PAD 700 Post-Class Notes on Issues of Taxation and Finance in Public Administration

Note to students in PAD 700: As always, what I write below is not a substitute for assigned readings, homework exercises, and points made in the classroom. Your command of material from the texts, the reader, and the Shafritz dictionary is what counts for you success in this class, the program and, ultimately, your career. You may use these notes to embellish test answers but knowing only what I write here will not save you from being marked down on exam questions.

Taxation and budgeting involve most of the theoretical and applied knowledge imparted by this MPA program. Just in terms of what we have read so far this term, the concepts in Denhardt's "finance" chapter, and the tax articles in the reader, relate to:

Utilitarianism (enacting policies that provide the greatest good to the greatest number);

Agenda-setting processes (How National Sales Taxes and Flat Taxes got on the agenda);

Federalism (Different mixes of taxes predominate on the state/local and federal levels);

Separation of powers (Jurisdictional chief executives propose budgets, legislatures decide on them);

Urban/suburban policy (Tax incentives, often without meaning to, push suburban growth, city decline);

Contracting out (Budgets fund services government provides directly, and through third parties);

Privatization ("Let's not have government pay for this at all any more" is heard often in budget debate).

Later on in the term, you should be able to relate what goes on in the budget process to planning, to organization and management and other topics we will discuss. In short, working hard to understand budgeting and finance in terms of more general public administration concepts is an excellent way to learn about the field and prepare for your higher management career.

Another reason you ought to know this stuff real well is that, in all sorts of ways, taxes and budgets can pick you pocket and/or put money in your pockets. Furthermore, the public debate over taxes and spending often features rhetoric that is so far from the actual impact of proposals that the unknowing smile and cheer as their pockets are picked. (Try to really understand what The Flat Tax and the National Sales Tax would do to you if either replaced the current federal income tax system; Try to really understand how the current budget surplus only exists because your social security taxes are counted against today's expenditures, not the future retirement payments of you and your fellows).

Career planning might also make you consider concentrating on budgeting and finance. People who really understand budgets and taxes, and have specific skills (auditing, the ability to research spending impacts, etc.) can move up the positional and salary ladder fast. Some of public administration's most financially successful graduates, including some from this program, work on Wall Street, not in City Hall.

Now, the homework "hand-in" question and our discussion of that question in class was designed to drive home crucial concepts in taxation: (1) the effective tax rate, (2) the marginal tax rate. The discussion on marginal tax rate was designed to sensitize you to the general concept of marginal analysis. When decisions flow from analysis, as they often do in organizational settings (and, theoretically, with individuals), the decision hinges NOT on the average impact of a particular action, but the impact of that action at a specific place and time. Therefore, in deciding whether to work overtime on the last Saturday of the year, you ought to factor in the marginal tax rate (25+% for most of you), not your average, "effective" tax rate for the year (about 15% for most of you). The marginal tax rate is what really tells the story of what you are going to earn on that last day.

Also, some of you had trouble with the math in the tax calculation. You must master this level of math. If you do not, you condemn yourself to a lifetime of being a victim to mathematical shell games advancing tax policies that will hurt you. And in not mastering tax math, you consign yourself to being a lifetime customer at the mercy of paid, professional tax preparers who may actually cause you to pay more taxes than you should. But, if you stay math averse, you will have no way of knowing. (A personal story: Because of my recent marriage I, for the first time ever, used the professional tax preparer my wife had employed for many years. And I trusted--until the deficiency notices came from the state tax agency. No big deal, and correctable, and the arcane pension calculations this gentleman overlooked may have been overlooked by others--though not by me in past years. But who knows how many other things he overlooked through the years as my wife blindly relied on his expertise. If you do not have the basic mathematical and statistical skills to be an informed consumer of policy recommendations and analytical work, you are essentially powerless. USE MATH SMARTS!)

On the regressive, progressive and proportional taxation, just make sure you know the definitions COLD! And make sure that you NEVER trot out one of these definitions without THE measure being "tax as a percentage of total income." Only this measure allows you to compare Mary Ordinary with Barbra Striesand. Effective rate, effective rate, effective rate--tax as a percentage of total income--should be your mantra. Any other formulation, such as dollars paid in tax, tells you nothing about equity, and leaves you vulnerable to all sorts of bogus claims about how this or that person, or this or that group, pays "way more than our fair share."

The article on "Our Outmoded Tax System" is a important. Ideas introduced in this article will be centerpieces in the public finance class required for most students. The author discusses equity, revenue adequacy, economic impact, and administrative costs in the context of actual state tax policies to which students should be able to relate. Even if you can't relate easily, struggle to do so. Every bit of understanding you gain now is money in the bank for your PAD 743 class, and crucial preparation for potential test questions in this class.

Budgeting is a process that public administration students must understand. The higher you go in your career, the more likely you are to have budgeting responsibilities. Whether for a unit or an agency, the budget is the manager's justification of what he/she wants to do in the coming year(s) and a reflection on what the agency or unit has done in the past year. If you cannot effectively champion the budget for which you are responsible, your employees, your activities and your clients are in jeopardy. Learn how to deal with budgets here at John Jay, where things misunderstood or poorly argued produce "make believe" set-backs, rather than real world grief with your ego and job hanging in the balance.

The capital budgeting, debt management, risk management and purchasing management material is self-explanatory. Just know what these processes are. You may never do any of them, but if you don't know what they are, you risk coming across as an ignoramus the day your boss says "What do you think about bringing someone on board as a full time risk management analyst?"

That's all for this week, folks.