Public Finance

Carl Shoup

• Publisher: Routledge
• Year: 2017
• eBook ISBN: 9781351495721
• Topic: Economics
• Subtopic: Public Finance
• Index: Economics

Broad in scope and carefully balanced in emphasis, this book is a major treatise on the theory and practice of public finance. It is unique in its presentation of a worldwide perspective and in its treatment of both the instruments of public finance and the goals, effects, and criteria of public finance measures. The book is divided into three parts. Book One defines the field, specifies the possible meaning of the "effects" of a public finance measure, and describes the criteria by which these measures are commonly appraised.Book Two is concerned with micro public finance and opens with a discussion of the theory of public goods in general. Each of the major free government services and types of transfer payments as well as the taxes that government employs are then examined. This section concludes with a chapter on the relevant aspects of government borrowing and inflationary finance. Book Three considers the major goals of public finance policy and describes how the various instruments described in Book Two can be used in achieving these goals. Among the topics treated are the use of appropriate instruments to resolve conflict in goals, conceptual problems of measuring the public finance sector and its maximum and minimum economic limits, consensus goals of equity full employment and Pareto-optimism use of resources, and goals that evoke conflicts of interest within any community.

BOOK TWO

Micro Public Finance

Part I: Government Outlays

chapter three

Types of Outlay and Receipt; Expenditure Administration

A. TYPES OF GOVERNMENT OUTLAY¹

1. Explicit Government Outlays

Government outlays are either explicit or imputed. Explicit government outlays are either transfer payments or payments for goods and services. Transfer payments, in turn, are either unrequited transfer payments, involving no quid pro quo, or are payments for property, representing asset transactions. Unrequited transfer payments are chiefly donative, consisting of welfare payments, subsidies, and aid to other governments, foreign or domestic, but are sometimes compulsory, notably as reparations.

Property payments may be divided into purchases of existing real assets, chiefly land and buildings, and purchases of financial instruments, as in open-market operations where the government or its agent, the central bank, buys its own obligations from the private sector, or buys private-sector obligations, commercial bills for example.

The line between property payments for existing real assets and purchases of goods and services is drawn by including in payments for goods and services only those payments that commonly stimulate current production directly. Computers or pencils bought new by the government may have been produced before the government decided to buy them, but if the government is the first purchaser, that is, if the goods are not second-hand, it may be assumed that the government’s order, or anticipation of it, stimulated current production, either of these items or of those that replace them in stock.²

Purchase of an old building does not directly stimulate current factor activity, however much it may indirectly stimulate,such activity by improving the tone of the real estate market. In contrast, purchase of a new building is a purchase of goods and services for the reasons given above with respect to new computers or pencils.

The government’s outlay for a building is an investment expenditure. The government invests, in the national-income sense, and the seller of the building disinvests. When the building was constructed, it represented an investment by the one at whose order it was built. A formal rule to implement the distinction drawn in the paragraph immediately preceding is the following : If the disinvestment that is the other side of the coin to the government’s investment occurs in a year subsequent to the year in which the building was constructed, the government’s investment is not to be counted as a purchase of goods and services ; the government is buying a “used” or “old” building. The purchase of goods and services, that is, the stimulation of factor activity, is to be attributed to the party who ordered the building constructed in that earlier year; the date of attribution is the year of construction. But if the government’s purchase of the building occurs in the same year as that in which the building was constructed, the government’s purchase may be assumed to be the event the anticipation of which stimulated the factor activity that went into creation of the building, even if the building changes hands several times during that year before the government buys it. The government is purchasing a “new” building. The purchase of goods and services may be attributed to the government rather than to the other party, if any, at whose order the building was constructed.

Government purchase of land is not a purchase of goods and services except to the extent that the purchase price covers the cost of new grading, drainage, and the like; the rest of the purchase price does not directly stimulate factor activity. In general, little land is new land, and so, as with secondhand buildings, computers, or pencils, purchase of it is, with the exception noted above, a property payment.

When the government rents a building, machine, or other asset, part of the rental goes to cover depreciation (excepting land), part to cover maintenance costs incurred by the owner, and the rest as interest and profit. The latter two parts are payment for current factor activity, or approximately so, but the part of the rental that goes to cover depreciation is payment for an existing real asset. The depreciation part of the rental payments is a substitute for an outright purchase price. The rule suggested above for an outright purchase price of a building may be applied here. If the building was new when the government leased it, the entire rental payment may be regarded as one that directly stimulated the factor activity of creating the building, and the later factor activity of maintaining it. Over a long-term lease the activity so stimulated recedes into the past; it is not current factor activity. It would be preferable, for the aim of measuring the impact of the government on current economic activity, to capitalize the lease payments into a single sum in the initial year of the lease, and include this sum, rather than the subsequent rental payments, as a purchase of goods and services. In the absence of such an accounting procedure, inclusion of the rental payments is a second-best alternative, better than omitting the entire rental, or omitting that part of it that reflects depreciation.

If the building is already a used one when the government leases it, inclusion of the rentals in purchase of goods and services is tantamount to including the purchase price of a used building. The capital value of the building has already entered the national income accounts in the earlier year when the present private owner, or some predecessor, purchased it from the one who built it, or had it constructed at his order. Inclusion of that part of the rental that covers depreciation in purchase of goods and services would be double counting.

Interest paid by the government on its obligations is not an outlay for purchase of an existing asset, real or financial. It must therefore be a purchase of services of some kind. The service that it purchases is the yielding up of liquidity, that is, foregoing the certainty that the asset can be a substitute for money because it can be sold at a predetermined price at any given time. On occasion, however, the service purchased is evidently something other than the yielding up of liquidity.

The aggregate of property payments by government is typically small, with respect to real assets, but large with respect to financial assets. Central banks commonly purchase substantial amounts of financial instruments on the open market, with a view to stabilizing the economy or influencing its rate of growth.

2. Imputed Government Outlays

An imputed government outlay is an expense that does not give rise to a money transfer. Either (1) it is an accounting substitute for recording a money outlay of an earlier year, for example, an annual depreciation charge for a building owned and used by the government, the cost of this building not having been recorded as an expense in the year of purchase, or (2) it occurs simultaneously with a twin item of imputed income, the two offsetting each other. An example of such an offset is the imputed interest yielded by a government-owned and government-used building, offset by an imputed outlay because this imputed interest is deemed spent at once in producing the governmental service that the building is instrumental in supplying. An imputed outlay to cover risk-bearing may also be presumed; the contribution made by the use of the building is deemed valuable enough to cover such a charge, that is, the building earns an imputed income large enough to pay a fee for risk-bearing.³

The sum of depreciation, imputed interest, and the imputed charge for risk-bearing is the imputed rental of the government-owned building. But if the purchase price of the building has been included as an expense in the year of purchase, only the imputed interest and the imputed charge for risk-bearing can be entered as outlays in the subsequent years’ accounts without double counting. And depreciation, unlike imputed interest expense and imputed risk-bearing expense, is not linked simultaneously with an equal item of imputed income. Depreciation in a given year does not itself reflect factor activity in that year; it merely represents the gradual transformation of a durable asset into another good.

Another example of imputed outlay that is offset by imputed income is the extra money compensation that the government would have to pay a military conscript to induce him to volunteer. By conscripting him at a much lower wage the government acts as if it paid him that higher wage and simultaneously taxed the difference away from him. The imputed outlay is matched by an equal imputed tax revenue.

Again, if the government allows a taxpayer in, say, a 40 per cent income tax bracket to deduct a $100 contribution to a charity, or if it gives him a 7 per cent credit against tax for a $100,000 investment in machinery, it is as if the government allowed no such deduction or credit (hence took $40 more in tax, or $7,000 more) and then itself gave $40 to the charity or supplied $7,000 toward purchase by the private firm of the machine. Imputed tax revenue is exactly offset by imputed outlay.⁴

Volunteer services to government may be regarded as a combination of imputed income, received as a gift from the volunteer, which is spent at once, imputedly, on hiring him.

Other offset imputations are those arising from compulsory loans to the government, loans by the government that involve some risk of default, loans by the government at low interest rates, and government guarantee of private loans.

A compulsory loan contains, for those who would not subscribe to the loan voluntarily, a tax element. The government receives imputed tax revenue from the compelled lender, in the form of part of what he pays for the government bond. The government also incurs an imputed interest charge. This is in addition to the actual interest it pays. This imputed interest charge is what the government would have to pay to the compelled lender to induce him to lend the money freely, if he were also subject to an explicit tax equal to the implicit tax that is hidden in the compulsory loan (see Chapter 16, pages 425-26).

Governments commonly make “soft” loans, that is, loans of a type that on the average will almost surely not be repaid in full, and some of which are so expected to be entirely uncollectible that they are virtually subsidies or welfare payments. On the dates when the government fails to receive the stipulated interest, that fact will be attested to by the simple absence of a cash receipt. The government’s surplus will be smaller that year, or its deficit larger, than if the interest had been paid. The default shows up in the government’s accounts as a “negative receipt”; receipts are smaller than they would have been if no default had occurred. This method of accounting for defaults understates the government’s outlay, if the loan itself was not treated as an outlay when it was made.

As an extreme case, let us consider a loan made by the government in perpetuity (no maturity date) against the payment of a market rate of interest perpetually. If the loan itself is not counted as an outlay, and if the debtor defaults at once and never pays any interest on the loan, receipts are perpetually smaller than they would have been if the borrower had not defaulted, instead of outlays being larger.

The reverse treatment—larger outlay total in case of default, receipts total un-changed by default—calls for either (a) inclusion, in outlay, in the year the loan is made, of an imputed payment to a reserve for bad debt losses, with a credit to receipts account and a debit to the loss-reserve account in the year when the default occurs; or (b) in the year when default occurs, inclusion in outlays for that year of an imputed outlay, the amount defaulted, with a corresponding entry for imputed receipts (as if the interest had been paid to the government and turned back by it to the debtor). Choice between the two methods depends on the relative importance attached to smoothing out this outlay item over a series of years and to avoidance of temporary inaccuracy that any reserve accounting necessarily entails.

If the government makes a loan at an interest rate lower than it could have obtained on the market, the cost represented by the interest foregone affects only the receipts total, not the outlay total, unless extra accounting entries are made, as follows. There are two methods of making such entries.

This kind of loan is in part an outright grant, and in part a true loan of an amount such that the interest stipulated on the total “loan” plus the excess of the redemption value over this true-loan part is enough to represent a market rate of interest on that part. The grant element can therefore be written off as an expenditure in the year that the “loan” is made. The receipts side for later years will include not only the interest actually paid but also the “capital gain” on the loan, the amount by which the redemption value exceeds the true loan segment of the “loan.” Alternatively, the outlay total, for each year of the life of the loan, can be increased by an imputed expense representing the difference between the stipulated interest and the market rate, and this imputed expense will be matched by an entry for imputed interest received.

Governments commonly guarantee loans made by certain types of lenders to certain types of borrowers, especially in the mortgage field. If the debtor defaults, government outlays increase explicitly, as the government makes good on its guarantee. The alternative, inclusion in outlays in year of guarantee of a payment to a reserve for anticipated outlays to make good the guarantees, may be preferred, to average the outlays over the years, and to record at once the conditional obligation that is assumed by taxpayers, present and future.

3. Free or Subsidized Government Services as “Outlays”

The goods and services and the property purchased by the government, other than financial assets, are used by it in rendering services that are either dispensed free of charge or sold at a price. The “outlay” of the government might be defined to consist of the services it dispenses free of direct charge and the loss it incurs in selling at prices below cost, plus only that part of outlay on goods and services and real assets that it recovers through sale of the services. The emphasis placed in this chapter and in Chapter 4 on the economic effects of the free dispensing of services could justify such a classification, but to avoid too sharp a break with established usage, government “outlay” will here include all government expenditure on goods and services and on property purchases, and will not include the services dispensed free of charge.

B. TYPES OF GOVERNMENT RECEIPT

1. Explicit Government Receipts

Explicit government receipts are either transfer receipts or receipts from the sale or rental of goods and services. Transfer receipts are (a) unrequited receipts, involving no quid pro quo from the government; or (b) receipts from the sale of property, representing asset transactions (“property sales receipts”); or (c) receipts in the form of new money created within the government sector.

Unrequited transfer receipts are either compulsory (taxes, including the tax element in compulsory loans, and certain fees) or donative (usually aid from other governments, foreign or domestic).

Property sales receipts are either from the sale of real assets, the production of which was not stimulated directly by the sale, as when government stockpiles are reduced or old buildings are disposed of, or from the sale of financial instruments. These instruments may be either the government’s own obligatio...

Table of contents

• Cover Page
• Title Page
• Copyright Page
• Dedication
• Acknowledgments
• Contents
• LIST OF FIGURES
• LIST OF TABLES
• ALDINETRANSACTION INTRODUCTION
• FOREWORD
• BOOK ONE: PUBLIC FINANCE ANALYSIS
• BOOK TWO: MICRO PUBLIC FINANCE
• BOOK THREE: MACRO PUBLIC FINANCE
• Index