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

• Author: Laura Kalambokidis
• DOI: http://doi.org/10.1111/puar.12162
• Published date: 01 July 2014
• Date: 01 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.

E-mail: kalam002@umn.edu

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

value.

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

2014.

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.