Chapter 19 - Government Finance

• National Debt - The ==accumulation== of government budget ==deficits== over time
• Government Revenues – allow governments to operate from the following sources:
• Taxes – mandatory contributions collected by governments, which sets ==tax rates==, but public reaction to the tax determines how much total ==revenue== is collected
• Government Bonds – a ==security== sold by the government to borrow money to be ==repaid== from future ==tax revenues==
• Charges – governments sell ==goods== and ==services== like mail, passports, trains, etc.
• Government Expenditures – the money spent by the government, which tends to spend more during ==recessions== and let during economic booms
• Government Budgets – the projection of the government’s ==future revenue== and spending.
• ==Businesses== can change what they produce when some kinds of output are taxed and others are subsidized.
• These operations include taxation, the sale of government bonds and innumerable ways of spending money currently, or promising to spend future money, such as by guaranteeing bank deposits or establishing pension systems to cover some or all of the population when they retire.
• One of the ways of dealing with the many complications of government financial operations is to break them down into the ways that governments raise money and the ways that they spend money—and then examine each separately, in terms of the repercussions of these operations on the economy as a whole.
• The choice between financing government activities with current tax revenues or with revenues from the sale of bonds—in other words, going into debt—has further repercussions on the economy at large.
• If all current government spending is paid for with money received in taxes, then the budget is said to be balanced.
• If current tax receipts exceed current spending, there is said to be a budget surplus.
• If tax revenues do not cover all of the government’s spending, some of which is covered by revenues from the sale of bonds, then the government is said to be operating at a deficit, since bonds are a debt for the government to repay in the future.
• ==Consumers== can change what they buy when some of the goods they use are heavily taxed and other goods are not.
• ==Investors== can decide to put their money into tax-free municipal bonds, or into some foreign country with lower tax rates, when taxes on the earnings from their investments rise—and they can reverse these decisions when tax rates fall.

Government Revenues

• Government revenues come not only from taxes and the sale of bonds, but also from the prices charged for various goods and services that governments provide, as well as from the sale of assets that the government owns, such as land, old office furniture, or surplus military equipment.
• The prices charged for goods and services sold by the government are seldom what they would be if the same goods or services were sold by businesses in a free market—and therefore government sales seldom have the same effect on the allocation of scarce resources which have alternative uses.
• “Death and taxes” have long been regarded as ==inescapable realities,== but which of the various ways in which taxes can be collected is actually used, and which particular tax rate is imposed, makes a difference in the way individuals, enterprises, and the national economy as a whole respond.
• People adjusted their behavior to a more favorable outlook for investments by increasing their investments, so that the new and lower tax rate on the returns from these increased investments amounted to more total revenue for the government than that produced by the previous higher tax rate on a smaller amount of investment.
• ==Tax-exempt securities== usually pay lower rates of return than securities whose returns are subject to taxation.
• Taxes are the prices charged by governments, and sometimes the government too can collect more total revenue at a lower tax rate, it all depends on how high the tax rates are initially and how people react to an increase or a decrease.
• Although it is common in politics and in the media to refer to government’s “raising taxes” or “cutting taxes,” this terminology blurs the crucial distinction between tax rates and tax revenues.
• Knowing who is legally required to pay a given tax to the government does not automatically tell us who in fact ultimately bears the ==burden== created by that tax—a burden which in some cases can be passed on to others, and in other cases cannot.
• While an investor can invest in ==tax-free bonds== at a lower rate of return or in other assets that pay a higher rate of return, but are subject to taxes, a factory worker whose sole income is his paycheck has no such options, and finds whatever taxes the government takes already gone by the time he gets that paycheck.
• Various complex ==financial arrangements== can spare wealthy people from having to pay taxes on all their income but, since these complex arrangements require lawyers, accountants and other professionals to make such arrangements, people of more modest incomes may not be equally able to escape their tax burden, and can even end up paying a higher percentage of their income in taxes than someone who is in a higher income bracket that is officially taxed at a higher rate.
• Since income is not the only thing that is taxed, how much total tax any given individual pays depends also on how many other taxes apply and what that individual’s situation is.
• ==Issues== and ==controversies== about tax rates often discuss the incidence of taxes on “the rich” or “the poor,” when in fact the taxes fall on income rather than wealth.
• Depending on the ==nature== of the tax and the competition in the market, the consumers can end up paying anywhere from none to all of the burden of those taxes.
• Under what is called “progressive taxation,” people with ==higher incomes== pay not only a ==higher amount of taxes== but also a higher percentage of their incomes.
• ==Taxes== cannot be passed on to consumers when a particular tax falls on businesses or products produced in a particular place, if consumers have the option of buying the same product produced in other places not subject to the same tax.
• Where income is in the form of capital gains, the effect of ==inflation== is accentuated because of the years that can elapse between the time when an investment is made and the time when that investment begins to pay a return —or is expected to pay a return, since expectations are by no means always fulfilled.
• From the standpoint of the allocation of scarce resources which have alternative uses in the economy, the net result is that these politically chosen projects are able to receive more resources than they would in a private free market, including resources that would be more valuable elsewhere.

Government Expenditures

• Government spending has repercussions on the economy, just as taxation does—and both the spending going out and the tax revenues coming in are to some extent beyond the existing administration’s control.

• When production and employment go down in the economy, the ==tax revenues== collected from businesses and workers tend to go down as well.

• Conversely, when production and employment are booming, more tax revenues come in and there are fewer individuals or enterprises receiving government financial help, so the government tends to be removing purchasing power from the economy at a time when there might otherwise be inflation.

• The weighing of costs against benefits, which is part of the allocation of scarce resources which have alternative uses, can be greatly affected by government ==expenditures==.

• While there are some goods and services which virtually everyone considers desirable, different people may consider them desirable to different degrees and are correspondingly willing to pay for them to different degrees.

• Many government expenditure patterns that would be hard to explain in terms of the costs and benefits to the public are by no means irrational in terms of the ==incentives== and ==constraints== facing elected officials responsible for these patterns.

• ==Government budgets==, including both taxes and expenditures, are not records of what has already happened, they are plans or predictions about what is going to happen, but of course no one really knows what is going to happen, so everything depends on how projections about the future are made.