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The study of how the government (or public) sector

pays for (or finances) expenditures through taxes


and borrowing. Governments produce or provide
valuable goods and services, such as education,
security, and transportation. They pay for these
goods by collecting taxes or, if taxes fall short, by
borrowing through the financial markets. Public
finance adapts and applies the fundamental
microeconomic theory of markets to the public sector
and government activity. In particular, this area of
study analyzes the efficiency of taxes and the market
failure of public goods. Public finance is also key to
the study of government stabilization policies that
address the inflation and unemployment problems of
business cycles. In particular, fiscal policy is the
manipulation of government expenditures and taxes
to stabilize the business cycle.
Public Finance Has Distinguishing Characteristics. - Man is
by nature a social being, and consequently seeks the
association of his fellow creatures. As this association
develops and becomes more complex, the need for
establishing and enforcing certain regulations appears, and
governments are inaugurated to safeguard property and
insure the orderly conduct of the community. The extent of
governmental activities depends largely upon the degree of
advancement in civilization. Among the primitive and
backward peoples, the functions of governments are few and
ill defined; whereas in highly civilized states they are
numerous and, although often very complex, they are,
nevertheless, well defined. The march of progress in the
development of government is from the simple to the
complex, and the more complex the organization the more
numerous and difficult are the problems which present
themselves.

The members of an advanced social group frequently fail to


comprehend the extent to which they are indebted to their
government for the services which it renders them. The
Constitution of the United States, for example, guarantees to
the citizen the protection of life, liberty, property, and the
pursuit of happiness; yet he often forgets that this guarantee
entails the maintenance of armies and navies, of legislatures
and judicial systems.
The postman makes his semi-daily delivery of mail without a
consideration by the ordinary citizen as to why or how. The
modern progress in science, literature, agriculture, industry,
and commerce is a matter of pride to every citizen, although
the contribution of the various governmental units toward
such progress is often forgotten. Government aid has
fostered the development of educational institutions, the
result of which has been that the development of science
and literature has been hastened; experiment stations and
schools have transformed agricultural methods; active health
campaigns have wiped out the cause of diseases and
pestilence; patent laws have stimulated inventions for the
development of industry, and copyright laws have enhanced
the quantity and quality of literature; while sound currency
and banking systems have made possible modern
commercial life.

A government has no superhuman power in exercising the


important function of supplying materials and services to a
social group. It cannot create the materials and services, but
must either secure them from some already existing source,
or cause them to be produced, either by its own activities or
by the activities of some other agency. The methods used by
governmental units in securing materials and services differ
widely, and after they have been secured the uses to which
they may be put also differ widely. None the less, it is a part
of the business of governments to secure the means of
supplying the various demands made upon it by its citizens.
The subject matter of Public Finance has to do with that
group of governmental functions which have to do with the
getting and using of materials and services.

The Word "Finance" Has No Definite Meaning

In the English language, at least, no definite meaning is


attached to the word "finance." A descriptive adjective is
often needed to clarify the intended meaning and to avoid
ambiguity. Such expressions as "private finance," "
corporation finance," "high finance," and "public finance" are
common in the daily newspapers. There are treatises on
corporation finance, for example, which explain the nature
and business methods of corporate organizations. The use
of the term "finance" in connection with a firm, business, or
individual frequently has reference to the condition of the
capital or assets, as, for example, "the finances of this
business are in good condition."

The ambiguity which arises with the use of the word


"finance," unmodified, may be avoided when the use of the
adjective is contemplated. Two forms of the word appear -
"financial" and "fiscal" - and a uniform use of the words for
particular meanings would be conducive to clearness. The
word "financial" has had no definite meaning. A financial
magazine, for example, treats of stocks, bonds, dividends,
and similar items, while the financial condition of a country
has to do with its money, credit, and banking. The word
"fiscal," however, has usually had a more definite meaning,
although its use has not always been clearly separated from
that of "financial." For the most part, however, "fiscal" has
been used in referring to the expenditures and revenues of
political bodies. A financial year, for example, might refer to
any number of conditions, while a fiscal year more definitely
refers to the revenues and expenditures of a political unit for
a particular period of time. The fiscal year of the Federal
government begins July 1st and ends June 30th. In this book
the word "fiscal" will be used to refer to conditions which are
related to revenues and expenditures of political bodies.

Public Finance is primarily concerned with fiscal aspects, yet


these aspects are often substantially influenced by financial
circumstances. A sound and efficient banking and currency
system, for example, materially aids in the collection and
expenditure of public revenues. It may not always be
possible, indeed, to separate the fiscal from the financial
conditions, as when, in times of war, a government issues
fiat money or treasury notes for the purpose of securing
funds. Fiscal authorities are likewise concerned about the
financial conditions of industries, because it is to productive
enterprises that they must turn as an important source of
revenue. Panics and crises, moreover, do not affect
industries alone, but the fiscal condition of political bodies as
well. A distinction can generally be drawn between aspects
of a fiscal and of a financial nature, and our concern in this
book will be with the former - aspects which deal with
expenditures and revenues of governments.

Public Finance Is a Division of Economics

There has been some discussion as to whether the study of


Public Finance properly belongs in the field of Economics.
Some writers treat fiscal problems in their works on general
economics, while others treat the problems under the
caption, "Economics and Public Finance." Still other writers
on general economics give no discussion of public
expenditures and revenues. The great amount of attention
which has been devoted to a discussion of private
consumption, production, and distribution has emphasized
the importance of these phenomena, yet the fact remains
that public revenues and expenditures are of sufficient
economic consequence to command the attention of
students of economics.

The principles which underlie the study of Public Finance are


clearly the same as those which underlie the study of the
other fields of economics. Economics deals with laws which
govern the activities of individuals in the expenditure of
energy to supply their wants. Public Finance is also a study
of the exertion of individual effort to supply wants.
Governments secure, through taxes or otherwise, some of
the returns from individual effort as a prerequisite to
supplying materials and services. The individual is
concerned with comparing the utility furnished by the
government with the utility he could have secured had the
government made no demands upon him. No individual
income can remain unaffected when a part of it is taken in
the form of a tax.

Public funds are frequently used, either to aid private


production or directly to carry on productive enterprises.
Those who are interested in efficient production must be
concerned about such uses of public funds, and those who
have the direction of public funds for productive enterprises
should know the economic principles upon which efficient
production rests. The successful management of a
government industry must be based upon just as sound
economic principles as is a successful industry conducted by
individuals. When the effect of securing revenues in different
ways is considered from the standpoint of justice, some
definite theory of distribution must be in mind. The
suggestion to adopt a rigorous single tax, which would take
the economic rent of land in taxes, immediately arouses the
interest of those who are concerned with rents and land
values. Any income, whether it is paid from a public purse or
from a private purse, is of economic concern. Fiscal officials
are concerned with the relationship of cause and effect in the
collection and use of public revenues; here the thought is
guided by the same economic laws that govern in the
problem of the distribution of wealth. The underlying
principles of Public Finance, then, are the same as those
upon which all sound economic reasoning is based.

Definition :

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