Public Finance Flashcards

The 'displacement effect' identified by Peacock and Wiseman suggests that government expenditure tends to increase permanently after major crises because:

Answer: Citizens accept higher tax levels during crises and resist returning to pre-crisis levels afterward

Peacock and Wiseman found that crises shift public tolerance for higher taxation upward, and this new higher tax level persists even after the emergency ends, permanently displacing spending upward.

When analyzing tax incidence, the statutory incidence refers to:

Answer: Who is legally required to remit the tax to the government

Statutory incidence identifies the legal taxpayer—who must file and pay—which often differs from economic incidence, reflecting who truly bears the burden after market adjustments.

The 'median voter theorem' in public finance predicts that, under majority rule, the equilibrium level of public spending will reflect the preferences of:

Answer: The voter whose preferred outcome is the median of all voters' preferred outcomes

The median voter theorem holds that majority rule produces the policy preferred by the median voter, since any alternative can be defeated by a majority coalition centered on the median.

A value-added tax (VAT) differs from a retail sales tax primarily in that:

Answer: VAT is collected at each stage of production with credits for taxes paid on inputs, reducing evasion

VAT uses an invoice-credit mechanism where each seller collects tax on sales but claims a credit for VAT paid on purchases, creating a paper trail that makes evasion more difficult than under a single-stage RST.

In public budgeting, 'incremental budgeting' differs from 'zero-based budgeting' in that incremental budgeting:

Answer: Uses prior-year appropriations as the baseline and focuses scrutiny on proposed changes

Incremental budgeting takes last year's budget as the starting point and reviews only additions or cuts, while zero-based budgeting requires agencies to justify their entire budget from scratch each year.

Which fiscal policy approach is most consistent with the 'functional finance' view associated with Abba Lerner?

Answer: Set spending and taxes to achieve macroeconomic goals regardless of the deficit's size

Functional finance holds that the proper criterion for fiscal policy is economic performance—price stability and full employment—not adherence to balanced-budget rules or debt targets.

A government implements a 'clawback' provision that phases out a child tax credit for families earning above $75,000. The primary fiscal purpose of this design is to:

Answer: Target benefits to lower-income families while controlling program costs

Clawback provisions phase out benefits as income rises, concentrating fiscal support among lower-income households and limiting program cost compared to a universal credit.