This article needs additional citations for
verification . Please help improve this article by
adding citations to reliable sources . Unsourced material may be challenged and removed.
Find sources: "Public finance" – news ·
newspapers · books · scholar · JSTOR (July 2008) ( Learn how and when to remove this template message )
Public finance is the study of the role of the government in the economy. [1] It is the branch of economics which assesses the government revenue and government expenditure of the
public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones.[2]
The purview of public finance is considered [ by whom? ] to be threefold: governmental effects on (1) efficient allocation of resources, (2) distribution of income , and (3)
macroeconomic stabilization .
Overview
The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently (in the sense that no waste occurs and that individual tastes are matching with the economy's productive abilities). If private markets were able to provide efficient outcomes and if the distribution of income were socially acceptable, then there would be little or no scope for government. In many cases, however, conditions for private market efficiency are violated. For example, if many people can enjoy the same good (the moment that good was produced and sold, it starts to give its utility to every one for free) at the same time (non-rival, non-excludable consumption), then private markets may supply too little of that good. National defense is one example of non-rival consumption, or of a public good . [3]
" Market failure " occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. [4] Externalities , public goods , informational advantages, strong economies of scale, and network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed " government failure ."
Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems (Diamond-Mirrlees separation). In this view,
public sector programs should be designed to maximize social benefits minus costs (cost-benefit analysis), and then revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible. In practice, government budgeting or public budgeting is substantially more complicated and often results in inefficient practices.
Government can pay for spending by borrowing (for example, with government bonds ), although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues. The accumulation of deficits over time is the total public debt . Deficit finance allows governments to smooth tax burdens over time, and gives governments an important fiscal policy tool. Deficits can also narrow the options of successor governments.
Public finance is closely connected to issues of
income distribution and social equity. Governments can reallocate income through
transfer payments or by designing tax systems that treat high-income and low-income households differently.
The public choice approach to public finance seeks to explain how self-interested voters, politicians, and bureaucrats actually operate, rather than how they should operate.
Public finance management
Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and effectively constitute good financial management. Resource generation, resource allocation and expenditure management (resource utilization) are the essential components of a public financial management system.
The following subdivisions form the subject matter of public finance.
1. Public expenditure
2. Public revenue
3. Public debt
4. Financial administration
5. Federal finance
Government expenditures
Main article: Government spending
Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption . Government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classed as government investment. Government expenditures that are not purchases of goods and services, and instead just represent transfers of money – such as social security payments – are called
transfer payments .[5]
Government operations
Main article: Government operations
Government operations are those activities involved in the running of a state or a functional equivalent of a state (for example, tribes ,
secessionist movements or revolutionary movements) for the purpose of producing value for the citizens . Government operations have the power to make, and the authority to enforce rules and laws within a civil, corporate , religious ,
academic, or other organization or group. [6]
Income distribution
Main article: Income distribution
See also: Redistribution (economics)
Income distribution – Some forms of government expenditure are specifically intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Likewise, public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services also have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public
road construction transfers wealth from people that do not use the roads to those people that do (and to those that build the roads).
Income Security
Employment insurance
Health Care
Public financing of campaigns
Financing of government expenditures
Budgeted revenues of governments in 2006.
Main article: Government revenue
Government expenditures are financed primarily in three ways:
Government revenue
Taxes
Non-tax revenue (revenue from
government-owned corporations ,
sovereign wealth funds , sales of assets, or seigniorage)
Government borrowing
Money creation
How a government chooses to finance its activities can have important effects on the distribution of income and wealth ( income redistribution ) and on the efficiency of markets ( effect of taxes on market prices and efficiency ). The issue of how taxes affect income distribution is closely related to tax incidence , which examines the distribution of tax burdens after market adjustments are taken into account. Public finance research also analyzes effects of the various types of taxes and types of borrowing as well as administrative concerns, such as tax enforcement.
Taxes
Main articles: Tax and Fiscal capacity
Taxation is the central part of modern public finance. Its significance arises not only from the fact that it is by far the most important of all revenues but also because of the gravity of the problems created by the present day tax burden. [7] The main objective of taxation is raising revenue. A high level of taxation is necessary in a welfare State to fulfill its obligations. Taxation is used as an instrument of attaining certain social objectives i.e. as a means of redistribution of wealth and thereby reducing inequalities. Taxation in a modern Government is thus needed not merely to raise the revenue required to meet its ever-growing expenditure on administration and social services but also to reduce the inequalities of income and wealth. Taxation is also needed to draw away money that would otherwise go into consumption and cause inflation to rise. [8]
A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or a functional equivalent of a state (for example,
tribes , secessionist movements or revolutionary movements). Taxes could also be imposed by a
subnational entity . Taxes consist of direct tax or indirect tax , and may be paid in money or as
corvée labor. A tax may be defined as a "pecuniary burden laid upon individuals or property to support the government [ . . .] a payment exacted by legislative authority." [9] A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" and is "any contribution imposed by government [ . . .] whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name." [10]
There are various types of taxes, broadly divided into two heads – direct (which is proportional) and indirect tax (which is differential in nature):
Stamp duty , levied on documents
Excise tax (tax levied on production for sale, or sale, of a certain good)
Sales tax (tax on business transactions, especially the sale of goods and services )
Value added tax (VAT) is a type of sales tax
Services taxes on specific services
Road tax ; Vehicle excise duty (UK), Registration Fee (USA), Regco (Australia), Vehicle Licensing Fee (Brazil) etc.
Gift tax
Duties (taxes on importation, levied at
customs )
Corporate income tax on corporations (incorporated entities)
Wealth tax
Personal income tax (may be levied on individuals, families such as the Hindu joint family in India, unincorporated ...........etc bye