CONTENTS
PREFACE = XIX
PART ONE INTRODUCTION = 3
1 THE PUBLIC SECTOR IN A MIXED ECONOMY = 3
THE ECONOMIC ROLE OF GOVERNMENT = 4
THE MIXED ECONOMY OF THE UNITED STATES = 4
DIFFERENT PERSPECTIVES ON THE ROLE OF GOVERNMENT = 5
AN IMPETUS FOR GOVERNMENT ACTION : MARKET FAILURES = 6
RENT CONTROL : A CASE STUDY IN GOVERNMENT FAILURE = 8
GOVERNMENT FAILURES = 8
ACHIEVING BALANCE BETWEEN THE PUBLIC AND PRIVATE SECTORS = 10
THE EMERGING CONSENSUS = 11
WHAT OR WHO IS THE GOVERNMENT? = 12
THINKING LIKE A PUBLIC SECTOR ECONOMIST = 14
ANALYZING THE PUBLIC SECTOR = 16
ECONOMIC MODELS = 18
NORMATIVE VERSUS POSITIVE ECONOMICS = 19
MUSGRAVE'S THREE BRANCHES = 20
DISAGREEMENTS AMONG ECONOMISTS = 20
DIFFERENCES IN VIEWS ON HOW THE ECONOMY BEHAVES = 21
DISAGREEMENT OVER VALUES = 22
REVIEW AND PRACTICE = 22
SUMMARY = 22
KEY CONCEPTS = 23
QUESTIONS AND PROBLEMS = 23
2 THE PUBLIC SECTOR IN THE UNITED STATES = 26
TYPES OF GOVERNMENT ACTIVITY = 27
PROVIDING A LEGAL SYSTEM = 28
GOVERNMENT PRODUCTION = 28
GOVERNMENT'S INFLUENCE ON PRIVATE PRODUCTION = 30
GOVERNMENT PURCHASES OF GOODS AND SERVICES = 33
GOVERNMENT REDISTRIBUTION OF INCOME = 33
OVERVIEW OF GOVERNMENT EXPENDITURES = 37
GAUGING THE SIZE OF THE PUBLIC SECTOR = 39
GROWTH IN EXPENDITURES AND THEIR CHANGING COMPOSITION = 39
COMPARISON OF EXPENDITURES ACROSS COUNTRIES = 42
GOVERNMENT REVENUES = 43
TAXES AND THE CONSTITUTION = 43
FEDERAL TAXATION TODAY = 44
STATE AND LOCAL GOVERNMENT REVENUES = 46
COMPARISON OF TAXATION ACROSS COUNTRIES = 47
DEFICIT FINANCING = 47
PLAYING TRICKS WITH THE DATA ON GOVERNMENT ACTIVITIES = 47
REVIEW AND PRACTICE = 50
SUMMARY = 50
KEY CONCEPTS = 51
QUESTIONS AND PROBLEMS = 52
PART TWO FUNDAMENTALS OF WELFARE ECONOMICS = 53
3 MARKET EFFICIENCY = 55
THE INVISIBLE HAND OF COMPETITIVE MARKETS = 55
WELFARE ECONOMICS AND PARETO EFFICIENCY = 57
ON THE PROWL FOR PARETO IMPROVEMENTS = 58
PARETO EFFICIENCY AND INDIVIDUALISM = 59
THE FUNDAMENTAL THEOREMS OF WELFARE ECONOMICS = 60
EFFICIENCY FROM THE PERSPECTIVE OF A SINGLE MARKET = 61
ANALYZING ECONOMIC EFFICIENCY = 63
THE UTILITY POSSIBILITIES CURVE = 63
EXCHANGE EFFICIENCY = 64
PRODUCTION EFFICIENCY = 68
PRODUCT MIX EFFICIENCY = 72
REVIEW AND PRACTICE = 73
SUMMARY = 73
KEY CONCEPTS = 74
QUESTIONS AND PROBLEMS = 74
4 MARKET FAILURE = 76
PROPERTY RIGHTS AND CONTRACT ENFORCEMENT = 77
MARKET FAILURES AND THE ROLE OF GOVERNMENT = 77
1 FAILURE OF COMPETITION = 77
2 PUBLIC GOODS = 79
3 EXTERNALITIES = 80
4 INCOMPLETE MARKETS = 81
5 INFORMATION FAILURES = 83
6 UNEMPLOYMENT, INFLATION, AND DISEQUILIBRIUM = 85
7 INTERRELATIONSHIPS OF MARKET FAILURES = 85
REDISTRIBUTION AND MERIT GOODS = 85
MARKET FAILURES : EXPLANATIONS OR EXCUSES? = 86
TWO PERSPECTIVES ON THE ROLE OF GOVERNMENT = 88
NORMATIVE ANALYSIS = 89
POSITIVE ANALYSIS = 90
REVIEW AND PRACTICE = 90
SUMMARY = 90
KEY CONCEPTS = 91
QUESTIONS AND PROBLEMS = 91
5 EFFICIENCY AND EQUITY = 93
EFFICIENCY AND DISTRIBUTION TRADE-OFFS = 94
ANALYZING SOCIAL CHOICES = 94
DETERMINING THE TRADE-OFFS = 96
EVALUATING THE TRADE-OFFS = 98
TWO CAVEATS = 102
SOCIAL CHOICES IN PRACTICE = 104
MEASURING BENEFITS = 105
ORDINARY AND COMPENSATED DEMAND CURVES = 107
CONSUMER SURPLUS = 109
MEASURING AGGREGATE SOCIAL BENEFITS = 111
MEASURING INEFFICIENCY = 111
QUANTIFYING DISTRIBUTIONAL EFFECTS = 113
DRAWING A POVERTY LINE = 114
THREE APPROACHES TO SOCIAL CHOICES = 114
THE COMPENSATION PRINCIPLE = 114
TRADE-OFFS ACROSS MEASURES = 115
WEIGHTED NET BENEFITS = 116
REVIEW AND PRACTICE = 117
SUMMARY = 117
KEY CONCEPTS = 118
QUESTIONS AND PROBLEMS = 118
APPENDIX : ALTERNATIVE MEASURES OF INEQUALITY = 120
THE LORENZ CURVE = 120
THE DALTON-ATKINSON MEASURE = 122
PART THREE PUBLIC EXPENDITURE THEORY = 125
6 PUBLIC GOODS AND PUBLICLY PROVIDED PRIVATE GOODS = 127
PUBLIC GOODS = 128
PUBLIC GOODS AND MARKET FAILURES = 129
PAYING FOR PUBLIC GOODS = 129
THE FREE RIDER PROBLEM = 130
ECONOMISTS AND THE FREE RIDER PROBLEM = 132
PURE AND IMPURE PUBLIC GOODS = 132
PROPERTY RIGHTS, EXCLUDABILITY, AND EXTERNALITIES = 134
PUBLICLY PROVIDED PRIVATE GOODS = 136
RATIONING DEVICES FOR PUBLICLY PROVIDED PRIVATE GOODS = 137
EFFICIENCY CONDITIONS FOR PUBLIC GOODS = 141
DEMAND CURVES FOR PUBLIC GOODS = 142
PARETO EFFICIENCY AND INCOME DISTRIBUTION = 147
LIMITATIONS ON INCOME REDISTRIBUTION AND THE EFFICIENT SUPPLY OF PUBLIC GOODS = 148
DISTORTIONARY TAXATION AND THE EFFICIENT SUPPLY OF PUBLIC GOODS = 148
EFFICIENT GOVERNMENT AS A PUBLIC GOOD = 149
REVIEW AND PRACTICE = 150
SUMMARY = 150
KEY CONCEPTS = 151
QUESTIONS AND PROBLEMS = 151
APPENDIX A : THE LEFTOVER CURVE = 152
APPENDIX B : MEASURING THE WELFARE COST OF USER FEES = 154
7 PUBLIC CHOICE = 156
PUBLIC MECHANISMS FOR ALLOCATING RESOURCES = 157
THE PROBLEM OF PREFERENCE REVELATION = 157
INDIVIDUAL PREFERENCES FOR PUBLIC GOODS = 158
THE PROBLEM OF AGGREGATING PREFERENCES = 162
MAJORITY VOTING AND THE VOTING PARADOX = 163
ARROW'S IMPOSSIBILITY THEOREM = 164
SINGLE-PEAKED PREFERENCES AND THE EXISTENCE OF A MAJORITY VOTING EQUILIBRIUM = 166
THE MEDIAN VOTER = 168
THE INEFFICIENCY OF THE MAJORITY VOTING EQUILIBRIUM = 169
THE TWO-PARTY SYSTEM AND THE MEDIAN VOTER = 171
SOCIAL CHOICE THEORY = 172
ALTERNATIVES FOR DETERMINING PUBLIC GOODS EXPENDITURES = 174
LINDAHL EQUILIBRIUM = 174
POLITICS AND ECONOMICS = 177
WHY DO INDIVIDUALS VOTE? = 177
ELECTIONS AND SPECIAL INTEREST GROUPS = 178
THE POWER OF SPECIAL INTEREST GROUPS = 179
THE ALTRUISTIC POLITICIAN? = 179
CAMPAIGN REFORM = 180
THE PERSISTENCE OF INEFFICIENT EQUILIBRIUM = 181
REVIEW AND PRACTICE = 182
SUMMARY = 182
KEY CONCEPTS = 183
QUESTIONS AND PROBLEMS = 183
APPENDIX : NEW PREFERENCE-REVELATION MECHANISMS = 185
8 PUBLIC PRODUCTION AND BUREAUCRACY = 189
NATURAL MONOPOLY : PUBLIC PRODUCTION OF PRIVATE GOODS = 190
THE BASIC ECONOMICS OF NATURAL MONOPOLY = 191
REGULATION AND TAXATION(SUBSIDIES) = 195
NO GOVERNMENT INTERVENTION = 196
NATIONAL PERFORMANCE REVIEW = 198
COMPARISON OF EFFICIENCY IN THE PUBLIC AND PRIVATE SECTORS = 198
SOURCES OF INEFFICIENCY IN THE PUBLIC SECTOR = 200
ORGANIZATIONAL DIFFERENCES = 200
INDIVIDUAL DIFFERENCES = 202
BUREAUCRATIC PROCEDURES AND RISK AVERSION = 204
CORPORATIZATION = 206
PRIVATIZING PRISONS = 208
A GROWING CONSENSUS ON GOVERNMENT'S ROLE IN PRODUCTION = 208
REVIEW AND PRACTICE = 210
SUMMARY = 210
KEY CONCEPTS = 211
QUESTIONS AND PROBLEMS = 211
9 EXTERNALITIES AND THE ENVIRONMENT = 214
THE PROBLEM OF EXTERNALITIES = 215
PRIVATE SOLUTIONS TO EXTERNALITIES = 217
INTERNALIZING EXTERNALITIES = 218
THE COASE THEOREM = 218
USING THE LEGAL SYSTEM = 219
THE EXXON VALDEZ OIL SPILL = 220
FAILURES OF PRIVATE SOLUTIONS = 221
PUBLIC SECTOR SOLUTIONS TO EXTERNALITIES = 223
MARKET-BASED SOLUTIONS = 224
DOUBLE DIVIDEND = 226
REGULATION = 230
INNOVATION = 231
INFORMATION DISCLOSURE = 232
COMPENSATION AND DISTRIBUTION = 233
PROTECTING THE ENVIRONMENT : THE ROLE OF GOVERNMENT IN PRACTICE = 234
AIR = 234
WATER = 237
TOXIC WASTE = 238
ENDANGERED SPECIES = 239
REVIEW AND PRACTICE = 240
SUMMARY = 240
KEY CONCEPTS = 241
QUESTIONS AND PROBLEMS = 241
PART FOUR EXPENDITURE PROGRAMS = 245
10 THE ANALYSIS OF EXPENDITURE POLICY = 247
NEED FOR PROGRAM = 248
MARKET FAILURES = 249
HIGHER EDUCATION IN THE UNITED STATES = 250
ALTERNATIVE FORMS OF GOVERNMENT INTERVENTION = 250
THE IMPORTANCE OF PARTICULAR DESIGN FEATURES = 252
PRIVATE SECTOR RESPONSES TO GOVERNMENT PROGRAMS = 253
EFFICIENCY CONSEQUENCES = 254
INCOME AND SUBSTITUTION EFFECTS AND INDUCED INEFFICIENCY = 254
DISTRIBUTIONAL CONSEQUENCES = 258
INCIDENCE OF EDUCATION TAX CREDITS = 260
EVALUATING THE DISTRIBUTIONAL CONSEQUENCES = 261
FAIRNESS AND DISTRIBUTION = 263
EQUITY-EFFICIENCY TRADE-OFFS = 264
PUBLIC POLICY OBJECTIVES = 266
POLITICAL PROCESS = 267
REVIEW AND PRACTICE = 268
SUMMARY = 268
KEY CONCEPTS = 269
QUESTIONS AND PROBLEMS = 269
11 COST-BENEFIT ANALYSIS = 271
PRIVATE COST-BENEFIT ANALYSIS = 272
PRESENT DISCOUNTED VALUE = 273
SOCIAL COST-BENEFIT ANALYSIS = 274
CONSUMER SURPLUS AND THE DECISION TO UNDERTAKE A PROJECT = 275
MEASURING NON-MONETIZED COSTS AND BENEFITS = 278
VALUING TIME = 279
VALUING LIFE = 279
CHILDREN, CAR SAFETY, AND THE VALUE OF LIFE = 280
VALUING NATURAL RESOURCES = 282
SHADOW PRICES AND MARKET PRICES = 283
DISCOUNT RATE FOR SOCIAL COST-BENEFIT ANALYSIS = 284
CLIMATE CHANGE AND DISCOUNT RATES = 286
THE EVALUATION OF RISK = 289
RISK ASSESSMENT = 291
DISTRIBUTIONAL CONSIDERATIONS = 292
COST EFFECTIVENESS = 293
REVIEW AND PRACTICE = 297
SUMMARY = 297
KEY CONCEPTS = 297
QUESTIONS AND PROBLEMS = 298
12 HEALTH CARE = 300
THE HEALTH CARE SYSTEM IN THE UNITED STATES = 304
THE PRIVATE SECTOR = 306
THE ROLE OF GOVERNMENT = 306
OTHER EXPENDITURE PROGRAMS = 307
TAX EXPENDITURES = 307
RATIONALE FOR A ROLE OF GOVERNMENT IN THE HEALTH CARE SECTOR = 308
IMPERFECT INFORMATION = 309
LIMITED COMPETITION = 309
ABSENCE OF PROFIT MOTIVE = 310
SPECIAL CHARACTERISTICS OF THE U.S. MARKET = 311
MALPRACTICE SUITS = 312
THE ROLE OF THE HEALTH INSURANCE INDUSTRY = 313
CONSEQUENCES OF INEFFICIENCIES IN HEALTH CARE MARKETS = 319
POVERTY, INCOMPLETE COVERAGE, AND THE ROLE OF GOVERNMENT = 321
REFORMING HEALTH CARE = 322
COST CONTAINMENT = 322
EXTENDING INSURANCE COVERAGE = 323
MEDICARE REFORM : EASING LONG-TERM FISCAL STRAINS = 325
REFORMING MEDICAID = 327
REVIEW AND PRACTICE = 328
SUMMARY = 328
KEY CONCEPTS = 329
QUESTIONS AND PROBLEMS = 329
13 DEFENSE AND TECHNOLOGY = 331
DEFENSE EXPENDITURES = 333
THE VALUE OF MARGINAL ANALYSIS = 333
GAME THEORY, THE ARMS RACE, AND THE THEORY OF DETERRENCE = 334
DEFENSE STRATEGY = 335
INCREASING THE EFFICIENCY OF THE DEFENSE DEPARTMENT = 338
DEFENSE PROCUREMENT = 338
DEFENSE CONVERSION = 341
TECHNOLOGY = 342
MARKET FAILURES = 344
THE SCOPE OF THE PATENT : CAN THE HUMAN BODY BE PATENTED? = 346
GOVERNMENT DIRECT SUPPORT = 348
REVIEW AND PRACTICE = 350
SUMMARY = 350
KEY CONCEPTS = 351
QUESTIONS AND PROBLEMS = 351
14 SOCIAL INSURANCE = 353
THE SOCIAL SECURITY SYSTEM = 356
SOCIAL SECURITY, PRIVATE INSURANCE, AND MARKET FAILURES = 358
HIGH TRANSACTIONS COSTS = 359
LACK OF INDEXING : THE INABILITY OF PRIVATE MARKETS TO INSURE SOCIAL RISKS = 359
ADVERSE SELECTION, DIFFERENTIAL RISKS, AND THE COST OF INSURANCE = 360
MORAL HAZARD AND SOCIAL SECURITY = 361
RETIREMENT INSURANCE AS A MERIT GOOD = 362
SHOULD SOCIAL SECURITY BE REFORMED? = 363
THE NATURE OF THE FISCAL CRISIS = 364
SAVINGS = 369
LABOR SUPPLY = 370
THE RATE OF RETURN = 372
INEQUITIES = 373
REFORMING SOCIAL SECURITY = 374
REDUCING EXPENDITURES = 374
INCREASING REVENUES = 375
STRUCTURAL REFORMS = 376
SOCIAL SECURITY ABROAD = 378
REVIEW AND PRACTICE = 381
SUMMARY = 381
KEY CONCEPTS = 381
QUESTIONS AND PROBLEMS = 382
15 WELFARE PROGRAMS AND THE REDISTRIBUTION OF INCOME = 385
A BRIEF DESCRIPTION OF MAJOR U.S. WELFARE PROGRAMS = 386
AFDC AND TANF = 387
THE EARNED INCOME TAX CREDIT = 388
FOOD STAMPS = 388
MEDICAID = 389
HOUSING = 390
OTHER PROGRAMS = 390
RATIONALE FOR GOVERNMENT WELFARE PROGRAMS = 391
DIMENSIONS OF THE PROBLEM = 392
ANALYTIC ISSUES = 393
LABOR SUPPLY = 393
CASH VERSUS IN-KIND REDISTRIBUTION = 397
INEFFICIENCIES FROM IN-KIND BENEFITS = 398
ARE IN-KIND BENEFITS PATERNALISTIC? = 401
CATEGORICAL VERSUS BROAD-BASED AID = 403
IS MEANS TESTING OBJECTIONABLE IN ITS OWN RIGHT? = 404
OTHER DISTORTIONS = 405
WELFARE REFORM : INTEGRATION OF PROGRAMS = 406
THE WELFARE REFORM BILL OF 1996 = 408
BLOCK GRANTING = 408
ANALYTICS OF STATE RESPONSES TO BLOCK GRANTS = 409
TIME LIMITS = 411
MANDATORY WORK = 411
THE WELFARE REFORM DEBATE OF 1996 = 411
CONCLUDING REMARKS = 413
EMPOWERMENT ZONES = 414
REVIEW AND PRACTICE = 414
SUMMARY = 414
KEY CONCEPTS = 417
QUESTIONS AND PROBLEMS = 417
16 EDUCATION = 420
THE STRUCTURE OF EDUCATION IN THE UNITED STATES = 423
FEDERAL TAX SUBSIDIES TO PRIVATE AND PUBLIC SCHOOLS = 425
WHY IS EDUCATION PUBLICLY PROVIDED AND PUBLICLY FINANCED? = 426
IS THERE A MARKET FAILURE? = 426
THE FEDERAL ROLE = 428
ISSUES AND CONTROVERSIES IN EDUCATIONAL POLICY = 428
EDUCATION OUTCOMES = 428
DO EXPENDITURES MATTER? = 430
SCHOOL VOUCHERS : CHOICE AND COMPETITION = 432
VOUCHERS : THE SAN JOSE AND MILWAUKEE EXPERIMENTS = 436
SCHOOL DECENTRALIZATION = 437
PERFORMANCE STANDARDS AND GOALS 2000 = 438
INEQUALITY = 439
AID TO HIGHER EDUCATION = 441
REVIEW AND PRACTICE = 442
SUMMARY = 442
KEY CONCEPTS = 444
QUESTIONS AND PROBLEMS = 444
APENDIX : HOW SHOULD PUBLIC EDUCATIONAL FUNDS BE ALLOCATED? = 446
PART FIVE TAXATION : THEORY = 449
17 INTRODUCTION TO TAXATION = 451
BACKGROUND = 452
THE FORMS OF TAXATION = 453
CHANGING PATTERNS OF TAXATION IN THE UNITED STATES = 455
COMPARISONS WITH OTHER COUNTRIES = 456
THE FIVE DESIRABLE CHARACTERISTICS OF ANY TAX SYSTEM = 456
ECONOMIC EFFICIENCY = 458
CORRECTIVE TAXES AND THE DOUBLE DIVIDEND = 464
ADMINISTRATIVE COSTS = 464
FLEXIBILITY = 466
POLITICAL RESPONSIBILITY = 467
FAIRNESS = 468
GERNERAL FRAMEWORK FOR CHOOSING AMONG TAX SYSTEMS = 476
UTILITARIANISM = 476
RAWLSIAN SOCIAL WELFARE FUNCTION = 478
LIMITATIONS OF THE SOCIAL WELFARE FUNCTION APPROACH = 478
WHAT ECONOMISTS CAN CONTRIBUTE TO DISCUSSIONS OF FAIRNESS = 479
REVIEW AND PRACTICE = 479
SUMMARY = 479
KEY CONCEPTS = 480
QUESTIONS AND PROBLEMS = 480
18 TAX INCIDENCE = 482
TAX INCIDENCE IN COMPETITIVE MARKETS = 484
EFFECT OF TAX AT THE LEVEL OF A FIRM = 484
IMPACT ON MARKET EQUILIBRIUM = 486
DOES IT MATTER WHETHER THE TAX IS LEVIED ON CONSUMERS OR ON PRODUCERS? = 487
THE INCIDENCE OF GOVERNMENT BENEFITS = 488
AD VALOREM VERSUS SPECIFIT TAXES = 488
THE EFFECT OF ELASTICITY = 491
TAXATION OF FACTORS = 493
THE PHILADELPHIA WAGE TAX = 496
TAX INCIDENCE OF ENVIRONMENTS WITHOUT PERFECT COMPETITION = 498
RELATIONSHIP BETWEEN THE CHANGE IN THE PRICE AND THE TAX = 498
AD VALOREM VERSUS SPECIFIC TAXES = 501
TAX INCIDENCE IN OLIGOPOLIES = 501
EQUIVALENT TAXES = 502
INCOME TAX AND VALUE-ADDED TAX = 502
EQUIVALENCE OF CONSUMPTION AND WAGE TAXES = 503
EQUIVALENCE OF LIFETIME CONSUMPTION AND LIFETIME INCOME TAXES = 504
A CAVEAT ON EQUIVALENCE = 505
OTHER FACTORS AFFECTING TAX INCIDENCE = 505
TAX INCIDENCE UNDER PARTIAL AND GENERAL EQUILIBRIUM = 506
SHORT-RUN VERSUS LONG-RUN EFFECTS = 508
OPEN VERSUS CLOSED ECONOMY = 508
ASSOCIATED POLICY CHANGES = 508
INCIDENCE OF TAXES IN THE UNITED STATES = 510
REVIEW AND PRACTICE = 514
SUMMARY = 514
KEY CONCEPTS = 514
QUESTIONS AND PROBLEMS = 515
APPENDIX : COMPARISON OF THE EFFECTS OF AN AD VALOREM AND SPECIFIC COMMODITY TAX ON A MONOPOLIST = 515
19 TAXATION AND ECONOMIC EFFICIENCY = 518
EFFECT OF TAXES BORNE BY CONSUMERS = 519
SUBSTITUTION AND INCOME EFFECTS = 520
QUANTIFYING THE DISTORTIONS = 521
MEASURING DEADWEIGHT LOSS USING INDIFFERENCE CURVES = 522
MEASURING DEADWEIGHT LOSS USING COMPENSATED DEMAND CURVES = 524
CALCULATING THE DEADWEIGHT LOSS = 527
EFFECTS OF TAXES BORNE BY PRODUCERS = 529
EFFECTS OF TAXES BORNE PARTLY BY CONSUMERS, PARTLY BY PRODUCERS = 531
TAXATION OF SAVINGS = 532
QUANTIFYING THE EFFECTS OF AN INTEREST INCOME TAX = 534
TAXATION OF LABOR INCOME = 535
EFFECTS OF PROGRESSIVE TAXATION = 537
THE 1993 TAX REFORM = 540
SECONDARY LABOR FORCE PARTICIPANTS = 540
MEASURING THE EFFECTS OF TAXES ON LABOR SUPPLIED = 541
STATISTICAL THECHNIQUES USING MARKET DATA = 542
EXPERIMENTS = 544
REVIEW AND PRACTICE = 547
SUMMARY = 547
KEY CONCEPTS = 548
QUESTIONS AND PROBLEMS = 548
20 OPTIMAL TAXATION = 550
TWO FALLACIES OF OPTIMAL TAXATION = 551
THE FALLACY OF COUNTING DISTORTIONS = 551
MISINTERPRETATIONS OF THE THEORY OF THE SECOND BEST = 551
OPTIMAL AND PARETO EFFICIENT TAXATION = 552
LUMP-SUM TAXES = 552
WHY IMPOSE DISTORTIONARY TAXES? = 553
DESIGNING AN INCOME TAX SYSTEM = 553
WHY DOES MORE PROGRESSIVITY IMPLY MORE DEADWEIGHT LOSS? = 554
A DIAGRAMMATIC ANALYSIS OF THE DEADWEIGHT LOSS OF PROGRESSIVE TAXATION = 556
CHOOSING AMONG FLAT-RATE TAX SCHEDULES = 557
THE 1993 TAX INCREASE ON UPPER-INCOME INDIVIDUALS : A PARETO INEFFICIENT TAX? = 558
GENERAL EQUILIBRIUM EFFECTS = 558
FLAT-RATE TAXES ARRIVE ON THE POLITICAL SCENE = 560
NONLINEAR TAX STRUCTURES = 560
DIFFERENTIAL TAXATION = 562
RAMSEY TAXES = 563
DIFFERENTIAL COMMODITY TAXES IN ADVANCED COUNTRIES WITH PROGRESSIVE INCOME TAXES = 567
INTEREST INCOME TAXATION AND COMMODITY TAXATION = 567
TAXES ON PRODUCERS = 567
THE DEPENDENCE OF OPTIMAL TAX STRUCTURE ON THE SET OF AVAILABLE TAXES = 570
REVIEW AND PRACTICE = 571
SUMMARY = 571
KEY CONCEPTS = 571
QUESTIONS AND PROBLEMS = 572
APPENDIX A : DERIVING RAMSEY TAXES ON COMMODITIES = 572
APPENDIX B : DERIVATION OF RAMSEY FORMULA FOR LINEAR DEMAND SCHEDULE = 574
21 TAXATION OF CAPITAL = 577
SHOULD CAPITAL BE TAXED? = 579
RELATIONSHIP BETWEEN CONSUMPTION TAXES, A WAGE TAX, AND EXEMPTING CAPITAL INCOME FROM TAXATION = 579
EQUITY ISSUES = 579
EFFICIENCY ARGUMENTS = 580
ADMINISTRATIVE PROBLEMS = 581
EFFECTS ON SAVINGS AND INVESTMENT = 582
EFFECTS OF REDUCED SAVINGS IN A CLOSED ECONOMY = 582
THE DISTINCTION BETWEEN SAVINGS AND INVESTMENT = 583
NATIONAL SAVINGS AND BUDGET NEUTRALITY = 584
EFFECTS OF REDUCED SAVINGS IN AN OPEN ECONOMY = 587
IMPACT ON RISK TAKING = 588
WHY CAPITAL TAXATION WITH FULL LOSS DEDUCTIBILITY MAY INCREASE RISK TAKING = 589
RISK TAKING AND THE 1993 TAX ACT = 590
WHY CAPITAL TAXATION MAY REDUCE RISK TAKING = 590
MEASURING CHANGES IN ASSET VALUES = 592
CAPITAL GAINS = 593
EQUITY AND THE 1997 REDUCTION IN CAPITAL GAINS TAXES = 594
DISTORTIONS FROM DEPRECIATION = 596
DEPRECIATION = 596
NEUTRAL TAXATION = 597
INFLATION = 597
REVIEW AND PRACTICE = 601
SUMMARY = 601
KEY CONCEPTS = 602
QUESTIONS AND PROBLEMS = 603
PART SIX TAXATION IN THE UNITED STATES = 605
22 THE PERSONAL INCOME TAX = 607
OUTLINE OF THE U.S. INCOME TAX = 608
EFFECTIVE VERSUS ACTUAL TAX RATES = 611
OTHER TAXES = 612
A LOOPHOLE IN THE EARNED INCOME TAX CREDIT? = 614
PRINCIPLES BEHIND THE U.S. INCOME TAX = 616
THE INCOME-BASED PRINCIPLE AND THE HAIG-SIMONS DEFINITION = 616
THE PROGRESSIVITY PRINCIPLE = 617
THE FAMILY-BASED RINCIPLE = 618
THE ANNUAL MEASURE OF INCOME PRINCIPLE = 621
PRACTICAL PROBLEMS IN INPLEMENTING AN INCOME TAX SYSTEM = 622
DETERMINING INCOME = 622
TIMING = 627
PERSONAL DEDUCTIONS = 627
DEDUCTIONS VERSUS CREDITS = 634
SPECIAL TREATMENT OF CAPITAL INCOME = 635
HOUSING = 635
SAVINGS FOR RETIREMENT = 636
INTEREST ON STATE AND MUNICIPAL BONDS = 639
CAPITAL GAINS = 640
CONCLUDING COMMENTS = 641
REVIEW AND PRACTICE = 642
SUMMARY = 642
KEY CONCEPTS = 643
QUESTIONS AND PROBLEMS = 643
23 THE CORPORATION INCOME TAX = 645
THE BASIC FEATURES OF THE CORPORATION INCOME TAX = 647
THE INCIDENCE OF THE CORPORATION INCOME TAX AND ITS EFFECT ON EFFICIENCY = 648
THE CORPORATION INCOME TAX AS A TAX ON INCOME FROM CAPITAL IN THE CORPORATE SECTOR = 648
SHIFTING OF THE CORPORATE TAX IN THE LONG RUN = 649
THE CORPORATION TAX FOR A FIRM WITHOUT BORROWING CONSTRAINTS = 652
THE INCIDENCE OF THE CORPORATION INCOME TAX WITH CREDIT-CONSTRAINED FIRMS = 653
THE CORPORATION TAX AS A TAX ON MONOPOLY PROFITS = 654
MANAGERIAL FIRMS : AN ALTERNATIVE PERSPECTIVE = 655
DEPRECIATION = 659
COMBINED EFFECTS OF INDIVIDUAL AND CORPORATE INCOME TAX = 661
DISTRIBUTING FUNDS : THE BASIC PRINCIPLES = 661
THE DIVIDEND PARADOX = 663
MERGERS, ACQUISITIONS, AND SHARE REPURCHASES = 664
DOES THE CORPORATE TAX BIAS FIRMS TOWARD DEBT FINANCE? = 665
DISTORTIONS IN ORGANIZATIONAL FORM ARISING BECAUSE SOME FIRMS DO NOT HAVE TAXABLE INCOME = 666
ARE CORPORATIONS TAX PREFERRED? = 667
CALCULATING EFFECTIVE TAX RATES = 668
THE PROPOSED MARGINAL INVESTMENT TAX CREDIT OF 1993 : AN IDEA BEFORE ITS TIME? = 670
THE CORPORATION TAX AS ECONOMIC POLICY = 670
TAXATION OF MULTINATIONALS = 672
SHOULD THERE BE A CORPORATION INCOME TAX? = 673
INTEGRATION OF THE CORPORATE AND INDIVIDUAL INCOME TAX = 673
WHY IS THERE A CORPORATE INCOME TAX AT ALL? = 674
REVIEW AND PRACTICE = 674
SUMMARY = 674
KEY CONCEPTS = 675
QUESTIONS AND PROBLEMS = 676
24 A STUDENT'S GUIDE TO TAX AVOIDANCE = 678
PRINCIPLES OF TAX AVOIDANCE = 679
POSTPONEMENT OF TAXES = 679
SHIFTING AND TAX ARBITRAGE = 680
SHORTING AGAINST THE BOX = 682
TAX SHELTERS = 684
WHO GAINS FROM TAX SHELTERS = 684
THE ECONOMICS OF TAX AVOIDANCE = 686
MIDDLE-CLASS TAX SHELTERS = 687
TAX REFORM AND TAX AVOIDANCE = 687
THE 1986 TAX REFORM = 688
MINIMUM TAX ON INDIVIDUALS = 689
THE 1993 AND 1997 TAX ACTS = 689
EQUITY, EFFICIENCY, AND TAX REFORM = 690
REVIEW AND PRACTICE = 690
SUMMARY = 690
KEY CONCEPTS = 691
QUESTIONS AND PROBLEMS = 691
25 REFORM OF THE TAX SYSTEM = 693
FAIRNESS = 695
HORIZONTAL EQUITY ISSUES = 695
VERTICAL EQUITY = 696
EFFICIENCY = 698
MARGINAL TAX RATES AND THE 1986 TAX REFORM = 700
BASE BROADENING = 702
SIMPLIFYING THE TAX CODE AND REDUCING ADMINISTRATIVE COSTS = 704
ASSESSING COMPLEXITY = 704
INCREASING COMPLIANCE = 705
REDUCING TAX AVOIDANCE = 707
REDUCING ADMINISTRATIVE COSTS = 708
SOURCES OF COMPLEXITY = 708
THE 1986 TAX REFORM = 709
GRADING THE 1986 TAX REFORM ACT = 710
TRANSITION ISSUES AND THE POLITICS OF TAX REFORM = 711
TAX REFORMS FOR THE TWENTY-FIRST CENTURY = 714
REFORMS WITHIN THE CURRENT FRAMEWORK = 714
MAJOR NEW REFORMS = 715
ORDINARY INCOME VERSUS CAPITAL GAINS = 718
ENERGY AND ENVIRONMENTAL TAXES = 718
IRAS AND NATIONAL SAVINGS = 720
REVIEW AND PRACTICE = 722
SUMMARY = 722
KEY CONCEPTS = 723
QUESTIONS AND PROBLEMS = 723
PART SEVEN FURTHER ISSUES = 725
26 FISCAL FEDERALISM = 727
THE DIVISION OF RESPONSIBILITIES = 728
OTHER INTERACTION BETWEEN THE FEDERAL GOVERNMENT AND THE STATE AND LOCAL GOVERNMENTS = 730
THE SIZE OF FINANCIAL TRANSFERS = 731
UNFUNDED MANDATES = 732
PRINCIPLES OF FISCAL FEDERALISM = 732
NATIONAL PUBLIC GOODS VERSUS LOCAL PUBLIC GOODS = 733
INTERNATIONAL PUBLIC GOODS = 734
DO LOCAL COMMUNITIES PROVIDE LOCAL PUBLIC GOODS EFFICIENTLY? = 734
TIEBOUT HYPOTHESIS = 735
MARKET FAILURES = 737
REDISTRIBUTION = 739
OTHER ARGUMENTS FOR LOCAL PROVISION = 742
PRODUCTION VERSUS FINANCE = 742
EFFECTIVENESS OF FEDERAL CATEGORICAL AID TO LOCAL COMMUNITIES = 743
THE FEDERAL TAX SYSTEM AND LOCAL EXPENDITURES = 748
REVIEW AND PRACTICE = 750
SUMMARY = 750
KEY CONCEPTS = 751
QUESTIONS AND PROBLEMS = 751
27 STATE AND LOCAL TAXES AND EXPENDITURES = 754
TAX INCIDENCE APPLIED TO LOCAL PUBLIC FINANCE = 755
LOCAL CAPITAL TAXES = 755
THE PROPERTY TAX = 756
INCOME, WAGE, AND SALES TAXES = 756
DISTORTIONS = 757
LIMITATIONS ON THE ABILITY TO REDISTRIBUTE INCOME = 757
RENT CONTROL = 758
CAPITALIZATION = 758
INCENTIVES FOR PENSION SCHEMES = 760
CHOICE OF DEBT VERSUS TAX FINANCING = 760
SHORT-RUN VERSUS LONG-RUN CAPITALIZATION = 761
WHO BENEFITS FROM LOCAL PUBLIC GOODS? THE CAPITALIZATION HYPOTHESIS = 761
ABSOLUTE VERSUS RELATIVE CAPITALIZATION = 762
THE USE OF CHANGES IN LAND RENTS TO MEASURE BENEFITS = 762
TESTING THE CAPITALIZATION HYPOTHESIS = 763
PUBLIC CHOICE AT THE LOCAL LEVEL = 764
PROPOSITION 13 = 766
PROBLEMS OF MULTI-JURISDICTIONAL TAXATION = 768
REVIEW AND PRACTICE = 769
SUMMARY = 769
KEY CONCEPTS = 770
QUESTIONS AND PROBLEMS = 770
28 DEFICIT FINANCE = 772
THE U.S. DEFICIT PROBLEM SINCE THE 1980s = 773
SOURCES OF THE DEFICIT PROBLEM = 775
MEASURING BUDGET DEFICITS : WHAT'S LARGE, WHAT'S REAL, AND WHAT'S RIGHT? = 776
FACTORS NOT CONTRIBUTING TO THE DEFICIT PROBLEM = 777
TAMING THE DEFICIT = 778
CONSEQUENCES OF GOVERNMENT DEFICITS = 782
HOW DEFICITS AFFECT FUTURE GENERATIONS = 783
ALTERNATIVE PERSPECTIVES ON THE BURDEN OF THE DEBT = 784
SCORING THE CLINTON DEFICIT REDUCTION PACKAGE = 786
IMPROVING THE BUDGETARY PROCESS = 787
BUDGET ENFORCEMENT ACT AND SCORING = 787
CAPITAL BUDGETS = 788
OTHER STRATEGIES = 788
THE LOGN-TERM PROBLEM : ENTITLEMENTS AND THE AGED = 789
REVIEW AND PRACTICE = 789
SUMMARY = 789
KEY CONCEPTS = 790
QUESTIONS AND PROBLEMS = 790
