The scope of government

Lesson 9

E>R>E phrases (to be written out from the English text) for translation by ear.

THE SCOPE OF GOVERNMENT

Nowthat you know some reasons for govern­ment action in a market economy, we will briefly survey the extent of the public sector. Total gov­ernment spending on goods and services now tops $I trillion annually, over 20% of our na­tional production. When we include transfer payments (Social Security, welfare, and other in­come payments not tied to production), govern­ment outlaysexceed one-third of all spending.

Figure 12 breaks down government spend­ing by its major functions. Nearly half of the 1970 federal budget was devoted to national defense; today that figure is about one-fifth. For the next quarter century, outlays on such domestic pro­grams as income security, health, education, nat­ural resources, environmental protection, and energy policy more than absorbed funds freed by reductions in national defense.

Federal expenditures tend to focus on ac­tivities with national implications. State and local government spending is directed at services that affect people in more limited geographical areas. In contrast to federal outlays, the com­position of state and local spending has changed little since the early 1960s, although there has been a relative reduction in highway spending and a rising proportion of outlays for welfare.

Figure 12 also shows that different levels of governmentrely on different taxes as revenue sources. State and local governments generate roughly two-thirds of their revenues from three major sources: (a) grants from the federal gov­ernment, (b) property taxes, and (c) sales taxes. On the other hand, almost 60% of federal rev­enues come from taxes on individual or corpo­rate incomes. When we include the second largest source of federal revenues, Social Security taxes (which are based solely on wage incomes), the figure is over 90%. Thus, less than 10% of total federal tax revenues rely on sources other than income.

You may have heard our income tax system referred to as progressive, which means the rich pay a greater percentage of their income as taxes than do the poor. Taxes can be related to in­come in three basic ways:

1. Progressive. A tax is progressive if the per­centage tax rate rises as income rises; higher incomes are taxed proportionally higher than lower incomes.

2. Proportional. Taxes collected are a fixed per­centage of income. The flat-rate tax pro­posal would institute a proportional tax.

3. Regressive. A tax is regressive if the percent­age of income paid as taxes declines as in­come rises.

The Budget Bill of 1993 reinstituted much of the progressivity of taxes on income that had been flatten ed by a 1986 reform of federal taxes. Although more tax loopholes were also opened up, the resulting pattern of collection is moder­ately progressive: people with higher income s tend to pay greater percentages of their incomes as taxes.

Social Security taxes totaling roughly 15% of the first $60,000 of an individual's wages are collected, and the tax is roughly proportional in the $0 to $60,000 range of wage income. Because Social Security taxes are not collected beyond $60,000 in wages, this tax is regressive when the entire income range is considered. Sales taxes also tend to be regressive because low income families commonly spend larger pro­portions (and save smaller proportions) of their income than high income families.

Taxing and spending are only two of the tools that government uses to mold economic activity. Laws and regulations also have verypowerful economic effects. Several studies have concluded that compliance with regulationab­sorbs 5% to 15% of national income.

In Chapter 2 we surveyed some allocative mechanisms used to resolve economic ques­tions. If the effects of people's choiceswere per­fectly foreseeable and if everyone could, as costlessly as possible, acquire all the information bearing on every decision, the most useful mechanisms would be fairly obvious. Informa­tion is costly, and the future, unfortunately, is uncertain. Information for decision-making is sought only as long as the benefits expected from acquiring a bit more information exceed the costs. Beyond that point, we as individuals rationally choose to be ignorant. Thus, private decisionsinevitably result in some mistakes be­cause we are all somewhat rationally ignorant when we choose, and cannot know- what the fu­ture holds.

One question is whether, in an environment of rational ignorance and pervasive uncertainty, government can make better decisions than we would make for ourselves. A part of the answer is that government decision-makers also operate in an uncertain environment and base decisions on only limited information. No perfect mechanisms for decision-making exist. If you voted in the last election, how much did you know about individ­ual candidates and important issues? How certain were you about the policies your candidates would support as the future unfolded?

An inequitable distribution of income is one perceived flaw of a market system, and markets tend to be inefficient when firms exercise mar­ket power or when property rights are uncer­tain or unenforceable. At the macroeconomic level, persistent high unemployment, erratic swings of the price level, and unbalanced or sluggish growth may also signal inefficiency.

Much of this book addresses how a market economy operates and how government policies intended to correct for possible failures of the market might operate. Although government is growing in the U.S. economy, regions in which government dominated economic activity for decades (e.g., Eastern Europe, China, and Vietnam) increasingly rely on market mecha­nisms. The growing momentum of forces from international markets is powerful evidence that no tools of economics are more important than supply and demand.

Дата добавления: 2015-11-14