David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

Learning Outcomes
By the end of this chapter, you should understand:
0 different kinds of government spending
fJ why public goods cannot be provided by a market
0 average and marginal tax rates
e how taxes can compensate for externalities
0 supply-side economics
0 why tax revenue cannot be raised without limit
f) how cross-border flows limit national economic sovereignty
e the political economy of how governments set policy
The scale of government rose steadily until the 1970s. Then many people felt it had become too big, using
resources better employed in the private sector. High taxes were thought to be stifling private enterprise.
Electorates in many countries turned to the political leaders who promised to reduce the scale of government.
Now the pendulum is swinging back. In the US, even a Republican president, George W Bush, promised
massive government resources to rebuild New York after the terrorist attacks of 2001. In the UK the tax
burden rose in the 1990s, after falling under Mrs Thatcher. Labour won the 2001 election on a promise of
higher government spending on health, education and transport.
For historical perspective, Table 14. l shows how government grew everywhere in the last century.
Most government spending is financed by tax revenue. However, just as you may
overspend your student income by borrowing now and repaying later, the government
need not balance its spending and revenue in any particular period. When the
difference between total revenues and total spending is negative, we then have a
budget deficit. When that difference is positive, the government is running a
budget surplus. Table 14.2 shows that, by 2009, after two years of the credit crunch, the
US and the UK had budget deficits higher than those in France and Germany.
After this broad background, we now examine microeconomic issues. First, we
distinguish marginal and average tax rates.
The budget surplus (deficit)
is the excess (shortfall) of
government's spending over
its revenue.
The marginal tax rate is the
fraction of the last pound of
income paid in tax.
The average tax rate is the
fraction of total income paid
in tax.
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