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Public Budgeting: A Revenue Analysis of Four Budgets



A Revenue Analysis of Four Budgets

A set of four budgets is analyzed with an eye on the revenue compositions and estimation. Although the distinct domains and different levels of aggregation posit some challenges in terms of the two-way transferability, the largely similar items, in the case of federal, state, and local budgets, reveal enough structural complementarities so as to suggest they best serve when addressed simultaneously. The agency budget, however, appears as much orthogonal vis-a-vis the hierarchy as it does contribute to the broader developmental agenda without featuring either the conventional earnings as part of a standalone revenue base or the independent and self-sustained set of objectives.

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Basic Description of Each Budget

The Federal budget is supposedly aimed at securing the developmental macro-level outcomes along the lines of short-term GDP growth targeting, the allocation of human capital and social capital, and infrastructural projects, to name but a few. However, the social dimension neither reduces to short-term needs only nor does the allocation of resource and investment pertain to the long-run or large-scale programs, which are largely overlooked by the market. On the one hand, the free market, no matter how information-efficient it is, may indeed stumble into some incidence of major failure, negative externalities, or adverse selection whereby the otherwise superior resources do not end up allocated to the best uses or some opportunity frontiers and segments fare untapped. The Federal, as well as state and local governments, unless the institutions are corrupt and prone to rent-seeking outcomes or high agency cost, will seek to provide critical public goods with utilities striking an interim balance between the market-delivered and the government-ensured goods.

In fact, the federal and state regulations may impose constraints on the market competition so as to control concentration patterns subject to scale economy tests. Incidentally, the industries exhibiting a high operating leverage historically may reveal progressively lower entry barriers, so that the natural monopoly is no longer applicable and licensing fees, as well as revenue proceeds, can make room for more competitive pricing and very different taxation or fee channels. On the other hand, a strategic partnership between private and corporate business (outsourcing), as well as the government, is conceivable beyond the issuance of the municipal bonds or T-bills.

The state budget narrows down the scope to a particular state given its comparative advantages, as well as disadvantages and factor endowments or relative resource scarcities. Apparently, optimizing resource allocation, whether done by the social manager (Smith & Lynch, 2004, p. 37) or the market player, is always a constrained subject to budget limits, institutional environment (state laws revealing some idiosyncrasy with respect to the federal laws) or transaction costs, and otherwise liquidity constraints or exogenous risks and uncertainties. In a well-defined sense, objectives or outcomes of each level face both higher and lower level objectives as either restraints or constituencies. Apart from the state populace, the social planner, as well as local governments, will have to consider or endogenize a host of stakeholders and their key interests, with a proper agency setting applying inter-generationally, as well as cross-temporally.

Along these lines, the rather involved tapestry of some 90 thousand local government entities acting nationally could be collapsed to the largely vertical and one-way interaction, which is accounted for in terms of taxes and charges, as well as intergovernmental aid. On second thought, the local budgets do at times reveal some structural gaps that are awkward to bridge to state the proportions alone. For that matter, the income or revenue transfers may not be recoverable from the respective residuals at a state level, which is what obtains in this particular case.

More specifically, the paper opts to zoom in on the state of Massachusetts, which is well renowned for its comparative and competitive advantage lying in the area of research and scholarly work, which naturally drives the choice of an agency budget as devised for the National Science Foundation. It remains to be seen whether and how state-based or even state-specific assets such as MIT’s engineering human capital can be relocated to mitigate the other states developmental issues, just like in Michigan. Although the bulk of NSF’s funding and effort has been put into research and education (up to 93 percent historically), in incremental terms, the dominant focus shift has been declared and made apparent in cyber-defense and the computing leverage at large as the underpinning of a major upheaval being targeted.

The Differences and Similarities of Each Budget

Arguably, the agency budgets do not fit squarely into a hierarchy featuring the federal versus state budgets, and neither do the local budgets. For one, specific agency may either be viewed as applying on a national level (or even supranational, as with the NSF) or fare as altogether beyond these scale dimensions. Although the NSF does have a clear-cut jurisdiction of its own, it is not least intended to foster the development path in environmentally and technologically sustainable ways, ironically by means of discontinuous yet controlled breakthroughs. Whereas a discussion of appropriation items could be considered more relevant as compared to the revenue requests, which are subject to coalition bargaining and policy cycle uncertainty, the agency’s outputs and societal influences might prove to be subtle, latent, and long-term in nature to serve as the immediate revenues or earnings to finance its own expenditures or to be judged by straightforward accounting, which fails to capture and report the social costs, anyway.

Certainly, all of the budgets have some specific and overlapping domains if only building bottom-up. For that matter, they all build on the basic interplay between the revenues and outlays or expenditures, with the higher-level or aggregated budgets tending to face a longer-term horizon, regardless of the project-specific timing.

Along the lines of revenue composition, it is possible to desolate similar items, for example, income tax, property tax, social insurance taxes, and fees/charges, to name a few. The structural proportions, however, appear complementary with respect to each budget’s relative fortes or core competencies. One alternative way of seeing that issue would be to conjecture the implied balanced scorecards mapping the resources (perhaps, in line with SWOT analysis) and slacks to a set of goals or targeted outcomes.

However, the targeted outcomes for agencies such as the NSF could be seen as either derivative with respect to a broader scope of developmental objectives or gap closing only inasmuch as its own goals and outcomes are not independent and are servile if acquiescent. In fact, one could go so far as to allow for the corrupt designs whereby the doctored evidence or biased research could be targeted indirectly, possibly by allocating the bulk of grant funds to pre-qualified themes or outlooks. Although the ethical clash or moral hazard pertains to the social sciences primarily (COx-related research pertaining to engineering and geosciences), one countervailing remedy may have to do with the fact that the agency tends to dominate in finding the computer sciences, biology, and mathematics research (NSF FY 2014, p.2). One troubling flipside, though, could be about all of the more controversial topics accounting for nearly the same controlling stake. In any event, the NSF is likely to continue boasting a pivotal player status while capitalizing on it.

What Accounts for the Major Sources of Revenue for Each?

Structurally, the key revenue contributions may differ. In this setup, one faces a horizon overlap running 2012 through 2019, with Federal-level versus state-level estimates available for 2012 through 2023 and 2004-2019, respectively (US White House, US Government Revenue). The Federal budget on hand (amounting to a Presidential proposal for 2014) suggests that individual income tax fetches a dominant and stable 45 percent share in the total revenue, with social security payroll and corporate taxes providing another 35 percent. Whereas the state level features a crucially significant part the income taxes have played around a flat 25 percent, it is the ad-valorem taxes, and property tax not least, that account for just under 35 percent of the revenues.

Although this proportion has oscillated somewhat, and so too has the social security item showing a decline from the formerly second-largest item, the shares even out starting 2014 showing a smooth pattern along with the fees and charges and the miscellaneous business proceeds. If anything, it is this simplifying propensity shining through the various levels and hardly lending itself with careful account of the potentially complex inter-linkage channels and mechanisms one would have anticipated.

However, the heuristic assessment as above pertains to combined state-and-local figures. Disjoint study of the 2014 projections, though representative of the longer-haul pattern, show some important structural disparities. Therefore, whereas the income taxes secure the bulk of the total revenue at the state level (some 38 percent), they account for the last item in the local breakdown (a meager 4.2 percent). Instead, the ad valorem tax proceeds grab a 54.2 percent share locally, which is only the second-largest one statewide (21.5 percent). Likewise, fees and charges versus business miscellaneous items reveal an inverse pattern of contribution with a gap factor being 1.5 or the reverse. Overall, these two items combined exhibit a similar gap, with the local budgets naturally linked to licensing, fee, and related items, and same goes for the property taxes. More direct taxes, however, are by and large collected federally and statewide.

How Are the Revenue Amounts Expected to Change in the Future?

When it comes to comparing and contrasting the estimates across the jurisdictions under study, one is led readily to infer the cumulative average growth rate (CAGR) as per each key revenue item. Overall, the GDP is apparently presumed to keep growing at 4.8 percent, with the pattern appearing to be too monotonous to be drawing upon any kind of RBC (real business cycle). For that matter, the receipts and the outlays at large are expected to grow 7.1 and 4.4 percent on average, thus, pointing out an improving efficiency, as well as a shrinking deficit or shortage. It would be straightforward to expect the debt (and leverage-financed proceeds) to decrease over the long haul, even though the debt is more applicable in capital financing and budgeting. The two conflicting trends could net out to an oscillatory or mean-reversion pattern as implied in the budget proposal, however, which echoes at least some mention of the economic cycle. Although the theoretical frameworks such as the Miller-Modigliani setup might posit the debt irrelevance when it comes to valuation or growth, still uncontrolled or mounting leverage would be at odds with sustainable development or a saddle path.

More specifically, it is those selfsame lead items that are anticipated to grow the fastest: Income taxes (7.4 to 8.2 percent), social security payroll tax (6.7), and property tax (10.3), as well as a miscellaneous aggregate (12 percent). In other words, the bulk of the revenues is created federally and locally, with the state level finding itself relatively more predisposed as an interim buffer to optimize the expenditures and deliver the services or public goods. On the other hand, it could amount to a fudge factor capturing the number of loopholes or discrepancies, intergovernmental swaps inter alia. Somewhat predictably, the residual social security tax channel accounts for the highest 18.1 percent growth as expected for the MA state-level. In addition, the total direct revenue is expected to outpace the GDP (or GRP) growth, at 6.3 and 4.4 percent respectively. It could hint at the increasingly higher relevance of excessive needs and public goods relative to market-provided consumer goods. However, somewhat more routinely, they would amount to a progressive tax bracket being deployed.

Comparative statics could come in handier when it comes to referring to the structural dynamics of the core items as the proportions of GDP. Irrespective of how the latter is going to grow years down the road, the receipts and outlay alike reveal a strikingly stable proportion anywhere around 19 and 21 percentages of GDP. The detail of closing the gap could reveal some arbitrary nature behind the projections, though. On the one hand, the receipt proportion reveals a flat .2 percentage increment in each year starting FY 2015, which projection style may or may not suggest active targeting. At the same time, it seems to be too naive to urge any rigorous assessment based on the weighted averaging, exponential smoothening, or time-series, and cross-sectional regressions (ANOVA or structural endogeneity) of any kind. The outlays, by contrast, reveal a more involved mean-reverting pattern, but this research appears beyond the immediate scope of this paper insofar as RDA (revenue development analysis) exceeds the revenue shortage being minimized over time.

Again, the dominant share of the individual income taxes grows at a 1 percent increment half of the time adding on a smaller .3 percentage later on. In sharp contrast, the corporate taxes appear more mean-reverted over the long haul, with the social security item proving downright declining. In fact, it is the latter dimension that may lend some extra support to the emphasis on public goods mitigating exploitation of the human capital. The other items, notably the excise taxes, property taxes, and custom duties are projected at a flat rate relative to the total revenue.

At the state level, the income tax share reveals a mean-reverting schedule in retrospect, which turns to be altogether declining post 2014. The ad-valorem tax proportion suggests a mixed albeit upward pattern. As was pointed out previously, they capture the largely federal versus mostly local domains. The inherent state domain of the social security payroll taxes reveals an upward albeit decelerating pattern in the proportionate terms. That borne in mind, the state-level projections show an implicit role of negative second-order conditions throughout. In other words, there is no room for trend or de-trending techniques per se, despite a clearly monotone stretching on the processes.

In effect, the increments could be revealing a negative sloped trend in the first-order influences, so that any extrapolation or averaging in levels could result in overshooting. However, insofar as they build on the history and show some co-movement or co-integration at that rate, the techniques like MWA (moving weighted average) or exponential smoothening (EXS) could be applied depending on the actual calibrating weight and/or the MAPE (mean absolute percentage average) performance (cf. Smith & Lynch, 2004, p. 320-340).

How Does the Budget Fit with the Mission of Each Domain?

Apart from the general domain, the federal budget is aimed at overseeing; the FY 2014 Federal Budget centers on a few grand ends and means (pp. 7-47). For the starters, lending more support to the middle class and maintaining the US as a superior destination for human capital should reach beyond the tax cuts (on individual and corporate income alike or opting for a tradeoff). Whatever the response rate is, apparent is the Bush-style tax cut with a decreasing proportion of household disposable incomes making up for the gap. That should imply the demand-side growth has exhausted itself, possibly pointing to a smaller marginal propensity to consume. However, all else held the same, a growing marginal propensity to save and invest need not fare on a tax cut per se. One dual agenda addresses a balanced approach to gap closing, which prudential policy outcome (the efficacy criterion being related to the input/output efficiency) in turn making a facet of the broader program of the 21st-century government (again showing a fuzzy line between the ends and means).

The state-level budget can be rationalized with an eye on the dual or compensatory tools, as well as alternative revenue base being fostered. This issue is made apparent in the dominated and decreasing role for the income and property taxes, among other things, which are posited as the macro versus local prerogatives. On the other hand, all of the revenue bases or sources are either sustainable or manipulable.

Still, the federal government as distinguished from the state authorities and local governments confront very different tradeoffs in the way of the tools available. For instance, it might be more awkward for the Federal government to change the tax rate overnight. Nevertheless, selling T-bills in line with the open market operations should be easier than having a municipal bond issue underwritten.

Not least, when it comes to positing the NSF as a key engine of R&D-induced growth and development, the target savings of .22 percent as a proportion in the total would seem to be a questionable objective. Although that could be a matter of structural optimization, the core expenditures have remained intact over time, and peripheral items apparently have been oscillating as a matter of short-term fixes.

How Can the Budget Be Improved and Revenue Estimation Accurately Assessed at Each Level?

To render the attempted approach as revealed in the data patterns more rigorous, one might want to integrate the increment-based TMA (transformational moving average) with a regression de-trending, whereby the very increments could further be incrementalized to account for the second-order effects, supposedly negative. The paper attempts to compare MWA and modified TMA as alternate tools based on the MAPE criterion resulting from the backwards-looking forecasting. Although the history proves inadequate and less applicable in the federal-level social insurance taxes, it suffices and proves to be most relevant for all practical purposes at the state level (White House, Census). In fact, an MWA tossup at an alpha of .9 (recent history presumed the most relevant) of the form image2.png feeds out an enviable image4.png of but .7 percent. In fact, further tests of predictive power on alternative tools, modified TMA included, would be superfluous. Consequently, the resultant pattern proves anything, but flat or monotone, which could realistically be applied to the GDP growth estimates, if one is to arrive at the RBC-sensitive figures.

On the other hand, the guesstimates could and should be more informed and educated as per the revenue section, when it comes to the deployment of think tanks and a host of related agencies contributing their proposals as part and parcel of the budget. One naive yet more balanced approach having to do with sustainability targeting would involve a reasonably complete set of ratios, be it efficiency or efficacy related, as well as more horizontal with respect to similar items. However, even the historic proportions, unless intentionally and specifically targeted from the outset, will have to be rationalized with respect to the fundamentals, macroeconomics not least. For one thing, the budget planning can hardly be disjoint vis-a-vis macro-targeting of tradeoffs involving unemployment, inflation, and growth among other things.

On second thought, many of the macro-optimizing premises may prove highly counterintuitive even if standardized in terms of the frameworks being employed. For instance, the IS/LM framework could maintain the relative efficacy of monetary versus fiscal policy, with the actual Philips and Laffer curves telling one just how sensitive the employment will be to price ceilings or minimum wage anywhere near full-employment equilibrium, or how responsive the tax base is likely to prove with an eye on the tax rate. For that matter, the actual policy multipliers a la Keynes could prove very different, as well as differentially lagged in response to specific propagation channels.

Conclusion

The four domains as discussed above have shown a lot of overlapping and complementary pillars. Whereas the state budget appears to be filling the gaps between the federal and the local planning, the agency program could appear altogether distinct, in just how remotely it fits with the routine hierarchy while serving the meta-level objectives. In a sense, the choice of a particular agency was motivated by specific state’s core competencies and resource base. It remains to be seen exactly how it facilitates the structuring of local governments and budget planning as a marginal contributor to the federal budget. On the one hand, the latter is itself not invariant with respect to the macroeconomic modeling or targeting. On the other hand, counterintuitive as specific macro-policy tools or tradeoffs could seem, the actual budgets on hand have revealed either some arbitrary targeting or otherwise na?ve approaches to the revenue estimation, which can hardly be grounded in the fundamentals or the interchange across the layers. The paper has proposed an alternative approach, the simplicity or cost-efficiency of which only competes with the high predictive power or efficacy.

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