Public or Government Finance

Public or government finance

Public or government finance is a field of economics that pays for government activities; it is always a concern and an ongoing question of financing of those activities.

Countries finance vary, some countries choose to finance a much wider range of activities and organizations with public money than others. It mainly depends on the members of the managing body, board or council of the public sector entities who are mostly appointed by an executive governmental body, they are either elected by the public or appointed by a legislative body.

Regardless of the extent in the public involvement and expenditures, most public sector entities use the cash method as basis of accounting, accordingly transactions are recognized only when there is an exchange of cash. Only recently, the benefits and reservations about the level of costs involved, the use of accrual accounting has become more popular as it recognizes economic events regardless of transactions.

Accrual accounting has the largest acceptance in financial reporting and is now the primary basis for the financial reporting process of public sector entities. However, a large number of public sector entities use a mix of both cash and accrual for different phases in their accounting cycle.

Government operations and expenditures

Activities involved in the governing process that the government is responsible of, it is about ruling and supervising whether a state or a group of people. In order to produce value for citizens, gGovernment exercises its power to adopt and enforceoperations have the power to make and the authority to enforce laws and rules.

Government's expenditures are classified into three general categories:

1. Government consumptions: good and services.
2. Government investments: infrastructure investment, research spending.
3. Transfer payment: transfer of money that is not expenditures paid for goods and services but for payment such social security, health care, income security,...

Financing government expenditures

Government financing are mainly collected by:

1. Taxes
2. Government borrowing
3. Asset sales or Seigniorage

Different governments choose to finance their activities in different set ups; however, the choice has a high impact on the distribution of income and wealth.

Taxes

Taxes can be defined as "A fee charged ("levied") by a government on a product, income, or activity. " *1 Or "Required payments of money to governments that are used to provide public goods and services for the benefit of the community as a whole.

Taxes are to found to create revenue for government and to finance government expenditure. It finances public goods and services./p>

Direct taxes: are taxes levied directly on personal or corporate income.

Indirect taxes: are taxes levied on the price of a good or service.

Government Borrowing:

In cases whenf the government is running facing a budget deficit, it has is needed to borrow this money through the issueissuing of the government debt such as Treasury Bills and or long-term government bonds.

The process is normally done by the central bank and involves selling debt to the bond and bill markets.

Seigniorage

"Seigniorage is usually defined by reference to a supposed earlier stage in which full bodied coins were minted by the State. Each coin would contain an amount of precious metal equal in value as a commodity to the coin's exchange value as well as to the nominal value stamped on the coin. The State's mint would accept gold for coining, assessing a fee, called a seigniorage charge. So long as that fee exceeded the mint's costs, the State would receive net revenue from its minting operation seigniorage revenue. If for example, a gold miner brought a pound of gold to the mint for coining, the State might charge a fee equivalent to one ounce of gold and provide fifteen one-ounce coins.

If minting costs were equal to the value of half an ounce of gold, the State would gain in purchasing power an amount equal to half an ounce of gold. In turn, the gold miner would have gained purchasing power equal to 15 ounces of gold, less mining costs."

Financing in different public entities around the world

In the Uunited Sstates, the taxes and the amount of each tax varies from one state to another, however, according to Congressional Budget Office, a preliminary analysis indicates that income taxes and payroll taxes account represent for four out of every five federal revenue dollars. Corporate income taxes contribute represent another 12 %. Excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts earnings of the Federal Reserve System and various fees and charges make up the balance. The composition structure of tax revenue has changed markedly significantly over the past half centurylast fifty years, The with payroll taxes contribution has hadng an increaseing, and corporate income and excise taxes a decreaseing, as share of the total., Only but the share provided byof individual income taxes has remained roughly constantstabile.

Payroll taxes swelledhas increased following after the creationfoundation of Medicare in 1965. Taxes for Medicare taxes, combined together with with periodicconstant increases in Social Security taxes, caused resulted in payroll tax revenue to growth from 1.6 percent of GDP in 1950 to more than 6 percent since 1990. Payroll taxes also includeconsist of unemployment insurance, railroad retirement, unemployment insurance, and federal workers' pension contributions.

Revenue from the corporate income tax fellcut down from about 5 perfrom between 5 and 6 percent of GDP in the early 1950s to 2.1 percent of GDP in 2008.

Excise taxes fell steadily throughoutremained stabile during the same period, from nearly 3 percent of GDP in 1950 to 0.5 percent in recent years.

The remaining other sourcessources of revenue of government which had less variation, and contributed have fluctuated less, together claiming between 0.5 and 1.0 percent of GDP since 1950, while and standing near the touch the bottom of that range in 2008.

In a very recent report, issued in January 2010 by the IFPI, it was stated that the total state revenue in Indiana was approximately $25.5 billion in FY 2009. This includes state taxes, Federal aid, and various state fees. Taxes accounted for approximately 55 % of Indiana's total state government revenue in the ?scal year 2009. Federal aid accounted for approximately 34 % of total revenues, and revenue from permits, licenses, and various other sources accounted for just over 11%. Like most states, Indiana relies heavily on sales and income taxes to fund state government. More than 75 % of state tax revenue comes from the general sales tax (approximately 44.5 % in FY 2009) and the individual income tax (approximately 30.9 percent in FY 2009). The remaining 25 % of tax revenue is from various other taxes. We consider motor fuel taxes (a type of selective sales tax), the corporate income tax, riverboat taxes, cigarette taxes, utility receipts taxes, insurance taxes, inheritance taxes, and alcoholic beverage taxes. These are the major sources of state tax revenue in Indiana accounting for approximately 98 % of tax revenue for FY 2009. There are also other taxes (?nancial institutions tax, railroad car property tax, race track wagering, pari-mutual taxes, charity gaming taxes, hazardous waste disposal taxes) that raise a small amount of revenue and that we do not consider in this analysis both because of their relatively small magnitude size. and the difficulty of allocating these taxes to the county level. Additional state revenue comes from a variety of fees and miscellaneous sources including professional licenses, sale of state property, etc.

References:

1. http://www.investorwords.com/4879/tax.html
2. http://www.investordictionary.com/definition/taxes.aspx
3. http://www.taxpolicycenter.org/briefing-book/background/numbers/revenue.cfm
4. http://tutor2u.net/economics/revision-notes/as-macro-government-borrowing.html
5. Developments in Performance Measurement Structures in Public Sector Entities, 2008, www.ifac.org
6. www.indianafiscal.org/docs/IFPI_IntrastateTax.pdf Intrastate Distribution of State Government Revenues and Expenditures in Indiana, 2010
7. Http://www.k.faculty.umkc.edu/keltons/Papers/.../Seigniorage%20or%20Sovereignty.pd

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