17 - Public Finance: Expenditures and Taxes

Government purchases

Exhaustive; products purchased directly absorb (require the use of) resources and are part of the domestic output

Government provides ______ to both households and businesses

Goods and services

Deficit spending

Government spending that is financed by borrowing It has this name because a government's budget is said to be "in deficit" if the government's spending in a given time period exceeds the money that it collects from taxes and proprietary income during that period

Personal income tax

Levied on taxable income on households and unincorporated businesses after certain exemptions and deductions (business expenses, charitable contributions, home mortgage, interest payments, certain state and local taxes) are taken into account

Transfer payments

Non-exhaustive; they do not directly absorb resources or create output Their key characteristic is that recipients make no current contribution to domestic output in return for them

Division of burden

Since the government imposes the tax on the sellers (suppliers), we can view the tax as an addition to the marginal cost of the product

The ability to borrow allows a government to...

Spend more in a given time period than it collects in tax revenues and proprietary income during that period

What three revenue sources do governments rely on to finance the G/S provided to businesses and households?

Taxes, borrowing, and the proprietary income generated by government-run or government-sponsored businesses like public utilities and state lotteries

The funds used to pay for gov purchases and transfers come from three sources:

Taxes, proprietary income, and funds that are borrowed by selling bonds to the public

Tax incidence

The degree to which a tax falls on a particular person or group

Determining whether a particular tax is progressive, proportional, or regressive is complicated because...

Those on whom taxes are levied do not always pay the taxes Some or all of the value of the tax may be passed on to others

If the government borrows when the economy is doing well, many economists...

Worry that the opportunity cost may be high In particular, the government's borrowing may "crowd out" private-sector investment