Functions of Government: 

Allocations

Functions of Government: 

Redistribution

Functions of Government:

Stabilization

Market Failures:

Public Goods

Market Failures:

Monopoly

Market Failures:

Externalities

Direct effects of the transaction to someone who is NOT apart of the transaction

Negative= harms someone (i.e. pollution

positive= benefits ofthers (free rider problem i.e. knowledge)

Functions of the Budget:

Political Document

Functions of the Budget:

Planning Device

Functions of the Budget:

Control Device

Functions of the Budget:

Managment and Coordinating Device

Functions of the Budget:

Economic Document

Functions of the Budget:

Legal Contract

The Budget Process:

Budget Formulation

The Budget Process:

Adoption

The Budget Process:

Execution

The Budget Process:

Auditing and Assessment

Federal Legislative Review and Appropriations:

Budget Committees

Federal Legislative Review and Appropriations:

Authorization Committees

Federal Legislative Review and Appropriations:

Appropriations Committee

Federal Legislative Review and Appropriations:

Financing Committees

Federal Legislative Review and Appropriations:

Budget Resolution

Allocate new budget authority, outlays, loans and guarantees to appropriations committees. Allocations must add up to corresponding budget aggregate.

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Types of Appropriations:

Regular Appropriations

Types of Appropriations:

Continuing Resolution

Types of Appropriations:

Supplemental Appropriation

Federal Budget Execution:

Budget Authority and Outlays

Federal Budget Execution:

Impoundment

Federal Budget Execution:

Recission

Federal Budget Execution:

Deferrals

Deferred revenues related to federal programs include:

• Prepaid federal grants that were not earned by fiscal year-end.
• Governmental funds only – Federal revenue that was earned but not available at fiscal year-end. (On the modified accrual basis, revenue is available if it can be collected within approximately 60 days.)

Types of Deficits:

Unified Budget Surplus/deficit

Types of Deficits:

Federal Fund Surplus/ Deficit

Types of deficits:

Trust Fund Surplus/ Deficit

Types of Deficits:

Off-Budget Surplus/ Deficit

• threat to long term United states economic growth
• effect of paying foreign debt on the living standard of future generations of americans
• crowding out of other policy agenda
• monetization of debt and inflation
• interest obligation and budget flexibilty 

• accounting entity
• records assets (revenues) and liabilitys (expenditures/ obligations) related to a specific purpose
• each fund operates as a self contatined entity
• revenue from a fund spent for a specific purpose
• seperate budgeting and control processes for each fund

The Fund Structure:

Government Fund

The Fund Structure:

Proprietary Fund

The Fund Structure:

Fiduciary Fund

Accounting System:

Cash

Accounting system:

Full Accrual

Accounting System:

Modified Accrual

Budget Classifications:

Traditional

Economic

• also called line item or object of expenditure
• focus on inputs such as labor, equiptment, supplies

weaknesses

• can inhibit efficiency and innovation
• input orientation: ignore agency results or impact
• there is no discussion of spending choices

Administrative

• classification according entity that is responsible for using public funds to prove public services

Weaknesses

• input orientation
• impede consideration of alternative programs
• categories of administration are too broad
• can conceal the full cost of delivery of services 

Budget Classifications:

Functional

• identify spending according to the intended purposes and objectives of the government
• suitable for fundamental resource allocation choices

Weaknesses

• doesn't show efficiency 

Budget Reform:

Traditional Performance Budgets

budget information organized by activities rather than line items only. 

pros

• promise of better services at lower cost
• shift legislative debate away from how much was spent to how resources were used
• managerial flexibility
• unit-cost comparisons across agencies

cons

• managers do not like performance based budgeting
• legislatures must change their review process
• asks whether activity is being done at low cost, not whether the activity is worth doing
• system is extremely expensive to develop 

Budget Reform:

Planning, Programming, and Budgeting System (PPBS)

Plan: What will happen in the future?

Program: Consider alternatives for dealing with future challenges

Budget: fund chosen program

pros

• long term view
• permit comparison of alternative methods of pursuing the same policy objective
• include some cost benefit analysis of the resource use of proposed programs

cons

• public services contribute to more than one public objective
• many resources used by an agency are shared and not clearly attributable to a single program
• programs cannot be accountable; departments can 

Budget Reforms:

Zero-Based Budgeting (ZBB)

• Everything starts with a clean slate
• prepare decision packages or alternatives for performing a function with differing budgets
• rank the packages and transmit the packages forward in the government hierarchy

pros

• require consideration of agency objectives
• budget builds from the bottom of the organization
• produce operating data- workloads, performance indicators

cons

• some spending activities will not be amenable to zero based treatment
• issue of sunk costs
• ranking of programs by bureaucrats versus ranking of society 

Budget Reforms:

New Performance-Based Budgeting

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Budget Reforms:

Government Performance and Results Act (GPRA)

• requires federal agencies to submit to the office of managment and budget: 5 year strategic plan, annual performance plan, annual program performance report, proposals to waive administrative procedural requirements and controls

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• performance dimensions: output, operating efficiency, productivity, intermediate outcome, end outcome
• agency performance reports are submitted annually to congress and white house
• performance information should inform budgeting and policymaking

Budget Reforms:

Program Assessment Rating Tool (PART)

• to complement GPRA
• questionaire designed to assess the effectiveness of agency programs
• it has customized questions depending on the type of program: direct federal, grant, regulatory, research and development, ect.
• divided into four sections: clear purpose, valid annual and long term goals, rates the mgmt, results of the program
• numerical score for each section 0-100
• OMB gives the score (not the agency)
• overall score is translated into qualitative rankings: effective (85-100), moderately effective (70-84), adequate (50-69), ineffective (0-49)

Capital Budgeting:

Pay-As-You-Go Financing

revenues raised currently

i.e. current taxes, user charges, grants

Capital Budgeting:

Pay-As-You-Use Financing

Time Value of Money:

Compounding Interest

adding on interest every year

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Time Value of Money:

Discounting

• adjusts sums to be recieved in the future to their present value equivalent
• it amounts in the other direction from compounding

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• A tax intends to move resources away from private use and will by itself harm the private sector.
• Tax policy seeks to achieve that shift with the least possible economic or social harm

Principles of Taxation:

Adequacy

• Does the tax system raise sufficient revenue to cover planned spending on services?
• sustainability dimension: funding current services will not place an undue burden on future generations

Principles of Taxation:

Benefits Recieved

Principles of Taxation:

Ability to Pay

Principles of Taxation:

Horizontal Equity

Principles of Taxation:

Vertical Equity

Principle of Taxation:

Regressive

effective rates are lower in high ability groups than in low

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Principles of Taxation:

Progressive

effective rates are higher in high ability groups than in low

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Principles of Taxation:

Proportional

effective rates are the same in all groups

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Principles of Taxation:

Neutrality

Principles of Taxation:

Collectability

Costs must be minimal in comparison to revenue collections

• taxpayer passive: tax collectors do most of the work (bear most of the cost)
• taxpayer active: impose most of the collection responsibility on the private taxpayer

Principles of Taxation:

Transparency

Citizens should have access to information regarding: 

• why is there a tax?
• what are the regulations involved?
• how is it calculated?
• how much am I paying?
• what am I paying for?

Income and Sales Tax:

Advantages of an Income Tax

• equity measuring ability: income measures a taxpayer's capacity to bear the cost of government
• equity adjustability: can be adjusted to account for individual taxpayer conditions (family size, infirmities, economic circumstances, ect.)
• yield: a broad income base permits significant revenue, and the growth of that base keeps pace with general economic activity
• base breadth: a braod base permits a low rate

Income and Sales Taxes:

Anti-Income Tax Argument

• Transparency: the individual income tax is so complicated that it violates the transparency standard
• Administration: annual operating cost of the internal revenue service exceeds $12 billion, the IRS has more than 95,000 employees
• cost to taxpayers: the cost to taxpayers of complying with the tax law is at least ten times the cost of administration
• economic effects: discourages savings and investments, and earning of income in general. Makers v. Takers

Income and Sales Taxes:

Problems with Corporate Income Tax

The tax applies to a total corporate profit as defined by the accounting system and the tax law. It covers both earnings retained by the firm and those paid in dividends

• double taxation: U.S. tax system treats corporations and their investors as seperate entities. Corporation pays tax on retained and distributed profit or dividends (via the corporate tax). Individual investors pay another tax for dividends (via the individual income tax). 
• Its Too High: The federal corporate income tax rate is 35% on income over $18.3 million. This rate is currently the highest statutory corporate income tax rate in the world

Income and Sales Tax:

Advantages of the Sales Tax

• Revenue breadth and adequacy
• charge for social costs
• equity and economic capacity
• economic effects

Income and Sales Taxes:

Problems with Sales Tax

• Vertical Equity: consumption spending is higher as a share of household income for lower-income households
• horizontal equity: variation in effective tax rates borne by households simply based on preferences

Income and Sales Taxes: 

Retail Sales Tax (RST)

three common features

1. imposed upon the sales, or elements incidental to the sales of a wide range of commodities
2. a system for suspending tax on items purchased for resale
3. all encourage seperate quotation of the tax in each transaction (the tax is added at purchase rather than being included in the price on the shelf, and tax thus collected is excluded from gross receipts upon which the tax is levied)

two special evaluations

• uniformity
• neutrality

Income and Sales Taxes:

Value-Added Taxes (VAT)

applies to the increment in value at each stage of the production and distribution process rather than applying only at the final (retail) stage 

its a simple but sophisticated way of taxing consumption expenditure collected by by businesses on their sales of goods and services to customers

accumulates through the stages of production and distribution to be a tax on all household consumption