The Public Budgeting and Finance Primer: Key Concepts in Fiscal Choice by Jay Eungha Ryu

Author:Jay Eungha Ryu [Ryu, Jay Eungha]
Language: eng
Format: epub
Tags: Law Enforcement, Political Science, General
ISBN: 9781317455080
Google: CWNsBgAAQBAJ
Publisher: Routledge
Published: 2015-01-28T12:56:57+00:00

where I is an individual’s before-tax income, τ is the individual’s net share of per capita taxes, z is lump-sum aid per capita, Σ is a sum operator, c is the unit cost of producing a public good, (1 − mi) denotes how much the individual’s tax burden is reduced by matching share of matching grants (readers are referred to Chapter 21 in Part V for more details), Giis a public good i, and Yis after-tax income of the resident. t is further defined as (b/B) π where b/B is the ratio of the individual’s tax base to the average tax base in the local jurisdiction where the individual lives, and π is the individual’s net burden per dollar of local taxes after deductions and credits.

Equation 17.1 is fairly complex, but readers need to focus on two factors that influence the level of public expenditures: income and tax burden of an individual living in a local jurisdiction. The measures of tax burden in the above equation, tc(1 − mi), are generally defined as the tax price of the individual. In particular, the ratio of the individual’s tax base to the average tax base in the local jurisdiction, (b/B) in t, and (1 − mi) have been the most frequently employed tax price measures in the literature of public finance (Duncombe and Yinger 1998, 2009; Fisher 2007, 77–81).

In general, an inverse relationship exists between tax price and the quantity of public goods. In contrast, as an individual’s income rises his or her demand for public goods also increases. This implies that most public goods are normal goods. Empirical findings indicate that the price elasticity of demand for public goods ranges between −.25 and −50. This means that if the tax price for public goods declines by 1 percent, the demand for the public goods will increase by about 0.25 to 0.50 percent. The income elasticity of demand for public goods ranges between 0.60 and 0.80. This means that if an individual’s income rises by 1 percent, his or her demand for public goods will increase by about 0.60–0.80 percent (Barr and Davis 1966; Bergstrom and Goodman 1973; Borcherding and Deacon 1972; Duncombe and Yinger 1998, 2009; Fernandez and Rogerson 2001; Fisher 2007, 82–84; Gramlich and Rubinfeld 1982; Merrifield 2000; Poterba 1997; Turnbull and Mitias 1999). Readers are referred to Chapter 21 in Part V on how (1 − mi) affects the demand for public goods. In short, when the local tax price is reduced by matching share mi, the demand tends to grow.

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