Public Finance Reform Essay ⋆ Business Essay Examples ⋆ EssayEmpire

Public finance is concerned with the financing and administration of government activities—and thus includes taxation, expenditure, fiscal policies, monetary reform, and so forth. Public finance reform seeks to streamline and improve these activities.

Tax Reform

Not all advocates of tax reform want the same thing. In the United States, tax reform efforts in recent years, and ongoing, have focused separately on the abolition of income tax; the adoption of a flat tax instead of the progressive income tax rate in use; the “FairTax” that would replace federal income tax with a federal progressive sales tax; shifts of the tax burden to or away from one class of society or another; and state-specific concerns, such as the ongoing debate over sources of tax revenue in New Hampshire, the only state with neither sales nor income tax. In the United States, perhaps more than in some other countries or perhaps simply with uniquely American rhetoric, there is a special emphasis on the importance of fairness in taxation, harkening back to the “taxation without representation” thorn in the Patriots’ side.

The means by which fairness is achieved can vary from party to party, persuasion to persuasion; for some it may mean taxing principally those who can afford to be taxed, for others it means a flat tax, and for still others it means taxing only those who participate in the systems and services funded by the tax. For some, a cigarette tax is a valid way to attach a tax to an opt-in item, the use of which no one enters into involuntarily; for others, it is an unfair tax that creates a special class of citizen.

Monetary Reform

Monetary reform calls for changes in the creation of money and maintenance of its supply. In the past, monetary reformers typically wanted a change to the government’s stance on gold and silver—either the return to a gold standard or the adoption of bimetallism. There are still some who want to readopt a gold or other precious metals standard, but 21st-century monetary reformers are more likely to focus on the abolition of central banks and fractional reserve private banking, in favor of full reserve private banking.

Economists like Ludwig von Mises and the Austrian school criticize fractional reserve banking— in which banks are legally obligated to keep only a fraction of their cash in reserve, expanding the money supply by loaning money to one client that still belongs to another client—as a form of fraud, and blame it for the highs and lows of the business cycles. Money is created every time a new loan is approved, but this money is not represented by any-thing tangible; money represents obligation where it once represented a receipt for gold or other tangible assets. Full reserve banking was in use until the 19th century, and some reformers seek a return to it as an inoculation against the economic upheavals of the last two centuries. Critics of full reserve banking point out that a return to it would not be a reform of monetary policy so much as an abandonment of it, as banks would be all but unable to issue loans at all, and there would be no means through which the government could manipulate the money supply. (Interestingly, Islamic banking comes close to full reserve banking, because Muslim religious law proscribes the charging of interest. In practice, the banks find ways around this; a mortgage transaction may be conducted by the bank buying the home and selling it to the buyer in installments, rather than explicitly lending the funds to the buyer.)

Public finance reform is also a concern during times of transition. China has faced issues of reform as it adopts some free market initiatives; Hungary went through the same debates in the 1990s, when it shifted from a socialist economy to a free market one.

Bibliography:

Anthony B. Atkinson and Joseph E. Stiglitz, Lectures in Public Economics (McGraw-Hill, 1980);
Robert Barro and Vittorio Grilli, European Macroeconomics (Palgrave Macmillan, 2007);
Joseph E. Stiglitz, Economics of the Public Sector, 3rd ed. (Norton, 2000).

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