The state of a nation hugely depends on how well it is governed. The numerous functions of a government are too overwhelming that it is inevitable to overlook one aspect of the many tasks of a sovereign. However, one aspect is too big to be overlooked. The economic functions of the government are one of the most, if not the most important, tasks of a sovereign.
The United States of America is known for its giant economy. It is home to the largest businesses and is hailed as the richest country in the world. However, recent happenings have greatly affected the economy. The US troops won’t pull out. Stocks continue to go down. The almighty dollar weakens. And the concatation of events just continue to go against us.
The impact of the economy trickles down from top to bottom. It affects each and every American and the United States, being the powerful country that it is, affects the whole world as well. Any negative occurrence in the country plays a domino effect from one American to the economy of the rest of the world.
So what are the economic functions of our government? What are its roles for improving our lives and the rest of the world? Adam Smith may be well-remembered for his Wealth of Nations, laissez fare (the people is better off without the government) and his strong opposition on the government. He saw a limited role for it with regard to the economic functions. It is just appropriate to start off the discussion of the economic functions of the government by stating the ones that Smith only believed in. These, for a fact, are adhered up to now.
The first function is that the government should provide public goods and services. Examples of public goods are national defense and street lights. Before proceeding any further, it is relevant that the definition of public goods and its difference from private goods be discussed. From the term itself, public goods are goods that can be consumed by the public. Thus, non-excludability is present. Non-excludability means that when goods are created, the exclusion of consumption will never be possible. On the other hand, private goods are those consumed privately. A good example of comparing private and public goods would be a burger and national defense, respectively. A burger can only be eaten by one person only. So when one person eats it, no one else can. However, if the government spends billions of dollars on national government (which is what they are doing now), each and every person who live in the country is having the privilege of getting protection and security. Another function of a public good and which Adam Smith has specifically mentioned (aside from national defense) as one of the vital functions of the government is to set up a facilitation of certain public works and institutions. It is evident that roads and high ways are essential in the development of a country. Institutions such as community colleges and schools are also beneficial to the welfare of many (Ebenstein and Ebenstein, 2000, p. 476).
Another economic function would be redistributing income taxes. Smith propounds principles in taxes such that taxes should be proportionate to income, its amount be certain (not arbitrary), its payment should be at a time convenient for the payer (Ebenstein and Ebenstein, 2000, p. 476). However, not all his principles are being followed. The government rules on taxes are also proportionate to income although it directly deducts the tax from the payroll. It also gives higher income tax rates for the rich, provides social security and MediCare. The next function would be correcting for externalities. In relation to the second function, externalities subsist when some of the costs or benefits connected with the production or consumption of a product “spill over” to third parties other than the direct consumer of the product. A good example for these is taxes that we would be used for positive externalities such as education and reducing negative externalities such as global warming. The next function would be maintaining legal and social framework. This involves creating laws and providing courts and information and service for a better economy performance. Establishing a money system, defining and enforcing property rights are also included. This leads us to the next function which is maintaining competition. Healthy competitions always makes anyone on-the-go and watchful of whatever that may happen. Creating and enforcing antitrust laws and regulating natural monopolies are ways on how the country can maintain its strong number one spot in the world market. And last but not the least, it is every government’s function to stabilize the economy by using the people’s money to proper use such as to promote economic growth, keep in check inflation and more importantly reduce unemployment (McConnell & Brue, 2005, p. 83).
The process of budgeting and spending of the Federal Budget is as grueling as anyone can imagine it. The new budget that the Federal Budget derives each year is taken from the laws enacted before Congress. The spending process includes three phases. These are authority, obligation and outlay. Budget authority is passed by the Congress and President. It grants the legal basis to make financial commitments in form of obligations. Obligations start from entering into contracts, hiring personnel and taking orders for goods and services. The funds that were made before Congress automatically get its money. Such example would be paying the Social Security benefits which are regularly given each year. The national defense also gets its automatic funds annually. The rest of the budget will depend on the laws enacted by Congress (McConnell & Brue, 2005, p. 83).
Revenues of the federal government are also referred to as receipts. They are derived from several sources. Half of the revenues of the federal government are from income taxes (be it corporate or individual). Recently, social insurance taxes have started to become prominent in the Federal revenues. This is due to the higher social security program of the government which will soon benefit the people. Miscellaneous receipts, various excise taxes, custom fees are also additional amounts that accumulate the Federal revenue. In the revenues, there exists a part which is called the offsetting collection. Offsetting collections are deducted from federal expenditures instead of counting as revenues. An example of this would be the sale of electricity from federal administrators. Most of these expenses arise from business-like or market-oriented activities (McConnell & Brue, 2005, p. 83).
In every collection or budget, be it in the government or the private sector, there sometimes exists the deficit and surplus. This is determined by the relationship of outlay or spending with the revenues. Deficits often occur when the budget is too high and the funds are not sufficient for the expenses. There are very little problems occurring with surpluses (who wouldn’t want to get more revenues than expenditures). On the other hand, a lot of problems occur during deficits. Ineffective tax collection often results in deficits. However, unforeseen circumstances affect the Federal budget. What are these unforeseen circumstances? Calamities, war breakout and tragedies. The effect of these would often result to a delay in the release of funds. Maybe a road construction will be postponed or the release of benefits to a veteran may take longer. In the end, the deficits in the Federal Budget trickle down to each and every American.
In taxation, there’s a continuous debate as to how the government will evenly and fairly charge the people with taxes. Economists have come up with two theories. One of which was actually and again suggested by Adam Smith (Ebenstein and Ebenstein, 2000, p. 476). This is the ability-to-pay theory. The ability-to-pay theory suggests that taxation should depend on the individual’s income. Hence, the higher the income the higher the taxes paid. The ability-to-pay theory is what is used nowadays. The other taxation theory is the benefits theory. The benefits theory states that an individual can only be taxed by the benefit he receives from public expenditures. So for example, Mr. A gets national protection, free education and usage of roads. He will only be taxed from those benefits that he gets from the government. A certain percentage will apply (McConnell & Brue, 2005, p. 83).