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Principles of Public Finance
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Principles of Public Finance
Public Finance and a Review of Basic Concepts
The Main Functions of the Public Sector
Resource Allocation
Redistribution
Stabilization
Dynamic Optimization
The Failure of Government
A Review of Basic Analytical Concepts
Constrained Maximization
Pareto Optimality
A Dual Approach
The Public Sector in Japan
Intergovernmental Finance
The Budgetary System
The Budgetary Formula in Japan
The Budgetary Process
The Execution of the Budget and the Settlement of the Account
The Content of the General Account in Japan
The Category of Budget
Government Expenditure
Tax Revenue
Public Debt
Organization of the Book
Appendix: Japan's Fiscal Management
References
The Macroeconomic Theory of Fiscal Policy I
The Simple Keynesian Model
The 45-degree Model
The Fiscal Multiplier
The Multiplier with Tax Rate
The Built-In Stabilizer
The Balanced-Budget Multiplier
The IS/LM Analysis
The Investment/Saving and Liquidity Preference/Money Supply Equilibrium Model
The Size of the Multiplier in the IS/LM Model
Extreme Cases of the Zero Crowding-Out Effect
Direct Crowding Out
The Crowding-In Effect
The Open Economy
Extension to an Open Economy Model
The Fixed Exchange System
The Flexible Exchange Rate System: The Effect of Fiscal Policy
The Flexible Exchange Rate System: The Effect of Monetary Policy
Zero Capital Movement
The Efficacy of Fiscal Policy and the Policymaker
Three Viewpoints
The Lag of Policy
Lag of Monetary Policy
Lag of Fiscal Policy
Lag and Automatic Stabilizers
Rules Versus Discretion
Appendix: Public Investment in Japan
A2 The Efficacy of Public Investment as a Counter-Cyclical Measure
A3 Fiscal Policy and the Optimal Size of Public Investment
References
The Macroeconomic Theory of Fiscal Policy II
The Permanent Level of Fiscal Variables
Definition of the Permanent Level of an Economic Variable
The Government's Budget Constraint
Consumption and Saving Behavior
Optimization Over Time
The Permanent Income Hypothesis
The Labor Market and Supply Function
Labor Supply by Households
Labor Demand by Firms
Equilibrium in the Labor Market
Equilibrium in the Goods Market
The Effect of Fiscal Policy
Three Cases of Fiscal Expansion
Temporary Expansion
Permanent Expansion A
Permanent Expansion B
Evaluation of the Public Sector
Substitutability
The Multiplier Effect of Government Spending
Evaluation of Government Spending
Appendix: The Size of Government Spending and the Private Sector's Evaluation
A2 Theoretical Considerations
A2.1 Evaluation of Government Spending
A2.2 Optimal Size of Government Spending
A2.3 Optimizing Behavior
A3 Empirical Results
A4 Conclusion
References
Public Debt
Ricard's Neutrality Theorem
A Two-Period Model
The Implications of Public Debt Issuance
Debt Issuance in an Infinite Horizon Economy
The Shift of the Burden to Future Generations
A Two-Overlapping-Generations Model
The Efficacy of Keynesian Policy
The Shift of the Burden
Barro's Neutrality
The Inclusion of Bequests
A Simple Model with Bequests
Barro's Neutrality Theorem
Policy Implications of the Debt Neutrality Theorem
Policy Implications
Theoretical Assumptions
Perfect Capital Market
Lump-Sum Taxes
Anticipation of Future Tax Increases
Planning Period and Bequest Motive
Empirical Evidence
The Non-Keynesian Effect
What Is the Non-Keynesian Effect?
The Non-Keynesian Effect in the Real World
Simple Theory of the Non-Keynesian Effect
Appendix: Government Debt in an Overlapping-Generations Model
A2 The Basic Model of Overlapping Generations
A2.1 The Consumer Within the Model of Overlapping Generations
A2.2 Production Technology and Capital Accumulation
A3 Government Debt and Intergenerational Transfer
A3.1 The Transfer Program
A3.2 Some Remarks
A3.3 The Burden of Debt
A4 Debt Neutrality with Altruistic Bequests
References
Economic Growth and Fiscal Policy
A Simple Growth Model
Long-Run Growth Rate in the Harrod-Domar Model
The Effect of Fiscal Policy
The Incorporation of Public Investment
Optimal Public Investment
The Role of Public Spending
Public Investment in the Market Economy
Optimal Allocation Between Two Regions
Optimal Size of Public Investment
The Discount Rate of Public Investment
The Solow Model
Formulation of the Solow Model
Stability of the System
The Effect of Fiscal Policy
The Endogenous Growth Model
The Optimal Growth Model
The AK Model
Public Investment and Growth Rate
Inequality and Economic Growth
Income Redistribution and Tax Rate
Externality of Educational Investment
Appendix A: Taxes on Capital Accumulation and Economic Growth
A1 Introduction
A2 The Endogenous Growth Model
A2.1 Technology
A2.2 The Three-Period Overlapping-Generations Model
A2.3 The Altruistic Bequest Motive
A3 Economic Growth and Efficiency
A3.1 The First Best Solution
A3.2 Optimizing Behavior in the Market Economy
A3.3 The Circumstance in Which Physical Bequests Are Zero
A3.4 The Circumstance in Which Physical Bequests Are Operative
A4 Taxes and Economic Growth
A4.1 The Constrained Economy
A4.2 The Unconstrained Circumstance
A5 Conclusion
Appendix B: The Supply-Side Effect of Public Investment in Japan
B1 Earlier Studies
B2 Recent Studies
B3.1 Constraints in Japan
B3.2 Public Investment Management Reform
B3.3 Strengthening Wide-Ranging Coordination
B3.4 Cost-Benefit Analysis
B4 Public Investment Management Reform
References
Fiscal Management
Understanding Fiscal Management
The Problem of Public Debt Issuance
Balanced-Budget Policy
The Efficacy of Keynesian Policy
The Tax-Smoothing Hypothesis
Compensation Policy
The Long-Run Argument for a Zero-Tax Nation
Overall Arguments on Fiscal Deficits
Fiscal Bankruptcy
The Possibility of Fiscal Bankruptcy
The Government Budget Constraint
Primary Balance
The Dynamics of Government Budget Constraint
Some Special Cases
g = t
r = n
g + rb — t = 0
The Rate of Interest and Fiscal Crisis
Fiscal Consolidation
Desirable Fiscal Consolidation
The Optimal Target of Fiscal Consolidation
Politically Weak Government
The Legal Constraint of Fiscal Consolidation
The EU and the Euro
Appendix: Fiscal Deficits in a Growing Economy
A1 Introduction
A2 A Simple Growth Model
A2.1 Analytical Framework
A2.2 The Government's Objective
A3 Optimal Deficits
A3.1 Phase Diagram
A3.2 Optimal Deficit During Transition
A3.3 Macro IS Balance
A3.4 Comparative Dynamics
A3.5 Optimal Deficit in the Long Run
A3.6 Numerical Example
A4 Conclusion
A4.1 Deficits and Growth
A4.2 Deficit Ceilings and Fiscal Privilege
A4.3 Hard Budget and Soft Budget Outcomes
References
The Public Pension
Justification of the Public Pension
The Public Pension System
Justification
Income Redistribution
The Failure of Private Pensions
Paternalism
The Efficiency of a Compulsory Public Pension
Economic Effect of the Public Pension
The Funded System
The Pay-AS-You GO System
Public Debt and the Public Pension
The Funded System and Public Debt Issuance Within the Same Generation
Pay-AS-You-GO System and Public Debt Issuance Among Generations
Generational Accounting
Public Pension Reform
The Aging Population in Japan
The DB System
The Move from DB to DC
A Fully Funded System
Intergenerational Conflicts
Privatization of the Pay-AS-You-GO System
A Simple Model
The Gain in Economic Welfare Through Privatization
Appendix A: Intergenerational Conflict in an Aging Japan
A1 Introduction
A2 Medical Insurance
A2.1 Japan's Health Care System
A2.2 The Retired and Elderly
A2.3 Issues of Medical Insurance
A3 The Pension System
A3.1 Japan's Public Pension System
A3.2 Pension Reform in an Aging Japan
A3.3 Outline of the 2004 Pension Plan Revision
A3.4 Is the 2004 Reform Effective?
Appendix B: Simulation Analysis in an Aging Japan
B1 Introduction
B2 The Model
B3 Simulation Analysis in Ihori et al. (2005)
B3.1 Demography
B3.2 Government Deficits
B3.3 The Social Security System
B3.4 Taxes
B3.5 Technological Progress
B3.6 Simulation Results
B4 Simulation Analysis in Ihori et al. (2011)
B4.1 Assumptions
B4.2 Simulation Results
B5 Conclusion
References
The Theory of Taxation
Taxation and Labor Supply
A Model of Labor Supply
Substitution Effect and Income Effect
The Cobb-Douglas Utility Function
The Efficiency of Taxation
A Comparison with Lump Sum Tax
The Size of the Excess Burden
The Excess Burden and the Substitution Effect
Interest Income Tax and Saving
The Life Cycle Saving Hypothesis
The Effect of Interest Income Tax: The Substitution Effect and the Income Effect
The Cobb-Douglas Utility Function
The Human Capital Effect
The Cobb-Douglas Utility Function Revisited
Investment and Tax
The Classical View
Corporate Tax and Borrowing Funds
Corporate Tax and Retained Earnings
The Cost of Capital
Depreciation
The Incidence of Corporate Income Tax in Japan
Consumption Tax
Shift of the Tax Burden and Price Determination
The Consumer as the Legal Taxpayer
The Burden of Tax and Incidence
Appendix: The Savings Elasticity Controversy
A1 Boskin (1978)
A2 Summers (1981)
References
Tax Reform
Labor Income Tax and Interest Income Tax
Exogenous Labor Supply
Comprehensive Income Tax
Expenditure Tax
Endogenous Labor Supply
The Negative Incentive Effect and Optimal Taxation
The Theory of Optimal Taxation
Theoretical Framework
The Ramsey Rule
The Inverse Elasticity Proposition
The Uniform Tax Rate Proposition
Mathematical Formulation
Heterogeneous Households
The Theory of Tax Reform
Optimal Taxation and the Theory of Tax Reform
The Fundamental Rule of Tax Reform
Application to Some Examples
Enlarging the Tax Base
Unifying Tax Rates
General Consumption Tax and Labor Income Tax
The Equivalence Theorem
A One-Period Model
Some Remarks
The Timing Effect of Taxation
The Overlapping-Generations Model
The Incidence of Tax Reform
Transitional Generations
The Effect on Saving and Economic Growth
Simulation Analysis of Tax Reform
Multi-Period Overlapping-Generations Growth Model
Comments by Evans (1983)
Appendix A: Optimal Taxation in an Overlapping-Generations Economy
A1 The Optimal Tax Rule
A1.1 Overlapping-Generations Growth Model
A1.2 Dual Approach
A2 The First Best Solution
A3 Second Best Solution
A4 Optimal Taxation in the Second Best Case
A4.1 The Modified Ramsey Rule
A4.2 The Elasticity Term
A4.3 The Implicit Separability Condition
A4.4 Two Objectives and Intertemporal Efficiency
A4.5 The Lagrange Multiplier
A5 Heterogeneous Individuals and Distributional Objectives
Appendix B: Tax Reform Within Lump Sum Taxes
B1 Introduction
B2 Analytical Framework
B3 Lump Sum Tax Reform
B3.1 The Tax Postponement Effect
B3.2 The Effect on Savings
B3.3 The Welfare Effect of Tax Reform
B4 The Tax Timing Effect
B4.1 The Welfare Implication of the Tax Timing Effect
B4.2 Summary
B5 Some Remarks
References
Income Redistribution
Progressive Income Tax
Income Redistribution Policy
A Two-Person Model with Income Inequality
The Social Welfare Function
The Socially Optimal Point
The Optimal Income Tax Schedule
Perfect Equality When Income Is Uncertain
Endogenous Labor Supply
The Detrimental Outcome of Perfect Equality
Endogenous Labor Supply
A Linear Income Tax Schedule
The Tax Possibility Curve
The Optimal Income Tax
The Rawls Judgment
The Bentham Criterion
Optimal Redistribution
Nonlinear Income Tax
The First Best
Self-Selection Constraint
The Optimal Marginal Tax Rate
A Differentiated Linear Tax Schedule
The Recent Approach to the Optimal Marginal Tax Rate
Economic Constraint and Redistribution
Credibility
The Crowding-Out Effect
Expectation
Asymmetric Information
Stigma
Commitment
Appendix: Optimal Linear Income Tax
A1 Introduction
A2 The Model
A3 Shift of the Social Welfare Function
A4 Shift of the Tax Possibility Frontier
A4.1 The Maximin Case
A4.2 The Utilitarian Case
A5 Conclusion
References
The Theory of Public Goods
Public Goods 1.1 Public Goods and Private Goods
Formulation of Public Goods
Public Goods and Actual Government Spending
Optimal Provision of Public Goods: The Samuelson Rule
The Samuelson Rule: Diagramed Derivation
The Samuelson Rule: Mathematical Derivation
The Samuelson Rule: Simple Derivation
Numerical Example: A Two-Person Model of Public Goods
The Theory of Public Good Provision: The Nash Equilibrium Approach
The Nash Equilibrium Approach of Private Provision
A Two-Person Model
Efficiency of the Nash Equilibrium
Examples: Comparison
Criticism of the Nash Equilibrium Approach
The Theoretical Analysis of Public Goods: The Lindahl Equilibrium
The Lindahl Equilibrium
Efficiency of the Lindahl Equilibrium
The Free Rider Problem
Public Goods and the Free Rider Problem
Possibility of the Free Ride Problem
Game Theory Approach to the Free Rider Problem
The Clarke Tax
The Clarke Tax and a Balanced Budget
The Neutrality Theorem of Public Goods
The Neutrality Theorem
The Model of Neutrality Result
Perfect Crowding Out
Plausibility of the Neutrality Theorem
Concluding Remarks
Appendix: Public Bads, Growth, and Welfare
A1 Introduction
A2 Analytical Framework
A3 Wealth Differentials
A3.1 The Neutrality Result
A3.2 Analytical Result
A4 Immiserizing Growth
A5 Conclusion
References
Public Spending and the Political Process
The Failure of Government
Government Intervention
The Theory of Public Choice
Small Government
The Voting Model
Inequality and the Demand for Public Goods
Analytical Framework
The Median Voter Theorem
The Voting Model and Reality
The Paradox of Voting
Problems with the Median Voter Hypothesis
Interest Groups
Political Parties and Fiscal Policy
The Objective of Parties
The Convergence Theorem
Further Analysis of the Convergence Theorem
Extensions and Voting
The Political Business Cycle
The Partisan Business Cycle
Theoretical Model of the Partisan Business Cycle
The Macroeconomic Model
The Behavior of Two Parties
The Effect of the Election
The Probability of Winning the Election
Further Comments
Change of Government
The Evaluation of Public Spending
Appendix A: Fiscal Privileges, Consolidation Attempts, and Pigouvian Taxes
A2 The Basic Model
A3 The Model Without Consolidation Attempts
A3.1 The Competitive Solution
A3.2 Pigouvian Tax
A4 The Model with Consolidation Attempts
A4.1 The Competitive Solution
A4.2 Pigouvian Tax
A4.3 The Consumption Tax
A5 Conclusion
Appendix B: Political Factors and Public Investment Policy in Japan
B1 Political Pressures from Local Interest Groups
B2 Intergovernmental Transfers in Japan
B3 The Impact of Interregional Transfers
B4 Efficient and Effective Public Investment Management
References
Local Public Finance
Intergovernmental Finance
Decentralization and Local Finance
The Decision System of Intergovernmental Finance
The Centralized System
The Decentralized System
Intergovernmental Finance
The Supply of Local Public Goods
Local Public Goods
The Optimal Provision of Local Public Goods
Voting with Their Feet: The Tiebout Hypothesis
Plausibility of the Tiebout Hypothesis
Tax Competition
The Competition for a Mobile Tax Base
Taxing Mobile Capital
The Time Consistency of a Tax Policy
The Time Consistency Problem
A Simple Model
The Principle of Local Tax
The Overlapping Tax Base
The Soft Budget Problem
The Benefit-to-Pay Principle
The Fixed Asset Tax
The Inhabitant Tax
The Consumption Tax
Basic Principles of a Local Tax System
Redistribution among Local Governments
Regional Diversity of Local Tax
The Three-Person Model of Regional Redistribution
Efficiency
Further Issues on Intergovernmental Finance
Local Public Debt
A Decentralized Fiscal System
Appendix: An Analytical Model of Central and Local Governments in Japan A1 The Local Allocation Tax in Japan
A2 An Analytical Model of Central and Local Governments
A2.1 The Soft Budget Constraint
A2.2 An Analytical Framework
A2.3 The Pareto Efficient Solution
A3 The Hard Budget Game
A3.1 The Second Stage
A3.2 The First Stage
A3.3 Outcome
A4 The Soft-Budget Game
A4.1 CG's Ex Post Transfer: The Second Stage
A4.2 LG's Behavior: The First Stage
A5 Welfare Implications
References
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