Econ 1a Foldvary

p. 457

Skousen, Economic Logic

Chapter 20, Fiscal Policy and the role of government.

Week 9, 10/21

Fiscal: government revenues and spending

What is the proper role and size of government?

What should government provide?

How should government be financed?

What should government prohibit?

Government and market: what is the best role for each?

Use analysis of economics, ethics, political science

Skousen: two positions: libertarian and welfare-state

The libertarian position.

Libertarian: liberty in all aspects of life, social and economic.

Equal self-ownership

Prohibit harm to others.

People have the right to do anything that does not coercively harm others.

Natural rights, not utilitarian.

A minimal state: defense, security, justice.

A larger role: public works, the provision of education

The welfare-state view

The social democrat view

Redistribution and welfare

Control money and interest, direct growth

The welfare state: public goods, redistribution (transfer payments),

stabilization (bail outs, stimulus); prohibitions and restrictions

Provision versus production

P. 453: activities that government can do better?

Everything government does can be and has been done by the private sector.

Fraser Institute, Economic Freedom of the World index

Measure based on size of government, taxation, legal structure, money, trade, regulations

Economic freedom and intervention

Too much government becomes a burden

Why government grew: depressions and war.

Expansion during the Great Depression.

Economics: demand-side Keynesian theory.

Economists: optimal level, less than 24 percent.

Growth could have been 5.8% rather than 3.5% since 1950.

Income today would be three times what it is.

Governments that downsized have improved growth, e.g. Chila, China

Why has the relative size of government grown?

Great Depression. Social Security.

Wars. Ideology.

The most important function of government:

The rule of protective law

Property rights, independent judiciary,

Public choice.

The application of economic theory to government and politics.

The disease of democracy: transfer (rent) seeking.

Major economist: James Buchanan, Nobel prize 1986.

Politicians have self-interest.

Voters are rationally ignorant.

Special interests have concentrated benefits.

Bureaucracies seek expansion.

Reforms: constitutional rules, decentralization, privatization and competitive bidding

Basic problem: mass democracy. Remedy: small-group democracy.

Chapter 21 - government revenues and tax policy

p. 485.

Tax the rich? They will react.

1990, Congress passed a luxury tax on yachts, jewelry, furs, and expensive automobiles.

Quantity demanded fell greatly. Congress repealed the tax.

High taxes on corporation make them keep their profits abroad.

Lower capital gains taxes resulted in a 91 percent gain in tax revenues from capital gains from 1996 to 2000. This contributed to the Internet boom of the late 1990s.

Most of federal tax revenues is from the individual income and ss taxes.

A third of state tax revenue is from sales taxes.

Sources of government revenue:

user fees (garbage collection)

excise taxes

sales taxes; 5 states don’t have them: AK, DE, MT, NH, OR


real estate taxes


income taxes

estate or inheritance taxes

Two rationales for taxes and fees:

1. The benefit principles

2. The ability to pay. User fees: tolls, fares, parking meters, passports

taxes on income, sales (excises, tariffs), value added.

Progressive, regressive, proportional (flat rate) taxation.

The most efficient tax system?

The most equitable tax system?

Two rationales for taxes and fees:

1. The benefit principles

2. The ability to pay. User fees: tolls, fares, parking meters, passports

taxes on income, sales (excises, tariffs), value added.

P. 511: Arthur Pigou

The Economics of Welfare, 1920