Public Budget and Finance - Essay Example

Public Budget & Finance of of This paper examines six elements of public finance and budgeting. It begins by looking at the historical evolution of the United States taxation system. It goes on to examine the elements of justice and fairness in the tax system. The next aspect focuses on the salient features of economic development programs organized by local governments. The paper also looks at the key issues in the outflow of funds from the Federal Reserve to the local governments. It ends with the discussion of cash management at the local government level as well as the elements of government debt. Keywords: Local government, treasury, taxation, development Evolution of Taxation and the Revenue base of the United States of America Taxation is a symbol of civilization since it has always been the source of revenue for empires and states since historic times (Samson, 2003, p21). Taxation generally developed as a method of nations giving legitimate protection to their subjects and their properties. The Ancient Egyptians, Greeks and Romans had taxes that required nations to pay the state for the use of land. In Medieval times, this was modified into a feudal system where nobles collected taxes from citizens in return for protection. This was popular in England. The UK Parliament imposed property taxation on their colonies in North America in 1634 (Jensen, 1934 p2). After independence in 1776, the Patriots used taxation to build revenue for the nation, influence peoples spending habits and promote justice and fairness in the nation (IRS Website, 2011). From 1781 – 1789, the Constitution gave the states the right to tax their people. This meant that states had to come up with their own tax regimes and set up local tax jurisdictions for the collection of taxes. The taxes were mainly in the form of tariffs and excise duties. States had the right to set up their own local government systems and the states paid some money to the Federal government in proportion to the volume and population of each state. Between 1862 and 1872 during the American Civil War, the Federal Government had to take more revenue from the individuals (IRS Website, 2011). This implied that the Federal Government had to supervise the collection of taxes from the local level to the state level to ensure that the war could be funded appropriately to restore the constitution and its various requirements. From 1913 to present, the 16th Amendment gave Congress the right to oversee the collection of taxes (IRS Website, 2011). This therefore implies that Congress has the right and responsibility of supervising states to set up tax jurisdictions and local offices to collect taxes for the funding of public development projects and ventures. Over this period of time, the states and local governments have maintained various levels of autonomy in their rights to collect and disburse taxes to the Federal level. The state and local levels impose various levels of income, corporate and other forms of taxes like property, excise and sales taxes. Federal taxes are fixed and many be varied on the basis of personal allowances and other major tax reliefs. However, due to the autonomy given to the various states, state tax rules vary drastically from state to state. The various corporate, income and other forms of taxes charged in each state is different. State tax laws and Federal Laws jointly regulate the social security tax rates and systems and this also varies from state to state. Over the years, local governments have been tasked with the collection of taxes for the development activities of their local jurisdiction. Local governments are usually concerned with the collection of property taxes and rates. This rates and systems have varied since 1776 due to the autonomy granted to each and every local government in taxation matters. Sales taxes and tariffs are also taxes that are under the regulation of the Federal government as well as the State governments. All these moneys are put into the treasury and used to assist in the development of the state through the funding of various developmental projects for the local community, state and Federal government. Key Historical Issues and Concepts that have shaped US Tax Policy According to the IRS Website (2011), the taxation system of 1781 was regressive. In that people of lower classes, particularly those in the working class were required to pay more taxes than the people of the ruling class. Prior to 1913, individuals with an income in excess of $3,000 and heads of households were exempt from taxation (Austin, 1939 p51). This demonstrates clearly, the fact that the rich were paying less whilst the poor bore the brunt of funding the government operations. Also, some groups of elites got the advantage of owning and controlling important activities that everyone had to pay for. These special interest groups enjoyed massive tax reliefs and in some cases, subsidies from the government which effectively transferred the poor mans wealth to support the rich peoples businesses. However, with time, it became apparent that there was the need for some kind of social justice that could be meted out through taxation. This led to several concepts and ideas that sought to ensure the fair distribution of wealth with the use of taxation as an instrument by the US government. This was mainly enshrined in the 16th Amendment of the US tax laws in 1913. The concept of horizontal and vertical equity through taxation was introduced and implemented in the country. “Horizontal equity exists when those with equal abilities to pay, do in fact pay the same amount of tax.”(Cataldo, 2001). This therefore means that taxation was dispensed in such a way that people within the same economic circumstances were made to pay similar rates of tax to ensure that fairness was infused into the taxation system. Vertical equity on the other hand promotes justice in the society. It ensures that tax payers with greater abilities to pay bear higher taxes. This is the basis of the progressive taxation system that was introduced by the 16th Amendment. It implies that the higher a person earns, the higher taxation s/he will pay. This ensured that there was some justice and fairness in the United States because the rich, who could afford luxuries were made to bear more of the burden to fund the states activities than the poor who could barely pay for their basic needs. The 16th Amendment also increased taxation for special interest groups who were controlling large stakes in the various states. It also sought to withdraw several benefits like subsidies that ensured that these interest groups remained rich at the expense of the poor in society. The result of the 1913 changes was a system of fair distribution of wealth and responsibility amongst Americans. It enabled the poor to also generate wealth and give them equal chances of getting even with the rich, who controlled many ventures in the country. Issues with Local Government economic development programs Local governments economic development programs have two major roles (Bartik 2003, p2). First they provide customized assistance for individuals, businesses and organizations that seek to provide greater economic development and benefits for the area. Secondly, they provide strategic initiatives where more general tax, spending and regulatory policies of the government are utilized to promote local economic development. This implies that local governments have to use their role as public sector institutions to seek the corporate welfare of the community they control. They have to use economic development programs as contact points to reach out to the wider community for the improvement of lives. Local governments use the stakeholder approach to identify the components of the community and the various needs they have. Stakeholders are people in the community and since the local government is there to help everyone, they need to go about their operations in a way that every member of the community will get a fair share of the national cake. Thus a typical economic development program will seek to identify all the stakeholders in the community and then come up with systems and structures that will ensure a win-win situation for all members of the community. In some instances, a particular economic development program might have a positive effect on a group of stakeholders and have a very negative influence on another group of stakeholders. In such a case, the local government will need to use dialog and debates to draw a balance between all the stakeholder needs and come up with a clear economic program with will seek the interest and benefit of all the relevant stakeholders. In each case, they need to identify the relevant matters in the status quo and come up with a cost-benefit analysis (Bartik, 2003, p9). Blackley & Leigh, (2010) also identify several stages that the decision making process of the local government will be. First of all, the will identify the issues at hand, formulate alternative solutions, develop a number of strategies, identify best strategy, implement it and monitor it. Blackley & Leigh (2010) also identify that a local government will look at the 3 Es in most situations when taking a decisions. First they will identify that the option they are choosing is economical, in order, they are not spending too much in dollar terms for a given option in the development plan. Secondly, they will ensure that the activity is efficient, in other words, the inputs will yield optimum outputs. Thirdly, it is effective, or it meets all the objectives that are required for the particular item or activity. The flow of funds between the various levels of government in the United States The US constitution has divided its operations and structures into separate political arms, sectors and tiers for each level of public operations and activities (McEntire & Dawson, 2001, p58). This shows clearly that the federal system encourages the nation to have an Executive headed by the President and assisted by his cabinet and key appointees in top level positions heading the various sectors. There is also the Congress which translates the key Federal policies for each sector to the State level and then the Local Government which brings the Federal policies to the people. There is the flow of funds from the Federal level to the State level and to the Local Government level to ensure that all these units fulfill their primary obligations of translating Federal policy to the masses and also to fund the various activities of the numerous decentralized public sector units. Funds flow up and down in this cycle. Basically, the local government and the state authorities collect taxes from the people and deposit it into the Treasury (Allen & Tommasi, 2001). This money goes to the Federal Reserve and it is consolidated alongside the Federal taxes that are taken. Based on the budget and policies of the state, various amounts of money are released to the state and its related public institutions as well as the local governments. Most of this money is released to the various sectors or projects linked to the decentralized bodies working with these government units (Federal Reserve, 2011). However, there are some percentages that local governments and state authorities can keep from the revenue they generate from taxes and other fees they collect from the public. This ensures that they always remain solvent and can run their operations even when there are issues with the Federal government. Essential Infrastructure of a Local Governments Cash Management Program Larson, 2009 (p120) states that the local government was responsible for collecting taxes and fees and paying them into the Treasury up until the 1970s. However, the demand for better services by members of the public has forced local governments to become more cautious about maximizing revenue through activities like investment and minimizing losses. Thus, most local governments invest the revenues they earn from collections like taxes and have come up with sophisticated systems like bonds and short-term borrowings to enable them to raise more revenue for their operations and more efficient cash management structures and systems that yield results. Local governments manage their cash through three main systems budgeting, spending controls and procurement management (Riley & Colby, 1991). Budgeting involves the estimation of inflows and outflows in order to get an idea of how to minimize losses and waste and also maximize returns. When this is done, the local government can draw up a good and strong plan to ensure the proper management of cash within a given period of time. Spending controls entails the creation of cut-offs and limits for the disbursement and use of money. For instance, there are limits to which the head of a local government unit can authorize for withdrawal by fellow members of staff. There are also checks and balances as well as internal controls that ensure that no one gets too much power and also, people are forced to use money responsibly and eschew corrupt practices and embezzlement. There are also procurement limitations and laws that forces the management of local government institutions to purchase from the right sources and avoid corrupt practices. Finally, every local government has a centralized financial management unit that is responsible for the control of spending in the institution. The use of internal auditors to control the activities of workers in local governments in addition to the normal external audit ensure that cash is managed well. The Philosophical & Practical Aspects of Governments Debt Policy Government must spend money in developing social amenities and infrastructure to improve the nation and the standard of living of the people. This therefore means that government must always have enough money to meet its obligations, which will always exist, irrespective of what happens. It is therefore imperative for the citizens to work and raise the money that will be used to improve the lives of the people in the society. Failure to do so will lead to a debt for the government. Government debt needs to be managed with clear objectives and a supporting policy framework that gives room for decisions that reduce costs (Mitra, 2007, p2). The essence of this is that government debt must be managed with scientific principles and ideas that brings the best of returns to people. Also, the state needs to have a comprehensive taxation and public funding systems that will ensure that that public spending is funded adequately. If government does not balance its income and expenditure, it can easily lead to the devaluation of the nations currency which will lead to inflation in the nation (Wheeler, 2004 p4). This is because high debts must be absorbed by the Central bank and they have to respond by devaluing the currency and this leads to the higher prices of goods and services in the country. This is perhaps best explained by the hyper inflation that hit Germany after the Second World War. This is because Germany was made to pay high amounts of money for causing the war and because there was limited money in its coffers, the currency had to be devalued and this led to hyper inflation. In some cases, government debt policy encourages the sale of government bonds to raise revenue from the public in order to fund public spending. Local governments issue municipal bonds to help the government to raise more revenue in addition to taxation to ensure that the government remains in a positive position to be able to provide all the necessary services for the larger society without destabilizing the economy. Allen, Richard & Tommasi, David (2001) Managing Public Expenditure Paris: OECD Austin, Britten, F. (1939) “Income Tax – Who Pays More” in The Rotarian London: Rotary Press Bartik, Timothy, J (2003) “Local Economic Development Policies” Upjohn Institute Staff Working Paper No 0309 W. E. Upjohn Institute Kalamazoo, Michigan Blackley, Edward James & Leigh Green Nancy (2010 Planning Local Economic Development: Theory & Practice California, Thousand Oaks: SAGE Publications. Cataldo, Anthoy, J & Savage, Arline, A (2001) US Individual Federal Income Tax Oxford: Elsevier Science. Federal Reserve (2011) “Flow of Funds Accounts of the United States: Flows & Outstanding 4th Quarter, 2010” Washington DC: Board of Governors of the Federal Reserve System Internal Revenue Service (2011) Understanding Taxes – Theme 2: Taxes in US History – Lesson 1: Evolution of Taxation in the Country Retrieved from: http://www.irs.gov/app/understandingTaxes/teacher/whys_thm02_les01.jsp on June, 9, 2011. Jensen, P. Jens (1934) “Property Taxation in USA” Massachusetts Property Tax Statute Boston: Barlowe Publishers McEntire, David A. & Dawson Gregg (2001) “The Intergovernmental Context” in Emergency Management: Principles & Practice for Local Governments Jorion Press pp58 – 71 Mitra, Srobona (2007) Is the Quality of Debt a Constraint for Monetary Policy New York: IMF Working Paper. Riley, Susan, C & Colby, Peter W. (1991) Practical Government Budgeting: A Workbook for Practical Managers Albany: State University Press. Samson, Williams, D (2003) “History of Taxation” in The International Taxation System Eds Lymer Andrew & Hasseldine, John Norwell, MA: Kluwer Academic Publishers Wheeler, Graeme (2004) Sound Practice in Government Debt Management Washington DC: World Bank. Read More