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Summary1-10 - Public finance also known as public sector...

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Public finance, also known as public sector economics or public economics, focuses on the taxing and spending activities of government and their influence on the allocation of resources and distribution of income. Public finance economists both analyze actual policies and develop guidelines for government activities. In the latter role, economists are influenced by their attitudes toward the role of government in society. In an organic view of society, individuals are valued only by their contribution to the realization of social goals. These goals are determined by the government. In a mechanistic view of society, government is a contrivance erected to further individual goals. It is not clear how the government can reconcile sometimes conflicting individual goals. Individual decision making is the focus of much economics and is consistent with the mechanistic view of society adopted in this book. This does not eliminate much controversy over the appropriate role of the government in our economy. The Constitution embodies constraints on federal and state government economic activity. The federal government may effectively undertake any expenditures it wishes and may use debt and taxes to finance them. The federal government may not discriminate among states when choosing tax rates and may not place a levy on state exports. The 16th Amendment empowers the federal government to tax personal incomes. State governments are forbidden to levy tariffs on imports, discriminate against outside residents, or tax other states' products. Most states have balanced budget requirements. All common measures of the size of government—employees, expenditures, revenues, etc.—involve some deficiency. In particular, these items miss the impact of regulatory costs. Nonetheless, there is strong evidence that the impact of the government on the allocation of national resources has increased over time. The level of government expenditures has increased in both nominal and real absolute terms, in per capita terms, and as a percentage of Gross Domestic Product. The share of defense spending in federal expenditure has fallen over time, while Social Security, public welfare, and payments on outstanding debt have increased in importance. The combination of entitlement programs and interest payments reduces yearly control over the level of expenditures. Personal income and Social Security payroll taxes are currently the largest sources of government revenue. Chapter 2 One goal of the field of public finance is to estimate how various government policies affect individuals' behavior. Economic theory provides a framework for thinking about the factors that might influence the behavior of interest, and helps generate hypotheses that can be tested through empirical research. However, theory alone cannot say how important any particular factor is.
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An important purpose of empirical work in public finance is to estimate the causal relationship between a government policy and some kind of behavior. Three
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