Public Finance

“It is a foolish thing to make a long prologue” (ii Maccabees 2:32). I shall once again follow this Biblical advice and be brief in describing the features of this seventh edition. The field of public finance is quite different than it was a generation ago. On the theoretical side, one of the main achievements has been to integrate the analysis of government spending and taxing more closely with basic economic theory. A prime example is the literature on optimal taxation, which attempts to derive prescriptions for government fiscal behavior using standard economic tools, rather than to annunciate a set of ad hoc “principles” for tax design. On the empirical side, the most exciting development is the widespread application of the tools of econometrics to understanding how expenditure and tax policies affect individual behavior and how the government itself sets policies. The results of modern research have been slow to enter traditional texts. This book takes its readers to many of the frontiers of current research. The approach to the material, while accessible to undergraduates, is the same as the approach shared by most economists who are now active in the field. The development of public finance has not proceeded free of controversy. In this book, discussed at length. One reviewer of an early draft of the manuscript warned against displaying too much of the profession’s dirty laundry in public. My feeling, however, is that “full disclosure” should apply not only in the market for securities, but in the market for ideas as well. Economic analysis sometimes loses touch with the reality it is supposed to describe. I have tried to avoid this tendency. The relevant institutional and legal settings are described in ample detail. Moreover, the text constantly emphasizes the links between economic analysis and current political issues. Organization: Part One now consists of three chapters that set the stage for the rest of the book. Chapter 1 consolidates two short chapters from the previous edition, and provides a broad perspective on the role of government in the economy. The next two chapters discuss the methodological tools used in the study of public finance. These include the methods of empirical analysis (Chapter 3). The remainder of the book follows the conventional tactic of analyzing government and revenue-raising activities separately).