UNIT 4: ECONOMICS OF

THE PUBLIC SECTOR

Chapter 11: Government and the Economy

Chapter 12: Taxes and Taxation

11.2 HOW DOES THE GOVERNMENT PROTECT PROPERTY RIGHTS? The Constitution outlines the federal government’s

economic powers. All government regulation, the establishment of rules aimed at influencing the behavior of firms and individuals, is based on these constitutional powers. Lay and collect taxes, provide for the general welfare, borrow

money, regulate interstate and foreign commerce, establish uniform bankruptcy laws, coin money and regulate its value, fix the standard of weights and measures, protect the writings and discoveries of authors and inventors

The government protects private property rights through such institutions as the court system, police forces, and the U.S. Patent and Trademark Office.

At times, the government limits property rights through eminent domain, the power to take an individual’s property for public use if the owner is fairly compensated.

11.3 WHAT REGULATORY ROLES DOES GOVERNMENT PLAY IN OUR ECONOMY?

The federal government acts to maintain competition when markets fail to do so. It does this through regulatory agencies like the Justice Department and the Federal Trade Commission, which create and enforce industry standards and regulations.

These agencies prohibit practices that restrict competition and monitor activities that might lead to a merger, the combining of two or more separately owned firms.

11.3 WHAT REGULATORY ROLES DOES GOVERNMENT PLAY IN OUR ECONOMY? The federal government also aims to protect

consumers, savers, and investors. Regulatory agencies like the Food and Drug

Administration work to ensure the safety of products as well as the financial security of savers and investors.

The Department of Labor seeks to safeguard the interests and physical well-being of workers.

Some critics argue that the government regulates firms too much, causing a variety of economic problems. These critics call for deregulation, or the removal of government restrictions on firms’ economic activity to increase competition.

11.4 HOW SHOULD GOVERNMENT ADDRESS EXTERNALITIES AND PUBLIC GOODS?

The government attempts to promote positive externalities such as higher education, which benefits society by creating a more productive workforce.

When faced with negative externalities, economists prefer that the government implement market-based policies, such as corrective taxes and cap-and-trade permits, which put the burden on the market rather than on society at large.

11.4 HOW SHOULD GOVERNMENT ADDRESS EXTERNALITIES AND PUBLIC GOODS? The government plays a role in preserving

common resources, or resources everyone has access to, through tolls, quotas, and privatization.

When common resources are overused or destroyed, economists call this a tragedy of the commons.

Governments must make choices as to which public goods they will provide.

When government intervention causes a more inefficient allocation of resources than would otherwise occur, economists say there is government failure.

11.5 WHAT DOES GOVERNMENT DO TO PROMOTE ECONOMIC WELL-BEING?

Since the Great Depression, the federal government has taken on more responsibility for economic well-being.

It attempts to promote economic stability by maintaining a widely accepted currency and stimulating business activity during economic slowdowns.

11.5 WHAT DOES GOVERNMENT DO TO PROMOTE ECONOMIC WELL-BEING?

The government also redistributes income to address poverty and to reduce the poverty rate, the percentage of the population whose family income falls below a certain level. To this end, the government coordinates many antipoverty programs.

http://aspe.hhs.gov/POVERTY/09poverty.shtml

CHAPTER 12 TAXES AND TAXIATION

12.2 WHAT ARE TAXES AND HOW SHOULD THEY BE LEVIED? A tax is a mandatory payment to a local,

state, or federal government. Taxes are collected and used for various purposes, including supporting functions of government, paying for economic infrastructure, and funding welfare and public services.

Adam Smith’s four maxims, or guidelines, of taxation—equity, certainty, convenience, and efficiency—continue to influence thinking about how taxes should be levied.

12.2 WHAT ARE TAXES AND HOW SHOULD THEY BE LEVIED? Economists differ over how to achieve

tax equity, the idea that the tax system should be fair. Some support the ability-to-pay principle,

which suggests that citizens should be taxed according to their wealth.

Others advance the benefits received principle, which says that those who benefit from a particular government program should pay for it.

12.2 WHAT ARE TAXES AND HOW SHOULD THEY BE LEVIED? A challenge in devising a fair tax system

is determining who bears the burden of a tax, or the tax incidence.

Taxes sometimes incur costs by distorting the incentives that normally guide people’s choices.

When taxes motivate people to be less productive, these taxes result in a deadweight loss, a reduction in productivity or economic well-being.

12.3 WHAT KINDS OF TAXES WILL YOU PAY IN YOUR LIFETIME? Americans pay many types of taxes. The

tax base is what is taxed, such as personal income, a good sold at a store, or a piece of property.

The tax rate refers to the percentage of income, or the value of a good, service, or asset, that is paid in tax.

12.3 WHAT KINDS OF TAXES WILL YOU PAY IN YOUR LIFETIME? Taxes are also defined by their structure.

A proportional tax takes the same share of income at all income levels.

A progressive tax takes a larger share of income as income increases.

A regressive tax takes a smaller share of income as income increases.

Among the main types of taxes are income taxes (progressive), payroll taxes (regressive), property taxes (proportional), sales taxes (regressive), corporate income taxes (progressive), excise taxes (regressive), and user fees and tolls (proportional).

12.4 HOW DO U.S. GOVERNMENTS SPEND THE REVENUE THEY RAISE? The federal government gets most of its

revenue from taxes. Each year, the federal government draws up a budget to determine how it will spend its revenue.

Mandatory spending is fixed by law and includes entitlement programs like Social Security and Medicare.

Discretionary spending may be raised and lowered as Congress sees fit, as in cases such as national defense.

12.4 HOW DO U.S. GOVERNMENTS SPEND THE REVENUE THEY RAISE? State and local governments also get

most of their revenue from taxes. They spend their revenue on various

services, including education, public safety, and social welfare.