Public finance & taxes

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review graphs and annual budget cycle

Finance

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76 Terms

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market failure

a problem that causes the market economy to deliver an outcome that does not maximize efficiency

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redistribution

the shifting of resources from some groups in society to other

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price mechanism

changing the price of a good to encourage or discourage use

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public provision

the government provides the good directly

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public financing of private provision

the government pays and companies produce

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political economy

the theory of how the political process produces decisions that affect individuals and the economy

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centralization

the extent to which spending is concentrated at higher (federal) levels or lower (state and local) levels

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budget surplus

when revenues exceed spendings

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budget deficit

when revenues fall short of spendings

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debt

measures the accumulation of past deficits over time

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public goods

goods for which the investment of any one individual benefits everyone in a larger group

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social insurance programs

government provision of insurance against adverse events to address failures in the private insurance market

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individual income tax

a tax lieved on the income

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corporate tax

the funds raised by taxing the incomes of businesses

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payroll tax

the taxes on worker earnings that fund social insurance programes

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theoretical tools

the set of tools designed to understand the mechanics behind economic decision making

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empirical tools

the set of tools designed to analyze data and answer questions raised by theoretical analysis

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utility function

a mathematical function representing an individual’s set of preferences, helps determine choice

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constrained utility maximization

the process of maximizing the well-being (utility) of an individual, subject to their resources (budget constraint)

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models

mathematical or graphical represtentations of reality

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indifference curve

a graphical representation of all bundles of goods that make an individual equally well off

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marginal utility

the additional increment to utility obtained by consuming an additional unit of good

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diminishing marginal utility

the consumption of each additional unit of good makes the individual less happy than the consumption of the previous one

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marginal rate of substitution

the rate at which a consumer is willing to trade one good for another

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budget constraint

a mathematical representation of all the combination of goods an individual can afford to buy if they spend their entire income

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opportunity cost

the cost of any purchase is the next best alternative use of that money, or the forgone oportunity

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substitution effect

holding utility constant, a relative rise in the price of good will always cause an individual to choose less of that good

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income effect

a rise in the price of a good will typically cause an individal to choose less of that good because their income can purchase less than before

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normal goods

goods for which demand increases as income rises

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inferior goods

goods for which demand decreases as income rises

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market

the arena in which demanders and suppliers interact

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market equilibrium

the combination of price and quantity that satisfies both demand and supply

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welfare economics

the study of the determinants of well-being, or welfare in society

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demand curve

a curve showing the quantity of a good demanded by individuals at each price

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elasticity of demand

the percantage change in the quantity demanded of a good caused by each 1% change in the price of that good

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supply curve

a curve showing the quantity of a good that firms are willing to produce at each price

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marginal productivity

the impact of a unit change in any input, holding other inputs constant, on the firm’s output

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marginal cost

the incremantal cost to a firm of producing one more unit of a good

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entitlement spending

mandatory funds for programs for which funding levels are autmatically set by the number of eligible recipients

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discretionry spending

optional spending set by appropriation levels each year at Congress’s discretion

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balanced budget rquirement

a law forcing a given government to balance its budget each year (spending=revenue)

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ex post bbr

a law forcing a given government to balance its budget by the end of each fiscal year

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ex ante bbr

a law forcing either the governor to submit a balanced budget or the legistrature to pass a balanced budget at the start of each fiscal year, or both

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real prices

prices stated in some constant year’s dollars

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nominal prices

prices stated in today’s dollars

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consumer price index

an index that captures the change over time in the cost of purchasing a “typical” bundle of goods

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cyclically adjusted budget deficit

a measure of the government’s fiscal position if the economy were operating at full potential GDP

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cash accounting

a method of measuring the government’s fiscal position as the difference between current spending and current revenues

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capital accounting

a method of measuring the government’s fiscal postion that accounts for changes in the value of the government’s net asset holdings

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static scoring

a method used by budget modelers that assumes that government policy changes only the distribution of total resources, not the amount of total resources

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dynamic scoring

a method used by budget modelers that attempts to model the effect of government policy on both the distribution of total resources and the amount of total resources

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implicit obligation

financial obligations that the government has in the future that are not recognized in the annual budgetary process

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present discounted value

the value of each period’s dollar amount in today’s terms

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short-run stabilization issues

the role of the government in combating the peaks and troughs of the business cycle

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automatic stabilization

policis that automatically alter taxes or spending in response to economic fluctuations in order to offset changes in household consumption levles

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discretionary stablilization

policy actions taken by the government in response to particular instances of an underperforming or overperforming economy

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integrational equity

the treatment of future generations relative to current generation

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fiscal policy

involves utilizing of government spending and altering tax revenue to influence a number of economic aspects

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expansionary fiscal policy

decrease in taxes or increase in spending to reduce unemployment and increase output

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contractionary fiscal policy

increase in taxes or decrease in spending to control inflation

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recognition lag

time it takes for the government to recognise that the country is not working to its full potential

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action lag

the government might recognise the problem, but the action is delayed in time

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impact lag

the time that it takes for the fiscal policy to have an impact

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government budget

a document presenting anticipated government revenues and expenditures for the financial year, which may or may not correspond with the calendar year

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budget allocation function

a function used to allocate jobs, tasks, functions and responsibilities

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budget distribution function

it’s how we distribute what we allocate

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budget stabilization function

when we use both fiscal and monetary policy

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budget fiscal function

refers to taking over taxes, duty and other fees, this function focuses on gathering and sharing funds

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budget vote of approval

an act of law issued by legislative body, which evaluates whether financial activity provided by executive body is lawful 

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provisional budget

temporary budget, for a month or a quarter until the yearly budget is adopted, it is “safe mode” in case when a budget draft resolution cannot be adopted on time

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principle of equilibrium

trying to balance with budget in that way, that expenditures are equal with revenues

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entireness principle

including all expenditures and revenues, not only selected ones

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cohesion principle

making only one budget containing all expenditures and revenues, not more documents

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operability principle

making an entity-focused budget, which means indicating tasks and funds for particular entities

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one-year principle

respecting the rule that budget is prepared for only one fiscal year

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openness principle

parliment’s budget work is open and apparent