Creating Public Value with Tax and Spending Policies: The View from Public Economics

Published date01 July 2014
Date01 July 2014
Laura Kalambokidis is professor
of applied economics at the University
of Minnesota, where she teaches public
f‌i nance and conducts research on issues
related to federal and state tax policy. As
Minnesota’s state economist, she is respon-
sible for developing twice-yearly revenue
and economic forecasts. Prior to joining
the University of Minnesota, she was a
f‌i nancial economist in the U.S. Department
of Treasury’s Off‌i ce of Tax Analysis.
Creating Public Value with Tax and Spending Policies: The View from Public Economics 519
Public Administration Review,
Vol. 74, Iss. 4, pp. 519–526. © 2014 by
The American Society for Public Administration.
DOI: 10.1111/puar.12162.
Laura Kalambokidis
University of Minnesota
According to the framework rooted in public economics,
governments can create public value by focusing tax
and spending policies on remedying market failures and
addressing concerns about fairness embodied in a social
welfare function. By pursuing optimal tax and spending
policies, governments navigate the omnipresent trade-of‌f s
between equity and ef‌f‌i ciency. Of course, in practice, the
process by which policies are adopted does not resemble
the planner’s problem in social choice theory. In addition,
real f‌i scal policies do not look much like the recom-
mendations that arise from the optimal tax literature.
Governments operate in public choice environments
that are not conducive to focused remedying of market
failure, and they suf‌f er from their own tendencies to fail
to achieve their objectives. Nevertheless, many of the tools
are in place to help the federal and state governments
focus tax and spending in ways that can maximize public
The year 2011 was a low point for U.S. f‌i scal
policy. Congress created a f‌i nancial crisis
by failing to raise the federal debt ceiling
to accommodate growing budget def‌i cits. A subse-
quent deal between congressional leaders and the
White House prevented the unthinkable—default
on U.S. sovereign debt—but did nothing to address
the long-term def‌i cit problem and could not prevent
the unprecedented downgrading of U.S. govern-
ment bonds by the credit-rating agency Standard &
Poor’s.  e bipartisan congressional supercommittee’s
failure to propose a def‌i cit-reduction plan triggered
the threat one year later of a recession-inducing fall
from a f‌i scal clif‌f . Meanwhile, across the country,
experts of all stripes called for
state and federal tax reform,
but Congress and state legisla-
tures did not budge. While tax
and spending policy presents a
prime opportunity for creating
public value, few would argue
that policy makers’ actions—or,
more accurately, inaction—dur-
ing 2011 succeeded in doing
so. Moreover, the setting as I write in October 2013
is not encouraging.  e country has just emerged
from another budget and debt ceiling impasse, this
one leading to a 16-day partial federal government
shutdown.  e deal that ended the shutdown funded
the government and suspended the debt limit only
temporarily, extending f‌i scal policy uncertainty into
Discouraging news about tax and spending policy,
however, is mitigated by signs here and there of
governments trying to make better choices about how
to obtain and invest tax dollars: governments trying
to do the right things and do those things right. For
example, since the 1990s, Washington State policy
makers have used a cost–benef‌i t framework to identify
policies that can deliver the greatest return to the
state’s investments, particularly in the area of criminal
justice (Pew Center on the States 2012b, 2). In early
2012, the Pew Center on the States reported that it
was helping other states adopt the Washington model.
e Pew Center also highlighted 13 states that had
taken steps to provide legislators with high-quality
assessments of the ef‌f ectiveness of business tax incen-
tives (Pew Center on the States 2012a, 1). In April
2012, the U.S. House Ways and Means Committee
held hearings to “conduct a thorough review of the
various targeted provisions in the [tax] Code com-
monly referred to as ‘tax extenders’” (2012, 1)—those
tax benef‌i ts with expiration dates that are typi-
cally routinely extended with little examination by
Congress. Ref‌l ecting the frustration of a witness to
perhaps too many of Washington’s failings, Urban
Institute resident fellow Howard
Gleckman (2012) wondered
whether the hearings “could
be a case of Congress doing its
actual job.”
Well, could they be? Are the
hearings, reports, program
evaluations, and cost–benef‌i t
analyses signs of governments
Creating Public Value with Tax and Spending Policies:
e View from Public Economics
While tax and spending policy
presents a prime opportunity
for creating public value, few
would argue that policy makers’
actions—or, more accurately,
inaction—during 2011 suc-
ceeded in doing so.

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