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Chapter 16 Public Sector

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

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  1. Chapter 16Public Sector Survey of EconomicsIrvin B. Tucker Lecture Slides

  2. 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.

  3. 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.

  4. 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

  5. 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

  6. 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

  7. 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%

  8. 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

  9. 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

  10. 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

  11. Exhibit 16.4 Federal Government Receipts, 2010 Corporate Income Taxes 9% Other 6% Excise Taxes 3% Social Insurance Taxes 40% Individual Income Taxes 42%

  12. 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

  13. 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

  14. 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

  15. 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

  16. What are two basic principles of taxes? Benefits-received Ability-to-pay

  17. What is the benefits-received principle? Those who benefit from government expenditures should pay the taxes that finance their benefits

  18. 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

  19. Which principle dominates in the U.S.? The ability-to-pay principle dominates the benefits-received principle

  20. What is aprogressive tax? A tax that charges a higher percentage of income as income rises

  21. What is theaverage tax rate? Total tax due divided by total taxable income

  22. What is themarginal tax rate? The change in taxes due divided by the change in taxable income

  23. What is aregressive tax? A tax that charges a lower percentage of income as income rises

  24. What is aproportional tax? A tax that charges the same percentage of income, regardless of the size of income. Also called a flat tax.

  25. 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

  26. 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

  27. What ispublic choice theory? The analysis of the government decision-making process to allocate resources

  28. Why might government be inefficient in solving society’s problems? Majority-rule problem Special-interest effect Rational ignorance Bureaucratic inefficiency Shortsightedness effect

  29. What is benefit - cost analysis? The comparison of the additional rewards and costs of an economic alternative

  30. What is the basic rule of benefit-cost analysis? A firm will produce additional units as long as marginal benefit exceeds the marginal cost

  31. What is themajority-rule problem? Voting can lead to a rejection of projects with marginal total benefits exceeding the marginal cost

  32. Can majority rule lead to inefficient solutions? Yes, “one-person one-vote” cannot measure the intensity of voters’ preferences as well as the market

  33. 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

  34. What is the special-interest group effect? Special-interest groups can create government support for programs with costs outweighing their benefits

  35. Why can special-interest voting be inefficient? A small group within the society can benefit while the whole society pays the costs

  36. 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

  37. What is bureaucratic inefficiency? The bureaucracy may become more powerful than elected officials

  38. What is the shortsightedness effect? Democracy has a bias toward programs offering clear benefits and hidden costs

  39. END

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