PAD 4223 Midterm

Public Financial management

"The subset of management that focuses on generating financial information that can be used to improve decision making in the public sector." (Finkler, 2016)

What is a three-legged stool?

- the principle stating that each of income, property, and sales taxes should constitute about one-third of total state and local tax revenues.

Two meanings of openness

1) Budget should be implemented as determined •Accountability of budget: Citizens can hold officials accountable through the budget document by seeing what was promised and what was delivered.•Government Performance and Results act (1993) •2) Budget should be adaptive and flexible to the environmental change •What is the "environment" of budgeting?•Level of available resources •Certainty of revenues •Emergencies•Citizens' opinions

1) Choice of revenue

1) Choice of revenue •Progressive income tax •Proportional income tax Sales taxes •Tariffs: Fees required for foreign producers to be allowed to market their goods in this country. •Property taxes: Tax a proportion of the worth or sales value of property people own •User fees: Depend on how much citizens use the service •Have little to do with the ability to pay. •Nonpayers enjoy the benefit indirectly.

External dynamics

1) Economic change •Increased demand for social services. •GDP changes: The broadest indicator of economic output is the GDP (Gross Domestic Product) 2) Social change 3) Political change 4) Changing prices •Nominal dollars- the dollar spent today •Real or Constant dollar - what the dollar can actually buy •Inflation - the purchasing power of the dollar declines, the purchasing power of fixed revenues declines, and prices of goods and services rise.

Five different views on the politics in budgeting

1) Reform Orientation: Clash of views between professional staff and elected officials over the boundary between technical budget decisions and properly political ones. •2) Incrementalism: Negotiation among actors •3) Interest groups are dominant: Conflicts among the interest groups on budgeting •4) Budget process is the core of politics: Budget process itself is the center and focus of budget politics .•5) Politics of budgeting centers in policy debates: budgets reflect policies.

Types of revenue used by the government: in detail

1) Taxes: biggest portion of revenue 2) Service charges and fees 3) Licenses, franchises, leases, rents 4) Gaming and lotteries 5) Investment earnings 6) Sales of assets 7) Fines 8) Intergovernmental payments 9) Bequests and gifts

How does democracy affect budgeting?

1)Accountability: answering to someone for something. In democracies this is achieved through elections. 2)Transparency: decision-making processes are regular, known, and open. 3)Responsiveness: government and employees dedicated to serve citizens. 4)Stewardship and Efficiency: stewardship calls for more than simply being efficient, it includes values such as integrity, liberty, justice, and democracy

Clusters in Budgetary Decision Making •Budgeting can be separated into five decision clusters

1)The Revenue Cluster: •technical estimates of how much income will be available. Interest groups are very involved. 2)The Budget Process: •how to make budget decisions: may revolve around individuals or groups trying to maximize their power through rearranging the process. 3)The Expenditure Cluster: •involves technical estimates and is policy relevant. Agency heads are more involved, interest groups are also active. 4)The Balance Cluster: •should balance be achieved through raising revenues, cutting expenditures, or both? 5)Budget Implementation: •issues revolve around the need to implement decisions exactly as made, and the need to make changes due to the environment.

Why is the budget important?

1. Future-looking statement of government goals and values 2. A legally enforceable plan of operations expressed in dollars 3. A way to assign resources through political processes 4. A record of the wins and losses in the political process.

Tax-Raising Strategies

1.Earmarking •Earmarking revenues : raise revenues for a specific purpose so that the money must be spend on that purpose .•Earmarking revenues for popular causes can be one way of overcoming popular resistance to tax increases. •What are disadvantages of earmarking? •Prevents comprehensive budgeting that considers priorities •Weak linkage between the amount of revenue and spending 2.Distributing benefits from a Tax Increase •Raise more revenues than needed for the immediate problem and design a package of expenditures that will gain support for the tax increase

Notions of Tax Fairness - four different approaches

1.Everyone pays something 2.Taxes paid in line with services and benefits received 3.Willingness to pay or political acceptability 4.Ability to pay (tax burden or effective tax rate)

Three steps to starve the beast

1.If federal revenues are cut, but federal spending is not:higher budget deficit. 2.Public opposition to high deficits: force Congress to cut spending on domestic programs (such as Social Security, Medicare, and Medicaid) 3.Results in tax cuts and spending cuts and changes in social policy: smaller government

What beliefs shape the antitax sentiment?

1.Taxes are too high 2.The tax burden is unfair 3.Government performance is unsatisfactory, so the return from taxes is unfair.

6 Functions of Revenue Systems

1.To finance public organizations and services 2.To reward and penalize certain economic and social behavior (what are sin taxes?) 3.To redistribute resources through privileged treatment or tax breaks (exemptions, deductions, credits) among individuals, activities, economic and other groups, geographic regions. 4.To affect demand - charging for particular services 5.To implement fiscal policy (stimulate economy) 6.To engage everyone in paying for privileges and responsibilities enjoying as being part of the community.

Four distinctive characteristics of budgeting in the government:

1.Variety of actors in budgeting 2.Separation of payer and decider 3.Openness of budget to the environment 4.Public budgets are constrained

Income tax example

1.determine total source of income (50,000) 2.subtract allowable deductions and exemptions to determine taxable income (Married- 3000, 2 children -4000)(50,000-7000=43000) 3.apply the appropriate tax rate to determine the amount of tax 1) 18650*0.1+(43000-18650)*0.15=5517.5 4.then subtract the allowable credits to determine the total amount of tax due. ($150, lifetime earning) 5517.5-150= 5367.5

•Income tax •The basic structure entails four steps...

1.determine total source of income 2.subtract allowable deductions and exemptions to determine taxable income 3.apply the appropriate tax rate to determine the amount of tax 4.then subtract the allowable credits to determine the total amount of tax due.

Competition within

2) categories also exists

Tax-Raising Strategies (Cont'd)

3. Temporary Taxes •A strategy used to disarm the opposition 4. Accountability •Improved accountability makes the difference between whether a tax is accepted by the public or not 5.Predictability •Politicians may raise a number of smaller taxes by a small amount so that the increase is less visible. 6. Taxing the politically weak •One way is to tax "outsiders": Outsiders are those who do not vote and hence cannot throw politicians out of office.

6. Trust funds

6. Trust funds Budget entities that separate out specific revenues and expenditures for a particular purpose.

What is ideology?

A systematic set of beliefs and values that shape our understanding of the world; these beliefs and values are the basis for political preferences.

Politics between the agencies and elected officials

Agencies •Requesting budget •Accomplish program goals Elected officials •Implement favored policies •reelection

How do taxes work?

All taxes can be expressed by the formula: Rate*Base=Yield rate- Percentage of the base that will be taken in tax base-Is what is taxed!Including property, consumption or income tax yield-The amount resulting from applying the rate to the base

What are the reasons for distrust in budgetary politics in the United States?

Americans point to government inefficiency as main reasons for distrust.

Example: City budget of $1million is financed by a single tax source, and the taxable base is estimated to be $10 million. What would be the imposed tax rate?

Answer: 0.1 (10 %) If we know the desired annual spending, we can divide it by an estimate of the tax base (for the same time period) to produce the tax rate that would be imposed in order to generate the needed amount of money.

Why Is Some Federal Spending Kept Secret?

Black budgets are budgets that are black out because of classified information pertaining to intelligence or defense issues.

Do we vote for our budget?

Citizens elect public leaders to make decisions.

Are citizens rational?

Citizens' economic self-interests and emotional basis both affect their decision making Do we always try to maximize our utility from public resources? Research suggests that IDEOLOGY, emotion, selectivity, and biases powerfully affect decisions.

Who are the players in budgetary politics?

Citizens, voters, taxpayers, decision makers

What is the context of budgeting in the US?

Democracy and relatively and relatively free-market free-market economy ------> Separation of powers ------> Federalism

Democracy:

Democracy is an institutional arrangement based on the participation of the

Definition of Participatory budgeting:

Democratic process in which community members directly decide how to spend part of a public budget

3. Public acceptability:

Depends on the tax visibility, affordability, and predictability.

Special-purpose governments reduce competition because

Does not have to compete with other functions.

Competition among the 1) actors with different interests

EX) environmental protection or economic growth?

What does the decision process involve?

Estimates on revenues and limits on expenditures

What is intergenerational equity?

Fairness across age-groups or generations; often thought of as requiring the generation enjoying the benefit to pay for it.

Tax resistance

Few people like paying taxes

Budget Balance Cluster and Politics

Focus on 1) managing economy, 2) the scope of government program, 3) which level of government will balance its budget. Ex) what programs will be terminated? Whose programs will be cut?? What will be the balance between revenue increases and spending decrease?

Cannot be changed without a change in the law. Why this happened?: Today's decision makers will not be held accountable for tomorrow's tax bill.

For the government employees, benefit expansion is a relatively painless substitute for salary increase

Difference of the government and the private sector in revenue generation Government generates revenue from non-exchange transactions

Government revenue is not the result of sale of goods and services The government generally does not give goods or services that is equal to what people pay

What is the issue network?

Groups that are connected through a policy issue

How the competition is reflected in budgetary decision making?

It depends on the budget process and the budget format

4. Affordability:

Keeping taxes from climbing too high is a tactic for keeping taxes acceptable. Affordability is accomplished in two different ways: 1) Keep tax burden low 2) Maintain relatively high taxes but create a system of exemptions from the burdens those rates impose.

What is the difference between local governments and special-purpose governments?

Local governments provide a variety of services, special-purpose provide only one.

Earmarking is different from lump-sum budgeting

Lump-sum budgeting: total amount of money is granted, with agency administrators maintaining discretion on how the money will be spent. •Supporters of programs will seek earmarks when they fail to succeed in normal competition. •How do public managers feel about earmarking? Why? And how do legislators feel about public managers?

Example of ideology affects budgeting: Starve the beast

Make future spending less affordable in order to reduce the role of the federal government in American society.

Do public leaders encourage participation?

Many do encourage participation. But why? •Increase trust and legitimacy •educate voters and taxpayers •get support for proposals •get input and feedback for decision making about the budget

3.Grants:

Money given for a specific purpose •1) government-mandated transfers: revenue is provided to other governments with restrictions Ex) federal money to state government for Medicaid •2) voluntary gifts to a government: transfers without restrictions

Do people prefer spending increases over cuts?

More people favor spending increases over cuts.9

The Problems of Tax Administration: tax rate

Nominal versus Effective Tax Rate

Difference of the government and the private sector in revenue generation Private businesses generate revenues from exchange transactions

People buy goods or services and pay for them: exchange in equal value

Internal dynamics

Percent change or growth of budget

How it is related to fairness?

Perception of fair government is related to the trust to government

1.Taxing everyone a little bit

Politicians tend to use a variety of taxes, even if some produce a limited amount of revenue. What is fiscal illusion?

4. Budget Balance Cluster and Politics

Politics behind maintaining the balance of budget

2. Politics of Protection

Politics of protection: protecting the population from taxation •The acceptability of taxation is related with who is taxed & what is taxed & exceptions.

Three categories of nonexchange transactions for government

Q1) Speeding ticket fines:Imposed tax revenue Q2) What is the category of income tax?:Derived tax revenue Q3) Taxes for owning a house:Property tax, Ad valorem taxImposed tax revenue Q4) Federal grant to FL state for general purposes:Grants, voluntary gifts to the government

2.Fungibility

Raise money for a popular policy and use the revenue for other purposes

What is one way to deal with this intense competition?

Raise the priority of a particular spending

2. Mandates What is a spending mandate?

State governments often make laws with spending implications for local governments, which the local governments have to carry out.

Example: Is the retail sales tax of 5% on a shirt the same whether it is purchased by Bill Gates or a college student?

Tax burden: tax paid on the shirt divided by the purchaser's income. Shirt - $100, Tax rate - 5% ($5) Student's income: $20,000 Bill Gate's income: $5,000,000 What is the burden faced by the two?Student: 0.00025 (=5/20000) Bill Gate: 0.000001 (=5/5000000)

Why do we pay taxes?

Taxes are the price we pay for civilized society and public services.

What is a regressive tax burden?

Taxes that burden lower-income taxpayers more than higher income taxpayers are labeled "regressive".

Who Makes Tax Policy?

The authority to make tax policy and write tax legislation is a key source of political power.

Governments have authority to tax: use legal authority for the compulsory confiscation of resources.

The average American household pays twenty-nine different types of taxes!!

Budget process can reduce competition

The budget process can also tone down competition. 1.formula allocations. •Many grants are based on formulas: once the formula has been established, there is no competition between recipients. 2.departments and programs can compete for. 3.Prioritization. how? •Provide a list in priority order of the programs that will be cut in case revenues are less than projected. Thus some programs are at greater risk, but some are not and for those the competition is markedly reduced.

Real-time:

The continual adjustment of decisions in each cluster to decisions and information coming from other clusters and from the environment. Budgeting is not sequential!

The environment of taxation

The environment of taxation

Five Principles of Taxation

The five principles of sound revenue system sometimes compete with each other and sometimes reinforce each other. A sound revenue system should: 1.Foster strong economic growth, job creation, and rising standard of living for everyone; 2.Minimize distortions of private economic behavior by households and business (an efficient tax); 3.Yield revenues as low as possible to finance justified levels of expenditures over time 4.Be structured to be simple, understandable, predictable, and efficient; 5.Have a tax burden that is equitable in impact.

The politics of expenditures

The politics of expenditures is the politics of choice

1) How is "the public" defined?

The public is DIVIDED and subdivided by political party, income, education, age, race, ethnic group, sexuality, geography, tax burdens, program benefits, core political beliefs.

How to Gain Support for Tax Policy?

There is no perfect tax policy that makes everyone satisfied! Strategies for public support: how can government get the kind of consent necessary in a democracy?

4) Voting directly on budget choices

Tools include initiatives, recall, referendum, town meetings

Trust funds reduce competition because

Trust funds have their own revenue sources and do not compete with any other spending programs.

The difference in tax burdens across states is important.

Types of revenues and their structure affects tax fairness at all levels of government.

4. Public Enterprises

What are public enterprises? Run like businesses; they sell goods or services on a fee- for-service basis.

5. Special purpose governments

What are special purpose governments? •created at the local level to provide a single service or perform a single major function.•These governments may charge fees, but they can usually also collect taxes, issue debt .•Provide library services, sewers, education, parks

3. Entitlements

What is an entitlement? •An entitlement is a particular program that offers public money to individuals, companies, or governmental units that fit requirements. •All who are eligible and apply for benefits receive them.

What does the decision process determine?

Who gets involved and the time frame of decision-making

1. Earmark What is a spending earmark?

Within existing revenue source, a legislative or constitutional mandate requires a particular level or amount of spending for specified purpose.

Public revenue systems:

all sources of public funding form a revenue system

Budget:

an estimate of income and expenditure for a set period of time.

Taxes that add to income inequality

are unfair and creates social problems.

Scarcity requires

budgeting and well managing public resources

Budgeting cannot proceed without a

decision process•

1.Imposed tax revenues:

directly charged on entities based on assessments •1) Ad valorem tax: a tax based on value ex1) property taxes •2) Imposing on behavior ex2) fines

Flat Tax: is it regressive?

ex) Speed ticket fine

How is the US government structured?

federal, state, local

Fiscal federalism

federal, state, local governments interact by reinforcing or undermining the policy objectives and fiscal capacities

examples of scarcity virtually unlimited human wants

food, clothing, shelter, security, comfort, transportation, affection, children, variety in diet, jewelry, wisdom, travel, entertainment, medicine

Responsiveness:

government accommodates public opinion in their decisions about public policies and spending

Leaders and participants wish to change:

how much is spent, on what, and how it is financed.

Sometimes the attitudes are

ideological and partisan. "Where we live, how old we are, and our racial or ethnic identity, education, income, partisan affiliation, and ideology influence attitudes about fair spending."

Some people often express a willingness to pay more

if the payment is directly linked to a particular service they support E.g., education

Public spending and age

in developed democracies, people generally receive fewer services and benefits when their tax contributions are highest.

Effective tax rate

is the number of dollars actually paid in taxes expressed as a percentage of a given tax base.

Nominal tax rate

is the tax rate written into law (statutory rate).

Joint Tax Committee (1926):

joint committee serving both the House and the Senate - devoted solely to taxation and staffed by nonpartisan technical expert

examples of scarcity limited resources and time

land, labor, capital, entrepreneurship

Finance:

managing the uses of the organization's financial resources and alternative resources.

Attitudes toward public spending

mirror the problems people encounter on daily basis.

what does the governing mean?

next 4 parts

Comparing dissimilar items requires a list of

priorities.

Executive Branch

sets the revenue agenda by framing the issue and controlling the tax administration.

What is government?

system by which a state or community is controlled.

2.Derived tax revenues:

taxes on exchange transactions which the government is not directly involved in the exchange •The government is not buyer nor seller •Ex) sales taxes, income taxes

Lobbying:

the direct promotion of a particular viewpoint in order to influence what government does (spends, taxes, regulates). •Lobbying pervades government and is legitimate within certain boundaries. •The most lobbied issue in Washington is said to be the budget and appropriations.

Tax burden:

the financial impact is different even if the nominal tax rate is the same

Real time budgeting:

the integration of the five clusters of decision making produces a pattern the author calls real-time budgeting

A wide and increasing gap between rich and poor can threaten

the political consensus that is needed to tackle the many challenges facing the nation.

1) Public opinion polls:

tools of democracy and sources of public opinion information

What is trust?

trustworthy government should have ability to deliver effective services, have commitment on public interests, and have integrity to tell the truths (Berg and Johansson 2020)

What is the iron triangle?

• policy-making relationship among the congressional committees, the bureaucracy, and interest groups •Iron triangles are less common today

Charges and fees are considered voluntary, and suggested to be most appropriate when:

•(1) the benefit can be measured and priced •(2) the actual recipient can be identified •(3) costs are known •(4) equity concerns are not a major consideration.

•Three issues

•(1) which taxes to consider; •(2) what definition of taxable wealth is used; •(3) what pattern of exceptions to grant to broad-based taxes.

Citizens' decision rules to cast their votes

•1) Calculus: weigh and compare candidates' positions and vote •Demands a lot of time and information •2) Trump: focusing on a single top priority issue and voting for a candidate with the same standing •3) Trade-off: willingness to trade budget preferences for seemingly more pressing policy concern •4) No show: not voting •5) Voting political parties: parties appeal to a broad public, different constituencies have different preferences. Budgetary decision does not always follow partisanship •6) Voting core beliefs •Public's feelings and political beliefs influence budgetary politics •Parties appeal to the more conservative or more liberal voters, rather than appealing to the median voters

4. Budget Constraints

•1) Intergovernmental mandates •Federal require state expenditures •State require local expenditure •2) Fund structure •Public Budgeting is based on funds, separate accounts for separate purposes. •Money can be spent only through those accounts, and cannot be freely moved between accounts.

1. Revenue Cluster and Politics

•1) Policy issue determines.. •who will be taxed or what the level of taxation will be •2) Interest groups participation •Narrowly defined interest groups: deflect taxes from their constituents •Broader interest groups: distribution of taxation

2. Budget Process Cluster and Politics

•1) Who should participate in the budget process? •2) How much citizens' and interest groups' preferences should engage in? •3) Bargaining over the power and choices on key policy issues

How do we make a choice?

•1) Within category •By grouping together similar things •2) Between categories •Comparing seemingly different and incomparable things is often necessary

Recurring Themes in Budgetary Decision-making

•1. Openness vs. Secrecy •2. Dynamics of budgeting over time

What is revenue?

•Amounts of money that the government has received or is entitled to receive

Property tax

•Based on the estimated fair-market value of the property as appraised for tax purposes and the tax rate, not the owner's ability to pay. •How do local government officials estimate anticipated revenues from property tax? •What is a politically free tax increase? •Property value increase, tax rate unchanged revenue increase without blame

3) Transparency

•Budget decisions and the processes that produce them need to be OPEN, UNDERSTANDABLE, and DOCUMENTED in readable records. •This should be done in order to allow for the public to PARTICIPATE and all interested (public and media) to EXAMINE the documents •Despite efforts, the public believes that transparency fails to meet its needs

Why do we need to make choices?

•Budgets have to be balanced •Revenues = expenditures

1. Variety of Actors in Budgeting

•Bureau Chiefs: desire for expansion vs. countervailing values •Bureaucrats •Executive Budget Office •Legislators •Interest Groups •Individuals

How should federal spending be divided among the states?

•By the amount citizens paid in taxes?Is it fair for one state to receive more than the others? •Flat amount per person?Is it fair for the states with small population? •Equal amounts?Is the identical treatment fair?

3) Exemptions at federal level

•Capital Gains taxes: •Applied to increases in the value of investments held for specific periods of time. •Tax Payer Relief Act of 1997 - reduced capital gains tax rate to 20% (from 28%) and 10% (from 15%) for long-term capital gains •As of 2020, long term capital gains tax rate depends on the income bracket •Earned income tax credit •Goal is to lighten the tax burden of the working and middle class and to encourage people to get off welfare and get a job.

3) Exemptions

•Characteristics of Tax breaks across all levels: 1.Broad taxes tend to be eroded by exceptions for particular groups 2.Tax breaks are given to businesses during a period of economic stress 3.No supervision or evaluation to see if the policy objective is being achieved.

1. Revenue Cluster and Politics

•Characterized by the policy orientation and active interest group participation

What age groups cost the most in terms of state services?

•Children (schools) •Young adult males (criminal justice) •Seniors (health) •There is no easy way to balance these demands in public decision making or to determine how an age-group's interests are best represented.

2) Defining Taxable Wealth

•Choosing the basis for taxation is a technical and political decision •Politicians can protect particular groups of people from taxation •Defining certain sources of wealth as not taxable. •Shifting the burden of taxation to other groups •Reducing the level of taxation for everyone.

Budgeting: Five clusters are INDEPENDENT but LINKED to each other

•Clusters are mostly independent •They need information from one another •All clusters depend on the PROCESS stream to organize and allocate power to them .•Revenue, expenditure, balance, and implementation depend on the PROCESS cluster.

Citizens are..

•Convinced that they are paying for mismanagement. •Sometimes resentful being forced to pay more than their share.

Budgetary Politics •The politics of budgeting

•Decisions are made about who gets, who pays, and who and what wins or loses. •Tackle shared problems in the face of scarcity and competing demands •Inform us what problems we are tackling and how successful are we.

What are some pressures for reform?

•Demands of interest groups •Individuals who are burdened by the tax •Perception that taxes are applied equally to all can deteriorate •Inequitable treatment of businesses and individuals

Responsiveness to citizen preference:

•Does not come easily, nor is it cheap in an open democratic society with a changing demographic profile. •Health benefits redistribute resources primarily to the elderly, but education redistributes to the young.

Criteria to determine how to spend public resources

•Efficiency •Marginal utility •Opportunity cost •Performance measurements

Financial and legal obligations to be paid in the future

•Entitlements and pensions •Distributive & redistributive entitlement programs (Medicaid, Medicare (1965), Social Security (1935) •Federal and state governments have to pay unfunded pensions, employees' and retirees' medical benefits

Entitlements can reduce competition.

•Entitlements must be funded first, makes a prior claim on the budget •EX) State level costs of healthcare entitlements keep growing. How this impacts other discretionary spending programs?

Sales tax

•Everyone pays the same tax rate. •Sales tax does not consider the taxpayer's ability to pay.

•When can the government increase taxes?

•Federal income tax became legal after a constitutional amendment in 1913 •Income tax rates has increased •Top rate on incomes over $500,000 = 7%

Fiscal federalism:

•Fragmented yet connected government system and policy arenas •Taxes are connected at federal, state, and local level •Federal offset: State and local income and property taxes are allowed as itemized deductions on the federal income tax. •Wide-spread state and local budget cuts that ran counter to the federal efforts to jump-start the economy.

Why is it important?

•General public trust/distrust of government institutions and leaders affect budgetary politics .•Low trust hinders budget implementation, evaluation

Tax legislation

•House - Ways and Means committee •Senate - Committee on Finance •The majority party in each house dominates the committee by appointing a chair who controls the agenda and appoints a majority of party members to the committee.

3) Exemptions at federal level: Durability of Tax Expenditures

•If tax expenditure can be reduced, more money would be available •Tax expenditures usually persist: •Tax expenditures for individuals were treated as entitlements .•Tax breaks cover a wide range of interests and constituents.

example tax rate

•Individual A earns $500,000; Individual B earns $360,000 •They are in the same tax bracket •A: 0.1*(100,000)+0.15*(200,000)+0.25(200,000)=90,000 •B: 0.1*(100,000)+0.15*(200,000)+0.25(60,000) =55,000 •A pays at 18% effective tax rate ($90,000/$500,000) •B pays at 15.3% effective tax rate ($55,000/$360,000)

3. Expenditure Cluster and Politics

•Interest group involvement, bargaining and competition •Competition to prevent one interest group ruling •Interplay of interest groups •Which program will be funded and who will benefit?

Participatory budgeting: cons

•Is everyone equally represented? •Misallocation of resources

What Does Counterterrorism Cost?

•It is nearly impossible to compute the overall cost of counterterrorism measures. •Department of Homeland and Security budget covers more than just terrorism. •Counterterrorism measures are present in 32 federal agencies. •State and local governments play a role in counterterrorism measures •Private sector spending is in part related to threats of terrorism.

Is it feasible to never raise taxes?

•It would be difficult since expenditures are likely to increase .•Inflation can also increase costs of equipment.

What do the authors suggest as the "worst tax" according to public opinion responders?

•Local property tax! •Why? Because it is highly visible.

What are some of the common problems of voting?

•Low voter turnout •Partisanship •Leadership: are the office holders listening to citizens' voices, how much power do citizens believe they have?

5. Budget Implementation Cluster and Politics

•Maintaining accountability by implementing the budget vs. allow necessary changes •Tension between legislative power vs executive discretion •Neutral oversight is often difficult •Ex) Emergency supplementals

Mandates at different levels Funded mandates and unfunded mandates

•Mandate come from the federal government to state and local governments: Medicaid •And from state governments to their local governments

What Are We Getting For The money?

•Measuring performance must be done carefully. •Performance measurements should draw on different types of measures including clearly targeted objective measures of: •Output •Efficiency •Effectiveness. •Measuring performance should be aimed at increasing efficiency, or reducing total costs, or both.

How do you perceive lobbying?

•Most lobbying is not glamorous and is not corrupt.

Getting approval on programs

•Not every program or service gives benefit to every tax payer in an even measure. •So how do they get the approval they would need? 1.Geographic dispersion 2.Positive spillovers •what is an exaggerated positive spillover? 3.Balancing benefit to a variety of groups: Everyone gets a little something from different programs. 4.Making program costs look cheap •There are three ways to make programs look cheap or free: grants, loans, insurance programs.

Public enterprises may be:

•On-budget, they are listed in the budget along with regular services •Off-budget means they are not included in the budget, and the degree of tradeoff allowed with other services may be minimal.

Participatory budgeting: a case

•Participatory budgeting in Cambridge, MA•For fiscal year 2022, City set aside $500,000 for capital projects to improve the community•Process •1) Brainstorming for ideas •2) Volunteer budget delegates develop ideas into formal project proposals •3) Approval of City Manager on proposals •4) Public vote on approved proposals •5) Winning projects are included in the budget

Why do public and political leaders show less support for spending on redistributive programs?

•Partly because citizens are fond of limited role for government •Disconnect between what is politically correct, and what is practical

Budget Balance Cluster and Politics

•Politics of budget balance is partisan •Different views by liberals and conservatives; Democrats and Republicans

Tradeoffs of making a choice

•Public budgeting involves a wide variety of actors with different spending goals •Necessity of choice in the budget competition between actors, between programs, and between beneficiaries. •E.g. The elderly might benefit from increased Medicare payments at the expense of reduced college loans to the young. •E.g. Who should be vaccinated first and funded?

How do we participate in public budgeting? How have you participated recently?

•Public meetings •Advisory committees •Surveys •Focus groups •Lobbying •Voting •Participatory budgeting

Why is public finance different from the private sector's finance and budget?

•Public resources are collected from citizens •Public resources are used to provide public goods and services for citizens •Public resources should be used to uphold democratic values and democracy

What is a circuit breaker?

•Reduces property tax burden on poor, disabled, or elderly households by offering a tax reduction or refund based on the proportion of income that goes to property taxes.

Service charges and user fees are paid in exchange for a specific good or service

•Riding the city bus •Monthly payments for water use •Renewing a driver's license •Buying hunting and fishing permits

It reduces competition because

•Segregated from the rest of the budget •The revenues public enterprises generate go exclusively for the expenses they incur.

3. Politics of Reform

•Simplify taxes and reduce special exceptions •Suggested to lead to revenue increases, which could be used to reduce the rates for everybody, or to reduce deficit, or sustain services and programs. •Another goal is equity of tax • that taxes overall are apportioned according to ability to pay.

Money deposited in a trust fund is supposed to be spent only for those purposes specified in the creation of the trust fund.

•Social Security •Highway Trust Fund

Lobbying for public interests and special interests

•Some lobbying promotes special interests. 1.Fails to benefit the general public 2.Benefits a few far more than the public, and whose costs outweigh the general benefit

Is it fair?

•Some may not see this spending as fair, but the people who get the benefits see them as what is rightfully coming to them. •The costs cannot be paid without reducing other domestic spending or raising taxes

Are potential reforms easy to accomplish? Why?

•Suggested to be difficult but not impossible to accomplish.

What is the difference between tax avoidance and tax evasion?

•Tax avoidance: using rules in the tax code that allow tax breaks .•Tax evasion: use of illegal methods to escape paying.

3) Exemptions at federal level: Durability of Tax Expenditures

•Tax breaks at the federal level are often justified in terms of achieving programmatic goals •An example of tax reductions to homeowners: •Encourage a stable homeowning class •Stimulate the economy •Tax breaks benefit the homebuilding industry and realtors •Is it really effective and efficient compared to other policies to achieve similar goals?

What about at the local level? What are the strategies there?

•Technical reasoning •"it will cost more later" •"will not cost much any way" - use "free money" (know what is meant by "free money") •Substituting leases for purchases •Use fees (programs seem to pay for themselves)

What about borrowing?

•Technically, it is not revenue because it has to be repaid •Public organizations borrow money to fund the purchase and construction of fixed assets

3. Openness of Budget to the Environment

•The budget that is passed should be the one that is implemented, but the budget also should be flexible and adaptive

The issues regarding secrecy of federal spending

•The constitutional requirement for public reports on spending •The value of open political discussion •The risk of revealing potentially harmful information to opponents •The risk of revealing details when aggregate figures are discussed •The loss of executive and congressional scrutiny when information is classified.

2) what is a distributive policy?

•The costs and benefits of distributive policies and programs (Social Security, Medicare, environmental protection, national security) are delivered widely. •These tend to be politically popular

How does diversity affect spending?

•The increasing diversity leads us to expect more varied service demands •Different expectations about the proper role of government and individuals' relationships with government and community.

What is Fairness?

•The sense that a decision, act, or outcome is right or appropriate •Justice (suggesting impartiality) vs. self-interested or personal bias •Using set procedures and following the rules •often associated with substantive and/or procedural justice.

The Problems of Tax Administration: tax base

•There are several problems to consider when determining tax base. 1.A problem in Income tax: •A worker's end-of-year income tax reporting to government is simple if this is the only source of income. •What if the employee has additional income source? 2.A problem in Property tax: Problem of subjectivity!• How is the taxable value determined if ownership has not changed in decades? Has not had any significant improvements? Is the fair market value the same as the original cost? Has the property value depreciated? •Solutions 1)Frequent appraisal of each property parcel as the way to estimate its fair market value 2)Income earning capacity is sometimes used to estimate •How much income can a pizza restaurant near campus generate?

The core question of budgetary politics:•"How much are people willing to pay?"

•This question assumes that individuals are self-interested. •We delegate our responsibility to elected officials who are free to make these decisions in this representative democracy .•Officials often look to public opinion polls to gauge voters' willingness to pay.

2. Separation of Payer and Decider

•Those who pay the bills (payer) ≠ The ones who make the decisions on how the money is to be spent (decider) •EX) Taxpayers elect their own representatives in 1800s •Growing gap between taxpayers and "tax eaters" in industrial revolution era •20th century: tax-payers and tax-users (consumers of government services) •Now everyone pays taxes, and everyone is a consumer of government services •The debate has shifted to the services used only by a few but paid by many.•Is user fee a good solution?

Public spending serves four main purposes:

•To finance operations •To assign public resources to different uses• To implement fiscal policy •To redistribute resources

Participatory budgeting: pros

•Transparency of budget process •Enhance democratic values

fairness in budgeting?

•Treat everyone the same• Treat people in different circumstances differently

2) How do leaders see their jobs?

•Trustee: makes decisions primarily using their own judgment and conscience. •Delegates: makes decisions that they believe reflect the will of their constituents. •What type of leader do you want?

How does politicians use poll results? •

•Use polls to shape decisions •Use polls to stand against special interests •Limit ability to make unpopular choices, encourage them to ignore minority viewpoints •Cherry pick results to support their own decision

Do governments add functions?

•When government adds functions, it has to find new sources of taxation or increase existing revenues to cover the increased costs: what is an example of a "adding a function"?

Income inequality creates concerns..

•Widening income gap threatens political stability .•Big income gap is fundamentally undemocratic. •Widening income gap is a drag on the economy that directly ties to mass consumption .•Income inequalities discourage economic growth and encourage corruption.

Making Budgetary Choices

•choices between possible expenditures •What budgetary choices did you make this week?

Scarcity leads to politics:

•competition over public resources •functions as mutual adjustment, bargaining, compromise, and cooperation.

What is the public sector?

•composed of organizations that are owned and operated by the government •Produces and provides public goods and services

3) Exemptions at federal level

•federal income tax has gone through a number of changes: 1.Structure of the tax •Definitions of taxable wealth, how to treat marriage or children, percentage rates for families with high, middle, or low incomes .2.Number of exceptions granted •reductions in taxes for a single individual or a class of individuals with certain characteristics or certain forms of wealth might get such reductions, or a company or a particular industry might get a particular tax break.

1) what is a redistributive policy?

•poverty programs and foreign aid •In redistributive programs, costs are shared widely, but benefits are targeted to narrow segments of the public. Safety net programs (Medicaid, food stamps, poverty programs), enjoy less support.

Mandatory spending

•↔ Discretionary spending •Includes entitlements and other expenses

Many of the other revenue sources are based on lifestyle and use of publicly provided services

↔ Taxes are compulsory payments