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Economics 344
INTRODUCTION
Public Finance: studies the taxing and spending behavior of government. In doing so, public finance focuses on how these activities affect the allocation of resources and the distribution of income. (Microeconomic Aspects)
sometimes referred to a public sector economics or public economics
Two alternative View of Government
Organic View: Society is conceived of as a natural organism. Each individual is a part of this organism, and the government can be thought of as its heart.
The individual has significance only as part of the community, and the good of the individual is defined with respect to the good of the whole. Thus, the community is stressed above the individual.
Proponents of the organic view usually argue that certain goals are natural for the societal organism to pursue. Pursuit of sovereignty over some geographical area is an example of such a natural good.
Mechanistic View: Government not as an organic part of society; but it is a contrivance created by individuals to better achieve their individual goals. Individual is all important.
Accepting that government exists for the good of the people, we are still left with the problem of defining just what good is and how the government should act to promote it. There is virtually universal agreement that it is good for individuals when government protects them from violence. To do so government must have a monopoly on coercive power.
Most limited government must provide protection of lives and property.
Adam Smith: (1) defense, police
(2) education
(3) public works: roads, bridges, sewers
(4) justice system
The desirability of a given course of government action (or inaction) inevitably depends in part on ethical and political judgments.
Legal Framework
Article 1.8 of the Constitution empowers Congress "to pay the Debts and provide for the common Defense and general Welfare of the United States." The notion of "general welfare" has been interpreted very broadly by Congress and the courts, and now this clause effectively puts no constraints on government expenditure activity. The Constitution does not limit the size of federal expenditure, either absolutely or relative to the size of the economy. Bills to appropriate expenditures (like practically all other laws) can originate in either house of Congress.
Financing: Article 1.8: "The Congress shall have Power to lay and collect Taxes, Duties, Imports, and Excises." Unlike expenditure bills, "All Bills for raising Revenue shall originate in the House of Representatives" (Article 1.7).
Congress cannot discriminate among the states when it sets tax rates. (Article 1.8).
"No... direct Tax shall be laid, unless in Proportion to the Consensus of Enumeration herein before directed to be taken" (Article 1.9) A direct tax is a tax levied on a person as opposed to a commodity. In general, the only permissible direct tax is a head tax, under which every citizen has the same tax obligation.
In the late 19th Century, attempts to introduce a federal tax on income were declared unconstitutional by the Supreme Court because income taxation leads to different tax burdens for different citizens. Given this decision, the only way to introduce an income tax was via a constitutional amendment. The 16th Amendment ratified in 1913.
"No person shall be... deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation." (Fifth Amendment).
"No Tax or Duty shall be laid on Articles exported from any State" (article 1.9). This article was included to assure the southern states that their exports of tobacco and other commodities would not be jeopardized by the central government. It has had little impact on the development of the public finance system.
State and Local Governments
Article 1.10 states, "No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports." Thus, international economic policy is in the hands of the federal government.
SIZE OF GOVERNMENT
Size of government measured by the volume of its annual expenditures, of which there are basically three types:
(1) Purchases of goods & services
(2) income transfers to people, businesses, and governments.
(3) interest payments
The federal government itemizes its expenditures in the unified budget.
In 1993, fed expenditures (excluding $186 billion in grants to state and local governments) were $1,307 billion. Adding state and local government expenditures made that year gives us a total of $2,193 billion [Economic Report of the President, 1994, pp. 363, 364.]
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The US government outlays for payments for individuals by category: 1965-98 (in millions of dollars)
1965 / 1966 / 1967 / 1968 / 1969 / 1970 / 1971 / 1972 / 1973Social security (incl. railroad retirement) / 17,738 / 20,989 / 22,011 / 24,229 / 27,725 / 30,654 / 36,404 / 40,735 / 49,799
Federal employees retirement and insurance / 5,106 / 5,607 / 6,224 / 6,830 / 7,654 / 8,741 / 10,171 / 11,363 / 12,980
Unemployment assistance / 2,537 / 2,068 / 2,042 / 2,270 / 2,297 / 3,083 / 5,760 / 6,652 / 4,893
Medical care / 1,786 / 2,413 / 6,174 / 8,836 / 10,740 / 12,026 / 13,681 / 16,413 / 17,557
Assistance to students / 58 / 100 / 532 / 938 / 1,271 / 1,519 / 2,563 / 3,026 / 3,999
Housing assistance / 219 / 239 / 257 / 281 / 342 / 480 / 737 / 1,121 / 1,614
Food and nutrition assistance / 299 / 363 / 418 / 505 / 587 / 960 / 2,179 / 3,218 / 3,641
Public assistance and related programs* / 4,651 / 4,668 / 4,613 / 5,215 / 5,767 / 6,397 / 7,816 / 9,089 / 8,487
All other payments for individuals / 708 / 630 / 938 / 746 / 843 / 946 / 1,253 / 1,437 / 1,770
Total, payments for individuals / 33,103 / 37,076 / 43,211 / 49,849 / 57,225 / 64,806 / 80,564 / 93,055 / 104,739
1974 / 1975 / 1976 / 1977 / 1978 / 1979 / 1980 / 1981 / 1982
Social security (incl. railroad retirement) / 56,712 / 67,277 / 74,929 / 86,258 / 94,779 / 105,361 / 120,333 / 141,524 / 157,773
Federal employees retirement and insurance / 15,036 / 18,355 / 21,180 / 24,022 / 26,681 / 29,930 / 34,677 / 40,487 / 44,436
Unemployment assistance / 5,594 / 12,806 / 18,560 / 14,318 / 10,886 / 9,837 / 16,889 / 18,406 / 22,314
Medical care / 20,694 / 26,241 / 31,519 / 37,195 / 42,277 / 48,431 / 56,985 / 67,647 / 76,778
Assistance to students / 4,303 / 6,196 / 7,920 / 6,419 / 6,421 / 6,592 / 7,538 / 8,561 / 7,870
Housing assistance / 1,794 / 2,093 / 2,466 / 2,964 / 3,631 / 4,230 / 5,418 / 6,775 / 7,960
Food and nutrition assistance / 4,433 / 6,643 / 7,959 / 8,527 / 8,859 / 10,716 / 13,932 / 16,119 / 15,493
Public assistance and related programs* / 9,907 / 12,180 / 14,078 / 15,186 / 16,143 / 15,957 / 19,398 / 21,380 / 21,421
All other payments for individuals / 1,933 / 2,045 / 2,023 / 2,088 / 2,085 / 2,784 / 3,358 / 3,759 / 3,879
Total, payments for individuals / 120,407 / 153,836 / 180,634 / 196,978 / 211,761 / 233,837 / 278,530 / 324,658 / 357,924
The US government outlays for payments for individuals by category: 1965-98 (in millions of dollars) (continued)
1983 / 1984 / 1985 / 1986 / 1987 / 1988 / 1989 / 1990 / 1991Social security (incl. railroad retirement) / 172,284 / 179,724 / 190,295 / 200,246 / 209,009 / 220,679 / 234,234 / 250,488 / 270,514
Federal employees retirement and insurance / 47,265 / 49,025 / 49,846 / 52,920 / 55,203 / 59,280 / 62,099 / 64,099 / 69,642
Unemployment assistance / 29,815 / 16,911 / 16,186 / 16,427 / 15,760 / 13,857 / 14,125 / 17,445 / 25,451
Medical care / 84,991 / 92,217 / 104,219 / 111,488 / 120,165 / 129,900 / 143,114 / 164,282 / 184,140
Assistance to students / 8,455 / 8,600 / 9,152 / 9,208 / 8,574 / 9,210 / 10,952 / 11,270 / 12,121
Housing assistance / 9,366 / 9,932 / 11,200 / 12,279 / 12,626 / 13,841 / 14,661 / 15,901 / 17,178
Food and nutrition assistance / 17,869 / 17,972 / 18,457 / 18,524 / 18,863 / 19,998 / 21,102 / 23,872 / 28,388
Public assistance and related programs* / 23,103 / 23,342 / 24,662 / 26,840 / 27,814 / 30,658 / 32,396 / 33,293 / 39,076
All other payments for individuals / 3,376 / 3,484 / 3,285 / 3,330 / 3,263 / 3,233 / 3,346 / 3,440 / 3,755
Total, payments for individuals / 396,523 / 401,209 / 427,302 / 451,261 / 471,277 / 500,656 / 536,030 / 584,090 / 650,263
1992 / 1993 / 1994 / 1995 / 1996 / 1997 / 1998**
Social security (incl. railroad retirement) / 289,342 / 306,013 / 321,144 / 336,959 / 351,418 / 366,516 / 382,374
Federal employees retirement and insurance / 71,911 / 75,199 / 79,354 / 82,209 / 84,061 / 89,501 / 93,490
Unemployment assistance / 37,701 / 36,208 / 27,145 / 21,919 / 22,958 / 21,145 / 21,534
Medical care / 217,014 / 240,376 / 264,646 / 289,723 / 307,994 / 327,238 / 342,764
Assistance to students / 11,542 / 14,602 / 8,641 / 14,814 / 12,834 / 13,013 / 13,080
Housing assistance / 18,864 / 20,870 / 22,445 / 25,505 / 24,498 / 23,692 / 24,347
Food and nutrition assistance / 32,521 / 35,040 / 36,646 / 37,486 / 37,826 / 35,956 / 36,030
Public assistance and related programs* / 44,825 / 50,148 / 57,873 / 61,765 / 63,883 / 69,157 / 73,854
All other payments for individuals / 3,971 / 4,310 / 4,296 / 4,222 / 3,951 / 3,855 / 4,062
Total, payments for individuals / 727,690 / 782,767 / 822,190 / 874,602 / 909,423 / 950,073 / 991,535
* includes supplemental security income program, family support payments to States and TANF, low income home energy assistance, earned income
tax credit, legal services, veterans non-service connected pensions.
** estimates.
SOURCE: The Budget of the United States Government, Fiscal Year 1999 (Office of Management and Budget, Internet site,
http://www.access.gpo.gov/su_docs/budget/index.html).
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State, local, and federal government expenditures (selected years)
Total Expenditures (billions) / 1990 Dollars (billions) / 1990 Dollarsper Capita / Percent
of GDP
1929 / $ 10 / $ 93 / $ 767 / 9.9 / %
1940 / 19 / 187 / 1,418 / 18.4
1950 / 61 / 338 / 2,223 / 21.3
1960 / 137 / 584 / 3,228 / 26.6
1970 / 293 / 958 / 4,672 / 28.3
1975 / 515 / 1,198 / 5,547 / 31.6
1980 / 841 / 1,343 / 5,897 / 30.2
1985 / 1,312 / 1,581 / 6,630 / 31.4
1990 / 1,801 / 1,801 / 7,205 / 31.4
1995 / 2,322 / 2,019 / 7,676 / 32.0
1996 / 2,418 / 2,063 / 7,772 / 31.7
1997 / 2,511 / 2,091 / 7,805 / 31.1
SOURCES: Updated figures were taken from Economic Report of the President 1998. 1990 GDP deflators were taken from IFS Yearbook 1997 and IFS April 98.
Government outlays as a percentage of gross domestic product
Seven industrialized countries: 1995
France / 46.8% / United Kingdom / 37.3%*Germany / 46.0 / United States / 32.1
Italy / 44.5 / Japan / 32.0
Canada / 42.7
*1994
Other selected countries: 1995
Australia / 34.8% / Ireland / 39.3%*Austria / 47.5 / Korea / 25.1
Belgium / 50.8 / Netherlands / 50.3
Denmark / 58.1 / Norway / 50.9
Finland / 53.2 / Spain / 38.1
Greece / 35.1* / Sweden / 57.6
Iceland / 36.0 / Switzerland / 53.8
*1994
SOURCE: National Accounts Volume 2 Detailed Tables 1983/95.
Expenditures
(1) National defense relative importance has fallen over time. (1955, 39.3 percent; 1991, 15.4 percent)
(2) Social Security program has grown enormously
(3) Public welfare activities have increased as a proportion of government spending. Public welfare includes Aid to Families with Dependent Children (AFDC), old-age assistance, and Medicaid program
(4) Payment of interest on debt.
Expenditures by all levels of government: 1955, 1991 (in %)
Category / 1955 / 1991 / 1995National defense etc. / 39.3 / 15.4
Federal Social Security / 3.9 / 15.8
Interest on debt / 5.1 / 10.8
Public Welfare / 2.9 / 7.1
Education / 11.5 / 13.9
Other / 37.3 / 37.0
Revenue collections by all levels of government, 1955, 1991 (in %)
Category / 1955 / 1991 / 1995Personal income tax / 28.3 / 27.2
Corporate income tax / 17.5 / 5.7
SocSec payroll tax / 4.8 / 17.8
Sales taxes / 16.2 / 11.5
Property taxes / 10.0 / 7.9
Other taxes & charges / 23.3 / 29.9
Indeed, much of the government budget consists of so-called entitlement programs ─ programs with cost determined not by fixed dollar amounts, but by the number of people who qualify. The laws governing Social Security, many public welfare programs, farm price supports, and so forth include rules that determine who is entitled to benefits and their magnitude. Expenditures on entitlement programs are therefore out of the hands of the current government unless it changes the rules. Similarly, debt payments are determined by interest rates and previous deficits, again mostly out of the control of current decision makers.
About 75% of the federal budget is entitlement
Distribution of all US government expenditures by level of government,
selected years
Federal / State / Local1900 / 34.1 / % / 8.2 / % / 57.7 / %
1910 / 30.1 / 9.0 / 60.9
1920 / 39.7 / 9.8 / 50.5
1930 / 32.5 / 16.3 / 51.2
1938 / 45.5 / 16.2 / 38.3
1950 / 59.3 / 15.2 / 26.5
1960 / 57.6 / 13.8 / 28.6
1971 / 48.4 / 18.6 / 33.0
1980 / 54.9 / 18.1 / 27.0
1988 / 57.1 / 17.4 / 25.6
1991 / 55.5 / 18.6 / 26.0
1994 / 41.4 / 25.6 / 33.0
SOURCE: Werner Pommerehne, "Quantitative Aspects of Federalism: A Study of Six Countries," in The Political Economy of Fiscal Federalism, ed. W. Oates (Lexington, MA: D.C. Heath, 1977), p. 311, except for figures after 1980, which were computed from various editions of US Bureau of Census, Statistical Abstract of the United States.
Breakdown of government expenditures