Public Finance and Public Policy

A Textbook Prospectus by

Jonathan Gruber, Ph.D.

Massachusetts Institute of Technology

December, 2003

The field of Public Finance has undergone two fundamental changes in the past twenty years. First, there has been a growing interest in the study of transfer programs and social insurance. This mirrors the growth in importance, both in terms of fiscal magnitudes and centrality to the policy debate, of these areas of government intervention. Second, the field has shifted from one dominated by theory to one focused on high quality empirical work, both in the traditional areas of tax and direct spending, as well as in the newer areas of transfer programs and social insurance.

Yet neither of these trends is well represented by the major textbooks in use in Public Finance today. These books tend to be heavily dominated by theory, with little emphasis on empirical evidence. And they remain heavily focused on traditional issues of taxation and public goods, with relatively little discussion of transfer and social insurance programs.

I propose to write a new textbook that would remedy these deficiencies. My book would be distinguished from the existing offerings by three features:

Updated Selection of Topics: Any Public Finance textbook must devote extensive discussion to issues of taxation and direct government spending. While including this traditional material, my book will devote an increasing share of the discussion to the transfer and social insurance programs that are dominating government activity. In particular, the book will be organized around three core areas:

• Social Insurance and Redistribution: The major innovation of the book will be a much expanded discussion of the largest and fastest growing function of government, social insurance and redistribution. There will be separate chapters for: redistribution and welfare policy; Social Security; Unemployment Insurance, Workers’ Compensation and Disability Insurance; and both public and private health insurance issues.
• Taxation in Theory and Practice: The chapters on taxation, while presenting the traditional theoretical presentation, will also focus on the key sources of current policy debate, including capital gains taxation, estate taxation, and the use of the tax code as a tool of social policy through tax credits for labor supply, child care, and other activities.

Updated Pedagogy: Theoretical development is obviously central to the presentation of core Public Finance concepts. But my textbook will integrate theoretical discussions with careful presentation of the empirical evidence that supports, or does not support, these theoretical models. I will do so within a framework that carefully explains how to interpret empirical results to students of Public Finance who may not have been exposed to sophisticated empirical methods. Students will be introduced to the central empirical findings from Public Finance over the past two decades on program incentives and behavioral responses to those incentives. And the discussion will highlight where there is more or less certainty about the answers to these central empirical questions. Highlighting the unanswered questions will hopefully motivate students to continue their study of Public Finance issues.

Updated Presentation: Presented correctly, Public Finance should be one of the most exciting, and, quite frankly, one of the most enjoyable subject areas to study in economics. The questions of public finance are the questions discussed on the front page of the newspaper every day. My textbook will draw on the exciting policy debates of our times to illustrate the points made by the theoretical and empirical presentations, through the use of both short policy applications throughout each chapter, as well as lengthier discussions of some policy areas (such as global warming or Social Security reform).

Throughout the analysis, I will draw on three particular strengths that I bring to this exercise. First, I have been doing research on a broad range of Public Finance issues for the past 12 years. I have done first hand research in virtually every topic area to be covered by the book, including:

Second, I have taught a popular undergraduate course on Public Finance at MIT since 1992. I have developed for this course a detailed set of computerized notes that form the basis of my lectures. I have shared these notes with colleagues at a number of Universities who have found them a very useful teaching tool. These notes provide a backbone on which my textbook can be constructed.

Third, I have first hand experience with the policy process, garnered during my fourteen months as Deputy Assistant Secretary for Economic Policy at the Treasury Department during 1997-1998. I was very fortunate during that time to work in a wide variety of areas, including:

I will draw on this experience to help inform the policy exercises that will feature prominently in the text.