

Bradley Childs William Gale

Belmont University Brookings Institution
Robert Chirinko Gary Galles
Emory University Pepperdine University
John A. Christianson Malcolm Getz
University of San Diego Vanderbilt University
Edward Coulson J. Fred Giertz
Pennsylvania State University University of Illinois
Steven Craig Gregory Gilpin
University of Houston Indiana University, Bloomington
Steven G. Craig Robert Gitter
University of Houston Ohio Wesleyan University
Susan Dadres Amihai Glazer
Southern Methodist University University of California, Irvine
Bev Dahlby Roy T. Gobin
University of Alberta Loyola University of Chicago
John Deskins Haynes Goddard
Creighton University, Omaha University of Cincinnati
Robert A. Dickler William T. Gormley
Bowie State University Georgetown University
Avinash Dixit Jane Gravelle
Princeton University Congressional Research Service
Kevin T. Duffy-Deno Gordon Gray
Southeastern Massachusetts University American Enterprise Institute
Alejandra Edwards Michael Greenstone
California State University, Massachusetts Institute
Long Beach of Technology
Wayne Edwards Timothy J. Gronberg
University of Alaska, Anchorage Texas A & M University
Nada Eissa Simon Hakim
Georgetown University Temple University
Eric Engen Jonathan H. Hamilton
Federal Reserve Board University of Florida
O. Homer Erekson Rich Hanson
Miami University, Ohio University of California, Irvine
Judy Feder Winston Harrington
Georgetown University Resources for the Future
Allan M. Feldman Kevin Hassett
Brown University American Enterprise Institute
Lee Fennell Eric Helland
University of Texas Claremont McKenna College
John Fitzgerald L. Jay Helms
Bowdoin College University of California, Davis
Fred E. Foldvary Roger S. Hewett
Virginia Tech Drake University
Jane G. Fortson James Hines
Princeton University University of Michigan
Ken Fortson Randall Holcombe
Princeton University Florida State University
Don Fullerton Douglas Holtz-Eakin
University of Texas American Action Forum
 Acknowledgments xiii

Janet Holtzblatt Robin Lumsdaine

US Treasury American University
Gary A. Hoover Pirudas Lwamugira
University of Alabama Fitchburg State College
John K. Horowitz Molly K. Macauley
University of Maryland Resources for the Future
Hilary Hoynes Brigitte Madrian
University of California, Davis University of Pennsylvania
Paul Hughes-Cromwick N. Gregory Mankiw
Henry Ford Health System Harvard University
Robert Inman Randall Mariger
University of Pennsylvania University of Washington
Micah Jensen Jim Marton
Georgetown University University of Kentucky
Rebecca Kalmus Simon Medcalfe
Harvard University Brenau University
Robert Kelly Jonathan Meer
Fairfield University Stanford University
Valerie Kepner Philip Meguire
King’s College University of Canterbury
Edward Kienzle Roger P. Mendels
Boston College University of Windsor
Bruce R. Kingman van der Merwe Fanus
SUNY, Albany Potchefstroom University for Christian
Jeffrey Kling Higher Education, South Africa
Congressional Budget Office David Mitchell
Tori Knight Missouri State University
Carson-Newman College Olivia Mitchell
Helen Ladd University of Pennsylvania
Duke University Farshid Mojaver
Charles G. Leathers University of California, Davis
University of Alabama Robert Moore
Gary D. Lemon Occidental College
De Pauw University Adele Morris
Al Lerman Brookings Institution
US Treasury James J. Murphy
Peng Li University of Massachusetts
Huazhong University of Science John Murray
and Technology Bank of Canada
Steve Lile Noelwah Netusil
Western Kentucky University Reed College
Alessandro Lizzeri Eric Nilsson
New York University California State University, San Bernardino
Alan Lockard Louise Nordstrom
Binghamton University Nichols College
Bradley S. Loomis Peter Norman
Rochester Institute of Technology University of North Carolina, Chapel Hill
Edward Lopez Pia M. Orrenius
University of North Texas Federal Reserve Bank of Dallas
Jens Ludwig Susan Parks
Georgetown University University of Wisconsin, Whitewater
xiv Acknowledgments
Anthony Pellechio
World Bank
Anita Alves Pena
Colorado State University
Alfredo M. Pereira
University of California,
San Diego
Wade Pfau
National Graduate Institute
of Policy Studies
Florenz Plassmann
Binghamton University (SUNY)
Joseph Pomykala
Towson University
Paul Portney
University of Arizona
James Poterba
Massachusetts Institute
of Technology
B. Michael Pritchett
Brigham Young University
Uwe E. Reinhardt
Princeton University
Christopher J. Rempel
Reed College
Mark Rider
US Treasury
Robert Rider
University of Southern
California
Jose Daniel Rodriguez-Delgado
University of Minnesota
Carol Rosenberg
Urban Institute
Stephen Rubb
Bentley College
Steven R. Sachs
University of Connecticut
Efraim Sadka
Tel-Aviv University
Gian S. Sahota
Vanderbilt University
Robert C. Sahr
Oregon State University
Andrew Samwick
Dartmouth College
Benjamin Scafidi
Georgia State University
Helen Schneider
University of Texas at Austin
Barbara Schone
Georgetown University
James K. Self
Indiana University
Albert J. Shamash
Trenton State College
Daniel Shaviro
New York University
Eytan Sheshinski
Hebrew University
Mark Showalter
Brigham Young University
Jonathan Skinner
Dartmouth College
Kenneth Small
University of California, Irvine
John L. Solow
University of Iowa
John Sondey
South Dakota State University
Richard Steinberg
Virginia Polytechnic Institute
and State University
C. Eugene Steuerle
The Urban Institute
Thomas F. Stinson
University of Minnesota
John Straub
Tufts University
Paul Styger
Potchefstroom University
for Christian Higher Education,
South Africa
Phillip Swagel
University of Maryland
Kurtis Swope
United States Naval Academy
Amy Taylor
US Center for Health Services
Research
Nicolaus Tideman
Virginia Tech University
Kiertisak Toh
Radford University
Mehmet Tosun
University of Nevada, Reno
Gregory A. Trandel
University of Georgia
Alan Viard
American Enterprise Institute
 Acknowledgments xv

Valerie Yates
Marianne Vigneault University of Pennsylvania College
Bishop’s University of General Studies
Lennard van Vuren Chiou-Nan Yeh
Potchefstroom University for Christian Alabama State University
Higher Education, South Africa
Aaron Yelowitz
Michael Wasylenko University of Kentucky
Syracuse University
James Young
Kristen Willard
Northern Illinois University
Columbia University
Mark L. Wilson Sajid Zaidi
West Virginia University-Tech Princeton University
Clifford Winston Joshua Graff Zivin
Brookings Institution Columbia University
Pavel Yakovlev George Zodrow
Duquesne University Rice University

Finally, we both would like to thank our families for their support. Longtime
readers of this book might recall that the first edition was written when Lynne
Rosen and Jonathan Rosen were babies. Now they are college graduates, and have
been delighted to welcome Zachary Gayer, Jacob Gayer, and Nathan Gayer into
the Public Finance family.

Harvey S. Rosen and Ted Gayer

Brief Table of Contents

Part I Part IV
GETTING STARTED 1 FRAMEWORK FOR TAX ANALYSIS 295
1 Introduction 2 14 Taxation and Income Distribution 296
2 Tools of Positive Analysis 18 15 Taxation and Efficiency 324
3 Tools of Normative Analysis 34 16 Efficient and Equitable Taxation 347

Part II Part V
PUBLIC EXPENDITURE: PUBLIC GOODS THE UNITED STATES REVENUE
AND EXTERNALITIES 53 SYSTEM 373

4 Public Goods 54 17 The Personal Income Tax 374

5 Externalities 73 18 Personal Taxation and Behavior 407
6 Political Economy 108 19 The Corporation Tax 430
7 Education 132 20 Deficit Finance 452
8 Cost-Benefit Analysis 147 21 Fundamental Tax Reform: Taxes on
Consumption and Wealth 470

Part III Part VI

PUBLIC EXPENDITURE: SOCIAL MULTIGOVERNMENT PUBLIC
INSURANCE AND INCOME FINANCE 497
MAINTENANCE 175
22 Public Finance in a Federal System 498
9 The Health Care Market 176
10 Government and the Market for
Appendix 528
Health Care 201
11 Social Security 222 Glossary 550
12 Income Redistribution: Conceptual References 559
Issues 251 Name Index 573
13 Expenditure Programs for the Poor 270 Subject Index 577

xvi
 Table of Contents

The First Fundamental Theorem of Welfare

Part I Economics 41
GETTING STARTED 1
Fairness and the Second Fundamental Theorem
CHAPTER 1 of Welfare Economics 42
INTRODUCTION 2 Market Failure 46
Public Finance and Ideology 3 Market Power 46
Organic View of Government 3 Nonexistence of Markets 47
Mechanistic View of Government 4 Overview 48
Viewpoint of This Book 5 Buying into Welfare Economics 48
Government at a Glance 5 Summary 50
The Legal Framework 6 Discussion Questions 50
The Size of Government 8
Expenditures 10 Part II
Revenues 11 PUBLIC EXPENDITURE: PUBLIC GOODS
Our Agenda 13 AND EXTERNALITIES 53
Summary 13
CHAPTER 4
Discussion Questions 14
PUBLIC GOODS 54
Appendix: Doing Research in Public
Public Goods Defined 54
Finance 16
Efficient Provision of Public Goods 56
CHAPTER 2 Deriving the Efficiency Condition 58
TOOLS OF POSITIVE ANALYSIS 18 Problems in Achieving Efficiency 61
The Role of Theory 18 The Free Rider Problem 63
Causation versus Correlation 20 Privatization 64
Experimental Studies 21 Public versus Private Provision 64
Conducting an Experimental Study 22 Public versus Private Production 65
Pitfalls of Experimental Studies 23 Public Goods and Public Choice 68
Observational Studies 24 Summary 69
Conducting an Observational Study 25 Discussion Questions 69
Pitfalls of Observational Studies 26
Quasi-Experimental Studies 27 CHAPTER 5
Conducting a Quasi-Experimental Study 28 EXTERNALITIES 73
Pitfalls of Quasi-Experimental Studies 30 The Nature of Externalities 74
Conclusions 31 Graphical Analysis 76
Implications 77
Summary 31
Conclusion 81
Discussion Questions 32
Private Responses 81
CHAPTER 3 Bargaining and the Coase Theorem 81
TOOLS OF NORMATIVE ANALYSIS 34 Mergers 83
Welfare Economics 34 Social Conventions 83
Pure Economy Exchange 34 Public Responses to Externalities: Taxes and
Production Economy 39 Subsidies 84
xvii
xviii Table of Contents

Taxes 84 Does Government Spending Improve Educational

Subsidies 85 Outcomes? 137
Public Responses to Externalities: Emissions Public Spending and the Quality
Fees and Cap-and-Trade Programs 87 of Education 139
Emissions Fee 88 Does Education Increase Earnings? 140
Cap-and-Trade 91 New Directions for Public Education 141
Emissions Fee versus Cap-and-Trade 93 Charter Schools 142
Command-and-Control Regulation 97 Vouchers 142
The Us Response 99 School Accountability 144
Progress with Incentive-Based Approaches 100 Summary 145
Implications for Income Distribution 101 Discussion Questions 146
Who Benefits? 101
Who Bears the Cost? 102 CHAPTER 8
COST-BENEFIT ANALYSIS 147
Positive Externalities 103
Present Value 147
A Cautionary Note 104
Projecting Present Dollars into the
Summary 105
Future 148
Discussion Questions 105 Projecting Future Dollars into the
Present 148
CHAPTER 6
Inflation 149
POLITICAL ECONOMY 108
Private Sector Project Evaluation 150
Direct Democracy 108
Internal Rate of Return 152
Unanimity Rules 109
Benefit-Cost Ratio 153
Majority Voting Rules 110
Logrolling 114 Discount Rate for Government Projects 154
Arrow’s Impossibility Theorem 116 Rates Based on Returns in the Private Sector 154
Representative Democracy 117 Social Discount Rate 155
Elected Politicians 118 Discounting and the Economics of Climate
Change 156
Public Employees 120
Government Discounting in Practice 156
Special Interests 121
Other Actors 125 Valuing Public Benefits And Costs 157
Market Prices 157
Explaining Government Growth 126
Adjusted Market Prices 158
Conclusion 129
Consumer Surplus 159
Summary 129
Inferences from Economic Behavior 160
Discussion Questions 130
Valuing Intangibles 163
CHAPTER 7
Games Cost-Benefit Analysts Play 163
EDUCATION 132 The Chain-Reaction Game 163
Justifying Government Intervention The Labor Game 164
in Education 133 The Double-Counting Game 164
Is Education a Public Good? 133 Distributional Considerations 164
Does Education Generate Positive Uncertainty 165
Externalities? 133 An Application: Are Reductions in
Is the Education Market Inequitable? 135 Class Size Worth It? 166
What Can Government Intervention in Education Discount Rate 167
Accomplish? 136 Costs 167
Does Government Intervention Crowd Out Private Benefits 167
Education? 136 The Bottom Line and Evaluation 168

Use (and Nonuse) by Government 169
Summary 170
Discussion Questions 171
Appendix: Calculating the Certainty
Equivalent Value 173
Part III
PUBLIC EXPENDITURE: SOCIAL
INSURANCE AND INCOME
MAINTENANCE 175
CHAPTER 9 Consumption Smoothing and the Annuity
THE HEALTH CARE MARKET 176
What’s Special about Health Care? 176
The Role of Insurance 176
The Role of Risk Pooling 182
Adverse Selection in the Health Insurance
Market 182
Insurance and Moral Hazard 186
Other Information Problems in the Health Care
Market 191
Externalities of Health Care 192
Do We Want Efficient Provision of Health
Care? 192
Paternalism 192
The Problem of the Uninsured 192
High Health Care Costs 195
Summary 198
Discussion Questions 199
CHAPTER 10
GOVERNMENT AND THE MARKET FOR
HEALTH CARE 201
Private Health Insurance 202
The Implicit Subsidy for Employer-Provided
Insurance 202
The Advantages of Employer-Provided Health
Insurance 204
Employer-Provided Health Insurance and Job
Lock 205
Cost Control and Private Insurance 205
Government Provision of Health Insurance:
Medicare and Medicaid 206
Medicare: Overview 206
Cost Control under Medicare 209
Medicare: Impacts on Spending and Health 211
Medicaid: Overview 212
Medicaid: Impacts on Health 213
Table of Contents xix
Affordable Care Act of 2010 215
Alternative Paths to Health Care Reform 216
Single-Payer Approach 216
Market-Oriented Approach 218
Final Thoughts 219
Summary 220
Discussion Questions 220
CHAPTER 11
SOCIAL SECURITY 222
Why Have Social Security? 223
Market 223
Adverse Selection and the Annuity
Market 223
Other Justifications 224
Structure of Social Security 226
Basic Components 226
Distributional Issues 230
The Trust Fund 234
Effects of Social Security on Economic
Behavior 235
Saving Behavior 235
Retirement Decisions 240
Implications 241
Long-Term Stresses on Social Security 241
Social Security Reform 243
Maintain the Current System 243
Privatize the System 245
Conclusions 248
Summary 248
Discussion Questions 249
CHAPTER 12
INCOME REDISTRIBUTION: CONCEPTUAL
ISSUES 251
Distribution of Income 252
Interpreting the Distributional Data 253
Rationales for Income Redistribution 256
Simple Utilitarianism 256
The Maximin Criterion 259
Pareto Efficient Income Redistribution 260
Nonindividualistic Views 261
Other Considerations 262
Expenditure Incidence 263
Relative Price Effects 263
Public Goods 264
xx Table of Contents

Valuing In-Kind Transfers 264 Incidence Depends on the Disposition

Reasons for In-Kind Transfers 267 of Tax Revenues 298
Conclusion 268 Tax Progressiveness Can Be Measured
Summary 268 in Several Ways 299
Discussion Questions 268 Partial Equilibrium Models 301
Unit Taxes on Commodities 301
CHAPTER 13
Ad Valorem Taxes 305
EXPENDITURE PROGRAMS Taxes on Factors 307
FOR THE POOR 270 Commodity Taxation without Competition 309
A Quick Look at Welfare Spending 270 Profits Taxes 311
TANF 271 Tax Incidence and Capitalization 312
Income Maintenance and Work Incentives 272 General Equilibrium Models 313
The Basic Trade-Offs 272 Tax Equivalence Relations 313
Analysis of Work Incentives 273 The Harberger Model 315
Work Requirements 278 Analysis of Various Taxes 316
Time Limits 279 Some Qualifications 318
Family Structure 279 An Applied Incidence Study 319
National versus State Administration 279 Conclusions 320
The Earned Income Tax Credit 280 Summary 321
Supplemental Security Income 282 Discussion Questions 321
Medicaid 283
CHAPTER 15
Unemployment Insurance 284 TAXATION AND EFFICIENCY 324
Benefits 285 Excess Burden Defined 325
Financing 285 Questions and Answers 328
Effects on Unemployment 285
Excess Burden Measurement with Demand
Supplemental Nutrition Assistance Program Curves 332
(SNAP) 287 Preexisting Distortions 334
Housing Assistance 288 The Excess Burden of a Subsidy 335
Programs to Enhance Earnings 289 The Excess Burden of Income Taxation 336
Education 289 Differential Taxation of Inputs 338
Employment and Job Training 290 Does Efficient Taxation Matter? 341
Overview 290 Summary 342
Summary 292 Discussion Questions 342
Discussion Questions 293
CHAPTER 16
Part IV EFFICIENT AND EQUITABLE
FRAMEWORK FOR TAX ANALYSIS 295 TAXATION 347
Optimal Commodity Taxation 347
CHAPTER 14 The Ramsey Rule 348
TAXATION AND INCOME Equity Considerations 351
DISTRIBUTION 296 Summary 352
Tax Incidence: General Remarks 297 Application: Taxation of the Family 352
Only People Can Bear Taxes 297
Optimal User Fees 353
Both Sources and Uses of Income Should Overview 356
Be Considered 298
Optimal Income Taxation 356
Incidence Depends on How Prices Are
Edgeworth’s Model 356
Determined 298
Modern Studies 357

Politics and the Time Inconsistency
Problem 358
Other Criteria for Tax Design 360
Horizontal Equity 360
Costs of Running the Tax System 362
Tax Evasion 363
Overview 369
Summary 370
Discussion Questions 370
Part V
THE UNITED STATES REVENUE
SYSTEM 373
CHAPTER 17
THE PERSONAL INCOME TAX 374
Basic Structure 374
Defining Income 376
Items Included in H-S Income 376
Some Practical and Conceptual Problems 377
Evaluating the H-S Criterion 378
Excluded Forms of Money Income 379
Interest on State and Local Bonds 379
Some Dividends 380
Capital Gains 380
Employer Contributions to Benefit Plans 383
Some Types of Saving 383
Gifts and Inheritances 384
Exemptions and Deductions 384
Exemptions 384
Deductions 385
Impact on the Tax Base 391
Tax Expenditures 391
The Simplicity Issue 392
Rate Structure 392
Effective versus Statutory Rates 394
Taxes and Inflation 395
How Inflation Affects Taxes 396
Tax Indexing 397
The Alternative Minimum Tax 398
Choice of Unit and the Marriage Tax 399
Background 399
Analyzing the Marriage Tax 402
Treatment of International Income 403
State Income Taxes 404
Table of Contents xxi
Summary 405
Discussion Questions 405
CHAPTER 18
PERSONAL TAXATION
AND BEHAVIOR 407
Labor Supply 407
Theoretical Considerations 408
Some Caveats 411
Labor Supply and Tax Revenues 414
Saving 416
Empirical Evidence 421
Tax-Preferred Savings Accounts 422
Taxes and the Capital Shortage 423
Housing Decisions 424
Proposals for Change 425
Portfolio Composition 426
A Note on Politics and Elasticities 427
Summary 428
Discussion Questions 428
CHAPTER 19
THE CORPORATION TAX 430
Why Tax Corporations? 430
Structure 431
Employee Compensation Deducted 431
Interest, but Not Dividends, Deducted 431
Depreciation Deducted 432
Investment Tax Credit 434
Treatment of Dividends versus Retained
Earnings 434
Effective Tax Rate on Corporate Capital 435
Incidence and Excess Burden 435
A Tax on Corporate Capital 435
A Tax on Economic Profits 436
Effects on Behavior 437
Total Physical Investment 437
Types of Assets 440
Corporate Finance 440
State Corporation Taxes 443
Taxation of Multinational Corporations 443
Global versus Territorial Taxation 445
Corporation Tax Reform 446
Full Integration 447
Dividend Relief 448
xxii Table of Contents

Summary 449 Wealth Taxes 487

Discussion Questions 450 Estate and Gift Taxes 488
Rationales 488
CHAPTER 20 Provisions 490
DEFICIT FINANCE 452 Reforming Estate and Gift Taxes 493
How Big Is the Debt? 452 Prospects for Fundamental Tax Reform 494
Interpreting Deficit and Debt Numbers 453 Summary 494
Summing Up 456
Discussion Questions 495
The Burden of the Debt 456
One Hand Borrows from the Other 457
An Overlapping Generations Model 457
Part VI
MULTIGOVERNMENT PUBLIC
Neoclassical Model 459 FINANCE 497
Ricardian Model 461
Overview 461 CHAPTER 22
To Tax or to Borrow? 462 PUBLIC FINANCE IN A FEDERAL
Benefits-Received Principle 462 SYSTEM 498
Intergenerational Equity 462 Background 499
Efficiency Considerations 462 Community Formation 500
Deficits and Functional Finance 463 The Tiebout Model 501
Federal Debt and the Risk of a Fiscal Crisis 464 Tiebout’s Assumptions 502
Moral and Political Considerations 465 Tiebout and the Real World 504
Controlling the Deficit 465 Optimal Federalism 504
Overview 467 Disadvantages of a Decentralized System 505
Summary 468 Advantages of a Decentralized System 507
Discussion Questions 468 Implications 509
Public Education in a Federal System 510
CHAPTER 21 Property Tax 511
FUNDAMENTAL TAX REFORM: TAXES Incidence and Efficiency Effects 512
ON CONSUMPTION AND WEALTH 470 Why Do People Hate the Property Tax So
Efficiency and Equity of Personal Much? 517
Consumption Taxes 470 Intergovernmental Grants 518
Efficiency Issues 471
Types of Grants 520
Equity Issues 472
The Flypaper Effect 524
Retail Sales Tax 475 Overview 525
Rationalizations 476
Summary 525
Efficiency and Distributional Implications of State
Discussion Questions 526
Sales Taxes 477
A National Retail Sales Tax? 478
Value-Added Tax 479 APPENDIX:

Implementation Issues 480 SOME BASIC MICROECONOMICS 528

A VAT for the United States? 480
Hall-Rabushka Flat Tax 482 GLOSSARY 550

Cash-Flow Tax 483 REFERENCES 559

Income versus Consumption Taxation 484 NAME INDEX 573
Advantages of a Consumption Tax 484 SUBJECT INDEX 577
Disadvantages of a Consumption Tax 485
Problems with Both Systems 486
 Part One

GETTING STARTED

People’s political philosophies influence their views on the role of government.

Some people hold individual freedom as a top priority; others place more
emphasis on promoting the well-being of society as a whole. Philosophical
differences can and do lead to disagreements on the appropriate scope for
government economic activity.
However, forming intelligent opinions about public policy requires not only
a political philosophy but also an understanding of what government actually
does. Who has the legal power to conduct economic policy? What does
government spend money on, and how does it raise revenue? Chapter 1
discusses how political views affect attitudes toward public finance, and
outlines the operation of the US system of public finance. It provides a broad
framework for thinking about the details of the public finance system that are
discussed in subsequent chapters.
Chapters 2 and 3 present the analytical tools used by public finance
economists. Chapter 2 focuses on the tools of positive analysis, which deals
with statements of cause and effect. The question here is how economists try
to assess the impacts of various government policies. However, we want to
determine not only the effects of government policies, but whether or not they
produce results that are in some sense good. This is the role of normative
analysis, which requires an explicit ethical framework, because without one, it
is impossible to say what is good. Chapter 3 covers this ethical framework.

1
Chapter One
Introduction
Public Finance is nothing else than a sophisticated discussion of the relationship between the
individual and the state. There is no better school of training than public finance.
—former czech prime minister vaclav klaus

The year is 1030 bc. For decades, the Israelite tribes have been living without a
central government. The Bible records that the people have asked the prophet Samuel
to “make us a king to judge us like all the nations” [1 Samuel 8:5]. Samuel tries
to discourage the Israelites by describing what life will be like under a monarchy:
This will be the manner of the king that shall reign over you; he will take your sons, and
appoint them unto him, for his chariots, and to be his horsemen; and they shall run before
his chariots . . . And he will take your daughters to be perfumers, and to be cooks, and to be
bakers. And he will take your fields, and your vineyards, and your oliveyards, even the best of
them, and give them to his servants . . . He will take the tenth of your flocks; and ye shall be
his servants. And ye shall cry out in that day because of your king whom ye shall have chosen
[1 Samuel 8:11–18].

The Israelites are undeterred by this depressing scenario: “The people refused to
hearken unto the voice of Samuel; and they said: ‘Nay; but there shall be a king
over us; that we also may be like all the nations; and that our king may judge us,
and go out before us, and fight our battles’ ” [1 Samuel 8:19–20].
This biblical episode illustrates an age-old ambivalence about government. Gov-
ernment is a necessity—“all the nations” have it, after all—but at the same time it
has undesirable aspects. These mixed feelings toward government are inextricably
bound up with its taxing and spending activities. The king will provide things that
the people want (in this case, an army), but only at a cost. The resources for all
government expenditures ultimately must come from the private sector. As Samuel
so graphically explains, taxes can be burdensome.
Centuries have passed, mixed feelings about government remain, and much of the
public finance controversy still centers around its financial behavior. This book is about the taxing
and spending activities of government, a subject usually called public finance.
The field of economics This term is something of a misnomer because the fundamental issues are not
that analyzes government
taxation and spending. financial (that is, relating to money). Rather, the key problems relate to the use of
real resources. For this reason, some authors prefer the label public sector economics
or simply public economics.
public sector
economics We focus on the microeconomic functions of government—the way government
See public finance.
affects the allocation of resources and the distribution of income. Nowadays, the
macroeconomic roles of government—the use of taxing, spending, and monetary
policies to affect the overall level of unemployment and the price level—are usually
public economics taught in separate courses.
The boundaries of public finance are sometimes unclear. Some policy goals that
See public finance.
might be achieved by government spending or taxation can also be achieved by

2
Another random document with
no related content on Scribd:
 INDIA AND THE BOERS.
The Boers are a sober, industrious and most hospitable
body of peasantry.—Dr. Livingstone.

You heard that song of the Jubilee!

Ten thousand cannon took up the song,
Ten million people came out to see,
A surging, eager and anxious throng.
And the great were glad as glad could be;
Glad at Windsor, glad at Saint James,
Glad of glory and of storied names,
Generals, lords and gentlemen,
Such as we never may see again,
And ten thousand banners aflying!
But up the Thames and down the Thames
Bare, hungered babes lay crying,
Poor, homeless men sat sighing;
And far away, in fair Cathay,
An Eden land but yesterday,
Lay millions, starving, dying.

Prone India! All her storied gems—

Those stolen gems that decked the Crown
And glittered in those garment-hems,
That Jubilee in London town—
Were not, and all her walls were down,
Her plowshare eaten up with rust,
Her peaceful people prone in dust,
Her wells gone dry and drying.
You ask how came these things to be?
I turn you straight to historie;
To generals, lords and gentlemen
Who cut the dykes, blew down the walls
And plowed the land with cannon-balls,
Then sacked the ruined land and then—
Great London and the Jubilee,
With lying banners aflying.

Eight millions starved to death! You hear?[B]

You heard the song of that Jubilee,
And you might have heard, had you given ear,
My generals, lords and gentlemen,
From where the Ganges seeks the sea,
Such wails between the notes, I fear,
As you never had cared to hear again.
The dead heaped down in the dried-up wells,
The dead, like corn, in the fertile fields
You had plowed and crossed with your cannon wheels,
The dead in towns that were burning hells
Because the water was under your heels!
They thirsted! You drank at the Jubilee,
My generals, lords and gentlemen,
Drank as you hardly may come to when
The final account of your deeds may be.

Eight millions starved! Yet the Jubilee—

Why, never such glory since Solomon’s throne.
The world was glad that it came to see,
And the Saxon said, “Lo, the world is mine own!”
But mark you! That glittering great Crown stone,
And the thousand stars that dimmed in this sun,
Were stolen, were stolen every one,
Were stolen from those who starved and died!

Brave Boers, grim Boers, look to your guns!

They want your diamonds, these younger ones—
Young generals, lords and gentlemen—
Robbers to-day as they were robbers then.
Look to your guns! for a child can see
(Can your children see now for crying?)
That they want your gems! Ah, that Jubilee,
With those lying banners aflying!

[B] See report of Julian Hawthorne, sent by a

New York magazine to photograph and give
details of the starving in India, about the time of
the Jubilee. He does not give these figures, but
his facts and photographs warrant a fearful
estimate. As for the subjugation of India and the
wanton destruction, not only of life, but the very
means of life, this is history. And now, again, is
despoiled India starving,—starving, dying of
hunger as before; even more fearfully, even while
England is trying to despoil the Boers. And when
her speculators and politicians have beaten them
and despoiled them of their gold and diamonds
and herds, what then? Why, leave them to starve
as in India, or struggle on in the wilderness as
best they can.
AT THE CALEND’S CLOSE.
“For faith hath still an Olivet
And Love a Galilee.”

Two things: the triple great North Star,

To poise and keep His spheres in place,
And Zeus for peace: for peace the Tzar.
Or Science, Progress, Good or Grace,
These two the centum’s fruitage are;
And of the two this olive tree
Stands first, aye, first since Galilee.

Christ’s centum bends his frosted head;

Christ’s calend calls a solemn roll.
What shall be writ, what shall be said
Of Saxon when this blood-writ scroll
By God’s white light at last is read?
What of ye Saxon nations, ye
Who prate the Christ most noisily?

The eagle’s bent beak at the throat

Of Peace where far, fair islands lie:
The greedy lion sees a mote
In his brave, weaker brother’s eye
And crouches low, to gorge and gloat.
The Prince of Peace? Ye write his name
In blood, then dare to pray! For shame!

These Saxon lies on top of lies,

Ten millstones to the neck of us,
Forbid that we should lift our eyes
Till we dare meet that manlier Russ;
In peons for peace of paradise:
Forbid that we, until the day
We wash our hands, should dare to pray.
 AS IT IS WRITTEN.
The she wolf’s ruthless whelp that tare
Old Africa is dead and all
Despised; but Egypt still is fair,
Jugartha brave; and Hannibal
Still hero of the Alps and more
To-day than all red men of Rome.
Archimedes still holds his measured home;
Grim Marius his ruins as of yore,
And heart still turns to heart, as then.
Live by the sword and by the sword
Ye surely die: thus saith the Lord—
And die despised of men.
 TO OOM PAUL KRUGER.
ON HIS SEVENTY-FIFTH BIRTHDAY.

His shield a skin, his sword a prayer:

Seventy-five years old to-day!
Yet mailed young hosts are marshaling there
To hound down in his native lair—
Oom Paul Kruger, South Africa.

Mars! Ever was such shameless shame?

Christ’s calend calls the roll to-day,
Yet Christians write the sweet Christ’s name
In blood, and seek, with sword and flame—
Oom Paul Kruger, South Africa.

Stand firm, grim shepherd-hero, stand!

The world’s watchtowers teem to-day
With men who pray with lifted hand
For you and yours, old, simple, grand—
Oom Paul Kruger, South Africa.

God’s pity for the foolish few

Who guide great England’s hosts to-day!
They cannot make the false the true;
They can but turn true hearts to you—
Oom Paul Kruger, South Africa.

Or king or cowboy, steep or plain,

Or palace hall, where, what—to-day,
All, all, despite of place or gain,
Are with you, with you heart and brain—
Oom Paul Kruger, South Africa.
Brave England’s bravest, best, her Fair,
Who love fair play, are yours to-day.
And oh, the heart, the hope, the prayer—
The world is with you over there—
Oom Paul Kruger, South Africa.
USLAND[C] TO THE BOERS.

And where lies Usland, Land of Us?

Where Freedom lives, there Usland lies!
Fling down that map and measure thus
Or argent seas or sapphire skies:
To north the North Pole, south as far
As ever eagle cleaved his way;
To east the blazing morning star,
And west? West to the Judgment Day!

No borrowed lion, rampt in gold;

No bleeding Erin, plaintive strains;
No starving millions, mute and cold;
No plundered India, prone in chains;
No peaceful farmer, forced to fly
Or draw his plowshare from the sod,
And, fighting, one to fifty, die
For freedom, fireside and God.

Fear not, brave, freeborn, voiceless Boers.

Great Usland’s heart is yours to-day.
Aye, England’s heart of hearts is yours,
Whatever scheming men may say.
Her scheming men have mines to sell,
And we? Why, meat and corn and wheat.
But, Boers, all brave hearts wish you well;
For England’s triumph means defeat.

[C] It is a waste of ink and energy to write “United

States of America” always. All our property is
marked Us. Then why not Usland? And why
should we always say American? The Canadian,
the Mexican, the Brazilian and so on are as
entirely entitled to the name American as we.
Why not say Usman, as Frenchman, German,
and so on?
 THAT USSIAN OF USLAND.
Anent the boundary line—“Lest we forget, lest we forget.”

“I am an Ussian true,” he said;

“Keep off the grass there, Mister Bull!
For if you don’t I’ll bang your head
And bang your belly-full.

“Now mark, my burly jingo-man,

So prone to muss and fuss and cuss,
I am an Ussian, spick and span,
From out the land of Us!”

The stout man smole a frosty smile—

“An Ussian! Russian, Rusk, or Russ?”
“No, no! an Ussian, every while;
My land the land of Us.”

“Aw! Usland, Uitland? or, maybe,

Some Venezuela I’d forgot.
Hand out your map and let me see
Where Usland is and what.”

The lank man leaned and spread his map

And shewed the land and shewed,
Then eyed and eyed that paunchy chap,
And pulled his chin and chewed.

“What do you want?” A face grew red,

And red chop whiskers redder grew.
“I want the earth,” the Ussian said,
“And all Alaska, too.
“My stars swim up yon seas of blue;
No Shind am I, Boer, Turk or Russ.
I am an Ussian—Ussian true;
My land the land of Us.

“My triple North Star lights me on,

My Southern Cross leads ever thus;
My sun scarce sets till burst of dawn.
Hands off the Land of Us!”
FIGHT A BOY OF YOUR SIZE.

Back, far back in that backwood’s school

Of Lincoln, Grant and the great we prize
We boys would fight, but we had one rule—
You must fight a boy of your size.

Or white boy or brown, aye, Boer no doubt,

Whatever the quarrel, whatever the prize
You must stand up fair and so fight it out
With a boy somewhat your size.

But a big boy spoiled so for fights, he did,

He lied most diplomatic-like-lies
And he fought such fights—ye gods forbid—
But never a boy of his size.

He skinned and he tanned, kept hide, kept hair,

Now I am speaking figure-wise—
But he didn’t care who and he didn’t care where
Just so he was under size.

Then the big boy cried, “A big chief am I,

I was born to bang and to civilize,
And yet sometimes I, in my pride I sigh
For something about my size.”

Then the good Schoolmaster he reached a hand

And across his knee he did flop crosswise
That bully, and raise in his good right hand
A board of considerable size.

And the good Schoolmaster he smote that chief,

 He smote both hips and he smote both thighs;
And he said as he smote, “It is my belief
This board is about your size.”

Beware the bully, of his words beware,

His triangular lips are a nest of lies,
For he never did dare and he never will dare,
To bang a boy of his size.
 MILLER, C. H. (Joaquin)
(The Poet of the Sierras)
Complete Poetical Works
In One Volume
This volume completes the life work of this “Sweet Singer by
the Sunset Sea.” In it are included all the best poems
formerly published under the following titles: “Songs of the
Sierras”—“Songs of Sunland”—“Songs of
Summerlands”—“Songs of Italy”—“Songs of the Mexican
Seas”—“Classic Shades”—“Songs of the Soul”—“Olive
Leaves”—“Joaquin,” and others. The book contains 330
pages of double column matter, printed from new type on
laid paper. Each of the longer poems is followed by
extensive foot notes written by the poet himself, also a
most interesting, reminiscent preface and appendix
narrating incidents and scenes in his eventful life, never
published before. It has several illustrations showing the
poet at different ages, also a beautiful scene from his
present home on “The Hights.”

PRICE.

Beautifully Bound in Silk Cloth, side and back stamp $2

in gilt, gilt top 50
Gift Edition, bound in three-quarter Levant 4 50
Limited Autograph Edition, bound in full Morocco 7 50
 WHAT TWO GREAT POPULAR POETS SAY:
Edwin Arnold recently said: “Joaquin Miller is one of the
two greatest American poets.”
James Whitcomb Riley said of Joaquin Miller’s singing: “It
is the truest American voice that has yet thrilled the
echoes of our wild, free land, and awakened the
admiration and acclaim of the Old World. No marvel that
our Country is proud of this proud child of hers, who in all
lands has sung her dawning glory and his own changeless
loyalty to her.”

Songs of the Soul

This volume contains this well known poet’s latest, and as
pronounced by all critics, best poetic productions. The
longest poem, entitled “Sappho and Phaon,” occupies
seventy-three pages of the book, and is destined to
become a classic. Besides this there are several of his
older and most popular poems, such as “Columbus,”
“Passing of Tennyson,” “Sunset and Dawn at San Diego,”
etc., making a 12 mo. volume of 163 pages, with author’s
latest portrait.

PRICE.

Bound in Fine Silk Cloth, design on cover, Library $1

Edition 00
Author’s Autograph Gift Edition, bound in full
3 50
padded Leather
Paper Edition, printed in Gilt 25
“If Joaquin Miller had written nothing else, this one poem
(Sappho and Phaon) would make a place for him among
immortals.”—The Wave.
The Critic, in a recent article, places him among the
world’s greatest poets.
The London Athenæum gives “Columbus” first place
among all the poems written by Americans as to power,
workmanship and feeling.
 TRANSCRIBER’S NOTES:
Inconsistencies in hyphenation have been
standardized.
Archaic or variant spelling has been retained.
The Table of Contents was created by the transcriber
for the convenience of the reader and is granted to the
public domain.
*** END OF THE PROJECT GUTENBERG EBOOK CHANTS FOR
THE BOER ***

Updated editions will replace the previous one—the old editions

will be renamed.

Creating the works from print editions not protected by U.S.

copyright law means that no one owns a United States copyright
in these works, so the Foundation (and you!) can copy and
distribute it in the United States without permission and without
paying copyright royalties. Special rules, set forth in the General
Terms of Use part of this license, apply to copying and
distributing Project Gutenberg™ electronic works to protect the
PROJECT GUTENBERG™ concept and trademark. Project
Gutenberg is a registered trademark, and may not be used if
you charge for an eBook, except by following the terms of the
trademark license, including paying royalties for use of the
Project Gutenberg trademark. If you do not charge anything for
copies of this eBook, complying with the trademark license is
very easy. You may use this eBook for nearly any purpose such
as creation of derivative works, reports, performances and
research. Project Gutenberg eBooks may be modified and
printed and given away—you may do practically ANYTHING in
the United States with eBooks not protected by U.S. copyright
law. Redistribution is subject to the trademark license, especially
commercial redistribution.

START: FULL LICENSE

THE FULL PROJECT GUTENBERG LICENSE