Intro to Public Budgeting and Finance

Module 1- Institutional Failure

Revolutionary War

1780- Washington’s troops lacked food which led to stealing.

Why: this problem was because of Congress, they were structurally unable to tax the states or establish public credits

10th Amendment

The federal gov’t only has the power specifically mentioned in the constitution, everything else can be controlled by the states or the people

16th amendment

lets federal gov’t collect income tax from peoples earning without dividing it based on the states population as they previously did.

Article 2 Section 8 (Power of Congress)

to lay and collect taxes, duties, imposts and excises, to pay debts, borrow money, regulate commerce. coin money and regulate the value.

Article 1, Section 9 (writ of habeas Corpus)

no tax or duty shall be laid on articles exported from any state, no money shall be drawn from treasury, but consequences of appropriation made by law

Gov’t Branches

Legislative (makes law): Congress, Senate (6 yr), House of Reps (6)

Executive (carry out laws): President, VP and Cabinet

Judicial (interprets laws): Supreme Courts or other federal courts

Filibuster

Most votes in Congress require 51% majority pass. In Senate 3:5 vote can stop the debate and allow vote to take place. They yap until 3:5 stops them

Nuclear option

Allows the Senate to block filibuster for certain actions

Electoral College

538 electors who awards votes to the popular vote winner. If 270 vote isn’t reached, House of Repsdecides the President. Each state has a number of electors based on its congressional representation.

Two-Sector Model

Households provide labor to firms who pay them income. Households spend income on goods, firms use the money to produce more goods

Three-Sector Model

Same as the 2 sectors but adds in gov’t; Households pay taxes to the gov’t and save in the financial market. Gov’t uses taxes to make purchases and may borrow from financial market firms invest in financial markets to expand.

Asymmetric Information

different info level between parties in a transaction

Adverse Selection

Poor quality goods dominating the market; high risk or poor quality who know their situation are more likely to participate in a transaction, leading to a market failure. Those with low risk or good quality would rather opt out leading to neg consequences for less informed.

Moral Hazard

Riskier behavior occurs after getting insurance coverage

Economic Stablization

Gov’t role is to lower unemployment rate & lower inflation

Fiscal Policy

Gov’t spending and taxation goal is to influence economy to speed up or slow down. Takes a long time to implement and requires approval of different chambers in gov’t

Monetary Policy

Management of economy by controlling the supply of money & interest rates (banks)

Redistribution

reduce income inequality & provide a basic standard of living.

Mixed Economy

Some functions are performed by gov’t while some are preference by private companies.

Subsidy

When the gov’t pays people or an organization to help them do something like innovate or provide services

Tariff

Taxes imposed by one country on goods and services on another country’s imports

Major Revenue Sources

personal income, sales, corporate income and property are main revenue sources for federal, state and local gov’t

Tax Structure

Regressive: Disproportionally affects lower income individuals (excise tax)

Proportional: Same rate across income levels (sales tax)

Progressive: Higher rates for higher income (income tax)

Forward Shifting

Business increase prices to reflect taxes

Backward Shifting

Business paying workers or company less for what it needs. Can help business save money but make workers unhappy or lower quality produced

Absorption

Business takes on extra cost rather than reflecting to people or company which lowers profits for owners.

Income effect

when tax is imposed you have less money to spend so you have to cut back on purchases

substitution effect

taxes make certain things expensive compared to others so you switch to a cheaper alternative

Why is tax an efficiency?

tax is inefficient if it causes you to change you choices in ways you wouldn’t without the tax

Why is tax a dead weight loss?

tax might make you less happy or business might lose customers which will make taxes a dwl

DWL: loss of economic efficiency with market not at equilibrium

Horizontal equity

people in the same income group should pay the same amount in taxes.

Vertical is taxes vary in proportions to income

Tax Payer Passive System

Gov’t does most of the work

Tax Payer Active System

Taxpayers have to calculate and remit taxes themselves

Gross Income Formula

Wages +Salaries+ Dividends+ interest+ other oncome

Adjusted Gross Income (AGI)

Gross Income- adjustments

Taxable Income

AGI- Max (Standard deduction, itemized deduction)

Tax Paid Liability

(Income in each bracket*tax rate for the bracket)

Final Tax liability

tax liability- tax credit

Average tax rate

(total tax paid/ total taxable income)*100

Marginal tax rate

add $1 to taxable income and see what tax bracket it is

Tax Levy

assessed value* mil rate