Public finance and public policy

Public Finance and Public Policy: A Tour Through the Book Part I  Introduction and Background Why Study Public Finance? The goal of studying public finance is to understand the proper role of the government in the economy The changing role of government and exciting current policy debates motivate the study of this field Theoretical Tools of Public Finance We review the microeconomic tools necessary to understand the effects of government intervention in the economy Empirical Tools of Public Finance We review the main issues in empirical public finance, the use of data and statistical methods to measure the impact of government policy on individuals and markets Budget Analysis and Deficit Financing We delve into the complexity of budgetary issues that arise as governments consider their revenue and expenditure policies Part II  Externalities and Public Goods A major role of government is to address market failures caused by goods that have external costs and benefits or public benefits In this part we discuss when the private market can and cannot solve these problems and the prospects for government success in addressing the problems Externalities: Problems and Solutions When externalities cause private markets to fail, and what tools does government have to combat this failure? Externalities in Action: Environmental and Health Externalities We use theoretical tools to examine examples of environmental and health externalities (such as acid rain, global warming, cigarette smoking, and obesity) Public Goods Cost-Benefit Analysis Political Economy Goods with public benefits may be underprovided by the private market, under conditions discussed in Chapter 7, but the public sector faces two key problems in providing those goods: measuring their costs and benefits (Chapter 8) and effectively translating voters’ preferences for public projects into public policy (Chapter 9) 10 State and Local Government Expenditures We discuss the local provision of public goods and the question of whether competition across localities can solve the problem of underprovision of public goods 11 Education We review the public finance issues involved in providing education, one of the most important public goods in the United States Part III  Social Insurance and Redistribution The increased nature and scope of government spending on social insurance programs is one of the most fundamental changes in U.S public policy over the past fifty years 12 Social Insurance: The New Function of Government We examine the general theory of social insurance, highlighting the benefits (consumption smoothing) and costs (moral hazard) of insurance 13 Social Security 14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation We apply the principles of social insurance from Chapter 12 to the study of the nation’s largest social insurance programs We discuss the institutional features of these programs, their benefits and costs, and prospects for program reform 15 Health Insurance I: Health Economics and Private Health Insurance 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform The largest and most rapidly growing government expenditure is on health care We discuss the nature of health economics and the functioning of private health insurance markets, the role of the nation’s two largest public health insurance programs, and the structure and impacts of the Affordable Care Act 17 Income Distribution and Welfare Programs We review the facts on income distribution in the United States, the theoretical and empirical effects of welfare policy, and the impacts of fundamental welfare reform Part IV  Taxation in Theory and Practice In this part we move from the study of government expenditures to the study of how the government raises revenue through taxation 18 Taxation: How It Works and What It Means We provide the institutional and theoretical bases for understanding tax policy and its effects, focusing in particular on the appropriate base for individual income taxation 19 The Equity Implications of Taxation: Tax Incidence 20 Tax Inefficiencies and Their Implications for Optimal Taxation Markets not take taxes lying down In these chapters, we discuss how market reactions affect both the equity implications of tax (tax incidence) and the efficiency costs of taxation We use this theory to model the optimal design of taxes on goods and on income, and discuss evidence on the distribution of tax burdens 21 Taxes on Labor Supply 22 Taxes on Savings 23 Taxes on Risk Taking and Wealth In these chapters we explore the effect of income taxation on individual behavior and the resulting implications for tax policy How taxes affect labor supply, and what has been the effect of the Earned Income Tax Credit? How taxes affect savings, and what has been the effect of tax-subsidized retirement savings? How taxes affect the distribution of asset holdings, and what has been the effect of the capital gains, estate, and property taxes? 24 Taxation of Business Income We discuss the structure of the corporate income tax and its implications for a firm’s investment and financing decisions 25 Fundamental Tax Reform and Consumption Taxation Fundamental tax reform in the United States focuses on moving to a low-rate, broad-based tax system We discuss the benefits of this reform, the political and economic barriers it faces, and possible reforms such as a consumption or flat tax Public Finance and Public Policy this page left intentionally blank Public Finance and Public Policy FiFth edition Jonathan Gruber ROBERT DODGE/E+/GETTY IMAGES Massachusetts Institute of Technology A Macmillan Education Imprint New York To Andrea, Sam, Jack, and Ava Vice President, Content Management: Catherine Woods Vice President, Editorial, Sciences, & Social Sciences: Charles Linsmeier Publisher: Shani Fisher Executive Editor: Carlise Stembridge Executive Development Editor: Sharon Balbos Development Editor: Jane Tufts Associate Media Editor: Lindsay Neff Media Producer: Andrew Vaccaro Editorial Assistant: Carlos Marin Marketing Manager: Tom Digiano Marketing Assistant: Alex Kaufman Director of Content Management Enhancement: Tracey Kuehn Managing Editor: Lisa Kinne Project Editor: MPS North America LLC Project Editor Liaison: Julio Espin Photo Editor: Cecilia Varas Director of Design, Content Management: Diana Blume Cover and Text Designer: Vicki Tomaselli Art Manager: Matthew McAdams Production Manager: Susan Wein Supplements Project Editor: Edgar Doolan Composition: MPS Ltd Printing and Binding: RR Donnelley Photo Cover Credit: Robert Dodge/E+/Getty Images Library of Congress Control Number: 2015951239 ISBN-13: 978-1-4641-4333-5 ISBN-10: 1-4641-4333-1 © 2016, 2013, 2011, 2007 by Worth Publishers All rights reserved Printed in the United States of America First Printing Worth Publishers One New York Plaza Suite 4500 New York, NY 10004–1562 www.worthpublishers.com About the Author SEVANS d r Jonathan Gruber is a Professor of Economics at the Massachusetts Institute of Technology (MIT), where he has taught since 1992 He is also the Director of the Health Care Program at the National Bureau of Economic Research, where he is a Research Associate, and President Elect of the American Society of Health Economists He is also a member of the Institute of Medicine, the American Academy of Arts and Sciences, and the National Academy of Social Insurance Dr Gruber received his B.S in Economics from MIT and his Ph.D in Economics from Harvard University Dr Gruber’s research focuses on the areas of public finance and health economics He has published more than 150 research articles, has edited six research volumes, and is the author of Health Care Reform, a graphic novel In 2006, he received the American Society of Health Economists Inaugural Medal for the best health economist in the nation aged 40 and under During the 1997–1998 academic year, Dr Gruber was on leave as Deputy Assistant Secretary for Economic Policy at the Treasury Department From 2003 to 2006, he was a key architect of the ambitious health reform effort in Massachusetts and in 2006 became an inaugural member of the Health Connector Board, the main implementing body for that effort In 2009–2010, he served as a technical consultant to the Obama Administration and worked with both the Administration and Congress to help craft the Patient Protection and Affordable Care Act In 2011, he was named “One of the Top 25 Most Innovative and Practical Thinkers of Our Time” by the online magazine Slate In both 2006 and 2012, he was rated one of the top 100 most powerful people in health care in the United States by Modern Healthcare magazine BRIEF ContEnts Contents Preface vii xvii PART I Introduction and Background Why Study Public Finance? Theoretical Tools of Public Finance 27 Empirical Tools of Public Finance 65 Budget Analysis and Deficit Financing 93 PART II Externalities and Public Goods Externalities: Problems and Solutions 123 Externalities in Action: Environmental and Health Externalities 153 Public Goods 191 Cost-Benefit Analysis 219 Political Economy 241 10 State and Local Government Expenditures 275 11 Education 305 PART IV Taxation in Theory and Practice 18 Taxation: How It Works and What It Means 549 19 The Equity Implications of Taxation: Tax Incidence 585 20 Tax Inefficiencies and Their Implications for Optimal Taxation 619 21 Taxes on Labor Supply 657 22 Taxes on Savings 683 23 Taxes on Risk Taking and Wealth 713 24 Taxation of Business Income 739 25 Fundamental Tax Reform and Consumption Taxation 777 Glossary G-1 References Index vi I-1 R-1 ROBERT DODGE/E1/GETTY IMAGES PART III Social Insurance and Redistribution 12 Social Insurance: The New Function of Government 335 13 Social Security 367 14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation 403 15 Health Insurance I: Health Economics and Private Health Insurance 433 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform 471 17 Income Distribution and Welfare Programs 511 ContEnts Preface The Effects of Price Changes: Substitution and Income Effects 37 2.2 Putting the Tools to Work: TANF and Labor Supply Among Single Mothers 39 xvii PaRt I Introduction and Background ChaPtER Why Study Public Finance? 1.1 The Four Questions of Public Finance When Should the Government Intervene in the Economy? aPPlICatIon Modern Measles Epidemics How Might the Government Intervene? What Are the Effects of Alternative Interventions? aPPlICatIon The CBO: Government Scorekeepers 10 Why Do Governments Do What They Do? 11 1.2 Why Study Public Finance? Facts on Government in the United States and Around the World 11 aPPEndIx The Mathematics of Utility Maximization 62 1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education 21 Social Security 21 Health Care 22 Education 23 1.4 Conclusion 24 ROBERT DODGE/E1/GETTY IMAGES ChaPtER Empirical Tools of Public Finance 65 3.1 The Important Distinction Between Correlation and Causality 66 The Problem Highlights 24 Questions and Problems 25 Advanced Questions 25 67 3.2 Measuring Causation with Data We’d Like to Have: Randomized Trials 68 Theoretical Tools of Public Finance 27 2.1 Constrained Utility Maximization Demand Curves 46 Supply Curves 48 Equilibrium 49 Social Efficiency 50 Competitive Equilibrium Maximizes Social Efficiency 53 From Social Efficiency to Social Welfare: The Role of Equity 54 Choosing an Equity Criterion 56 2.4 Welfare Implications of Benefit Reductions: The TANF Example Continued 56 2.5 Conclusion 58 Highlights 59 Questions and Problems 59 Advanced Questions 60 The Size and Growth of Government 12 Decentralization 13 Spending, Taxes, Deficits, and Debts 14 Distribution of Spending 16 Distribution of Revenue Sources 19 Regulatory Role of the Government 19 ChaPtER Identifying the Budget Constraint 40 The Effect of TANF on the Budget Constraint 41 2.3 Equilibrium and Social Welfare 45 28 Preferences and Indifference Curves 29 Utility Mapping of Preferences 31 Budget Constraints 33 Putting It All Together: Constrained Choice 35 Randomized Trials as a Solution 69 The Problem of Bias 70 Randomized Trials of ERT 71 Randomized Trials in the TANF Context 71 Why We Need to Go Beyond Randomized Trials 72 3.3 Estimating Causation with Data We Actually Get: Observational Data 73 Time Series Analysis 73 Cross-Sectional Regression Analysis 77 Quasi-Experiments 81 vii Index Economic efficiency See also Social insurance deadweight loss, 626–628 elasticities determining, 622–626 graphical approach to, 620–622 optimal commodity taxation and, 634–639 optimal income taxes, 640–642 Economic Growth and Tax Relief Reconciliation Act, 549 Economic incidence, 587 Economic profit, 747 Economics, 200 Economic theory, 43, 177 Education attainment, 311 competition in markets for, 320–323 credit market failure, 309 government and, 307–331 policy debates, 23–24 returns to, 323–327 special, 319 vouchers, 313 Effective capital gains, 759 Effective corporate tax rate, 756–757 Efficiency, 56 See also Economic efficiency costs, 620 entire gain, 800 losses, 7–8 of scale, 284 Efficiency-equity trade-off, 524 Eissa, Nada, 664 Elasticity compensated, 627 cross-price, 48 of demand, 47–48 determining, 622–626 rule, 635 of supply and demand, 592 Ellerman, Daniel, 160 Embedding effect, 226–227 Emergency spending, 99 Emission reduction, 170 Empirical public finance, Empirical tools defined, 28 of public finance, 65 Enron, 398, 729 Ensign, John, 768 Entitlement spending, 97 Environmental agreements on global warming, costeffectiveness of, 164–167 Environmental Budget Agency, 100 Environmental damage, 156 Environmentally conscious growth, 165 Environmental Protection Agency (EPA), 21, 125, 136, 153–156, 233, 729 Environmental regulation, 155–160 Equality of opportunity, 56 Equalization, fiscal, 280 Equilibrium, 49–50 Equity, 56, 559 across-family horizontal, 577 across-marriage horizontal, 577 finance, 745, 760 horizontal, 560, 784, 798 vertical, 560, 642, 784 Equity-efficiency trade-off, 8, 54, 640, 786–787 Estate tax, 551, 713, 727–728 Estrogen replacement therapy (ERT), 68–71, 73, 81 European Train Control System (ETCS), 230 Evidence, experimental, 663–664 Ex ante BBRs, 100–101 Excise tax, 552, 608 Excludable, but not rival public goods, 193 Exemption, 554 Expected experience, 347 Expected return, 715, 761 Expected utility model, 339 Expenditures advertising, 565 government, 102 medical, 564 tax, 576, 799, 803 Expenses, corporate tax, 747–750 Experience actual, 347 expected, 347 rating, 347 Experimental evidence, 663–664 Ex post BBRs, 100–101 Extended Unemployment Compensation (EUC), 403–404 Externality, 124–125 financial, 174 health, 174 internalizing the, 132, 148 physical, 174 positive, 571 positive consumption, 130–131 positive production, 130–131 price and quantity approaches to addressing, 139–148 private-sector solutions to negative, 132–136 public-sector remedies for, 136–139 as reason for redistribution, 291 smoking, 173–176 theory of, 125–131 F Falling real price, 101 Family basis, 578 Federal Communications Commission (FCC), 21 Federal Emergency Management Agency (FEMA), 351–352 Federal Insurance Contributions Act (FICA), 369 Federalism, fiscal, 277–281 Federal Reserve, 112 Federated Department Stores, 585 I-5 I-6 Index Finance corporate tax for, 758–767 debt, 745 equity, 745, 760 firm, 745 public, 8–9 Financial capital, 603 Financial externalities, 174 Financial Services Forum, 808 Fiorino, Daniel J., 155 Firm financing, 745 First-dollar coverage, 451 First Fundamental Theorem of Welfare Economics, 53 First order conditions, 654 Fiscal equalization, 280 Fiscal federalism, 277–281 optimal, 281–290 redistribution of, 290–300 Fiscal imbalance, 109 Fiscal position on government budgeting, 114–120 Flat of the curve, 503 Flat-rate VAT, 804 Flat tax advantages of, 805 Hall-Rabushka, 805 problems with, 805–808 FleetBoston Financial Corporation, 735 Fletcher, Michael, 512 Flood Insurance Reform and Modernization Act, 352 Flow deficit, 95 Flypaper effect, 298 Food and Drug Administration (FDA), 20–21, 186, 233, 729 Food deserts, 185 Food stamps, 513–514 Football schools, 316 Forbes, Steve, 785 Ford, Gerald, 93 Foreign tax credit, 767 Form 1040, 784–785 Fortune 100 companies, 740 Fortune 500 companies, 530 Fossil fuels, 123–124, 129, 161–163 401(k) accounts, 397–398, 696, 706 Four questions of public finance, 3–11 See also Government intervention defined, Free rider problem, 135, 191–192, 198, 502, 513 Friedman, Milton, 181, 317, 603 Friedman, Thomas, 171 Full Benefits Age (FBA), 372, 373, 385–386, 392–393, 399, 408 Fuller, Ida May, 375–376 Full shifting, 593 Fundamental tax reform benefits of, 789 tax code, 784–786 tax compliance, 779–784 tax efficiency, 786–789 Funded plan, 373 Furman, Jason, 773 G Gamble, Christina, 357 Game theory, 215 Garfield, James, 433–434 Gates, Bill, 562, 713 Gates, William Sr., 713 Gawande, Atul, 440–441, 503–504, 506 General Accounting Office, 783 General Electric, 767 General equilibrium tax incidence, 586, 602 General Motors, 229, 767 General welfare, 335–336 George, Henry, 736 Ghostbusters, 565 Gingrich, Newt, 513 Giuliani, 735 Glaeser, Ed, 735 Glaxo-SmithKline, 770–771 Global system, 767 Global warming, 145, 161–171 environmental agreements on, cost-effectiveness of, 164–167 future of, 167–171 Kyoto Treaty on, 164 Godfather’s Pizza, 777 Gokhale, J., 109 Goldman Sachs, 745 Goods common, 193 demand for, 57 inferior, 38 normal, 38 numeraire, 193 public, 17 Good Samaritan government, 350 Google Earth, 780 Gore, Al, 113 Government, 11–21 borrowing, 117 centralization of, 13–14 debt, 14–16, 95, 102 decentralization of, 13–14 deficit, 14–16, 95, 102 distribution of, 16–19 expenditure, 102 failures, 11 regulatory role of, 19–21 revenue, 19, 102 size and growth of, 12–13 spending, 14–16 taxes, 14–16 Government and education higher, 327–331 involvement of, 310–319 role in, 307–310 Index I-7 Government budgeting, 95–101 alternative approaches to, 101–106 fiscal position on, 114–120 long-run perspective on, 106–114 Government intervention alternative, effects of, 9–10 in economy, 4–8 methods of, 8–9 process of, 11 Government-regulated accounts, 398–399 Government-supported budget constraint, 39 Graetz, Michael, 778 Gramm-Rudman-Hollings Deficit Reduction Act (GRH), 98 Grandfathering, 793 Grant, block, 293–295, 298, 542 Grants-in-aid, 19 Grasso, Richard, 743 Gray, Freddie, 511–512 Great Depression, 12, 207, 278, 369, 515 Great Recession, 96, 99, 106, 544, 571 Greenhouse effect, 161 Greenhouse gas emissions, 164, 167–168 Greenspan, Alan, 112, 390, 395 Greenspan Commission, 390, 394 Gross domestic product (GDP), 12–16, 22, 96, 102–103, 106, 113, 119, 124, 381, 434, 435, 439, 498, 657, 782 combined, 305 Gross income effect, 787 Gross national product (GNP), 114 Gross price, 591–592 Gross tax, 554 Group-specific mandated benefit, 648 Guiteau, Charles, 433 Health insurance, 3, 338 consumption-smoothing, 451–452 elasticity of demand for, 455–458 moral hazards of, 452–455 optimal, 458–459 social (total) value of, subsidization of, in United States, 459–462 Health Insurance Experiment (HIE), 455–459, 465, 476, 480 Health maintenance organization (HMO), 346–347, 464–466, 482, 490–493, 500, 504 Health Management Associates (HMA), 487 Health savings accounts (HSAs), 460–461 Healy, Bernadine, 71 Hebert, Paul, 357 Hedonic market analysis, 228 Herculean efforts, 395 Hewlett-Packard, 743 Higher education, 327–331 High/Scope Educational Research Foundation, 307 High-speed rail (HSR) system, 219–220 Hill-climbing exercise, 49 Hinckley, John, 433 HIV, 100, 172 Holdout problem, 135 Home health care, 496 Homeowners Flood Insurance Affordability Act (HFIAA), 352 Horizontal equity, 560, 784, 798 House of Representatives, 2–3, 97, 99, 171, 276, 404 House prices, 287 House Ways and Means Committee, 807 Human capital, 323, 666, 718 Hurricane Katrina, 99, 351–352 H I Haig-Simons comprehensive income definition, 563–568, 577, 675, 788, 790 Halfway houses, 209–210 Hall, Keith, 106 Hall-Rabushka flat-tax, 805 Harberger, Arnold, 619 Hardship, 522 Harvard University, 66, 68, 231, 347–348, 493 Hatzis, Aristides, 782 Hausman, Jerry, 226 HCA corporation, 486–487 Head Start, 100, 538–539 Head Start Impact Study (HSIS), 538–539 HealthAmerica Corporation, 345 Health care policy debates, 22–23 Health care reform Affordable Care Act, 500–506 history of, 497–499 Massachusetts experiment and, 499–500 in United States, 435–450 Health externalities, 174 Identification problem, 66 Illicit drugs, 181–187 Imperfect self-insurance, 354 Implicit insurance, 448 Implicit obligations, 107 Implicit taxation, 383, 388–384 Improvised explosive devices (IEDs), 210 Impure public goods, 192–193 Imputed rental value, 570 Income earned, 719 effect, 38–39 effect of social insurance, 462 inclusion effect, 787 mobility, 310 post-tax, 640 real, 690 splitting, 580 and substitution effects, 43 target, 660 taxable, 555, 573 I-8 Index Income distribution facts on, 514–520 welfare policy, 520–523 Income tax, 19, 608 capital, 96, 685 corporate, 551 individual, 551 Independent Insurance Agents and Brokers Association, 351 Independent Payment Advisory Board (IPAB), 504 Independent Practice Association (IPA), 464 Independent variables, 78 Indicator variables, 91 Indifference curve, 30, 35, 38 Indirect tax, 552 Individual Development Account (IDA), 572 Individual income tax, 551 Individual mandate, 500 Individual Retirement Accounts (IRAs), 554, 684, 696–697 Industrial Revolution, 161 Infant mortality rate, 434 Inferior goods, 38 Inflation, 101 Inflation tax, 102 Information asymmetry, 342 Inframarginal effects, 723 Inframarginal impacts, 568–569 In-kind welfare, 520 Institutional care, 496 Insurance See also Health insurance; Social insurance auto, 338 casualty and property, 338 defined, 338 disability, 336, 405, 522 formalizing, 339–342 government interventions in, 349–352 health, 3, 338 implicit, 448 life, 338 moral hazards of, 355–359 no-fault, 409–410, 425 premium, 338 trust, 731 value of, 338–339 Interest payments, 747 Interest rate, 116–117 nominal, 691 real, 691 Intergovernmental grants, 278, 291 Internal Revenue Service (IRS), 566, 579, 675, 684, 783–784, 791 International corporations, 767–773 International emissions trading, 164–165 International Federation of Health Plans, 439 Intertemporal budget constraint, 109, 686 Intertemporal choice model, 685–686 Inversions, corporate, 772 Investment, corporate tax for, 752–758 Investment tax credit (ITC), 750–751, 755–757 Iraq war, 99 Isolation of issues, 226 Itemized deductions, 555 J Jackson, Lisa, 154 Jackson Memorial, 486 Jaguars, 558 Japan’s Ministry of Health, 187 Jeffries, Michael, 743 Job lock, 449 Job match quality, 416 Jobs and Growth Tax Relief Reconciliation Act, 549, 721, 765 Johnson, Lyndon, 93–94, 663–664 Joint Clean Energy Research and Development, 168 Joint Committee on Taxation, 114, 704, 769 Joint Economic Committee, 557 Joint Tax Committee, 703 JP Morgan Chase & Co., 745 K Kaiser Family Foundation, Keating, Frank, 729 Kennedy, Edward, 441, 513 Kennedy, John F., 565 Keynes, John Maynard, 626 King William III, 623 Krugman, Paul, 114, 336, 562 Kyoto Treaty, 164 L Labor, 48, 236 Laboratory experiments, 203 Labor force participation (LFP), 384 Labor supply, 659 basic theory on, 659–661 child care, 675–679 Earned Income Tax Credit, 667–673 evidence on, 663–666 Laffer curve, 641, 724 Lagrangian, 654 Lancet,The, Langeler, Gerry, 727 LAPD, 357 Large deadweight loss, 147 Law of large numbers, 70–71, 443–444 Legacy debt, 375, 390 Legitimate business costs, 564–565 Leisure, 40–43, 77 composition of, 43–44 marginal value of, 359 time spent on, 225 Leveling down, 299 Leviathan, 795 Liability, deferral of, 576 Life insurance, 338 Index “Life is priceless” argument, 228 Lifetime Learning Tax Credit (LLTC), 330 Lifetime Savings Accounts and Retirement Savings Accounts, 683 Lifetime tax incidence, 612 Limited liability, 741 Liquidity constraints, 693 Little League baseball, 357–358 Lock-in effect, 722 Long-term care, 480–481 defined, 495 financing, 496–497 Lubold, Mark, 736 Lump-sum tax, 284, 652–653 Lustgarten, March, 744 Lyon, Drew, 740 M Mackey, Linda, 351 Magnet schools, 320–321 Major Risk Insurance plan, 458 Managed care, 463 impacts of, 465–466 prospective reimbursement and, 463–465 “revolution,” 466 Managed Care Organizations (MCOs), 209 Manchin, Joe, 154 Mandate, 8, 500 Mankiw, N Gregory, 727 Marginal analysis, 36–37 Marginal benefit, 634–635 Marginal cost, 48–49 Marginal damage (MD), 127–128, 136–138, 141–142 Marginal deadweight loss, 627 Marginal effect, 723 Marginal health benefit, 454 Marginal impacts, 568–569 Marginal product, 359 Marginal productivity, 48–49 Marginal rate of substitution (MRS), 35–36, 195, 197–198, 216 budget constraint and, 36 defined, 32 diminishing, 32 utility function and, 33 Marginal revenue, 49, 600–601 Marginal tax rate, 559 Marginal utilities (MU), 198 defined, 31 diminishing, 31, 338 Marginal value, 359, 503 Marine Corps, 210 Market, 49–50 annuities, 379–380 black, 800 equilibrium, 50 failures, 125 monopoly, 599 I-9 nongroup insurance, 442 oligopoly, 601 prices, 620 quantities, 620 for vice and virtue, 160 Markey, Edward, 169, 211 Markowitz, Sara, 180 Marriage neutrality, 579 penalty, 674 subsidy, 579 tax, 578–580 Massachusetts Connector, 504 Massachusetts experiment, 499–500 Massachusetts health care reform, 209 Matching grant, 292–293 Maurice, Arthur, 585 Mayo Clinic, 441 McAllen County, Texas, 439–441, 503–506 McCain, John, 721 McCardell, John, 182 McCarthy, Eugene, 160 McDonald’s, 371 McGreevey, James, 585 McGruber’s, 623–625 Means-tested, 337, 520 Measles epidemics, 5–7 Medicaid, 279, 435, 446–447, 471–472, 518–519, 523 benefits of, 475–480 for low-income families, 473–475 Medicaid Managed Care Organizations, 500 Medical expenditures, 564 Medicare, 4, 9, 97, 109, 337, 349, 435, 446, 450, 466, 471–472 effects of, 484–495 HMOs, 490–492 process for, 480–484 Medicare Advantage, 492, 501–502 Medicare Hospital Insurance, 480–481 Medicare Modernization Act, 492 Medicare Part A, 480–481 Medicare Part B, 481 Medicare Part D, 481–484, 494 Merrill Lynch, 745 Microsoft Corporation, 713, 729 Middlebury College, 182 Middle Class Tax Relief and Job Creation Act, 404 Mill, John Stuart, 200 Miller, George, 307 Milwaukee voucher program, 321 Minimally acceptable income, 516–517 Minimal standard of living, 519 Minimum wage, 598–599 MIT Energy Initiative, 154, 174, 284 Mobility, 282 Monday effect, 420 Money, culture of, 503–504 Monopoly market, 599 I-10 Index Montreal Protocol of 1987, 163–164 Moral hazard, 337, 355–358 Mortgage, 570 Mortgage Bankers Association, 808 Multinational firm, 767 N Nash bargaining, 215 Nash equilibrium, 215 National Academy of Sciences, 519 National debt, 102 National Flood Insurance Fund, 351 National Flood Insurance Program (NFIP), 351–352 National Geographic, 357 National health insurance, 497 National Health Insurance (NHI), 694 National Institutes of Health (NIH), 71 National Surface Water Survey (NSWS), 156 Natural disasters, 99 Natural logarithm, 43 Natural monopoly, 318 Negative consumption externality, 128, 131 Negative correlation, 77–78 Negative externality, Negative financial externality, 495 Negative income tax (NIT), 664–665 Negative internality, 179 Negative production externality, 126, 131 Net earnings, 740 New Deal programs, 278 New Source Performance Standards (NSPS), 157 New York City’s Times Square, 200–201 New Yorker,The, 439 New York Stock Exchange, 743 New York Times, 171, 276, 562, 725 New York University, 330 Nichols, Rob, 808 9-9-9 Plan, 777 Nitrogen oxides (NOX), 155 Nixon, Richard, 93, 280, 471, 557 NJ Business and Industry Association, 585 No Child Left Behind (NCLB) Act, 275–277, 322 No-fault insurance, 409–410, 425 Nominal interest rate, 691 Nominal prices, 101 Non-deductible IRA, 697, 704 Non-excludable public goods, 192–193 Nongroup insurance market, 442 Non-rival in consumption, 192 Non-satiation, 29 Normal goods, 38 Normative question, 45 Norquist, Grover, 714 Nub city, 358 Nuclear Energy Institute, 210 Numeraire good, 193 NYC Board of Health, 186 O Obama administration, 153–154, 171, 181, 276, 549–550 Obama, Barack, 1–2, 94, 99, 114, 154–155, 171, 277, 305, 307, 331, 368, 441, 471, 501, 578–580, 684, 707, 721, 727, 739–740 ObamaCare, 2, 472 Obama, Michelle, 578–580 Observational data, 73–76 Occupational Safety and Health Administration (OSHA), 21 Off budget trust fund, 391, 395–396 Office of Economic Opportunity, 664 Office of Management and Budget (OMB), 223 Offshore profit shifting, 771 Ohio River Valley, 156 Okun, Arthur, 298, 523–524 Old Age Security and Disability Income (OASDI), 407–408, 561 Oligopoly markets, 601 Olson, Pamela, 683 Olympics, 714 On-the-job injury, 405 Opportunity cost, 34–35, 222, 747 Optimal commodity taxation, 634–635 equity implications of, 635–639 inverse elasticity rule, 635 Ramsey taxation, 634–635 theory of, 634–635 Optimal fiscal federalism, 277, 281–290 Optimal income taxation, 639–640 behavioral effects model for, 640–642 example of, 640 Optimality condition, 195 Optimal social insurance, 360 Ordeal mechanisms, 532 Order of issues, 226 Oregon State Police, 234 Organization for Economic Cooperation and Development (OECD), 12, 280–281, 515–516, 553, 566, 580, 721, 728, 767, 770, 795 Orshansky, Molly, 517 Orszag, Peter, 727 Overinsurance, 459 Overstated wage, 225 Overstating deficit, 112 Overtime pay rule, 662 OVP Venture Partners, 727 Ownership vs control, 742–745 P PACES, 321 Packaging Concepts, Inc., 735 Paddington Station, 229–230 Papandreou, George, 780 Parkinson’s disease, 72 Partial equilibrium, 602 Partial experience rating, 405–406, 422 Partially funded system, 374 Index Partial self-insurance, 354 Particulates, 155 Parties with elastic demand, 593–594 Parties with inelastic demand, 593–594 Part I of the Coase Theorem, 132–133 Part II of the Coase Theorem, 133 Paternalism, 380 Patient-Centered Outcomes Research Institute (PCORI), 504 Patient Protection and Affordable Care Act (ACA), 1–4, 8, 10, 23, 100, 106, 174, 186, 435, 445–446, 448, 471, 473, 487, 497, 500–505 projected impacts of, 505–506 Patients, 451 Paul, Rand, 404 Paul, Ron, Pay-as-you-go process (PAYGO), 98–99, 657 Payment of annuity, 370 Payroll tax, 19, 110, 551, 608 Pell Grant program, 329–330 Pelosi, Nancy, Peltzman, Sam, 311 Pension plan, 696 Pentagon, 210 Perfectly elastic demand, 47 Perfectly inelastic demand, 47 Perfect self-insurance, 354 Perry, Rick, 367–368 Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA), 541–542 Physical externalities, 174 Pigou, A C., 137 Pigouvian taxation, 137–139, 144–145 Pitts, Joe, 171 Plesko, George, 769 Policy debates, 21–24 education, 23–24 health care, 22–23 Social Security, 21–22 Political economy, 11, 192, 212 Poll tax, 558–559 Pollution absolution, 160 Polychlorinated biphenyls, 157 Polynuclear aromatic hydrocarbons (PAHs), 157 Pooled cost, 344 Pooling equilibrium, 346–348 Population growth effect, 375 Porsches, 558 Positive consumption externalities, 130–131 Positive externalities, 571 Positive production externalities, 130–131 Post-tax income, 640 Poverty line, 58, 516–517 Precautionary savings model, 693 Pre-existing conditions exclusions, 445 Preexisting distortions, 628 I-11 Preference, 28 aggregation, 212, 281 knowledge, 212 revelation, 212, 281–282 Preferred provider organization (PPO), 464–465 Prefers leisure control variable, 80 Prefers work control variable, 80 Pregnancy Discrimination Act, 648 Premium, actuarially fair, 340 Premium support, 492 Present discounted value (PDV), 107–109, 223–224, 377, 697–699, 749, 754–756, 767, 797 Price after-tax, 591–592 approach, 139 elasticity of supply, 52 equilibrium, 50 falling real, 101 gross, 591–592 house, 287 markers, 600 mechanism, nominal, 101 and quantity approaches to addressing externality, 139–148 ratio, 36 ratio of the, 195 real, 101 relative, 567 takers, 600 tax, 298–299 Price-discriminating monopolists, 600 PricewaterhouseCoopers, 740 Primary earners, 662 Primary Insurance Amount (PIA), 370, 373, 392–393, 399 Private health insurance coverage, 477 Private marginal benefit (PMB), 127–128, 138 Private marginal cost (PMC), 126–127, 130, 132, 137–138, 141 Private market equilibrium, 195 Private provision, 8–9 Private-sector solutions to negative externality, 132–136 Privatization, 395 Pro-consumption, 796 Producer burden, 589–591 Production complementarities, 662 Production function, 48 Profit accounting, 747 defined, 49 maximization, 48, 49 Progressive deductions, 574 Progressive price indexing, 394 Progressive tax system, 561 Progressivity, 577 Project STAR, 328 Promotion expenditures, 564–565 Property and casualty losses, 564 Property damage, 156 I-12 Index Property tax, 19, 279, 551, 715 capital tax view of, 734 defined, 732 sources of, 733–734 types of, 734–736 Proportional tax system, 561 Prospective capital gains tax reduction, 723 Prospective Payment System (PPS), 485–488 Prospective reimbursement, 464 Providers, 451 Public finance See also Four questions of public finance defined, empirical, goal of, government, facts on, 11–21 policy debates, 21–24 Public financing, 8–9 Public goods, 17 excludable, but not rival, 193 impure, 192–193 non-excludable, 192–193 optimal provision of, 192–197 private provision of, 197–204 public provision of, 204–212 Public interest jobs, 331 Public projects, 220–224 benefits of, 224–235 Public provision, Public-sector remedies for externality, 136–139 Puget Sound, Washington, 465 Pure profits, 746–747 Pure public goods, 192–193 Q Quality-improving technological changes, 502 Quantity approach, 139 Quasi-experimental analysis, 81, 84–85, 158, 182, 450, 543, 648, 664 Quayle, Dan, 530 R Race to the Top fund, 306 Railroad Retirement, 395 Ramsey, Frank, 634, 639 Ramsey Rule, 634–636, 653–654 RAND, 455–459, 465, 476, 480 Randomization, 69 Randomized trial, 66, 70 causality and, 68–73 defined, 69 Rangel, Charles, 683–684, 808 Rational addicts, 173 Ratio of the prices, 195 Rawlsian social welfare, 55–56, 513 Reagan, Ronald, 94, 98, 433–434, 565 Real income, 690 Real interest rate, 691 Realized experience, 347 Real prices, 101 Reconciliation instructions, 97 Redistribution is externalities, 291 Redistribution of fiscal federalism, 290–300 Redistributive function of past earnings, 370–371 Red Robin, 357 Reduced form estimates, 85 Reduction actuarial, 372 benefit rate, 41, 521 Reemployment bonus experiments, 415 Reemployment earnings insurance, 428 Refund, 557 Refundable, 574 Refundable Earned Income Tax Credit, 667 Regression bivariate, 77 discontinuity, 418, 457 line, 78 Regressive deductions, 574 Regressive tax system, 561, 798 Regulation economic and social activity, 19–20 environmental, 155–160 Reid, Harry, 404 Reimbursement, 466 Relative income inequality, 514 Relative price, 567 Renault, 558 Rental value, 570 Rents, 222 Repetitive loss properties, 352 Replacement rate, 371, 407 Reporting effect, 787 Republicans, 99–100, 404, 550, 562, 684 Residential Re-entry Centers (RRCs), 209–210 Restrictions, Retained earnings, 745, 747 Retirement hazard rate, 385 Retrospective reimbursement, 463, 489 Return, expected, 715, 761 Return to education, 323–327 Revaluation of the product, 749 Revealed preference, 227 Revenue Act, 565 Rich, Jeffrey, 744 Richardson, Margaret, 780 Rising real price, 101 Risk aversion, 341–342 neutral, 452 pool, 442 premium, 346 Risk taking, 714 evidence on, 718 financial investment model, 715–716 Index labor investment, 718–719 real-world complications, 716–718 Rival but not excludable public goods, 193 Robustness of economic equilibria, 205 Romney, Mitt, 368, 726–727 Rossotti, Charles O., 783 Roth IRA, 703–705 Roth, William, 783 Rubio, Marco, 307 Ryan, Paul, 808 S Sales tax, 19, 552 Salmon, Matt, 276 Samaritan’s dilemma, 350 Samuelson, Paul, 200 Santorum, R., 154 SAT, 66–67, 70, 297 Saver’s tax credit, 697 Savings, 686 after-tax interest rate on, 688–690 inflation and, 690–692 private vs national, 706–707 retirement, 695–705 tax incentives on, 707–709 traditional theory on, 685–688 Savings alternative models implications of, 705–706 precautionary, 692–693 self-control, 693–695 Scherzer, Max, 107–108 School finance equalization, 296–297 School Lunch and Breakfast Programs, 523 S-corporation, 741–742, 766 Scott, Bobby, 276 Screening model, 324 Seafood promotion strategy, 99 Seattle Times, Secondary benefits, 236 Secondary earners, 662 Second Fundamental Theorem of Welfare Economics, 54 Secondhand smoke, 176 Self-control problem, 177 Self-insurance, 337, 353–355 Self-Sufficiency Project (SSP), 537 Senate, 97 Senate Budget Committee, 112 Senate Finance Committee, 783 Senyek, Christopher, 769 Separate products at separate prices, 346 Separating equilibrium, 346, 348 September 11, 2001, 113 Sequestration requirement, 98 Serrano v Priest, 299 Service Employees International Union, 739 Shareholders, 741 Sharer, Kevin, 743 I-13 Shelby, Richard, 806 Sherwood, Rocky, 356–357 Shopping, 281 Shore, Dinah, 566 Short-run stabilization issues, 115 Simplified Employee Pension IRA (SEP IRA), 697 Simpson, Alan, 368 Single-payer system, 22–23, 472 Sixteenth Amendment, 278 60 Minutes, 182 Skittles, 102, 692 Sludge, 125–126, 142 Smetters, Kent, 109 Smoking economics of, 171–173 externalities of, 173–176 internalities of, 176–179, 188 SNAP, 513–514, 533 SO2 allowance system, 158–159 Social capital, 204 Social discount rate, 223 Social efficiency, 50–53 competitive equilibrium for maximizing, 53–54 consumer surplus, 50–52 defined, 53 measuring, 50 producer surplus, 52 social surplus, 53 to social welfare, role of equity and, 54–56 Social-efficiency-maximizing choice, 58, 195, 197 Social insurance, 17–18, 336 adverse selection, 345, 348–349 asymmetric information on, 342–348 benefit of, 360, 421–425 central trade-off of, 357 central trade-off with, 337 consumption-smoothing benefits of, 412–413 cost of, 360, 421–425 example of, 343–345 implications for reforming, 425–428 income effect of, 462 models of, 644–647 moral hazard effects of, 413–421 optimal, 359–360 savings accounts, 427 self-insurance vs., 352–355 tax-benefit linkage analysis, 647–648 Social marginal benefit (SMB), 127–129, 132, 137, 141, 147, 194–195, 197 Social marginal cost (SMC), 126–127, 129–130, 132, 138, 141, 194–195, 197 Social Security, 17–19, 21–22, 97, 108–110, 175, 335–336, 356, 367, 451, 525, 695, 780 consumption-smoothing benefits of, 379–383 details on, 369–373 operation of, 373–376 payroll, 598 I-14 Index Social Security (continued) policy debates, 21–22 redistribution of, 376–379 reforming, 389–399 retirement and, 383–389 surplus, 391 Social Security Administration, 375, 390, 517 Social Security Wealth (SSW), 375–376, 378, 381–383 Social welfare, 45–56, 46, 54 demand curves, 46–48 equilibrium, 49–50 social efficiency, 50–53 supply curves, 48–49 Social welfare function (SWF), 54, 524, 534 Social welfare-maximizing point, 58 Soros, George, 713 Special education, 319 Special flood hazard areas (SFHAs), 351 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), 523 Specific excise tax, 587 Spending discretionary, 97, 99 emergency, 99 entitlement, 97 stimulus, 106 Spillovers, 309 Sport utility vehicles (SUVs), 129–130 Staff model, 464 Standard deduction, 554 Standard error, 90 State and local tax payments, 564 State Commission of Investigation, 210 States of the world, 339 State welfare programs, 536 Statutory burden of a tax, 596 Statutory incidence, 587 Steer, Andrew, 155 Stevens, David, 808 Stimulus spending, 106 Stock buffer, 693 company, 397–398 Straight-line depreciation, 748 Structural estimates, 85–86 Student loan, direct, 329 Subsidiaries, 767 Subsidies, 8, 137–138 Substitution effect, 38–39 of social insurance, 462 Sulfur dioxide (SO2), 139–140, 155, 157, 159 Summers, Larry, 714 Sum of marginal rates of substitution, 198 Sum of the MRSs, 197 Sunset provision, 113–114 Supplemental Security Income (SSI), 521 Supply, compensated elasticity of, 653 Supply curve, 48–49 compensated, 653 defined, 48 Supreme Court, 501 Surplus, cash-flow, 14 Swagel, Philip L., 769 T “Take-up” channel, 476 TANF, 65–66, 71–74, 77–84 budget constraints, 41–45 labor supply, 39–45 welfare implications of benefit reduction, 56–58 Targeted tax cuts, 790 Targeting device, 799 Taste for leisure control variable, 80 Taxable income, 555, 573 Tax base capital allocation, 795–796 cascading, 801 compliance, 800–801 consumption tax, 795–801 savers vs non-savers, 799 savings decision, 796–798 simplicity, 798 tax reform politics, 790–793 tax shelters, 791–792 transitional inequities, 792–793 transition issues, 800 vertical equity, 798–799 Tax-benefit linkages, 287, 644 Tax capitalization, 792 Tax code, 784–786, 790 Tax compliance, 779 fundamental tax reform, 779–784 tax evasion, 779–781 Tax credit, 556, 573 corporate tax, 750–751 foreign, 767 Tax deductions, 573 Taxed on accrual, 719 Taxed on realization, 719 Tax efficiency fundamental tax reform, 786–789 revenue consequences of higher tax rates, 787–789 Tax evasion, 779 evidence on, 782–784 reasons for caring about, 784 theory of, 781–782 Tax expenditures, 576 Tax fairness, 559–561 Tax havens, 739 Tax incidence, 586 current, 612 extensions of, 596–602 general equilibrium, 586, 602–607 Index three rules of, 587–596 in United States, 607–613 Taxing consumption, 795 Tax loss offset, 717 Taxpayer Bill of Rights, 783 Taxpayer Relief Act, 721 Tax Policy Center (TPC), 575, 608–610 Tax price, 298–299 Tax rate, 378, 559 Tax reform benefits of, 789 politics, 790–795 tax code, 784–786 tax compliance, 779–784 tax efficiency, 786–789 Tax Reform Act (TRA), 565, 664, 697, 721, 778–780, 789, 794–795 See also Tax reform Tax shelter, 778, 790–791, 794–795 Tax smoothing, 633 Tax subsidy, 444, 570 Taxes and taxation, 8, 549–581 See also Corporate tax; Income tax; Property tax ad valorem, 587 appropriate unit of, 577–580 avoidance, 779 bear, 593–594 benefits, 734 capital gains, 719–727 cash-flow, 804 commodity, 633 consumption, 552 corporate, 608, 746–747 direct, 552 distortionary, 653 double, 730–731, 759 estate, 551, 713, 727–728 excise, 552, 608 expenditures, 799, 803 fairness of, 558–562 flat, 805–808 gross, 554 Haig-Simons, deviation from, 566–577 implicit, 383, 388–384 income, 19, 608 income tax base, 562–566 indirect, 552 individual income, 553–558 inflation, 102 lump-sum, 284, 652–653 payroll, 19, 110, 551, 608 Pigouvian, 137–139, 145 poll, 558–559 property, 19, 279, 551, 715 sales, 19, 552 types of, 551–553 Tax wedge, 589, 677, 726 TechAmerica, 740 Technical Mapping Advisory Council, 352 Temporary Assistance for Needy Families (TANF), 27–28, 39–46, 56–59, 86, 91, 521–522, 524, 527, 532, 540, 544 Temporary layoff, 423 Territorial system, 767 Thaler, Richard, 695 Thatcher, Margaret, 284, 558–559 Theoretical tools, 28 See also TANF constrained utility maximization, 28–39 equilibrium and social welfare, 45–56 Theory economic, 43, 177 of externality, 125–131 game, 215 Three rules of tax incidence, 608 “Throw Momma from the Train” Act, 114 Tiebout, Charles, 281 Tiebout equilibrium, 734 Tiebout model, 281–291, 299, 315, 564 Time series analysis, 73–74 Tim Hortons, 772 Timon of Athens, 356 Title funds, 276–277 Toder, Eric, 739 Tollman, Stanley S., 779–780 Tom Bean district, 297 Total average tax rate, 610 Total family earnings, 672–673 Total product, 666 Total social surplus, 53 Total suspended particulates (TSPs), 158 TRA 86, 794–795 Train Protection and Warning System (TPWS), 229–230 Trans-fats, 186 Transfer price, 770 Transfer tax, 715 defined, 727 estate tax, 729, 730–732 tax wealth, 729 Transitional inequities from tax reform, 792 Treatment group, 69, 71 TRICARE, 447 Truman, Harry S., 471 Trust, 731 Trustee, 731 Trustees of the Medicare and Social Security Funds, 109 U Uncollateralized borrowing, 353 Uncompensated care, 448 Underinsurance, 459 Underprovision of care, 466 Understated wage, 225 Unemployment Compensation Extension Act, 404 I-15 I-16 Index Unemployment insurance (UI), 336, 353–355, 403–405, 451, 473, 477 defined, 405 institutional features of, 405–407 Unfunded plan, 373 Unfunded Social Security, 375 Unit of taxation, 577 University of Athens, 782 University of Chicago, 132 University of Connecticut, 769 Unlocking effect, 724 Urban Institute, 608 U.S.–China Clean Energy Research Center, 168 U.S.–China Climate Change Working Group (CCWG), 168 U.S Constitution, 277–278, 335 U.S Department of Defense, 282, 447 U.S Department of Education, 307 U.S Department of Energy, 210 U.S Department of Health and Human Services (HHS), 27, 65 U.S Department of the Interior, 125 U.S Department of Veterans Affairs, 447 U.S health care, 435–450, 471 basics of, 441–442 CHAMPVA, 447 health care reform in, 435–450 Medicaid, 446–447 Medicare, 446 private insurance, 442–446 TRICARE, 447 uninsured, 447–450 U.S Internal Revenue Service, 771 U.S Navy Veterans Association, 570 U.S News and World Report, 808 U.S Tax Code, 771, 772 U.S Tax Court, 566 U.S Transportation Department, 233 U.S Treasury Department, 351–352, 806 Utilitarian social welfare function (SWF), 55, 655 Utility functions, 28–29, 31 Utility maximization, 49 V Valuation, contingent, 226 Value of additional government revenues, 634 average, 503 of leisure, 225 of life, differences in, 232 Value-added tax, 801–803 Variables causal, 66 correlated, 66, 80 dependent, 78 Vermont system, 422–423 Vertical equity, 560, 642, 784 Viscusi, Kip, 231 W Wackenhut Corporation, 210 Wage, after-tax, 666, 677 Wage growth effect, 375 Waist measurement test, 187 Wall Street, 745 Wall Street Journal, 743–744 Ward Hunt ice shelf, 161–162 Warm glow model, 204 Warner, Mark, 793 Washington Nationals, 107–108 Washington Post, 154, 683 Wasting money, 503 Waxman, Henry, 169 Waxman-Markey Climate Bill, 171 Wealth taxes, 551, 728 Welfare categorical, 520 economics, 45–46 general, 335–336 in-kind, 520 lock, 541 means-tested, 520 Welfare reform law, 541–542 Welfare policy, 520–523 moral hazard costs of, 523–529 reducing, 529–544 Welfare system, 394, 526 cash, 39, 513, 520, 527, 542 West Antarctica Ice Sheet, 162 White House, 307, 433 Wicked Tuna, 357 Wikipedia, 199 Window Tax, 623 Withholding, 556–557 “Within-state” control groups, 479 WNYC, 199 Worker, Homeownership, and Business Assistance Act, 404 Worker’s compensation (WC), 337, 644 defined, 408 institutional features of, 408–410 self-insured, 425 Worker self-insurance, 427–428 Work Opportunity Credit, 556 Works Progress (later Work Projects) Administration (WPA), 278 World Bank, 372 World Health Organization (WHO), 184 World Resources Institute, 155 World War II, 12, 16, 95, 367, 384, 389, 407, 515 X Xtreme Alternative Defense Systems, 210 Z Zoning, 285 Federal Revenues and Expenditures, Surplus or Deficit, 1930–2014 Revenue and spending (% of GDP) (a) 50 40 Expenditures 30 20 10 1930 Surplus/ Deficit (% of GDP) Revenues 1940 1950 1960 1970 1980 1990 2000 2010 2014 1980 1990 2000 2010 2014 1980 1990 2000 2010 2014 (b) –5 –10 Surplus/Deficit –15 –20 –25 –30 1930 1940 1950 1960 1970 (c) % of GDP 120 100 Debt 80 60 40 20 1930 1940 1950 1960 1970 Data from: Office of Management and Budget (2015) Debt figures for 1930–1939 come from the U.S Department of the Treasury’s Bureau of the Public Debt The Distribution of Federal Expenditures (% of total spending), 1960 and 2014 Federal government expenditure by function 1960 Health (including Medicare), 2.9% Education, welfare, housing, 4.0% Unemployment, disability, 8.6% 2014 Health (including Medicare), 26.3% National defense, 49.4% Net interest, 9.7% Other, 12.0% National defense, 17.2% Social Security, 24.3% Education, welfare, housing, 12.9% Other, 7.4% Unemployment, disability, 5.4% Social Security, 13.4% Net interest, 6.5% Data from: Bureau of Economic Analysis, NIPA Table 3.16; Office of Management and Budget (2015) The Distribution of Federal Revenues (% of total revenue), 1960 and 2014 Sources of federal receipts Other, 3% 1960 Other, Excise taxes, 5% 3% Excise taxes, 13% Social insurance contributions, 17% Income taxes, 44% Corporate taxes, 23% Data from: Bureau of Economic Analysis (2015) 2014 Social insurance contributions, 35% Income taxes, 42% Corporate taxes, 15% ... political and economic barriers it faces, and possible reforms such as a consumption or flat tax Public Finance and Public Policy this page left intentionally blank Public Finance and Public Policy. . .Public Finance and Public Policy: A Tour Through the Book Part I  Introduction and Background Why Study Public Finance? The goal of studying public finance is to understand the proper... Introduction and Background Why Study Public Finance? Theoretical Tools of Public Finance 27 Empirical Tools of Public Finance 65 Budget Analysis and Deficit Financing 93 PART II Externalities and Public