Syllabus, Public Finance Econ 132, Fall 2006 Professor Mason Gaffney Classes begin on, Friday, September 29, 10:10AM Location: Sproul 2343 Vacation Days: Friday, Nov. 10, Veterans’ Day Friday, Nov. 24, Thanksgiving Midterm exam: Friday, November 3 Last day of class: Friday, December 8 Final exam: Thursday, December 14, 8 AM My office hours: Wednesday, 12:30-1:30 and by apptmt. My office: Sproul 3105 Equipment required: a clicker, registered in your name, brought to class, in working order, not lost or “left at home” – carry a spare fresh battery Textbook required: none Readings: a. Most of them are posted on iLearn b. A few are on Reserve Basis of grading: a. Daily quizzes, 70% b. Midterm, 10% c. Final, 20% d. Extra credit from term papers is optional, and added to a+b+c. A term paper can add from 0 to 10% to your grade, depending on QUALITY e. Anyone who feels moved to address the class on a relevant topic is welcome to do so, and will get extra credit IF (and only if) the talk is of good quality Introductory A. Why this syllabus is so long a. It is a survey, to show you how the whole subject fits together b. We will fly through parts of it, and treat other parts in depth B. Why I do not use a textbook C. Readings are on iLearn, with headings keyed to this syllabus D. Survey of issues currently in play (more on this is in Unit IV, but the whole list is here)
E. Some basic economic concepts, and mathematics of finance Unit I. What governments do A. National defense 1. Repel invasion 2. Protect international commerce, in some reasonable measure 3. Protect overseas property of U.S. citizens and corporations? This is parlous, and challenges foreign sovereignty 4. Police the world? 5. Acquire new lands with their peoples? B. Manage public lands: dedicate, administer, lease, or sell subject to reserved powers like taxation, police power, eminent domain, ferae naturae, etc. C. Public works and services to make private land more usable 1. Domestic Transportation, Communication: infrastructure and legal framework for 2. Other natural monopolies and public goods, infrastructure and legal framework for 3. Water supply, drainage, flood control 4. Sanitation, sewerage, pest abatement 5. Other public utilities D. Regulate currency and banking E. Unify the regions of the polity a. Offset “Balkanization”. “Donor” and “donee” jurisdictions. Fiscal Federalism. b. Keep internal markets free c. Keep internal migration free, for persons and capital d. Offset local “fiscal mercantilism” (e.g. “mall wars”; exclusionary zoning; gated communities; tax increment financing; etc.) e. The price paid for disunity: civil strife, partition, foreign domination F. Protect the rights of persons a. Policing b. Administer justice G. Guard the welfare of minors, the aged, the infirm and helpless – a public trust a. Education b. Policing and jailing c. Administer justice d. Pensions H. Guard public health
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a. Sanitation b. Control communicable diseases, epidemics c. Fire control Regulate spillover damages a. Control pollution of the common environment b. Protect air and water Confer and regulate citizenship; uphold voting rights Define and protect property Enforce contracts Raise revenues and regulate public finance Stabilize and enhance the macro-economy a. Regulate money and banking b. Manage public debt and the banks with “open market policy” c. Run deficits or surpluses as needed to regulate aggregate spending Can we rein in wasteful government spending? Causes and possible cures Can we dispense with government and taxes? Anarchism, libertarianism, the Laffer Curve effect, “public choice”, secessionism, Randism, Coasianism, et al. We can use taxation and regulation to sharpen incentives, weaken monopoly, and help private markets work better Measuring the benefits of government spending. For this we must first know who benefits, and how? See Unit II.
Unit II. Who benefits from government spending? A. Proximate vs. Ultimate beneficiaries a. Benefits may be “shifted” from the proximate or apparent beneficiaries b. Benefits then “lodge” in the ultimate beneficiaries, who may be invisible until you’ve learned how to find them B. Rents: a. Assets of inelastic supply capture rents, surpluses, and benefits b. The idea of “public goods”, and their locational element in fact C. Land values derived from captured rents a. Simple capitalization b. Capitalization of rising expectations c. Capitalization of “floating values”, the hope of future rents d. Unearned increments
e. “Perfect knowledge” is not perfect foresight, so land values are inflated by the most optimistic expectations of rising rents, and falling discount rates f. The value/rent ratio keeps changing, and is currently higher than in the recent past D. Military Spending E. Recipients of privatized lands F. Reshuffling rents by improving transportation G. Who owns the water? H. Value of utility hookups I. Value of internal trade J. The “World Economy”: current churning of rents K. Education: proximate and ultimate beneficiaries L. Care of the aged: promises, promises M. Policing: a. protecting persons sometimes, and property at all times b. High cost of policing auto traffic N. Administering justice a. Regressive penalties b. Crimes without victims? c. Need for “standing” in court d. High costs screen out poor clients M. Public health a. Achievements in sanitary engineering of the Progressive Era: sewering the cities; William Gorgas, yellow fever, and mosquito abatement b. Current pressing problems 1. Loss of wetlands 2. Solid waste disposal 3. Radioactive waste 4. Pollution of air and waters c. Plagues of the past d. Epidemiology – hope for the future N. Welfare: proximate and ultimate beneficiaries Unit III. Who pays the taxes? 1. Proximate vs. Ultimate payors a. Taxes may be “shifted” from the proximate or apparent payors b. Taxes then “lodge” in the ultimate payors, who may be invisible until you’ve learned how to find them c. The process of shifting and lodging is called “tax incidence” 2. Basic theory of tax incidence
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a. Locke, Vanderlint, Quesnay, Smith b. Ramsey c. Musgrave and forward shifting d. Excess burden, who bears it? The property tax “General” sales taxes a. Retail sales taxes b. Value-added taxes (VAT) c. Turnover taxes (taxes in cascade) The income taxes a. Personal b. Corporate c. Net proceeds of mineral extraction Payroll taxes Excise and user taxes a. Taxes on vehicles and their usage i. Gasoline taxes, state and federal ii. Vehicle license taxes iii. Sales taxes on sale of vehicles iv. Charges for curb parking v. Vehicle taxes as a form of land tax vi. The balance: vehicles may be more subsidized than taxed vii. The falling role of vehicle taxes (yes, really!) b. Sumptuary taxes (“sin” taxes) c. “Green” taxes d. Utility taxes e. “Severance” (of natural resources) taxes Rents from public lands and other natural resources in the public domain (radio spectrum, aircraft lanes, shipping lanes, rights-of-way, waters, fisheries, timber, grazing, quotas, curb parking, licenses, private r.r. sidings, piers, seawalls, mooring space, etc.) Estate and inheritance taxes
Unit IV. What’s currently in play? (Reprised from Introduction) 1. Federal level 2. State level 3. Local level Unit V. Effect of taxes on efficiency, incentives, and allocation 1. “Excess burden” (collateral damage) of shiftable taxes
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a. The acid test: effect of taxes on the use of marginal land b. Effects on internal margins of land use c. Quantum leap effects: forcing land into lower uses d. Intertemporal effects: slowing the frequency of capital turnover, and site renewal e. Effects on capital formation Costs of administration and enforcement Evasion and avoidance – the costs of cheap enforcement Taxes without excess burdens When are excess burdens desirable? Congestion, pollution, depletion, and “marginal-cost pricing” How taxes may magnify and sharpen incentives a. Wealth effects b. Liquidity effects c. Income effects
Unit VI. Effect of taxes on distribution of wealth and income 1. The “Pen Parade” 2. “Point values” (like wealth) and “flow values” (like income, wages, cash-flow, and consumption) 3. Standard measures of dispersion or inequality 4. Shorthand measure of (3): share of the top few 5. Wealth is more dispersed or unequal 6. Taxes now focus increasingly on cash-flows 7. Dispersion by: a. Wealth b. Income c. Ethnic and religious groups d. Gender e. Age groups f. Regions, states, neighborhoods g. Educational level h. Industries, organizations, occupations i. Corporations vs. Households j. Location of owners: Absentees vs. Residents 8. What is “justice in distribution”? Unit VII. Government Debts 1. The constant temptation for governments to borrow 2. The Keynesian rationale (“demand-side economics”) 3. The Barro rationale (“Ricardian Equivalence”) 4. The military rationale 5. The awful truths about public debt
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Crowding out Inflation Compound interest Wasted and sterilized capital The reckoning, when you foot the bill
Unit VIII. An economy of abundance 1. We nearly had it 2. We lost it 3. Can we get it back?