Public Finance , 10th ed

The role of government in society has been and will always be controversial. Some believe government does too much while others believe it needs to do more. Many look to government to solve problems they believe to be important to them but would rather not have it engage in activities that benefit others.

No matter what your view of government it is clear that its programs and scope have grown significantly from a small share of the economy in the early 1900s to between 30 and 50 percent of the economy in modern industrial nations today. Citizens give up substantial amounts of their income each year to pay the taxes necessary to finance government expenditures.

This book is about the government sector of the economy. A framework for analyzing the role of government will be developed. That framework will be used understand why government has grown and the consequences of future growth. We will study both the economic and political aspects of government.

Major government expenditure programs will be analyzed. Alternative mechanisms for financing government activity and their economic effects will be discussed, as will issues relating to the government budget deficits and debt. Since 2000 government spending in the United States as a share of gross domestic product has increased.

Federal expenditures for national defense and health care by governments have both gone up as a share of the economy. And a major recession that began in 2007 resulted in more demands for increased government spending to stabilize the financial system. The recession has adversely affected tax collections for both the federal, state, and local governments.

Many state and local governments have been forced to curtail spending and raise taxes to balance budgets in 2008 and 2009. The federal government ’s budget deficit and debt outstanding has been soaring.

Some of the growth in federal spending and the increase in government borrowing is due to the extraordinary circumstances resulting from the financial crisis and recession. The federal government has provided assistance to state and local governments to help them cope with the effect of the recession on their budgets and has also acquired ownership shares in struggling businesses in the banking, financial, and automotive sectors of the economy. Although these shares can be sold in the future they do pose the risk that economic losses could be borne by taxpayers. The federal government ’s budget deficit in 2010 will be the largest since the end of the Second World War. As government grows there will be consequences for all of us.

A major factor influencing that growth is the expanding role of governments in financing health care. Government expenditures for health care have been rising rapidly in recent years. If current trends continue federal government spending on health care through its two major health insurance programs, Medicare and Medicaid, could account for more than 50 percent of federal government spending by 2080 as the population ages. State government expenditures for health care have also been increasing significantly.

Either tax rates will increase in the future to finance growth in government spending or increased federal budget deficits could impact the economy in ways that either slow economic growth or cause inflation. Of course, another alternative would be to attempt to reduce the rate of growth of federal government spending. Given the projected importance of health care......

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