Public Finance

by Rosen, Harvey S.

• ISBN13: 9780072876482
• ISBN10: 0072876484
• Edition: 7th
• Format: Hardcover
• Copyright: 2004-01-16
• Publisher: McGraw-Hill/Irwin

Summary

Public Finance--while continuing to follow an innovative approach that is both theoretical and empirical--is now completely updated to reflect major changes in its key topics. New or revised information includes explanations of the Social Security trust fund, a new section on the alternative minimum tax (AMT), possible links between the corporation tax and high-profile scandals such as Enron, and more.

Author Biography

Harvey S. Rosen is a professor of economics and business policy at Princeton University. He was appointed by President Bush to serve on the Council of Economic Advisors.

Table of Contents

PART 1 Getting Started
Introduction	3	(17)
Public Finance and Ideology	4	(3)
Organic View of Government	4	(1)
Mechanistic View of Government	5	(1)
Viewpoint of This Book	6	(1)
Government at a Glance	7	(9)
The Legal Framework	7	(3)
The Size of Government	10	(3)
Expenditures	13	(2)
Revenues	15	(1)
Our Agenda	16	(1)
Summary	16	(1)
Discussion Questions	17	(1)
Selected References	18	(1)
Appendix: Doing Research in Public Finance	18	(2)
Tools of Positive Analysis	20	(13)
The Role of Theory	21	(3)
Methods of Empirical Analysis	24	(6)
Interviews	24	(1)
Experiments	25	(1)
Econometric Studies	26	(4)
Concluding Remarks	30	(1)
Summary	31	(1)
Discussion Questions	31	(1)
Selected References	32	(1)
Tools of Normative Analysis	33	(22)
Welfare Economics	33	(8)
Pure Exchange Economy	34	(5)
Production Economy	39	(2)
The First Fundamental Theorem of Welfare Economics	41	(1)
Fairness and the Second Fundamental Theorem of Welfare Economics	42	(4)
Market Failure	46	(2)
Market Power	46	(1)
Nonexistence of Markets	47	(1)
Overview	48	(1)
Buying into Welfare Economics	48	(2)
Summary	50	(1)
Discussion Questions	50	(2)
Selected References	52	(3)
PART 2 Analysis of Public Expenditure
Public Goods	55	(26)
Public Goods Defined	55	(3)
Efficient Provision of Public Goods	58	(7)
Deriving the Efficiency Contribution	60	(3)
Problems in Achieving Efficiency	63	(1)
The Free Rider Problem	64	(1)
The Privatization Debate	65	(5)
Public versus Private Provision	66	(1)
Public versus Private Production	67	(3)
Education	70	(6)
What Do Expenditures for Public Education Accomplish?	72	(2)
New Directions for Public Education	74	(2)
Public Goods and Public Choice	76	(1)
Summary	76	(1)
Discussion Questions	77	(1)
Selected References	78	(1)
Appendix: Preference Revelation Mechanisms	79	(2)
Externalities	81	(30)
The Nature of Externalities	82	(2)
Graphical Analysis	84	(4)
Implications	85	(3)
Conclusion	88	(1)
Private Responses	88	(4)
Bargaining and the Coase Theorem	88	(3)
Mergers	91	(1)
Social Conventions	92	(1)
Public Responses to Externalities	92	(7)
Taxes	92	(2)
Subsidies	94	(2)
Creating a Market	96	(1)
Regulation	97	(2)
Evaluation	99	(1)
The US Response	99	(2)
Market-Oriented Approaches: Sulfur Dioxide	101	(1)
Implications for Income Distribution	101	(2)
Who Benefits?	102	(1)
Who Bears the Costs?	102	(1)
Positive Externalities	103	(4)
A Cautionary Note	103	(4)
Summary	107	(1)
Discussion Questions	107	(3)
Selected References	110	(1)
Political Economy	111	(32)
Direct Democracy	112	(10)
Unanimity Rules	112	(2)
Majority Voting Rules	114	(4)
Logrolling	118	(2)
Arrow's Impossibility Theorem	120	(2)
Representative Democracy	122	(11)
Elected Politicians	122	(4)
Public Employees	126	(2)
Special Interests	128	(4)
Other Actors	132	(1)
Explaining Government Growth	133	(7)
Controlling Government Growth	136	(4)
Conclusions	140	(1)
Summary	140	(1)
Discussion Questions	141	(1)
Selected References	142	(1)
Income Redistribution: Conceptual Issues	143	(22)
Distribution of Income	144	(4)
Interpreting Distributional Data	146	(2)
Rationales for Income Redistribution	148	(8)
Simple Utilitarianism	148	(3)
The Maximin Criterion	151	(2)
Pareto Efficient Income Redistribution	153	(1)
Nonindividualistic Views	154	(1)
Other Considerations	155	(1)
Expenditure Incidence	156	(6)
Relative Prices Effects	157	(1)
Public Goods	157	(1)
Valuing In-Kind Transfers	158	(2)
Reasons for In-Kind Transfers	160	(2)
Conclusion	162	(1)
Summary	162	(1)
Discussion Questions	163	(1)
Selected References	164	(1)
Expenditure Programs for the Poor	165	(26)
A Quick Look at Welfare Spending	165	(1)
TANF	166	(1)
Income Maintenance and Work Incentives	167	(9)
The Basic Trade-offs	167	(1)
Analysis of Work Incentives	168	(6)
Work Requirements	174	(1)
Time Limits	175	(1)
Family Structure	175	(1)
National versus State Administration	176	(5)
Medicaid and Health	181
The Earned Income Tax Credit	176	(2)
Supplemental Security Income	178	(1)
Medicaid	178	(3)
Crowding Out	179	(1)
The Medical Notch	180	(1)
Food Stamps and Child Nutrition	181	(1)
Housing Assistance	182	(2)
Programs to Enhance Earnings	184	(1)
Education	184	(1)
Employment and Job Training	185	(1)
Overview	185	(3)
Summary	188	(1)
Discussion Questions	188	(2)
Selected References	190	(1)
Social Insurance I: Social Security and Unemployment Insurance	191	(25)
Why Have Social Insurance?	192	(2)
Adverse Selection	192	(1)
Other Justifications	193	(1)
Structure of Social Security	194	(9)
Basic Components	195	(3)
Distributional Issues	198	(4)
The Trust Fund	202	(1)
Economic Status of the Aged	202	(1)
Effects on Economic Behavior	203	(3)
Saving Behavior	203	(2)
Retirement Decisions	205	(1)
Implications	206	(1)
Long-Term Stresses on Social Security	206	(1)
Social Security Reform	207	(3)
Maintain the Current System	207	(1)
Privatize the System	207	(3)
Unemployment Insurance	210	(3)
Benefits	211	(1)
Financing	211	(1)
Effects on Unemployment	212	(1)
Conclusions	213	(1)
Summary	213	(1)
Discussion Questions	214	(1)
Selected References	215	(1)
Social Insurance II: Health Care	216	(23)
What's Special About Health Care?	216	(3)
The US Health Care Market	219	(3)
Private Insurance	219	(3)
The Role of Government	222	(6)
Medicare	222	(5)
The Implicit Subsidy for Health Insurance	227	(1)
The Twin Issues: Access and Cost	228	(5)
Access	228	(1)
Cost	229	(4)
New Directions for Government's Role in Health Care	233	(3)
Individual Mandates	233	(1)
Single Payer	233	(2)
Add a Prescription Drug Benefit	235	(1)
Final Thoughts	236	(1)
Summary	236	(1)
Discussion Questions	237	(1)
Selected References	238	(1)
Cost--Benefit Analysis	239	(34)
Present Value	240	(3)
Projecting Present Dollars into the Future	240	(1)
Projecting Future Dollars into the Present	240	(2)
Inflation	242	(1)
Private Sector Project Evaluation	243	(4)
Internal Rate of Return	245	(1)
Benefit-Cost Ratio	246	(1)
Discount Rate for Government Projects	247	(3)
Rates Based on Returns in the Private Sector	247	(1)
Social Discount Rate	248	(1)
Government Discounting in Practice	249	(1)
Valuing Public Benefits and Costs	250	(7)
Market Prices	250	(1)
Adjusted Market Prices	251	(1)
Consumer Surplus	252	(1)
Inferences from Economic Behavior	253	(3)
Valuing Intangibles	256	(1)
Games Cost-Benefit Analysts Play	257	(1)
The Chain-Reaction Game	257	(1)
The Labor Game	258	(1)
The Double-Counting Game	258	(1)
Distributional Considerations	258	(2)
Uncertainty	260	(1)
An Application: Are Reductions in Class Size Worth It?	261	(2)
Discount Rate	261	(1)
Costs	261	(1)
Benefits	262	(1)
The Bottom Line and Evaluation	262	(1)
Use (and Nonuse) by Government	263	(2)
Summary	265	(1)
Discussion Questions	265	(2)
Selected References	267	(1)
Appendix: Calculating the Certainty Equivalent Value	267	(6)
PART 3 A Framework for Tax Analysis
Taxation and Income Distribution	273	(31)
Tax Incidence: General Remarks	274	(4)
Only People Can Bear Taxes	274	(1)
Both Sources and Uses of Income Should Be Considered	275	(1)
Incidence Depends on How Prices Are Determined	275	(1)
Incidence Depends on the Disposition of Tax Revenues	276	(1)
Tax Progressiveness Can Be Measured in Several Ways	276	(2)
Partial Equilibrium Models	278	(14)
Unit Taxes on Commodities	278	(5)
Ad Valorem Taxes	283	(2)
Taxes on Factors	285	(2)
Commodity Taxation without Competition	287	(3)
Profits Taxes	290	(1)
Tax Incidence and Capitalization	291	(1)
General Equilibrium Models	292	(8)
Tax Equivalence Relations	293	(1)
The Harberger Model	294	(1)
Analysis of Various Taxes	295	(3)
Some Qualifications	298	(1)
An Applied Incidence Study	299	(1)
Conclusions	300	(1)
Summary	300	(1)
Discussion Questions	301	(2)
Selected References	303	(1)
Taxation and Efficiency	304	(25)
Excess Burden Defined	305	(8)
Questions and Answers	308	(5)
Excess Burden Measurement with Demand Curves	313	(8)
Preexisting Distortions	315	(1)
The Excess Burden of a Subsidy	316	(3)
The Excess Burden of Income Taxation	319	(2)
Differential Taxation of Inputs	321	(3)
Does Efficient Taxation Matter?	324	(1)
Summary	324	(1)
Discussion Questions	325	(1)
Selected References	326	(1)
Appendix A: Formula for Excess Burden	326	(1)
Appendix B: Multiple Taxes and the Theory of the Second Best	327	(2)
Efficient and Equitable Taxation	329	(30)
Optimal Commodity Taxation	329	(7)
The Ramsey Rule	331	(3)
Equity Considerations	334	(1)
Summary	335	(1)
Application: Taxation of the Family	335	(1)
Optimal User Fees	336	(3)
Overview	339	(1)
Optimal Income Taxation	339	(4)
Edgeworth's Model	340	(1)
Modern Studies	340	(3)
Politics and the Time Inconsistency Problem	343	(1)
Other Criteria for Tax Design	344	(10)
Horizontal Equity	345	(3)
Costs of Running the Tax System	348	(1)
Tax Evasion	349	(5)
Overview	354	(1)
Summary	354	(1)
Discussion Questions	355	(1)
Selected References	356	(3)
PART 4 The United States Revenue System
The Personal Income Tax	359	(42)
Basic Structure	359	(2)
Defining Income	361	(3)
Items Included in H-S Income	361	(1)
Some Practical and Conceptual Problems	362	(1)
Evaluating the H-S Criterion	363	(1)
Excludable Forms of Money Income	364	(6)
Interest on State and Local Bonds	364	(2)
Some Dividends	366	(1)
Capital Gains	366	(3)
Employer Contributions to Benefit Plans	369	(1)
Some Types of Saving	369	(1)
Gifts and Inheritances	370	(1)
Exemptions and Deductions	370	(10)
Exemptions	371	(1)
Deductions	371	(7)
Impact on the Tax Base	378	(1)
Tax Expenditures	378	(1)
The Simplicity Issue	379	(1)
Rate Structure	380	(5)
Effective versus Statutory Rates	382	(3)
Taxes and Inflation	385	(3)
How Inflation Can Affect Taxes	385	(2)
Coping with the Tax/Inflation Problem	387	(1)
The Alternative Minimum Tax (AMT)	388	(2)
Choice of Unit and the Marriage Tax	390	(4)
Background	390	(2)
Analyzing the Marriage Tax	392	(2)
Treatment of International Income	394	(1)
State Income Taxes	395	(1)
Politics and Tax Reform	396	(1)
Summary	397	(1)
Discussion Questions	398	(2)
Selected References	400	(1)
Personal Taxation and Behavior	401	(27)
Labor Supply	402	(9)
Theoretical Considerations	402	(3)
Empirical Findings	405	(1)
Some Caveats	406	(2)
Labor Supply and Tax Revenues	408	(3)
Overview	411	(1)
Saving	411	(10)
Econometric Studies of Saving	418	(1)
Tax-Preferred Savings Accounts	419	(1)
Taxes and the Capital Shortage	420	(1)
Housing Decisions	421	(3)
Proposals for Change	422	(2)
Portfolio Composition	424	(1)
A Note on Politics and Elasticities	425	(1)
Summary	426	(1)
Discussion Questions	426	(1)
Selected References	427	(1)
The Corporation Tax	428	(27)
Why Tax Corporations?	428	(1)
Structure	429	(5)
Employee Compensation Deducted	430	(1)
Interest, but Not Dividends, Deducted	430	(1)
Depreciation Deducted	430	(3)
No Investment Tax Credit	433	(1)
Treatment of Dividends versus Retained Earnings	433	(1)
Effective Tax Rate on Corporate Capital	434	(1)
Incidence and Excess Burden	434	(3)
A Tax on Corporate Capital	434	(1)
A Tax on Economic Profits	435	(2)
Effects on Behavior	437	(7)
Total Physical Investment	437	(4)
Types of Asset	441	(1)
Corporate Finance	441	(3)
State Corporation Taxes	444	(1)
Taxation of Multinational Corporations	445	(4)
Evaluation	446	(3)
Corporation Tax Reform	449	(3)
Full Integration	449	(3)
Dividend Relief	452	(1)
Summary	452	(1)
Discussion Questions	453	(1)
Selected References	454	(1)
Deficit Finance	455	(18)
How Big Is the Debt?	455	(6)
Interpreting Deficit, Surplus, and Debt Numbers	457	(3)
Summing Up	460	(1)
The Burden of the Debt	461	(5)
Lerner's View	461	(1)
An Overlapping Generations Model	462	(2)
Neoclassical Model	464	(1)
Ricardian Model	465	(1)
Overview	466	(1)
To Tax or to Borrow?	466	(4)
Benefits-Received Principle	467	(1)
Intergenerational Equity	467	(1)
Efficiency Considerations	467	(1)
Macroeconomic Considerations	468	(1)
Moral and Political Considerations	469	(1)
Overview	470	(1)
Summary	471	(1)
Discussion Questions	471	(1)
Selected References	472	(1)
Taxes on Consumption and Wealth	473	(32)
Retail Sales Tax	473	(5)
Rationalizations	474	(2)
Efficiency and Distributional Implications	476	(1)
A National Retail Sales Tax?	477	(1)
Transitional Issues	478	(1)
Value-Added Tax	478	(4)
Implementation Issues	479	(1)
A VAT for the United States?	480	(2)
Hall-Rabushka Flat Tax	482	(1)
Cash-Flow Tax	483	(1)
Efficiency and Fairness of Personal Consumption Taxes	484	(3)
Efficiency Issues	484	(1)
Equity Issues	485	(2)
Income versus Consumption Taxation	487	(4)
Wealth Taxes	491	(1)
Why Tax Wealth?	491	(1)
Estate and Gift Taxes	492	(7)
Rationales	493	(3)
Provisions	496	(3)
Reforming Estate and Gift Taxes	499	(1)
Summary	499	(1)
Discussion Questions	500	(1)
Selected References	501	(4)
PART 5 Multigovernment Public Finance
Public Finance in a Federal System	505	(37)
Background	506	(1)
Community Formation	507	(1)
The Tiebout Model	508	(4)
Tiebout's Assumptions	509	(2)
Tiebout and the Real World	511	(1)
Optimal Federalism	512	(9)
Disadvantages of a Decentralized System	512	(3)
Advantages of a Decentralized System	515	(2)
Implications	517	(1)
Public Education in a Federal System	518	(1)
Federalism and the Urban Crisis	519	(2)
Property Tax	521	(9)
Incidence and Efficiency Effects	522	(6)
Why Do People Hate the Property Tax So Much?	528	(2)
Intergovernmental Grants	530	(9)
Types of Grants	532	(5)
The Flypaper Effect	537	(1)
Intergovernmental Grants for Education	538	(1)
Overview	539	(1)
Summary	539	(1)
Discussion Questions	540	(1)
Selected References	541	(1)
Appendix Some Basic Microeconomics	542	(25)
Glossary	567	(10)
References	577	(18)
Author Index	595	(4)
Subject Index	599