Fiscal Federalism and State and
Local Government Finance
Levels of Government
County (called a Parish in Louisiana)
School, Water, Fire, Sanitation District
City, Town, Village
The federal government sends 15% of
Taxes on Wealth Property
A Comprehensive Wealth Tax Base
Real Property is property such as land and
the structures on the land.
Intangible Property is wealth that is held as
paper or financial assets.
Personal Property is wealth t
Taxes on Consumption and Sales
Consumption as a Tax Base
Consumption can be an alternative to
income as a measure of ability to pay.
Note that capital gains would not be taxed
if it were not spent.
Taxation of Corporate
Forms of Business
Corporations are granted the legal
status of people.
This means that they can own property
and borrow money.
Taxation of Personal Income
in the United States
The Tax Base: Basic Rules for
Calculating Taxable Income and
Why Much of Income Is Untaxed
Taxable Income is the portion of income received by
households that is subject to personal income tax.
The Theory of
Income Taxes were introduced as an
emergency measure during the U.S.
An 1894 attempt to introduce a regular
income tax was declared unconstitutional.
In 1913, the 16th Amendment to the U.S
Budget Balance and
A Budget Surplus exists when Tax Revenues
are greater than expenditures and is the
difference between the two.
A Budget Deficit exists when Expenditures
are greater than Tax Revenues and is the
Derivation of the Formula for Excess
Burden of a Unit Tax
W = 1/2T Q
W = excess burden (Deadweight loss)
T = tax
Q = change in equilibrium quantity as a result
of the tax
Solving for Q
Step 1: Some Definitions
T = PG PN
Taxation, Prices, Efficiency,
and the Distribution of Income
A Lump-sum tax is a fixed tax that is
owed by everyone and is not subject to
anything taxpayers can change.
It is independent of income,
consumption, or wealth.
Federal, State, and Local Revenue
$3 trillion annually
Income (Corporate and Personal)
Sales and Excise
Purpose and Consequences
Government Health Care Spending
Government spending represents 45% of the
$1.3 trillion spent on Health Care.
20% of the Federal Budget is devoted to
health care issues.
Figure 9.1 U.S. Health Expenditures as a
Social Security and
Social Security Act of 1935
Requirements at that time:
Retirement Age: 65
1% for employer and
Tax applied to the first $3000
of earned income
Other Nations and Social Insurance
Government Subsidies and
Income Support for the Poor
Poverty in 2001
33 million people in U.S. affected
12% of the population classified as
Poverty in the United States
Poverty threshold or poverty line
Cost-Benefit Analysis and
Economic Analysis for the Budget Process:
Achieving the Least-Cost Means of
Accomplishing an Authorized Objective
A Program is a combination of government activities
producing a distinguishable
Public Choice and the Political
The Supply of Public Goods
Through Political Institutions
Public Choice involves
decisions being made
through political interaction
of many persons according
to pre-established rules.
Public Goods are goods for which
exclusion is impossible.
One example is National Defense: A
military that defends one citizen
from invasion does so for the entire
Characteristics of Public Goods
Externalities and Public Policy
Externalities are costs or benefits of
market transactions not reflected in
Negative externalities are costs to third
Positive externalities are benefits to third
Efficiency Resource Use
2 inputs (capital and labor)
2 outputs (food and clothing)
F = F(LF,KF)
C = C(LC,KC)
F = food production
C = clothing production
Li = labor devote
Efficient Markets and
Positive and Normative Economics
Positive Economics explains what is,
without making judgments about the
appropriateness of what is.
Normative Economics: designed to
formulate recommendations about
Indifference Curve Analysis
Market Baskets are combinations of
Indifference Curves are curves
connecting various market basket
combinations of goods that make an
individual equally happy.
Assumptions about Preferences
Individuals and Government
Public finance is the field of economics
that studies government activities and the
alternative means of financing government
Governments are organizations formed to