Study Questions For The Final Exam

Public Sector Economics

These questions are not designed to take the place of studying your notes and the reading assignments.  Do not e-mail me and ask me to answer all or some of these questions for you.  If you have missed class, it is your responsibility to get the notes from another student.  Once you have answered these questions yourself, if you are unsure of any of your answers, let me know and I will tell you if you are correct or not.  Don't be afraid to ask me questions, I just want you to try to answer the questions yourself first.  Make sure you have done all of the reading assigned.  Also, pay attention to the homework questions and the exercises we have done in class when studying.

Topic:  Other Taxes and Tax Ideas

1. What is a green tax?
2. Would you consider it a serious replacement for the income tax?  Why or why not?
3. What are some of the benefits of a green tax with respect to "efficiency" from the perspective of an economist (not from the perspective of a business firm - at least always)?
4. What do those who advocate a tax on carbon suggest the government do in order to make the tax less regressive (if indeed it would be)?  Explain.
5. What is a tax on wealth?  Example.
6. Why are wealth taxes often advocated?
7. Why might a one time tax on wealth decrease economic distortions - such an incentive changes?  Why might this theory not work?
8. What is a tax on the transfer of wealth?  Are these taxes fair?  Explain your arguments.
9. What are five possible economic effects of a property tax?
10. What is tax exporting?  What are two ways politicians can export taxes?  Examples?
11. What is tax competition?  Explain.  Example?

Topic:  Tax "Avoision"  (ALL FROM TULLOCK)

    1.  What is an example of tax avoidance?  What is an example of tax evasion? What is the difference?

    2.  What are the costs (effects) of tax loopholes we discussed in class?

    3.  An economic incidence of tax avoidance is the tax industry.  Explain.  Another is the corporate structure (how a corporation might choose to finance its operations).  Explain.

    4.  Can tax evasion be productive?  Example?

    5.  Discuss some economic incidences of tax "avoision" - are there clear answers to this analysis?

Topic:  Supply-Side Economics and Taxes

1. Supply side economics focuses on incentives - explain. 

2. What is the substitution effect?  What is the income effect?  Which effect do supply side economists think is more prevalent in the economy?

3. Describe the backward bending supply curve of labor.  Graph.

4. What is the tax base?

5. What are the two reasons supply side economists give regarding a tax cut leading to an increase in tax revenue?

6. What is the theory behind the idea that the relatively rich will end up paying more of the overall tax revenue with an income tax cut?

7. What is the Laffer curve?  Explain it and graph it.

8. What conclusions do the supply side economists reach regarding policy?

9. Is there any empirical evidence for supply side economics?  Explain.

10. What's the difference between a Keynesian tax cut and a supply-side tax cut?

11. Under what presidential regimes have there been major income tax cuts in the United States?  What do those tax cuts indicate with respect to tax revenue and with respect to who ends up paying more of the overall tax to the government?

12. Criticize the supply side theory.

Topic:   Alternative Means of Financing Government Expenditures

1. What are the three basic ways of financing government spending?

2. What are some other less popular ways of financing government spending?

3. Throughout the history of the U.S., when did deficit spending typically take place?

4. How does the government go into debt?

5. What is a balanced budget?  Budget surplus?  Budget deficit?

6. What is the difference between a budget deficit and the government's debt?

7. There are three basic categories of U.S. government debt holders.  Who are they?  (Hint:  split debt held by the public into domestic and foreign investors).

8. What are "intragovernmental" holdings of the debt?  Example?

9. Discuss how the U.S. Treasury and the Fed "monetize" the debt.

10. The government can increase the money supply in order to pay for government spending without monetizing the debt?  Explain.

11. When the Fed makes money off of its portfolio holdings (of bonds, mortgage securities, etc.) - what does it do with the money?  How does this relate to financing of the government spending?

Topic:   Alternative Means of Financing Government Expenditures - The Economic Theory

1. According to Buchanan, the "orthodoxy" on the public debt is based upon three basic propositions: there is no real transfer of wealth among generations, the analogy between individual or private debt and public debt is fallacious, and there is a sharp distinction between an internal and an external public debt.  Why does Buchanan disagree with all three?

2. How did Buchanan attack the notion that "we owe it to ourselves" with respect to the national debt? This relates to the last question - with respect to where the burden of deficit spending falls.
3. According to the Keynesians, there is a difference between cyclical and structural deficits - what are they and which are considered OK and why?
4. In response to the Keynesians regarding cyclical deficits - Buchanan and others discuss the theory of crowding out.  Explain this theory -- why can deficit spending decrease productivity in the economy?
5. What are modern day Keynesians saying about "crowding out" today? 
6. What is the "infrastructure"/"education" argument against crowding out?
7. What is the Ricardian Equivalence Theorem and how does it relate to crowding out?
8. What are some reasons as to why the Ricardian Equivalence Theorem may fail?
9. Can you discuss some "other" arguments (besides crowding out) that would argue that government debt is not good for an economy?
10. Why and how might deficit financing lead to more government spending?  Think about it.
11. According to Buchanan, Keynesian economics opened the door to large government deficits and debts.  Explain.
12. Provide a public choice argument as to why we have a large public debt.  Include in your answer the different ways a debt (or government spending in general) can be financed?
13. What does Buchanan suggest in order to deal with the large government debt and deficit spending?  This relates to your "cumulative" question on the final -- everyone better get it right!!

Readings:  Make sure you look over the readings, handouts, in class exercises, and homework assignment. 

It has been fun - have a great summer!   Pay attention to the rules in the camp grounds -- they might change your incentives regarding camp fires, which of course would lead to you doing what Smokey Bear would want you to do, and the outcomes would be very good - no man or woman caused forest fires!!