Chapter 22The Public Sector • Key Concepts • Summary • Practice Quiz • Internet Exercises    ©2000 South-Western College P...
In this chapter, you will  learn to solve these   economic puzzles:   Should the the Social    How does tax burdenHow does...
What is the purpose  of this chapter?To examine public-sector decisions of politicians, government bureaucrats, voters, an...
What has happened tothe size of Government?Since the 1950’s, government expenditures have grown from about one-quarter to ...
Government Expenditures 1935 - 199850%45%             Total government expenditures40%35%30%                              ...
1970 Federal Outlays                                Other           3% 2%                   5%           International aff...
1998 Federal Outlays              2.0% 1.0% 2.5%                                                 Other                    ...
1970 State & Local Outlays        Other                      20%                                   Civilian safety40%     ...
1995 State & Local Outlays        Other                       26%        Civilian safety33%                               ...
Federal Receipts 1998                                    Other                  5%   3%                              11%  ...
State & Local Receipts 1998                                Other  24%                                Corporate income taxe...
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...
Tax Burden 199870%                             Sweden60%                          France50%                          Italy...
50% Growth in Taxes in the U.S., 1935 - 199845%            Total government taxes40%35%30%25%               State & Local ...
How does the  Government decidewhich tax is appropriate?     Benefits received      Ability to pay                    15
What is the Benefits Received Principle?The concept that those who benefit from government expenditures should pay the tax...
What is the Ability  to Pay Principle?The concept that those who have higher incomes can afford to pay a greater proportio...
Which principledominates in the U.S.?The ability-to-pay principle dominates the benefits- received principle              ...
What is a  Progressive Tax?A tax that charges a higher percentage of income as income rises                  19
What is theAverage Tax Rate?Total tax due divided by total taxable income                   20
What is theMarginal Tax Rate?The change in taxes due divided by the change in taxable income                   21
What is a  Regressive Tax?A tax that charges a lower percentage of income as income rises                  22
What is aProportional Tax?A tax that charges the same percentage of income, regardless of the size of income              ...
What is a Flat Rate Tax?Same as a proportional tax                    24
Federal Individual Income Tax RateSchedule for a Single Taxpayer, 1998    Taxable Income   Marginal Tax Rate   0 — $23,350...
What isPublic Choice Theory?The analysis of the government decision- making process to allocate resources                 ...
Who is James Buchanan?  The founder of public   choice theory which   applies economic   analysis to politics             ...
What is theBenefit - Cost Analysis?The comparison of the additional rewards and costs of an economic alternative          ...
What is the basic Rule of Benefit-cost Analysis? A firm will produce  additional units as long  as marginal benefit  excee...
Why might Governmentbe Inefficient in solving Society’s Problems?• Majority rule problem• Special interest effect• Rationa...
What is theMajority Rule Problem?Voting can lead to a rejection of projects with marginal total benefits exceeding the mar...
Can Majority Rule leadto inefficient solutions? Yes, “one person one  vote” cannot measure  the intensity of voters’  pref...
What is the Special- Interest Group Effect?Special-interest groups can create government support for programs with costs o...
Why can Special-Interest Voting be inefficient? A small group within  the society can benefit  while the whole society  pa...
What is Rational Ignorance?The voters choose to remain uninformed because the marginal cost of obtaining information is hi...
What is Bureaucratic   Inefficiency?The bureaucracy may become more powerful than elected officials                  36
What is theShortsightedness Effect?Democracy has a bias toward programs offering clear benefits and hidden costs          ...
Key Concepts           38
Key Concepts•   What has happened to the size of Government•   How do taxes in the U.S. compare to other cou•   What is th...
Key Concepts cont.•   What is the Marginal Tax Rate?•   What is a Regressive Tax?•   What is a Proportional Tax?•   What i...
Summary          41
Government expendituresrepresented a rising share of GDPfrom the 1950’s to 1985 comparedto private-sector spending. Themaj...
Government Expenditures 1935 - 199850%45%             Total government expenditures40%35%30%                              ...
Federal tax revenues are theprimary source of revenue for allfederal government units. The mostimportant taxes at the fede...
50% Growth in Taxes in the U.S., 1935 - 199845%            Total government taxes40%35%30%25%               State & Local ...
State and local government taxrevenues consist primarily of salesand property taxes. While states relyon income taxes for ...
Local governments collectmost of their tax revenue fromproperty taxes, but the majority oftheir receipts are from charges ...
The taxation burden, measuredby taxes as a percentage of GDP, islighter in the U.S. than many otheradvanced industrial cou...
Tax Burden 199870%                             Sweden60%                          France50%                          Italy...
The benefits-received principleand the ability-to-pay principle are thetwo basic philosophies of taxationfairness. The gas...
Sales, excise, and flat-ratetaxes are examples of a regressivetax because each results in a greaterburden on the poor than...
Public choice theory reveals thegovernment decision making process.For example, government failure canoccur for any of the...
(1) Majority voting may not followbenefit-cost analysis, (2) special interestgroups can obtain large benefits andspread th...
Chapter 22 Quiz   ©2000 South-Western College Publishing                                            54
1. From 1950 to the late-1990s, total government  expenditures as a percentage of GDP in the  United States   a. fell by h...
Government Expenditures 1935 - 199850%45%             Total government expenditures40%35%30%                              ...
2. Which of the following accounted for the  second largest percentage of total federal  government expenditures as of 199...
1998 Federal Outlays              2.0%1.0%2.5%                                              Other                         ...
3. Which of the following contributed the  second largest percentage of total state and  local government revenues in 1999...
State & Local Receipts 1998                                Other  24%                                Corporate income taxe...
4. Which of the following countries devotes  about the same percentage of its GDP to  taxes as the United States?   a. Swe...
Tax Burden 199870%                             Sweden60%                          France50%                          Italy...
5. “The poor should not pay income taxes.”  This statement reflects which of the following  principles of taxation?   a. F...
6. Some cities finance their airports with a  departure tax: Every person leaving the city  by plane is charged a small fi...
7. Which of the following statements is true?   a. The most important source of tax revenue     to the federal government ...
8. Which of the following statements is true?   a. A sales tax on food is a regressive tax.   b. The largest source of fed...
9. A tax that is structured so that people with  higher incomes pay a larger percentage of  their income for the tax than ...
10. Generally, most economists feel that a  ______type of income tax is a fairer way to  raise government revenue than a s...
11. The federal personal income tax is an   example of a (an)    a. excise tax.    b. proportional tax.    c. progressive ...
12. A 5 percent sales tax on food is an   example of a    a. flat tax.    b. progressive tax.    c. proportional tax.    d...
13. Margaret pays a local income tax of 2  percent, regardless of the size of her  income. This tax is   a. proportional. ...
14. Which of the following statements relating to  public choice is true?   a. A low voter turnout may result when voters ...
Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises           ...
END      74
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08 the public sector

  1. 1. Chapter 22The Public Sector • Key Concepts • Summary • Practice Quiz • Internet Exercises ©2000 South-Western College Publishing 1
  2. 2. In this chapter, you will learn to solve these economic puzzles: Should the the Social How does tax burdenHow does we replace the of incomeatax States compare Security with fair? Is flat tax a national the United tax favor the upper-income flat tax? sales tax or a worker? to other countries? 2
  3. 3. What is the purpose of this chapter?To examine public-sector decisions of politicians, government bureaucrats, voters, and special interest groups 3
  4. 4. What has happened tothe size of Government?Since the 1950’s, government expenditures have grown from about one-quarter to over one third of GDP 4
  5. 5. Government Expenditures 1935 - 199850%45% Total government expenditures40%35%30% Expen ditures25% al Gov. Stat e & Loc20%15%10% Federal government expenditures 5% Year 35 40 45 50 55 60 65 70 75 80 85 90 95 00 5
  6. 6. 1970 Federal Outlays Other 3% 2% 5% International affairs22% 3% 5% Veterans benefits Agriculture 11% Transportation Education and health 9% Interest on federal debt National defense 40% Income security 6
  7. 7. 1998 Federal Outlays 2.0% 1.0% 2.5% Other 1.0% 2.5% International affairs 11.0% Veterans benefits Agriculture49.0% Transportation 15.0% Education and health Interest on federal debt 16.0% National defense Income security 7
  8. 8. 1970 State & Local Outlays Other 20% Civilian safety40% Highways 8% Health & hospitals 11% Income security 8% 13% Education 8
  9. 9. 1995 State & Local Outlays Other 26% Civilian safety33% Highways Health & hospitals 8% Public Welfare 7% 17% 9% Education 9
  10. 10. Federal Receipts 1998 Other 5% 3% 11% Excise taxes48% Corporate income taxes Social insurance taxes 33% Individual income taxes 10
  11. 11. State & Local Receipts 1998 Other 24% Corporate income taxes 39% Individual income taxes Property taxes19% 3% 15% State sales tax 11
  12. 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. 13. Tax Burden 199870% Sweden60% France50% Italy Germany40% Canada30% U.K. U.S.20% Japan10%0% 13
  14. 14. 50% Growth in Taxes in the U.S., 1935 - 199845% Total government taxes40%35%30%25% State & Local Gov. Taxes20%15%10% Federal government taxes 5% Year 35 40 45 50 55 60 65 70 75 80 85 90 95 00 14
  15. 15. How does the Government decidewhich tax is appropriate? Benefits received Ability to pay 15
  16. 16. What is the Benefits Received Principle?The concept that those who benefit from government expenditures should pay the taxes that finance their benefits 16
  17. 17. What is the Ability to Pay Principle?The concept that those who have higher incomes can afford to pay a greater proportion of their income in taxes, regardless of the benefits 17
  18. 18. Which principledominates in the U.S.?The ability-to-pay principle dominates the benefits- received principle 18
  19. 19. What is a Progressive Tax?A tax that charges a higher percentage of income as income rises 19
  20. 20. What is theAverage Tax Rate?Total tax due divided by total taxable income 20
  21. 21. What is theMarginal Tax Rate?The change in taxes due divided by the change in taxable income 21
  22. 22. What is a Regressive Tax?A tax that charges a lower percentage of income as income rises 22
  23. 23. What is aProportional Tax?A tax that charges the same percentage of income, regardless of the size of income 23
  24. 24. What is a Flat Rate Tax?Same as a proportional tax 24
  25. 25. Federal Individual Income Tax RateSchedule for a Single Taxpayer, 1998 Taxable Income Marginal Tax Rate 0 — $23,350 15.0% $23,350 — $61,400 28.0% $61,400 — $128,100 31.0% $128,100 — $278,450 36.0% $278,450 + — 39.6% 25
  26. 26. What isPublic Choice Theory?The analysis of the government decision- making process to allocate resources 26
  27. 27. Who is James Buchanan? The founder of public choice theory which applies economic analysis to politics 27
  28. 28. What is theBenefit - Cost Analysis?The comparison of the additional rewards and costs of an economic alternative 28
  29. 29. What is the basic Rule of Benefit-cost Analysis? A firm will produce additional units as long as marginal benefit exceeds the marginal cost 29
  30. 30. Why might Governmentbe Inefficient in solving Society’s Problems?• Majority rule problem• Special interest effect• Rationale ignorance• Bureaucratic inefficiency• Shortsightedness effect 30
  31. 31. What is theMajority Rule Problem?Voting can lead to a rejection of projects with marginal total benefits exceeding the marginal cost 31
  32. 32. Can Majority Rule leadto inefficient solutions? Yes, “one person one vote” cannot measure the intensity of voters’ preferences as well as the market 32
  33. 33. What is the Special- Interest Group Effect?Special-interest groups can create government support for programs with costs out-weighing their benefits 33
  34. 34. Why can Special-Interest Voting be inefficient? A small group within the society can benefit while the whole society pays the costs 34
  35. 35. What is Rational Ignorance?The voters choose to remain uninformed because the marginal cost of obtaining information is higher than the marginal benefit from knowing it 35
  36. 36. What is Bureaucratic Inefficiency?The bureaucracy may become more powerful than elected officials 36
  37. 37. What is theShortsightedness Effect?Democracy has a bias toward programs offering clear benefits and hidden costs 37
  38. 38. Key Concepts 38
  39. 39. Key Concepts• What has happened to the size of Government• How do taxes in the U.S. compare to other cou• What is the Benefits Received Principle?• What is the Ability to Pay Principle?• What is a Progressive Tax? 39
  40. 40. Key Concepts cont.• What is the Marginal Tax Rate?• What is a Regressive Tax?• What is a Proportional Tax?• What is the Majority Rule Problem?• What is the Special-Interest Group Effect?• What is Rational Ignorance?• What is Bureaucratic Inefficiency?• What is the Shortsightedness Effect? 40
  41. 41. Summary 41
  42. 42. Government expendituresrepresented a rising share of GDPfrom the 1950’s to 1985 comparedto private-sector spending. Themajor source of the growth in thepublic sector is transfer programs,officially tabulated in a categorycalled income security. After 1985,government outlays decreased as apercentage of GDP. 42
  43. 43. Government Expenditures 1935 - 199850%45% Total government expenditures40%35%30% Expen ditures25% al Gov. Stat e & Loc20%15%10% Federal government expenditures 5% Year 35 40 45 50 55 60 65 70 75 80 85 90 95 00 43
  44. 44. Federal tax revenues are theprimary source of revenue for allfederal government units. The mostimportant taxes at the federal level arethe individual income tax and payrolltaxes. Although not a tax revenue,borrowing has become the federalgovernment’s third largest method ofcollecting funds. 44
  45. 45. 50% Growth in Taxes in the U.S., 1935 - 199845% Total government taxes40%35%30%25% State & Local Gov. Taxes20%15%10% Federal government taxes 5% Year 35 40 45 50 55 60 65 70 75 80 85 90 95 00 45
  46. 46. State and local government taxrevenues consist primarily of salesand property taxes. While states relyon income taxes for revenue, theyalso collect sales and excise taxes.In addition, state budgets dependgreatly on charges and revenue-sharing grants from the federalgovernment. 46
  47. 47. Local governments collectmost of their tax revenue fromproperty taxes, but the majority oftheir receipts are from charges andgrants from the federal and stategovernments. 47
  48. 48. The taxation burden, measuredby taxes as a percentage of GDP, islighter in the U.S. than many otheradvanced industrial countries. Since1960, federal taxes have remained afairly constant fraction of GDP.State and local taxes, however, havegenerally increased as a percentageof GDP since the 1950’s 48
  49. 49. Tax Burden 199870% Sweden60% France50% Italy Germany40% Canada30% U.K. U.S.20% Japan10%0% 49
  50. 50. The benefits-received principleand the ability-to-pay principle are thetwo basic philosophies of taxationfairness. The gasoline tax is a classicexample of the benefits-receivedprinciple because users of thehighways pay the gasoline tax.Progressive income taxes follow theability-to-pay principle because thereis a direct relationship between theaverage tax rate and income size. 50
  51. 51. Sales, excise, and flat-ratetaxes are examples of a regressivetax because each results in a greaterburden on the poor than the rich. 51
  52. 52. Public choice theory reveals thegovernment decision making process.For example, government failure canoccur for any of the following reasons: 52
  53. 53. (1) Majority voting may not followbenefit-cost analysis, (2) special interestgroups can obtain large benefits andspread their costs over many taxpayers,(3) rational voter ignorance means asizeable portion of the voters will decidenot to make informed judgements, (4)bureaucratic behavior may not lead tocost effectiveness, an (5) politicianssuffer from a short time horizon, leadingto a bias toward hiding the costs ofprograms. 53
  54. 54. Chapter 22 Quiz ©2000 South-Western College Publishing 54
  55. 55. 1. From 1950 to the late-1990s, total government expenditures as a percentage of GDP in the United States a. fell by half. b. remained fairly constant. c. grew from one-fourth to one-half. d. grew from one-quarter to one-third. D. 55
  56. 56. Government Expenditures 1935 - 199850%45% Total government expenditures40%35%30% Expen ditures25% al Gov. Stat e & Loc20%15%10% Federal government expenditures 5% Year 35 40 45 50 55 60 65 70 75 80 85 90 95 00 56
  57. 57. 2. Which of the following accounted for the second largest percentage of total federal government expenditures as of 1999? a. Income security. b. National defense. c. Interest on the national debt. d. Education and health. B 57
  58. 58. 1998 Federal Outlays 2.0%1.0%2.5% Other 1.0% 2.5% International affairs 11.0% Veterans benefits Agriculture49.0% Transportation 15.0% Education and health Interest on federal debt 16.0% National defense Income security 58
  59. 59. 3. Which of the following contributed the second largest percentage of total state and local government revenues in 1999 (excluding “Other Categories”)? a. Corporate income taxes. b. Sales and excise taxes. c. Individual income taxes. d. Property taxes. D 59
  60. 60. State & Local Receipts 1998 Other 24% Corporate income taxes 39% Individual income taxes Property taxes19% 3% 15% State sales tax 60
  61. 61. 4. Which of the following countries devotes about the same percentage of its GDP to taxes as the United States? a. Sweden. b. Italy. c. United Kingdom. d. Japan. D. 61
  62. 62. Tax Burden 199870% Sweden60% France50% Italy Germany40% Canada30% U.K. U.S.20% Japan10%0% 62
  63. 63. 5. “The poor should not pay income taxes.” This statement reflects which of the following principles of taxation? a. Fairness of contribution. b. Benefits received. c. Inexpensive to collect. d. Ability to pay.D. Since the poor lack the ability to pay, the tax system should be designed so they pay less taxes than people with higher incomes. 63
  64. 64. 6. Some cities finance their airports with a departure tax: Every person leaving the city by plane is charged a small fixed dollar amount that is used to help pay for building and running the airport. The departure tax follows the a. benefits-received principle. b. ability-to-pay principle. c. flat-rate principle. d. public-choice principle. A. Those persons who are gaining the most from the airport are the ones who are paying the most for it. 64
  65. 65. 7. Which of the following statements is true? a. The most important source of tax revenue to the federal government is individual income taxes. b. The most important sources of tax revenue to state and local governments are sales and property taxes. c. The most important source of tax revenue to local governments is local property taxes. d. The taxation burden, measured by taxes as a percentage of GDP, is lighter in the U.S. than in most other advanced industrial countries. E e. All of the above are true. 65
  66. 66. 8. Which of the following statements is true? a. A sales tax on food is a regressive tax. b. The largest source of federal government tax revenue is individual income taxes. c. The largest source of state and local government tax revenue is sales taxes. d. All the above are true statements. D. All the above are true statements. 66
  67. 67. 9. A tax that is structured so that people with higher incomes pay a larger percentage of their income for the tax than do people with smaller incomes is called a (an) a. income tax. b. regressive tax. c. property tax. d. progressive tax.D. Answer a is not specific; b is the opposite principle, and c is based on property not income. 67
  68. 68. 10. Generally, most economists feel that a ______type of income tax is a fairer way to raise government revenue than a sales tax. a. Regressive. b. Proportional. c. Flat-rate. d. Progressive. D. A progressive tax is argued to be fair because people with higher incomes pay more tax. 68
  69. 69. 11. The federal personal income tax is an example of a (an) a. excise tax. b. proportional tax. c. progressive tax. d. regressive tax.C. Since the marginal tax rate increases with income, the federal personal income tax is a progressive tax. 69
  70. 70. 12. A 5 percent sales tax on food is an example of a a. flat tax. b. progressive tax. c. proportional tax. d. regressive tax.D. A sales tax on food is a regressive tax because people with higher incomes do not spend proportionately more on food. 70
  71. 71. 13. Margaret pays a local income tax of 2 percent, regardless of the size of her income. This tax is a. proportional. b. regressive. c. progressive. d. a mix of (a) and (b).A. Less tax is paid by a regressive tax and more tax is paid by a progressive tax as people’s incomes rise. 71
  72. 72. 14. Which of the following statements relating to public choice is true? a. A low voter turnout may result when voters perceive that the marginal cost of voting exceeds its marginal benefit. b. If the marginal cost of voting exceeds its marginal benefit, the vote is unimportant. c. Special-interest groups always cause the will of a majority to be imposed on a minority. d. All of the above. A. This is the rational ignorance public choice theory. 72
  73. 73. Internet ExercisesClick on the picture of the book, choose updates by chapter for the latest internet exercises 73
  74. 74. END 74

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