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Chapter 16 Government spending and revenue

Chapter 16 Government spending and revenue. David Begg, Stanley Fischer and Rudiger Dornbusch, Economics , 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward. Government spending. Government Spending as a Percentage of Income in Turkey.

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Chapter 16 Government spending and revenue

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  1. Chapter 16Government spending and revenue David Begg, Stanley Fischer and Rudiger Dornbusch, Economics, 9th Edition, McGraw-Hill, 2008 PowerPoint presentation by Alex Tackie and Damian Ward

  2. Government spending

  3. Government Spending as a Percentage of Income in Turkey.

  4. Government Spending in Turkey (2005,2010) (Million TL)

  5. Government spending EQUITY a progressive tax and transfer system redistributes income from rich to poor EFFICIENCY correction of market failure may improve resource allocation We may justify government spending on two grounds:

  6. Private and public goods A private good if consumed by one person, cannot be consumed by another person. e.g. dental treatment A public good even if consumed by one person, can still be consumed by other people. e.g. street lighting The strong externalities associated with public goods, mean that government intervention may be justified to ensure appropriate provision.

  7. Merit goods and bads Merit goods (bads) goods (bads) that society thinks everyone ought to have (ought not to have)regardless of whether they are wanted by each individual. e.g. Education, health services, cigarettes The government may spend money on compulsory education or compulsory vaccination because it recognises that otherwise individuals act in a way they will subsequently regret.

  8. Varieties of taxes Direct taxes taxes on earnings from labour, rents, dividends and interest. e.g. income tax, corporation tax Indirect taxes taxes levied on expenditures on goods and services e.g. VAT, duty on alcohol Wealth taxes capital transfer tax, tax on property

  9. Proportion of Direct and Indirect Taxes(%) * 6 aylık

  10. Proportion of Taxes to GDP (%) * 6 aylık

  11. Taxes in Turkey (1988-2010)

  12. A tax on wages SS' With a tax, labour supply is effectively at SS', workers receive W'', but firms pay W', the difference being the tax. W' W'' Employers pay the green area, and workers the blue. The orange area is a welfare loss for society. L' With no tax, the labour market is in equilibrium at wage W, hours L. SS Wage W DD L Hours worked

  13. The incidence of a tax Who pays a tax depends upon the elasticity of demand and supply for the product. This also affects the size of distortion caused by the imposition of a tax.

  14. A tax to offset an externality SS' But if there is a negative consumption externality (e.g. from smoking), the social optimum is at Q*. F E* A tax of E*F enables this optimum to be reached. DD' Q* Given private demandDD and supplySS, free market equilibrium is at Q. SS Price DD Q Quantity

  15. The Laffer curve shows how much tax revenue is raised at each possible tax rate. Beyond t*, higher tax rates reduce revenue because of disincentive effects. Tax revenue 100% t* Tax rate

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