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Chapter 16 Public Sector. Survey of Economics Irvin B. Tucker. Lecture Slides. What will I learn in this chapter?.

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chapter 16 public sector

Chapter 16Public Sector

Survey of EconomicsIrvin B. Tucker

Lecture Slides

what will i learn in this chapter
What will I learn in this chapter?

The practice of fiscal policy, including the facts of government expenditures and taxation. The final section examines the decision making of politicians, government bureaucrats, voters, and special-interest groups.

what is the difference between government spending g and government expenditures
What is the difference between government spending (G) and government expenditures?

Government spending (G) does not include transfer payments, but government expenditures or outlays does.

what is the size and growth of government expenditures
What is the size and growth of government expenditures?

Since 1929, total government expenditures have grown from about 10 percent of GDP to about 40 percent of GDP.

4

slide5

Exhibit 16.1 The Growth of Government Expenditures as a Percentage of GDP in the United States, 1929-2010

50

45

Total Government Expenditures

40

35

Government Expenditures as a percentage of GDP

30

State and Local Government Expenditures

25

20

15

Federal Government Expenditures

10

5

0

`29 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `20 `05 `10

Year

5

what is the dominant trend in federal government spending between 1970 and today
What is the dominant trend in federal government spending between 1970 and today?

Since 1970, a category called “income security” that includes transfer payments has become about one half of government expenditures.

6

slide7

1970 Expenditures

Exhibit 16.2 Federal Government Expenditures, 1970 and 2010

Education and Health 11%

Net Interest

Income Security 22%

9%

Transportation 5%

Agriculture 3%

Veterans Benefits 5%

National Defense 40%

International Affairs 2%

Other 3%

2010 Expenditures

Net Interest 6%

Education and Health 15%

Veterans Benefits 3%

National Defense 20%

Transportation 3%

International Affairs 1%

Agriculture 1%

Income Security 51%

how does federal government expenditures in the u s compare to expenditures in other countries
How does federal government expenditures in the U.S. compare to expenditures in other countries?

The U.S. government spends a lower percentage of GDP than other industrial countries

exhibit 16 3 government expenditures in industrial countries 2010
Exhibit 16.3 Government Expenditures in Industrial Countries, 2010

56%

55%

52%

52%

48%

44%

42%

39%

37%

Expenditures as a percentage of GDP

United Kingdom

United States

Germany

Australia

France

Japan

Sweden

Italy

Canada

what are the largest sources of revenue for the federal government
What are the largest sources of revenue for the federal government?

The largest source is individual income taxes and the second largest is social insurance taxes

10

slide11

Exhibit 16.4 Federal Government Receipts, 2010

Corporate Income Taxes 9%

Other 6%

Excise Taxes 3%

Social Insurance Taxes 40%

Individual Income Taxes 42%

how do taxes in the u s compare to taxes in other countries
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

12

exhibit 16 5 the tax burden in selected countries 2010
Exhibit 16.5 The Tax Burden in Selected Countries, 2010

55%

54%

47%

44%

40%

39%

34%

34%

Taxes as a percentage of GDP

29%

Sweden

Denmark

France

United Kingdom

Canada

Australia

Japan

Germany

United States

what is the size and growth of total government taxes
What is the size and growth of total government taxes?

Since 1929, total government taxes have grown from 11 percent to about 30 percent of GDP.

14

slide15

Exhibit 16.6 The Growth of Taxes as a Percentage of GDP in the U.S., 1929-2010

50

45

40

Total Government Taxes

35

Taxes as a percentage of GDP

30

25

State and Government Taxes

20

15

10

Federal Government Taxes

5

0

`29 `35 `40 `45 `50 `55 `60 `65 `70 `75 `80 `85 `90 `95 `20 `05 `10

Year

15

what are two basic principles of taxes
What are two basic principles of taxes?

Benefits-received

Ability-to-pay

what is the benefits received principle
What is the benefits-received principle?

Those who benefit from government expenditures should pay the taxes that finance their benefits

what is the ability to pay principle
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

which principle dominates in the u s
Which principle dominates in the U.S.?

The ability-to-pay principle dominates the benefits-received principle

what is a progressive tax
What is aprogressive tax?

A tax that charges a higher percentage of income as income rises

what is the average tax rate
What is theaverage tax rate?

Total tax due divided by total taxable income

what is the marginal tax rate
What is themarginal tax rate?

The change in taxes due divided by the change in taxable income

what is a regressive tax
What is aregressive tax?

A tax that charges a lower percentage of income as income rises

what is a proportional tax
What is aproportional tax?

A tax that charges the same percentage of income, regardless of the size of income. Also called a flat tax.

exhibit 16 7 federal individual income tax rate schedule for a single taxpayer 2010
Exhibit 16.7 Federal Individual Income Tax Rate Schedule for a Single Taxpayer, 2010

(1)

(2)

(3)

(4)

(5)

(6)

AverageTaxRate [(2)/(1)]

Marginal Tax Rate [(5)/(4)]

Change in Taxable Income

Taxable Income

Change in Tax

But Not Over

Tax

Over

$ 0 $ 8,375 $ 837 10% $ 8,375 $ 837 10.0%

8,375 34,000 4,681 14 25,625 3,844 15.0

34,000 82,400 16,781 20 48,400 12,100 25.0

82,400 171,850 41,827 24 89,450 25,046 28.0

171,850 373,650 108,421 29 201,800 66,594 33.0

35.0

373,650 . . . . . . . . . . . . . . .

25

slide26

Exhibit 16.8 The Progressive Income Tax versus a Flat Tax

35%

33%

35%

28%

30%

25%

25%

Federal government taxrate

17% Flat-rate tax

20%

15%

15%

10%

10%

5%

82,000

171,850

373,650

8,375

34,000

Taxable Income

what is public choice theory
What ispublic choice theory?

The analysis of the government decision-making process to allocate resources

why might government be inefficient in solving society s problems
Why might government be inefficient in solving society’s problems?

Majority-rule problem

Special-interest effect

Rational ignorance

Bureaucratic inefficiency

Shortsightedness effect

what is benefit cost analysis
What is benefit - cost analysis?

The comparison of the additional rewards and costs of an economic alternative

what is the basic rule of benefit cost analysis
What is the basic rule of benefit-cost analysis?

A firm will produce additional units as long as marginal benefit exceeds the marginal cost

what is the majority rule problem
What is themajority-rule problem?

Voting can lead to a rejection of projects with marginal total benefits exceeding the marginal cost

can majority rule lead to inefficient solutions
Can majority rule lead to inefficient solutions?

Yes, “one-person one-vote” cannot measure the intensity of voters’ preferences as well as the market

exhibit 16 9 majority rule benefit cost analysis of two park projects
Exhibit 16.9 Majority – Rule Benefit – Cost Analysis of Two Park Projects

(5)

(6)

(7)

(1)

(3)

(4)

(2)

Marginal Benefit

Marginal Cost (taxes)

Marginal Cost (taxes)

Marginal Benefit

Vote

Voter

Vote

Bob $100 $ 0 No $100 $ 90 No

Juan 100 101 Yes 100 90 No

Theresa 100 101 Yes 100 301 Yes

Total $300 $202 Passes $300 $481 Fails

33

what is the special interest group effect
What is the special-interest group effect?

Special-interest groups can create government support for programs with costs outweighing their benefits

why can special interest v oting be inefficient
Why can special-interest voting be inefficient?

A small group within the society can benefit while the whole society pays the costs

what is rational ignorance
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

what is bureaucratic inefficiency
What is bureaucratic inefficiency?

The bureaucracy may become more powerful than elected officials

what is the shortsightedness effect
What is the shortsightedness effect?

Democracy has a bias toward programs offering clear benefits and hidden costs

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