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Transcript of 1 The Public Sector Economics for Today by Irvin Tucker, 6 th edition ©2009 South-Western College...
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1
The Public Sector
Economics for Today by Irvin Tucker, 6th edition©2009 South-Western College Publishing
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What will I learn in this chapter?
What decisions public-sector politicians, government bureaucrats, voters, and special interest groups make
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What puzzles will I learn to solve?
How does the tax burden in the U.S. compare to other countries?
How does the Social Security tax favor the upper-income worker?
Should we replace the income tax with a national sales tax?
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What about the size of government?
Since the 1950’s, government expenditures have grown from about one-quarter to over one third of GDP
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5
10
5%10%
15%
20%
25%30%
35%
40%
45%50%
Total government expenditures
45 50 55 60 65 70 75 80 85 90 95 00 05
Government Expenditures 1940 - 2006
State & Local Gov. Expenditures
Federal government expenditures
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1970 Federal OutlaysOther
International affairs
Veteran's benefits
Agriculture
Transportation
Education and health
Interest on federal debt
National defense
Income security
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2006 Federal ExpenditursOther
International affairs
Veteran's benefits
Agriculture
Transportation
Education and health
Interest on federal debt
National defense
Income security
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1970 State & Local Outlays Other
Civilian safety
Highways
Health & hospitals
Income security
Education
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2006 State & Local Expenditures Other
Civilian safety
Highways
Health & hospitals
Public Welfare
Education
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How do taxes in the U.S. compare to taxes
in other countries?U.S. citizens are among the most lightly taxed people in the industrialized world
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GermanyItaly U.K. U.S.Canada JapanSweden
20
40
60
80
100
France
56%54%
50%
45% 40%
46%
36%34%
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Federal Receipts 2006Other
Excise taxes
Corporate income taxes
Social insurance taxes
Individual income taxes
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State & Local Receipts 2006 Other
Corporate income taxes
Individual income taxes
Property taxes
State sales tax
Federal Grants
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GermanyItaly U.K. U.S.Canada JapanSweden
20
40
60
80
100
France
59%
51%45%
42% 41%44%
32% 32%
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05 1045 50 55 60 65 70 75 80 85 90 95 00
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Total government taxes
Federal government taxes
Growth in Taxes in the U.S., 1935 - 2006
State & Local Gov. Taxes
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What are two types of taxes?Benefits receivedAbility to pay
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What is the benefits received principle?
Those who benefit from government expenditures should pay the taxes that finance their benefits
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What is the ability to pay principle?
Those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of the benefits
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Which principle dominates in the U.S.?
The ability-to-pay principle dominates the benefits-received principle
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What is aprogressive tax?
A tax that charges a higher percentage of income as income rises
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What is theaverage tax rate?
Total tax due divided by total taxable income
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What is themarginal tax rate?
The change in taxes due divided by the change in taxable income
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What is aregressive tax?
A tax that charges a lower percentage of income as income rises
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What is aproportional tax?
A tax that charges the same percentage of income, regardless of the size of income
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What is a flat rate tax?Same as a proportional tax
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319,100
5%
10%
15%
20%
25%
30%
35%
Federal government taxes
145,76070,36029,0507,150
10%
15%
25%
28%
35%33%
17% Flat-rate tax
The Progressive Income Tax versus a Flat Tax
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What ispublic choice theory?
The analysis of the government decision-making process to allocate resources
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Who isJames Buchanan?
The founder of public choice theory which applies economic analysis to politics
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What is thebenefit - cost analysis?
The comparison of the additional rewards and costs of an economic alternative
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What is the basic rule of benefit-cost
analysis?A firm will produce additional units as long as marginal benefit exceeds the marginal cost
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Why might government be inefficient in solving
society’s problems?• Majority rule problem• Special interest effect• Rationale ignorance• Bureaucratic inefficiency• Shortsightedness effect
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What is themajority rule problem?Voting can lead to a rejection of projects with marginal total benefits exceeding the marginal cost
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Can majority rule lead to inefficient solutions?
Yes, “one person one vote” cannot measure the intensity of voters’ preferences as well as the market
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What is the special-interest group effect?Special-interest groups can create government support for programs with costs out-weighing their benefits
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Why can special-interest voting be
inefficient?A small group within the society can benefit while the whole society pays the costs
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What isrational ignorance?
The voters choose to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it
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What is bureaucratic inefficiency?
The bureaucracy may become more powerful than elected officials
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What is the shortsightedness effect?
Democracy has a bias toward programs offering clear benefits and hidden costs
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END