Public Finance in Practice and Theory

Posted: 22 Feb 2010

See all articles by Alan J. Auerbach

Alan J. Auerbach

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Date Written: March 2010

Abstract

Public finance has both normative and positive elements, and moving between theory and practice requires attention to help us understand both what policies government should adopt and whether it is likely to do so. We should not be surprised when bad policies are adopted in spite of better policies being available if our political system is structured to deliver bad outcomes, for example, if our political environment gives politicians strong incentives to serve narrow interests at the expense of the common good. But this article focuses on examples where the contrast between normative and positive outcomes is not so clearly explained, and thus where understanding the reasons for observed policy practices might help us develop better positive theories. The four cases analyzed are: piecemeal progressivity, minimum taxes and other individual limits, quantity-based restrictions and dedicated taxes. While a full explanation for the anomalies discussed lies beyond this article’s scope, some lessons can be drawn from them.

Keywords: Richard Musgrave, public policy, fairness, public choice

JEL Classification: H11, D78

Suggested Citation

Auerbach, Alan Jeffrey, Public Finance in Practice and Theory (March 2010). CESifo Economic Studies, Vol. 56, Issue 1, pp. 1-20, 2010. Available at SSRN: https://ssrn.com/abstract=1555546 or http://dx.doi.org/ifp029

Alan Jeffrey Auerbach (Contact Author)

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-643-0711 (Phone)
510-643-0413 (Fax)

National Bureau of Economic Research (NBER) ( email )

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Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

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Munich, DE-81679
Germany

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