Contents

Preface .
• • • • • • • V

. PART ONE. STATEMENT OF ISSUES

Chapter 1. A Multiple Theory of the Public Household
I • 3
A. INTRODUCTION .
3
The~ri~s of Public Economy. · Three. Objective~ of B~dg~t Polic~.
B. THE ALLOCATION BRANCH .
6
Sit~ations Calling for · Adj.ust~e~ts in Allo.cation." &ci~l Wa~ts. Merit
Wants. · Prov~ding for the Satisfaction of Public Wants; The Function of
Expenditures and Taxes in the Allocation Branch. Requirement of Balance
in the Budget.
C. THE DISTRIBUTION BRANCH . . . . . . . . . 17
·. The Tax-Transfer Process of the Distribution Branch. The "Proper" State·
of Distribution. Relation to Taxation in the Allocation Branch. ,
D. THE STABILIZATION BRANCH . . . . . . . 22
Underlying Principles. Nature of the Budget Plan. Monetary and Debt
Policy. ·
Chapter 2. lnterdependenc,e and Consolidation of Subbudgets .' 28
28
A. ILLUSTRATION OF A HYPOTHETICAL BUDGET.
32
B. A SIMPLE ' MODEL . . ' . . . . . . . . . . . 'I:
The Subbudgets. Consolidation. Some Complications. ,'
E ND FISCAL POLITICS . .· . . . . ' . . . . . 37
C. F1sc~L F~ICIENC~ A s and the Allocation Branch.. Compensatory
st
Compensatory AdJu m_ent_b f Branch Distributional Considerations
Adjustments and the Distr1 u ion ·
and the Allocation Branch.
42
Chapter 3. Problems of Implementation
. . 42
A. PUBLIC PRODUCTION . . G d8 Public Production as an Alternai_ive
·
Separation of I ssues. Public oo •
to Public Control.
· B. PUBLIC MARKETING . · . . ,
. . . . • I •
46
Public Purchases. Public Sales,
xi
 ..
XU CONTENTS
C. RESPONSE OF THE PRIVATE SECTOR TO -BUDGET POLI~Y , • • 49
Implementation of the Desired End Result. Budget Policies as Exogenous
Disturbances . . Taxable Capacity versus Optimal Budget. Gains and
Losses from Bu'dget Policy. A Simple Model of the Optimal Budget.

PART TWO. THE SATISFACTION .OF PUBLib wANTS

~ hapter 4. The Benefit Approach . . . . . . l ... . .:··. 61
A. BACKGROUND. , 61
Two Major Approaches. General Setting. . The Classical Version.
B, RENAISSANCE OF THE BENEFIT APPROACH . 68
l
I .,,,---- Early Views. Wicksell. De Viti de Marco.
( C. TH]jl VOLUNTARY-EXCHANGE APPROACH . . .
- T he Liodab) Sa)utiau Appraisal in Terms of Partial Equilibrium.
~ statement io 'Ionas gf G ~ m : i u m.
- \ . \__THE SUBJECTIVE BASIS OF SOCIAL wANTS . • 86
\/Chapter 6. The Ability-to-pay Approach 90
' A. CONCEPTS OF ABILITY TO PAY. 91
General Setting. Index of Ability to Pay. Concept~ of Equal Sacrifice.
B. TAX FORMULAS UNDER VARIOUS CONCEPTS OF EQUAL SACRIFICE. 98
Formulas with Known and ,ldentical Utility Schedules. The Hypothesis of
Declining Marginal Income Utility. Formulas -with Known but Different
Utility Schedules. Formul~s with Known .but Unassigned Utility Sched-
ules. J;)oubtful Nature of Interpersonal, Utility Co~parisons.
c.~BuDGET D]i::TERMINATION As A WEl.,fARE PLAN. . . . . 110
_ Equal Marginal Sacrifice as the Ultimate Principle of Taxation. The Social-
welfare Principie of Taxation. The Maxim-g.m-weliare Principle of Budget
Determination.

·Chapter ·6. Budget Determination thr~ugh Voting. 116

A. NATURE OF THE PROBLEM. 116
B. MMORITY RULE. 119
The General Case. Types of Budget Choice. Single-service Budget: Tax
with Fixed Shares Given, Size of Budget to Be Determined. Single-service
Budget: Tax with Variable and Continuous Shares Given, Size of Budget to
Be Determined: -.. Single-service Budget: Tax, with Variable and·Reversing
Shares Given, Size of Budget to Be Determined. ,- Single-service Budget:
Size and Tax with Fixed Shares to Be Determined. Multiple-service
Budget: Size and Fixed Tax Given, Composition to Be Determined.
Evalqation.
C.- OTHER ORDERINGS . . . . . . . . . . . 127
Wicksell's System a( Qualified ,Majority. Plurality Rule. Point Voting.
D. STRATEGY. . . I
131
Central 'Finance. AS~eci~l P~obiem. of ·Lo~al Fin~nc~. ·
~! SUMMARY.
133

j chapter 7~ . Further Problems in Efficie~cy. 136

A. SUBSIDY-TAX POLICY FOR DECREASING-COST INDUSTRIES
136
140
B. COLLATERAL BENEFITS AI\JD COSTS
140
C. AVOIDANCE OF EXCESS BURDE~
 CONTENTS Xlll

Fix~d Su~ply of Work Effort and Saving. Multiple-excise System. Imper-

fect~ons m t~e Market. Variable Supply of Effort. Variable Supply of
Savmg. Variable Supply of Effort and of Saving. Progression and Other
Complications.
D. EXCESS BURDEN AND REQUIRED YIELD . . • , 155
E. THE RELATION OF NEUTRALITY .AND EQUITY 157

vthapter 8. Equal Treatment of Equals. 160

A. THE INDEX OF EQUAL:::TY . . . . . . . • . 161
Consumption versus Income. The Concept of Income. The Tax-paying
Unit. Deductions for Merit Wants.
B. THE COMPOSITION OF TH E TAX STRUCTURE . 173
0

Tax Structure and Horizontal Equity. ·Benefit Taxation. Regulatory

Taxation.
C. MULTILEVEL FINANCE. • . . . . . . . 179
Pure Federalism. Horizontal Equity in Comhined Budgets. Assurance of
a Minimum 1ievel of Public Services.

Chapter 9. Budget Items in the Social Accounts 184

A. BUDGET lTEMS"'IN THE NET NATIONAL PRonuc·r 184
Final Expenditures. Interm~diate Expenditures. Remedial Expenditures.
Capital Outlays and Public Assets. Transfer Payments. Receipts. Prof-
its and Losses of Public Enterprise.
B. BUDGET ITEMS IN NATIONAL INCOME. 195
Public Expenditures. Tax Receipts.
C. DISPOSABLE AND PERSONAL INCOME . •' 199

PART THREE. ADJUSTMENTS TO BUDGET POLICY:

CLASSICAL ASPECTS
-~apter 10. Incidence and putput Effects of Budget Policy . 205
rA. ECONOMIC CONSEQUENCES OF Bun.GET POLICY . . . . . 206
Total versus Partial Effects. Ma3or Aspects of Change. Ad3ustment over
Time. Other Disturbances Allowed For. /
B. TYPES OF BUDGET ADJUSTMENT AND CONCEPTS OF INCIDENCE . ; 211
Changes in Tax Policy. Changes in Expenditure Policy~- Changes in Tax
and Expenditure Policy. Concepts of Incidence in the Corripensatorr
System.
_,,,c. A MEASURE oF INCIDENCE. _ 211
Measure of Change in Real Income of Individual. Some Complication~.
Individual Income before and after Change. A Global Measure of Inci-
dence. Incidence and Output Effects.
D. OTHER CONCEPTS OF INCIDENCE AND SmFTING. 227
Concept of Incidence. Concepts of Shifting.

Chapter 11. Adjustments in Work Effort . 232

A. A PROPORTIONAL TAX ON WORK INCOME it 232

The Formal Argument. Secular Evidence. Spite Effect.
B. A PROGRESSIVE TAX ON wORK INCOME " 241
Adjustment by Individual. Adjustment by Group. ,
C . INCOME TAXES WITH CAPITAI. lNCOc\{E ' 24~
 xiv I'
CONTENTS

Adjustment by lndividual. Adjus't ment by Group. Succession Duties.

Corporation lncori1e Tax.
D. TAXES ON CONSUMPTION . . .
General l'ax on Consumption. Partial Tax on Consumption. 249
E. PUBLIC EXPENDITURES .

,Transfer Payments. Goods and Service Expenditures. Combined Tax.and 251

Expenditure Effects·. Significance of Changes in Work Effort.

Chapter 12. Adjustments in Consumption and Saving

I
A. ADJUSTMENTS IN THE COMPOSITION OF CONSUMPTION . . 257
B. ADJUSTMENT IN CONSUMPTION AND SAVING BY INDIVIDUAL . . . . . 257
Saving for Consumption Only: Standard Case. Saving for Consumption 259
Only : SP,ecial Cases. · Saving for Consumption and Accumulation. ·
C. ADJUSTMENTS IN. CONSUMPTION AND SAVING BY GROUP
Income Effects. Substitution Effects. 268
D. EFFECTS OF PUBLIC EXPENDITURES . •
Transfer Payments. Goods and Service Expenditures. 272
•
Chapt~r 13. Adjustments in Price and Output. 276
A. TAX ·ON ~ET INCOME . 276
Possible Types of Adjustment.
Conclusions. The Traditional ~rgument. Qualifications.

B. TAXES ON UNIT OF OUTPUT AND GROSS INCOME 287

Diagrammatic View. Algebraic Treatment with, Linear Functio,ns: Unit
':Dax. Algebraic Treatment with Linear Functions: Ad Valorem Tax. The
Genera.I Case: Unit Tax. The G~neral Case: Ad Valorem Taix. Monopo-·
listic Competition. Special Cases. Comparison of Unit and Ad Valorem
Taxes of Equal Yield. ·· ·
C. T AXES ON COST PAYMENTS. . · 306
Ad·Valorem Tax on Total Uni.t c_ost. Ad' Valorem Tax on: Variable Cost . .·
Ad Valorem Tax on Fixed Cost. Partial Taxes on Selected Factors.
. ' '
I'

Chapter 14. Adjustments µi Inves~ment 312

A. ADJUSTMENTS IN FINANCIAL'JNVESTMENT 312
Inve~tment Choice in Absence of Tax. Taxation without Loss Offset. Tax-
aticin ' with Full Loss Offset. ' The Size of the Portfolio. Tax on Capital.
Qualifications. T-he ·Supply of Funds. Changes in the Price Level.
Expenditure Effects. .
B. RE.A:r; INVESTME,NT AND DEPRECIATION 336
Significance of Depreciation. Depreciation Policy in a Neutral Profit~ Tax. ·
Tax Treatment of I nterest Cost. An Alternative Framework.

Chapter 16. lnci<tence in the All-consumption Model.

./ .
I
347
A. RELATIONSHIP BETWEEN GENERAL AND DISCRIMINATORY TAXES.
. 348
General versus Discri~ inatory Taxes. The Equivalence of General Taxes.
Equivalent Sets of D~·Qriminatory Taxes. Distributional Equivalence.
B. THE INCIDENCE OF G FJ?i,ERAi AND Dzi;;CRIMINATORY TAXES .
355
The Incidence Qf 'a General Tax. Simple Discrimin~tion in Products.
Simple Discrimination in Facto~s. Market Imperfections.
,..
(
,, .
I '•
 ',·'

CONTENTS xv
f C. ADJUSTMENTS IN ABSOLUTE PRICES , . ,, . . ' 364
Monetary ·Considerations. Adjustment to General Taxes. Adjustment to
Discriminatory Taxes. Alternative Monetary Assµmptions '. . ,

·Chapter 16. Incidence in the Capital-formation Model , 372

A: EFFECTS ON GROWTH AND FACTOR SHARES . . . . 372
B. DIFFERENTIAL INCIDENCE WITHOUT GROWTH'EFFECTS. 374
Comparison of Income Taxes and Product Taxes. Equivale~ce' between
Taxes. Incidence of Sales Tax on Consumer Goods.
C. DISCRIMI.NATORY INCOME TAX AND CAPITALIZATION 382
D. HISTORICAL REVIEW 385
Ricardo. Wicksell. Walras.

PART FOUR. COMPENSATORY FINANCE

Chapter 17. Income Determination and the Theory of Stabilization . ' . '· 405
A. OBJECTIVES . . . 406
B. THE STRUCTURE oF INCOME DETERMINATION AND THE RoLE oF MoNETARY
AND FISCAL POLICY . . . . . . . . . ., ; 1 , I' : • 4;01,
The Classical System. The Keynesian Sy~tem. Mixed· Systems ,without
Wealth Effects on Consumption. Wealth Effects ori Consumption Allowed
for. Conclusions. ·" · : '· ·· · . ··· .
C. CHANGES IN PRICE LEVEL AND EMPLOYMENT . ·,· . . . . '. ' i . '. . 423
Rising Prices belo;w Full E~ployment. Inftatiop by . Monopolistic
11
'Groups.
A Note on Money in the Classical System. , · ' ·, _ •• : ,,,

Chapter '18. -compensatory Ffua~ce ·: Consun'tption ~spects· . 429

,,, !1 \ ' •

A ALTERNATIVE BUDGET ADJUSTMENTS TO RAISE :EMPLOYMENT. · 429

· Budget Adjustments with Lump-s~nn/ T~x·~ 'Budge_t , Adjustments '.with , ·,,.
Income Tax. Income Leverage a11.d ;B~dget.t ry B,alanc~.. Differ~nces ,in
Propensity t~ 'C onsume Allo~~d'Jf?r. : Il~~s.trat~oh o(_ Alternativ~ .P ~licies.
Differences µi Types of Pubhc Ex1;>e:q~1tures. - ,. . _ . , ., , , ._ ,
B. ALTERNATIVE BUDGET ADJUSTMENTS TO CHECK· INFLATION . . , \'t • •_, . , . · ·445
Increase in Autonomous Expenditures. focreas~ in, Margi11;~J;f~op~~~it~1 to ,
Consume. . · . ,, ,, 1·

C. THE RoLE OF MoNEY ILLUSION,. •, . , , ,. . . 1•, •• • , ,, • • 447

Effectiveness of Restriction by Consumption • Tax. Expr
, .
n11 ~p,1 ,, n of Bala~ced
Budget _a t Full Employment. Open Inflation. _ l:fl :•
•l ~~-41

. • '. ,iit~:t Ip I '

Chapter 19, Compensatory Finance: ~nvestment Aspectf· ;/ ;1•i::'· • 456

A. PROFITABILITY EFFECTS . · , , , , , · ';ii'. ,: ,,; ', ; , I . . . . • . ' 456
Role of Transaction Drain. ·· Effects on ·L and I lfMh~tio'mi: }i'.irst Approxi- 1

mation. Effects on Land I Functiqns: Second A'p,roximation.

B. EFFECTS ON THE SUPPLY OF FUNDS . 4Q2
C. ALTERNA~IVE METHODS RECONSIDEnED. r,~ • 464 ,,t'
1 /ft
Availability Effects. Profitability Effects. · ;!i,1? 1" '' 1)1'
D. CHECKING INFLATION . , , • . • • 1, • 1 · • • ,. '-,i'~ir•. ,.
. , , 467
.d

High Taxes as a Cause of C11,pital Shortage., i,Bigh ·Taxes as a Cause of

Spending. Cost:.push Inflation. I .h,, ';
'H

q/\:() .f'
,. i I.
I I -~ ' ,

I
 XVI
.
CONTENTS
Chapter 20. Fiscal Dynamics and Growth 472
A. DYNAMIC MODELS WI'l'H STATIONARY EQUILIBRIUM: INVESTMENT AS A
FUNCTIO~ OF LEVEL OF INCOME . 473
System without Budget. Budget with Fixed Expenditures and Tax Yield.
Budget with Expenditure and Tax Rates as Parameters. Budget with Fixed
Expenditures and Tax Parameters. Pump Priming.
B . DYNAMIC MODELS WITH STATIONARY EQUILIBRIUM: INVESTMENT AS A
FUNCTION OF CHANGE IN INCOME. 480
Income Determination in Absence of'Budget. Budget with Fixed Expendi-
tures and Tax Yield. Budget with Expenditure and Tax Rates as Param-
eters. Budget with Fixed Expenditures and Tax Parameters.
C. BUDGET POLICY AND GROWTH 483
Determination of Required Rate. Balanced Growth in the Classical
Setting. Balanced Growth with a Fixed Rate of Growth in Private Invest-
ment. Balanced Growth with Investment a Function of the Level of Past
Income. Adjustments in Tax Structure. System with Accelerator Func-
tion. Unemployment, Inflation, and Capital Shortage. Secular Stagnation
and Inflation.

Chapter 21. Further Problems in Compensatory Finance. 501

A. PROBLEMS OF TIMING AND FLEXIBILITY . 501
Recognition of the Need for Policy Changes. Speed of Policy Initiation.
Time Lag in Effectiveness of Policy. Determinants of Built-in Flexibility.
A Measure of Built-in Flexibility. Quantitative Appraisal. Formula
Flexibility. Rules versus Discretion.
B. NEUTRALITY OF STABILIZATION POLICY • 517
Countercyclical Adjustments of Public Services. Light versus Heavy
Taxes. Taxation and Fiscal Discipline. ·

Chapter 22. Liquidity Aspects of Fiscal Policy. 526

A. FISCAL OPERATION~ AND CHANGES .IN THE STRUCTURE OF CLAIMS 526
Effects of Budget Policies on the Structure of Claims. Distinctions between
Fiscal and Liquidity Policies. Preliminary Conclusions. Fractional-
reserve Banking.
B. WEALTH EFFECTS ON CONSUMPTION . 533
Consumption as a Function of Income and Wealth. New-money Finance.
Debt Finance. Mixed Money and Debt Finance.
C. CLAIMS EFFECTS ON INVESTMENT. 540
New-money Finance. Debt Finance.
D. CONSUMPTION AND INVESTMENT EFFECTS COMBINED 54g
New-money Finance. Debt Finance.
E. LIQUIDITY STRUCTURE AND GROWTH . 550
Claim Effects in the Growth Model: Effects on Required Rate, Claim
Effects in the Growth Model: Effects on Expenditure Rate. The Efficient
Rate of Growth.

Chapter 23. Classical Theory of Public Debt

556
556
A. INTERNAL DEBT IN THE CLASSICAL SYSTEM.
Pay-as-you-use Finance. Intergeneration Equity. Old-age Insuran~e.
Loan Fin.a nce to Adjust Distribution. Loan Finance to Reduce Tax Frie-
 CONTENTS xvii
tion. Loan Finance of Self-liquidating Projects. The Capital-formation
Approa.eh.
571
B. INTERNAL DEBT IN THE COMPENSATORY SYSTEM
Fixed-investment Model. Mixed System.
575
C. EXTERNAL DEBT
Local Finance. National Finance. Conclusion on Concepts of Balance.
577
D. THE BURDEN OF DEBT. . .
Wasteful Use of Foreign Loans. I n t eres t as Soc1a
· l Cos t . .T ax F ric
· t·,ion.
581
Chapter 24. Compensatory Aspects of Debt Policy
581
A. THE PURCHASE OF ILLIQUIDITY
Criteria of Policy. Types of Debt Instruments. Differences between
Lenders. Continuity of Debt Policy. 590
B. THE TERM STRUCTURE OF RATES.
Rate Structure with Certainty and Uniform Market Outlook. Rate Struc-
ture with Certainty and Diverse ·Market Outlook. Rate Structure with
Uncertainty. Institutional Factors. 599
C. THE OPTIMAL MATURITY STRUCTURE.
The Classical Case for Funding. Effects of Changes in Debt Structure on
the Level of Investment. - Effects of Given Debt Structure on the Vari-
ability of Investment. Effects of Debt Structure on Level and Variability
of Consumption. Changes iD: Debt Structure and Their Timing. 611
D. THE INCIDENCE OF STABILIZATION PoLICY
Fiscal versus Monetary Restriction.
617
Name Index.
621
Subject Index