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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 1

Outlines of public finance - Chapter 1

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue



Public Finance Has Distinguishing Characteristics.

Man is by nature a social being, and consequently
seeks the association of his fellow creatures. As this
association develops and becomes more complex, the
need for establishing and enforcing certain regulations
appears, and governments are inaugurated to safeguard
property and insure the orderly conduct of the com-
munity. The extent of governmental activities depends
largely upon the degree of advancement in civilization.
Among the primitive and backward peoples, the functions
of governments are few and ill defined; whereas in
highly civilized states they are numerous and, although
often very complex, they are, nevertheless, well defined.
The march of progress in the development of government
is from the simple to the complex, and the more complex
the organization the more numerous and difficult are the
problems which present themselves.

The members of an advanced social group frequently
fail to comprehend the extent to which they are indebted
to their government for the services which it renders
them. The Constitution of the United States, for ex-
ample, guarantees to the citizen the protection of life,
liberty, property, and the pursuit of happiness; yet he
often forgets that this guarantee entails the maintenance
of armies and navies, of legislatures and judicial systems.


Th* postman makes his semi-daily delivery of mail
without a consideration by the ordinary citizen as to
why or how. The modern progress in science, literature,
agriculture, industry, and commerce is a matter of pride
to every citizen, although the contribution of the various
governmental units toward such progress is often for-
gotten. Government aid has fostered the development
of educational institutions, the result of which has been
that the development of science and literature has been
hastened; experiment stations and schools have trans-
formed agricultural methods; active health campaigns
have wiped out the cause of diseases and pestilence;
patent laws have stimulated inventions for the develop-
ment of industry, and copyright laws have enhanced
the quantity and quality of literature; while sound
currency and banking systems have made possible
modern commercial life.

A government has no superhuman power in exercising
the important function of supplying materials and serv-
ices to a social group. It cannot create the materials
and services, but must either secure them from some
already existing source, or cause them to be produced,
either by its own activities or by the activities of some other
agency. The methods used by governmental units in
securing materials and services differ widely, and after
they have been secured the uses to which they may be
put also differ widely. None the less, it is a part of the
business of governments to secure the means of supplying
the various demands made upon it by its citizens. The
subject matter of Public Finance has to do with that
group of governmental functions which have to do with
the getting and using of materials and services.

2. The Word "Finance" Has No Definite Mean-
ing. In the English language, at least, no definite
meaning is attached to the word " finance." A descrip-
tive adjective is often needed to clarify the intended
meaning and to avoid ambiguity. Such expressions as


"private finance/' " corporation finance/' "high finance/'
and " public finance" are common in the daily newspapers.
There are treatises on corporation finance, for example,
which explain the nature and business methods of cor-
porate organizations. The use of the term "finance"
in connection with a firm, business, or individual fre-
quently has reference to the condition of the capital
or assets, as, for example, "the finances of this business
are in good condition."

The ambiguity which arises with the use of the word
"finance," unmodified, may be avoided when the use of
the adjective is contemplated. Two forms of the word
appear " financial" and "fiscal" and a uniform use of
the words for particular meanings would be conducive to
clearness. The word "financial" has had no definite
meaning. A financial magazine, for example, treats of
stocks, bonds, dividends, and similar items, while the
financial condition of a country has to do with its money,
credit, and banking. The word "fiscal," however, has
usually had a more definite meaning, although its use has
not always been clearly separated from that of "financial."
For the most part, however, "fiscal" has been used in
referring to the expenditures and revenues of political
bodies. A financial year, for example, might refer to any
number of conditions, while a fiscal year more definitely
refers to the revenues and expenditures of a political unit
for a particular period of time. The fiscal year of the
Federal government begins July 1st and ends June 30th.
In this book the word "fiscal" will be used to refer to
conditions which are related to revenues and expenditures
of political bodies.

Public Finance is primarily concerned with fiscal as-
pects, yet these aspects are often substantially influenced
by financial circumstances. A sound and efficient banking
and currency system, for example, materially aids in the
collection and expenditure of public revenues. It may
not always be possible, indeed, to separate the fiscal from


the financial conditions, as when, in times of war, a gov-
ernment issues fiat money or treasury notes for the pur-
pose of securing funds. Fiscal authorities are likewise
concerned about the financial conditions of industries,
because it is to productive enterprises that they must
turn as an important source of revenue. Panics and
crises, moreover, do not affect industries alone, but the
fiscal condition of political bodies as well. A distinction
can generally be drawn between aspects of a fiscal and of
a financial nature, and our concern in this book will be
with the former aspects which deal with expenditures
and revenues of governments.

3. Public Finance Is a Division of Economics.
There has been some discussion as to whether the study
of Public Finance properly belongs in the field of Econom-
ics. Some writers treat fiscal problems in their works on
general economics, while others treat the problems
under the caption, " Economics and Public Finance."
Still other writers on general economics give no discus-
sion of public expenditures and revenues. The great
amount of attention which has been devoted to a dis-
cussion of private consumption, production, and dis-
tribution has emphasized the importance of these phe-
nomena, yet the fact remains that public revenues and
expenditures are of sufficient economic consequence to
command the attention of students of economics.

The principles which underlie the study of Public
Finance are clearly the same as those which underlie the
study of the other fields of economics. Economics deals
with laws which govern the activities of individuals in
the expenditure of energy to supply their wants. Public
Finance is also a study of the exertion of individual effort
to supply wants. Governments secure, through taxes or
otherwise, some of the returns from individual effort as a
prerequisite to supplying materials and services. The
individual is concerned with comparing the utility fur-
nished by the government with the utility he could have


secured had the government made no demands upon him.
No individual income can remain unaffected when a part
of it is taken in the form of a tax.

Public funds are frequently used, either to aid private
production or directly to carry on productive enterprises.
Those who are interested in efficient production must be
concerned about such uses of public funds, and those who
have the direction of public funds for productive enter-
prises should know the economic principles upon which
efficient production rests. The successful management of
a government industry must be based upon just as sound
economic principles as is a successful industry conducted
by individuals. When the effect of securing revenues in
different ways is considered from the standpoint of jus-
tice, some definite theory of distribution must be in mind.
The suggestion to adopt a rigorous single tax, which would
take the economic rent of land in taxes, immediately
arouses the interest of those who are concerned with rents
and land values. Any income, whether it is paid from a
public purse or from a private purse, is of economic con-
cern. Fiscal officials are concerned with the relationship
of cause and effect in the collection and use of public
revenues; here the thought is guided by the same eco-
nomic laws that govern in the problem of the distribution
of wealth. The underlying principles of Public Finance,
then, are the same as those upon which all sound economic
reasoning is based.

4. Public Finance Is Related to Other Sciences.
The subject matter of Public Finance is of such a nature
that its study cannot be separated from that of other
sciences. Students of the subject must take frequent
excursions into the related fields of Political Science,
History, Sociology, and Ethics. Likewise, those who are
primarily interested in these related subjects find that
account must be taken of the workings of the principles
of Public Finance.

Relation to Political Science and History. The principles


which underlie a study of expenditures and revenues have
a dependence upon Political Science second only to that
which they have upon Economics. The form of govern-
ment under which the citizens live and the officials work
is of the utmost importance. Differences in the method
of conducting fiscal affairs would necessarily be found in
states of autocratic, democratic, socialistic, or individu-
alistic governmental tendencies. Many political re-
straints exist, also, either because of constitutional or
legislative provisions, which must always be taken into
consideration by the fiscal student or official. In the
United States, for example, a tax would not be levied
upon exports because of constitutional restrictions to that
effect. Political expediency, moreover, is often so im-
portant in fiscal matters that it takes precedence over the
soundness of economic principles which might be applied.
Revenues must be had quickly, at times, and that method
is used which will supply the needed funds, notwithstand-
ing the economic objections which might be raised.

The interest in Political Science cannot be separated
from the principles of Public Finance. Revenues must
be secured to carry out the policies of executives and
legislators. Many of the compromises which have been
written into constitutions and statutes have been formu-
lated by fiscal considerations. Officials must always be
concerned about the exaction and use of funds, for there
is no surer and quicker method for gaining the disfavor of
a constituency than through the misuse of public revenues.

That would be a poor fiscal policy which took no con-
sideration of the activities of the past, with then- result-
ing successes or failures. A study of history, consequently,
is an invaluable asset in helping to formulate modern
fiscal policies. Countries have different characteristics,
thek citizens have peculiar traits, and it is only by a study
of history that these can be properly interpreted. It is
because of these inherent differences that a successful
system for obtaining revenues in one country would abso-


lately fail to give satisfaction in another. The student of
history, moreover, can be no less interested in what Pub-
lic Finance has to offer. In tracing revolutions and con-
stitutional reforms, for example, he will frequently find
that fiscal considerations have had an important in-
fluence, if, indeed, not an overwhelming one.

Relation to Sociology and Ethics. The problems of social
reform and those of Public Finance are, at present, in-
separably related. No longer is the individual held en-
tirely responsible for bettering social conditions, but the
various governmental units have adopted this activity as
one of their primary functions. So extensively have they
entered this field that one of the largest single items of
expenditure is for the classes of delinquents, defectives,
and dependents. The enormous sums which are spent
annually upon social institutions are of vital interest to the
students of expenditures and revenues. The student of
sociology is no less interested. He must be concerned
with the results of government activities of this nature,
and compare these results with what has been accom-
plished through other avenues of endeavor.

Ethical considerations must not be omitted from the
discussion and formulation of fiscal principles. When the
burden of a tax does not rest where it is placed, but is
shifted on to some one else, the question of justice im-
mediately presents itself. The same question also arises
when proposals are made to tax some individuals or classes
at a higher rate than others. The fiscal system is fre-
quently called upon to help solve the problem of evil
through the regulation or elimination of undesirable in-
dustrial or social institutions. Examples of this are the
use of taxes to eliminate the circulation of state bank
notes, and to regulate the use of intoxicating liquors. It
is clearly demonstrated, then, that Public Finance is far
from being an independent science, but draws heavily
from other fields as well as supplies much material to


5. Different Methods of Study May Be Used. Public
Finance is properly grouped among the social sciences,
and, as just indicated, it is closely related to a number of
these. Its field is definite enough, however, to admit of
independent scientific investigation. It deals at once
with principles and their application ; it is, therefore, both
an art and a science. The art nature appears when the
formulas which have been discovered through the scien-
tific processes of investigation begin to be applied. It
was a scientific process, for example, by which it was dis-
covered that the burden of taxes does not always rest
where it is first placed. The art nature appears when
this principle of shifting burdens begins to be used to cor-
rect injustices, and to inaugurate a more symmetrical
fiscal system. Both aspects are important the scientific
aspect to the student who is primarily interested in dis-
covering general truths and laws, and the art aspect to
the student who is concerned with the application of
formulated principles for the purpose of securing desirable
changes in the fiscal conditions.

Method of Study. Some writers have entered exten-
sively into a discussion of the proper methods of approach
to the study of Public Finance, but space does not war-
rant an extended discussion of this subject here. Some
have maintained that the study is primarily " inductive,"
while others have been just as strong defenders of the
" deductive" method of approach. As a matter of fact,
both methods have a place and are used simultaneously.
Since it is to a great extent a derived science, it necessarily
borrows a number of rules and laws, which, as general
principles, are bases for further reasoning. With the use
of these principles from which to start, it may be con-
sidered as a deductive science. These principles them-
selves have been derived, on the other hand, through the
processes of inductive reasoning the formulations have
been made only after bringing together a number of indi-
vidual cases from which conclusions could be drawn.


While the modern study, then, partakes of both inductive
and deductive reasoning, yet its early development was
marked by the almost exclusive use of the inductive
method. Comparative and historical studies also have an
important place in the study of Public Finance, for much
can be gained from knowing what other governmental
units are doing and have done to determine fiscal prin-
ciples and to solve fiscal difficulties.

Extent of Study. More important than method of
study, perhaps, are the classes of persons whose interest
Public Finance should command. The idea has been too
prevalent that a knowledge of its principles would be use-
ful only to the officials who are handling the business of
the government, and that they have no practical applica-
tion for the average citizen. No belief could be more
erroneous. While it is of utmost importance that officials
who have the direction of fiscal policies should be well
versed in the underlying principles of Public Finance, it
is none the less true that their constituents should be well
informed in the same field. Never before in the history
of the world has such a knowledge been so vital. De-
mocracy has been growing apace, with the prevailing idea
that it is the panacea for political ills. There is no virtue
in self-government itself to cure these ills, nor is there any
condition hi democracy to insure its survival, unless the
voters be properly grounded in the principles necessary
to insure an enduring state. The mere vote is not suffi-
cient; the voting must be intelligent as well. The manner
in which the purse strings are controlled is of paramount
importance, for in no field of governmental activity are
corruption and abuse so likely to creep in. The modern
writer should attempt to dispel the current notion that
fiscal treatises are dismal and uninteresting, and should
aim to vitalize them in connection with the life of every

6. The Systematic Study of Fiscal Problems Began in
Italy. Public Finance is, at present, usually given a subordinate place in the study of economics. In the order of
development, however, the study of Public Finance is
much older than that of the general principles of eco-
nomics in fact, it was the center around which the early
economic discussion developed. It was not until after
the Middle Ages, however, that fiscal problems reached a
degree of importance to warrant careful and systematic

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