Department of Economics Honours Programme in Economics 2017 Public Economics [Module code 11143-771] CGW Schumann Building Room 510 Tel: 808-2737 E-mail: ada@sun.ac.za Module lecturers Krige Siebrits (coordinator) CGW Schumann Building Room 509A Tel: 808-2234 E-mail: krigesiebrits@sun.ac.za Andreas Freytag Friedrich Schiller University (Jena, Germany) Honorary Professor (Stellenbosch) E-mail: a.freytag@wiwi.uni-jena.de Internal Moderator: Prof AP de Villiers Copyright 2017 University of Stellenbosch All Rights Reserved 1
A. GOALS The goals of the module are to: develop an understanding of various views on the role of the government in an economy; master the principles of public economics by means of study of the theories of public choice, government expenditure and taxation; and study the influence of public sector activities on the economy at the microeconomic level and with special reference to South Africa. B. MODULE CALENDAR AND LECTURE SESSIONS The dates, themes and lecturers of the lecture sessions are given below. Most sessions will take place on Mondays from 14:00 to 16:00 in the Jan Sadie Lecture Room (Room 207B) in the CGW Schumann Building. As shown in the table below, the exception will be Session 8 on 12 September 2017. Any changes in the programme will be announced in advance. Attendance of all sessions is compulsory and punctuality is expected at all times. Students are also expected to read the prescribed literature before the lectures. Sessions No Date Time Topic Lecturer 1 17-07-2017 14:00-16:00 Introduction Siebrits 2 24-07-2017 14:00-16:00 Market failure: Efficiency issues (1) Siebrits 3 31-07-2017 14:00-16:00 Market failure: Efficiency issues (2) Siebrits 4 07-08-2017 14:00-16:00 Market failure: Equity Siebrits 5 14-08-2017 14:00-16:00 Intergovernmental fiscal relations Jansen 21-08-2017 6 28-08-2017 14:00-16:00 SEMESTER TEST 04-09-2017 RECESS 7 11-09-2017 14:00-16:00 Public choice Freytag 8 12-09-2017 16:30-18:30 Government failure Freytag 9 18-09-2017 14:00-16:00 Theory of taxation: Efficiency and equity (1) Jansen 10 25-09-2017 14:00-16:00 Theory of taxation: Efficiency and equity (2) Jansen 11 02-10-2017 14:00-16:00 Direct taxation of individuals Jansen 12 09-10-2017 14:00-16:00 Direct taxation of companies Jansen 13 16-10-2017 14:00-16:00 Indirect taxation Jansen 2
C. ASSESSMENT Assessment will take place by means of a test, an essay on the topics listed in Section D and a final examination. All components are compulsory and must be completed. The test will take place on 28 August 2017, and will cover the work of the first five sessions. Students who cannot write the test on that day will have to take another test on the first five sessions on the same day they write the Public Economics examination. Students who wrote the test on 28 August will not be allowed to write the second test to improve their marks. More information on the date and scope of the examination will be provided in due course. The weights of the assessment components are as follows: Component Percentage of final mark Test 20 Essay 30 Examination 50 Total 100 D. ESSAYS The submission date for the essays will be 09 October 2017. The topics are as follows. 1. The influence of military expenditure on economic growth. 2. Policy measures to deal with internalities. 3. A critical assessment of principles of distributive justice. 4. A critical assessment of Niskanen's model of bureaucracy. 5. Should zero-rating of VAT be scrapped? 6. An evaluation of wealth taxes in accordance with the properties of a good tax system. 7. A critical assessment of intergovernmental transfers in South Africa. 8. A critical analysis of fiscal policy to address economic inequality. No more than FOUR students may select the same topic. Allocation of topics will be on a firstcome, first-served basis. First and second choices should be sent electronically to krigesiebrits@sun.ac.za by 23:59 on 04 August 2017. Essays must comply with the standards of academic writing, should not exceed 2 000 words and be presented in 1.5 line spacing and font size of 12. Omission of word count and deviation of more than 100 words (either side) will be penalised. Essays are to be submitted electronically in Microsoft Word format and screened via Turnitin. Students are reminded that plagiarism is a serious offense. Students are welcome to discuss their essay framework with any of the lecturers before embarking on their research. 3
E. PRESCRIBED BOOKS The prescribed book is: Black, P.A., E. Calitz, T.J. Steenekamp and associates. 2015. Public Economics. 6 th edition. Cape Town: Oxford University Press. [AVAILABLE AT VAN SCHAIK'S BOOKSHOP IN THE NEELSIE STUDENT CENTRE AND IN PROTEA BOOKSHOP, ANDRINGA STREET]. The prescribed and recommended readings also include material from: Buchanan, J.M. and G. Tullock. 1962. The Calculus of Consent. Ann Arbor: University of Michigan Press (Chapter 6) [ON RESERVE IN THE JS GERICKE LIBRARY]. Mueller, D.C. 2003. Public Choice 3 rd edition. Cambridge: Cambridge University Press (Chapters 5, 6 and 20) [ON RESERVE IN THE JS GERICKE LIBRARY]. Olson, M. 1965. The Logic of Collective Action. Cambridge: Harvard University Press [ON RESERVE IN THE JS GERICKE LIBRARY]. Rosen, H.S. & T. Gayer. 2014. Public Finance. 10 th edition. New York: McGraw-Hill Irwin (Chapters 14-16) [ON RESERVE IN THE JS GERICKE LIBRARY]. F. STUDY OBJECTIVES AND READINGS This section contains the study objectives of and prescribed and recommended reading for each session. Links to the readings (except the books listed in Section E) will be made available on the module website (https://www.ekon.sun.ac.za/publicecon2017). Session 1 (17 July 2017: 14h00-16h00) INTRODUCTION Krige Siebrits give an overview of the study field of public economics; discuss the historical evolution of economic role of the government; and discuss the benchmark model of resource allocation and its real-world relevance. Town: Oxford University Press: Chapters 1 and 2. Tanzi, V. 1997. The changing role of the state in the economy: A historical perspective. IMF Working Paper WP/97/114. Washington, D.C.: The International Monetary Fund. 4
South African application (not prescribed) Burger, P. 2014. Facing the conundrum: How useful is the "developmental state" concept in South Africa? South African Journal of Economics, 82(2): 1-22. Session 2 (24 July 2017: 14h00-16h00) MARKET FAILURE: EFFICIENCY ISSUES (1) Krige Siebrits explain the nature and effects of market failures associated with public goods, mixed goods and externalities; and discuss the role of government with regards to market failures associated with public goods, mixed goods and externalities. Town: Oxford University Press: Chapter 3. Metcalf, G.E. 2009. Market-based policy options to control US greenhouse gas emissions. Journal of Economic Perspectives, 23(2): 5-27. Croson, R.T.A. 2008. Public goods experiments. In The New Palgrave Dictionary of Economics (2 nd edition) (edited by S.N. Durlauf and L.E. Blume). New York: Palgrave Macmillan. Sandmo, A. 2008. Public goods. In The New Palgrave Dictionary of Economics (2 nd edition) (edited by S.N. Durlauf and L.E. Blume). New York: Palgrave Macmillan. Session 3 (31 July 2017: 14h00-16h00) MARKET FAILURE: EFFICIENCY ISSUES (2) Krige Siebrits explain the nature and effects of market failures associated with natural monopolies and insurance-market problems; and discuss the role of government with regards to market failures associated with natural monopolies and insurance-market problems. 5
Barr, N, 1989. Social insurance as an efficiency device. Journal of Public Policy, 9(1): 59-82. Town: Oxford University Press: Chapter 4. Kessides, I.N. 2005. Infrastructure privatisation and regulation: Promises and perils. World Bank Research Observer, 20(1): 81-108. Session 4 (7 August 2017: 14h00-16h00) MARKET FAILURE: EQUITY Krige Siebrits discuss Nozick's entitlement theory and apply it to South Africa; explain and apply the Pareto and Bergson criteria for assessing the welfare effects of public policy; explain the role of targeting in government spending programmes; discuss the strengths and weaknesses of the benefit incidence approach and the behavioural approach to assessing the distributive effects of public spending; and discuss the rationale for and the potential and limits of conditional cash transfer programmes. Town: Oxford University Press: Chapter 5. Das, J., Q-T. Do and B. Özler. 2005. Reassessing conditional cash transfer programs. World Bank Research Observer, 20(1): 57-80. Hoddinott, J. 2007. Social protection: To target or not to target. IDS Bulletin, 38(3): 90-94. Van de Walle, D. 1998. Assessing the welfare impacts of public spending. World Development, 26(3): 365-379. South African application (not prescribed) Inchauste, G., N. Lustig, M. Maboshe, C. Purfield, I. Woolard. 2015. The distributional impact of fiscal policy in South Africa. Policy Research Working Paper Series No. 7194. Washington D.C.: The World Bank. 6
Session 5 (14 August 2017: 14h00-16h00) INTERGOVERNMENTAL FISCAL RELATIONS explain the economic rationale for sub-national governments and compare the merits of fiscal decentralisation and centralisation; discuss the Tiebout model and its relevance for intergovernmental fiscal systems; understand the issues in respect of borrowing powers and debt management at subnational level, describe the assignment of expenditure functions and revenue sources to national, provincial and local spheres of government in South Africa,; provide a critique of fiscal centralisation trends in South Africa; and distinguish between different kinds of intergovernmental grants and explain the conditions under which each could be used. Amusa, H. and P. Mathane. 2007. South Africa's intergovernmental fiscal relations: An evolving system. South African Journal of Economics, 75(2): 265-292. Town: Oxford University Press: Chapter 18. Calitz, E. and H. Essop. 2013. Fiscal centralisation in a federal state: The South African case. Southern African Business Review, 17(3): 131-155. Session 7 (11 September 2017: 14h00-16h00) PUBLIC CHOICE THEORY Andreas Freytag understand and explain the median voter theorem; understand and explain the logic of collective decision-making; discuss the role of the agenda setter; and explain logrolling. 7
Town: Oxford University Press: Chapter 6. Mueller, D.C. 2003. Public Choice 3 rd edition. Cambridge: Cambridge University Press: Chapter 5. Recommended reading Buchanan, J.M. and G. Tullock. 1962. The Calculus of consent. Ann Arbor: University of Michigan Press: Chapter 6. Mueller, D.C. 2003. Public Choice. 3 rd edition. Cambridge: Cambridge University Press: Chapter 6. Session 8 (12 September 2017: 16h30-18h30) GOVERNMENT FAILURE Andreas Freytag understand and explain the logic of collective action; explain state failure and market failure and their differences; understand the political economy nature of distributional problems; understand the nature and effects of corruption; and discuss the measurement of corruption. Mueller, D.C. 2003. Public Choice 3 rd edition. Cambridge: Cambridge University Press: Chapter 20. Recommended reading Aidt, T.S. 2003. Economic analysis of corruption: A survey. Economic Journal, 113(491): F632- F652. Town: Oxford University Press: Chapter 6. Olson, M. 1965. The Logic of Collective Action. Cambridge: Harvard University Press. 8
Sessions 9 and 10 (18 September 2017: 14h00-16h00 and 25 September 2017: 14h00-16h00) THEORY OF TAXATION: EFFICIENCY AND EQUITY (1 AND 2) explain the meaning of all relevant tax terminology; discuss the properties of a good tax; analyse tax incidence (shifting) in a partial and general equilibrium framework; explain excess burden, using indifference curve analysis; determine the magnitude of excess burden, using the consumer surplus approach; explain the Ramsey rule and its applicability; and explain the theory of optimal taxation. Town: Oxford University Press: Chapters 11 and 12. Feldstein, M. 2008. Effects of taxes on economic behaviour. National Tax Journal, 61(1): 131-139. Rosen, H.S. & T. Gayer. 2014. Public Finance. 10 th edition. New York: McGraw-Hill Irwin: Chapter 16. Recommended reading Rosen, H.S. & T. Gayer. 2014. Public Finance. 10 th edition. New York: McGraw-Hill Irwin: Chapters 14 and 15. Session 11 (2 October 2017: 14h00-16h00) DIRECT TAXATION OF INDIVIDUALS define and explain the main tax bases in South Africa; distinguish between different direct taxes in South Africa; evaluate the personal income tax according to the norms of efficiency and equity; 9
describe the impact of inflation on the burden of taxation; explain the effect of direct taxation on the labour supply and saving; evaluate the arguments for and against capital gains taxation; and evaluate income tax reform options for developing countries. Bird, R. & E. Zolt. 2011. Dual income taxation: A promising path to tax reform for developing countries. World Development, 39(10): 1691-1703. Town: Oxford University Press: Chapter 13. Steenekamp, T.J. 2012. Taxing the rich at higher rates in South Africa? Southern African Business Review, 16(3): 1-29. Session 12 (09 October 2017: 14h00-16h00) DIRECT TAXATION OF COMPANIES define the company tax base in the SA context; evaluate company taxation according to the norms of efficiency and equity; discuss trends and issues in company taxation in developing countries; and evaluate the role of tax incentives. Abramovsky, L., A. Klemm, and D. Phillips. 2014. Corporate tax in developing countries: Current trends and design issues. Fiscal Studies, 35(4): 559 588. Town: Oxford University Press: Chapter 13. Zee, H., J. Stotsky and E. Ley. 2002. Tax incentives for business investment: A primer for policy makers in developing countries. World Development, 30(9): 1497-1516. Recommended reading James, S. 2014. Tax and non-tax incentives and investments: Evidence and policy implications. Unpublished paper. Washington, D.C.: The World Bank. 10
Session 13 (16 October 2017: 14h00-16h00) INDIRECT TAXATION distinguish between different indirect taxes in South Africa; discuss key issues in VAT design evaluate the Value Added Tax (VAT) according to the norms of revenue-raising capabilities, efficiency and equity; and discuss indirect tax policy reform options for developing countries. Town: Oxford University Press: Chapter 15. Carter, A. 2013. The Value Added Tax: Experience and issues. In Key Issues and Debates in VAT, SME Taxation and the Tax Treatment of the Financial Sector (edited by A. Carter). The International Tax Dialogue: 13-42. Keen, M. 2013. The anatomy of the VAT. National Tax Journal, 66(2): 423-446. 11