Principles of public finance Pubic finance:

It is the field of economics that studies Gov. activities that require expenditures and the alternative means of financing such Gov. expenditures. It is important to know the dimensions and aspects of Gov. expenditures and taxes and to know the role of the Gov. in the economy and its impact on resource use from one side and on the well-being of citizens from the other side.

The role of the gov. in different economics systems:

1. The purely market system: All the factors of production are owned by individuals, it is 100% private ownership. The role of the Gov. was limited only in the following three functions: Providing justice. Providing national defense and security. Providing essential infrastructure that the private sector wasn't able to perform profitably. 2. The purely command economic system: The gov. in command economics owns all the factors of production, takes all decisions; a central plan is used to allocate resources. 3. The mixed economic system: This economic system is a combination of both, market and command economy, since part of resources and factors of production are owned by the state and another part is owned by individuals.

To correct market failures:

It reflects monopoly, externalities, provision of merit goods, to achieve equity and to achieve macro-economic goals.

Difference between public finance and fiscal policy:

Public finance is concerned with the theoretical study of the tools of the fiscal policy; meaning, structure, size, objectives, limits and rules of public expenditure taxes and borrowing. Fiscal policy is concerned with the applied side of the analysis.

The essential objectives of the fiscal policy:

To control the level of economic activity: For example in case of inflation, the Gov. reduces its expenditures and increase direct taxes to control the level demand. In case of depression the Gov. increases its spending and reduces taxes to motivate individual spending and the economic activity in general.

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To provide essential goods and services: a. Public goods: they are mainly the infrastructure in the society such as roads, streets and water. b. Merit goods: they are mainly education and health care.

3. To affect the allocation of resources: The Gov. can use its fiscal policy; if the Gov. needs to encourage a special activity such as tourism, it reduces taxes on income and revenues generated from these activities. Such financial facilities could be used also to affect the allocation of resources geographically. 4. To redistribute income and wealth among people: The fiscal policy can be used to reduce the gap between the rich and the poor. Income: is the amount that people earn from work and it's measured as a flow of returns overtime. Wealth: it refers to people possessions that are worth money "assets" such as a house and it can be measured at a point in time. The redistribution of income: The poor pay little tax but receive benefits from the Gov. and the rich receive few benefits but pay most tax. So, the more income people earn, the more the income tax they pay.

How income and wealth are redistributed?

1. progressive taxes: Income tax takes a progressively higher percentage of incomes from people as they get richer. Taxes narrow the gap between people earning different incomes. Means of benefits: Poor people are entitled to benefits such as supplementary benefits and family income supplement. Other: a. Giving more people better education enables them to earn more and build more wealth. b. Encouraging people to run and own their own business.

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Meaning of public expenditures:

It is all amount of money spent by Gov., or any public institution to achieve a public or social interest.

Public expenditures consist of two parts: 1. Real spending: 2. Transfer payments:

Consists of spending by the central Gov. and the Gov. get return.

They aren't payment for goods; it is considered as part of public expenses, yet actual spending is done by household and firms who receive these payments with no return "the increase in no. of retired

and unemployed means public spending on transfer payment has increased.

There are two types of Gov. revenues:

1. 2.

Normal types of revenues such as:

Abnormal types of revenues such as:

a. b. Borrowing Issuing money

a. b.

Taxes: it depend on the ability to pay and it can't be avoided Fees: it is based on benefits and it can be avoided.

The direct tax:

It is imposed usually on income and wealth and paid directly by the tax payer to the Gov.

The indirect tax:

It is levied on goods and services, on spending and consumption, and it is included in the price of such goods and services. Income tax: It state that each person is allowed to earn a certain limited sum free tax, this is called tax free allowance. Gross income: It is the income before tax. Taxable income: It is the gross income tax allowance. Benefit VS ability to pay principles: The benefit principle: Individuals should be taxed in proportion to the benefit they receive from Gov. The ability to pay principle: It states that the amount of taxes people pay relate to their income and wealth. The higher the wealth or income, the higher the taxes.