Issuu

TEMAS SOBRE ECONOMIA

SEPA

Número 4:

DE PUERTO RICO

RATA

Arthur J. Mann

PUBLIC EXPENDITURE PATTERNS IN THE DOMINICAN REPUBLIC AND PUERTO RICO, 1930-1970

Número 5:

Arthur J. Mann

THE FISCAL SYSTEM AND INCOE DISTRIBUTION: THE CASE OF PUERTO RICO

Número 6:

Arthur J. Mann y Donald Perlis

UTILITY FUNCTIONS, PUBLIC GOODS AND INCOME DISTRIBUTION

UNIVERSIDAD DE PUERTO RICO FACULTAD DE CIENCIAS SOCIALES DEPARTAMENTO DE ECONOMIA RIO PIEDRAS, PUERTO RICO

UNIVERSIDAD DE PUERTO RICO Facultad de Ciencias Sociales DEPARTAMENTO DE ECONOMIA Rio Piedras, Puerto Rico

SEPARATAS NUMERO 4, 5 Y 6

c~ Arthur J. Mann

PUBLIC EXPENDITURE PATTERNS IN THE DOMINICAN REPUBLIC AND PUERTO RICO, 1930-1970

Arthur J. Mann

THE FISCAL SYSTEM AND INCOME DISTRIBUTION: THE CASE OF PUERTO RICO

Arthur J. Mann y Donald Perlis

UTILITY FUNCTIONS, PUBLIC GOODS AND INCOME DISTRIBUTION

Unidad de Investigaciones Econ&micas

Angel L. Ruiz Director

Miguel A. Ramírez Pérez Coordinador de Publicaciones Ad Honorem

Septiembre 1977

NOTA a leas tres publicaciones que aquí se reproducen siguen el objetivo básico expuesto antes de que material de calidad relevante a la economía de Puerto Rico y temas relacionados debe recibir la más amplia divulgación. Para ello nuestro compañero claustral y colaborador, el doctor Arthur 3. Mann ha adelantado su autorización para publicar por este medio. Cada uno de los ensayos está precedido de una página a color señalando los datos básicos del número de la separata, autor, título y fuente. Esto facilitará la lectura selectiva del material. Aprovechamos para dar la bienvenida al compañero Donald Pen is, del Recinto Universitario de Mayagüez, como colaborador.

SEPARATA Número 4

Arthur J. Mann

PUBLIC EXPENDITURE PATTERNS IN THE DOMINICAN REPUBLIC AND PUERTO RICO, 1930-1970

/Social and Economic Studies, 24 (Ttarch 1975:

47-82/

47 PUBLIC EXPENI)ITURE PA11`ERNS :íN THE DOMINICAN REPUBLIC AND PUERTO B.TCU, 193i1`197t!' Pt

►. MANN INTRODUCTION Over the past several decades there have appeared nunmrous empirical studies which attempt to measure and explain the absolute and relative growth of public sector activities in the economies .of many nations? Almost invariably such analyses have demonstrated that in both the developed and the developing countries the government's share of national output has risen over the varying spans of years covered by each investigation. The purpose of this paper is dual: (a) to fill the data gap with respect to public expenditure growth In the Dominican Republic and Puerto Rico, and (b) to present a tentative hypothesis to better identify the principal factors which have led to an increasingly active role for the public sector in both. countries. i

The hypothesis to be tested is not really noyél, for it involves combining the Peacock-Wiseman displacement effect coneepl 123 pp. 2428] with two cases of small, open economies_ The displacemeñt effect; which postulates an unsated demand for public disbursements, relates .to the stepwise manner in which government spending as a proportion of some grass output measure increases °(or decreases) over time. Public expenrlíture; an obvious function of public revenue, is constrained;hy the citizenry's ideas as to tolerable tax levels; under the influence of a social disturbance' such tolerability restraints are .lifted, thereby providing the mechanism by which. a "new plateau of expenditure may be reached with public expenditures again taking a broadly constant share of gross national product, though a different share from the former one' í123. p, xxiv] . Use of.such a concept thus enables one to measure the time pattern of public expenditure growth relative to that of national output growth. As generally conccived, the 'social disturbance' phenomenon deals with .events s►ích as. wars and economic depre5ssons which directly influence people's ideas about the tolerability of a given tax level. The two countries under analysis in this paper were not ovcrtlyirwolved, during the 1.930-lp7l period, in word war, but undoubtedly the. repercussions of ,the lrt3Oc depression revarbarated to their detriment. Thus, he secotidatE effects of economic cycles in their larger. more developed trading partners certainly viere causal factºr , leading to rí emcee] levels of economic activity in the. more economically dependent, smaller countries. if such a causal relation is valid, then it' uiaV be postulated drat he social disturbances generated by wars,, teiraftermath, and outer events ih iarger, developed nations additionally iniluenes; tax and public expendlithe patients (and CatIZCnry attitudes) in dependent economies. Such influences are transmitted to the latter national entities, with increased strength due to he extreme openness of ,their economic st.ructures;4' over he i9:3í3-t )7i} interval the sum of C .

SOCIAL AND ECONOMIC STUDIES

tnerdeandise imports and experts by value normally comprised some 2S to 40 per cent of GNP in the Dominican case, and a much higher 60 to 90 per cent he the Puerto Rican case. And in each instance the principd wading partner was the United States, which experienced the social upheavals of a great depression and a world war.

Gupta

bypothesis,

UMITATTDNS OF T E ANAIXS1S The restrictions imposed by the lack of a reliable gross output measure for Puerto Rico prior to i930s and for the Dominican Republic prior to 1940 limit the secular'relevance ofthe especially if'it, is 'desired to carry out analysis against the backdrop of Wagner'slnw of increasing state expenditures. 6 The displacement effect itself; although subjected to rather rigorous státistical testing by [.14L.has fallen under serious criticism from, aruong others, Pryor 125 pp: 443-446J Musgrave jIS pp. &7-901 and llird 141.

that

similar

which

198},

laird

opinion

the

corporations'-

public

classified,

formally

are

Culture

Rican

Puerto

Institute

th and

Rico

Pieertb

sity

data

There are aturnerous statistical and conceptual difficulties inhcrient in this typapf study. Mere collection of time-series data for one country alone poses a variety of .non-comparable 'and oft-times non4econciable figures. Such difficulties are evident in the large number of sources employed to ferret out the required primary data (see Appendix Rj. The quality of the data, especially in the Dominican case during the Trujillo era, may be questionable,, and amity of .the assumptions which necessarily had to Ñ. made by thia.researcher to approximate essential time-series can only be justified by reasoning that no alterative assumption would, represent an improt entenr over the one aetúally' ritiized; e.g., the d?rivation of Dominican gross national product data for the period l9401949. Al though it tritely observed that a tpénditure is a functidn of revenue, and especially of tax .revenue, little heed is taken of the. íncomú side of the public bpdget, concentration is to he almost solely upon the historical movements of public expenditures. The entire conceptual .question of what constitutes government expenditure on collect'ciy demanded goods and services :as opposed to public producLion (i.e., the activities of.the public corporations in Puerto Rico or the `autonomótis institútions' in the Dominican Republic). is reduced to the level of presenting for the `consolidated public sector in an appendix at the. end of the paper. Thus, emphasis almost-entirely on the r n-ix rnmercial expenditure activities of the centralgc3vemment is each nation, _regard'ess of revenue sources. This latter poinr thorns brief elaboration.. The question of which expenditures are most appropriate to rneascuc public activity in, any country at any time is conceptually unresolved. lr the Pescock-Wiseman viewpoint 123 p. 6j the activities of the I:uiilic obrporations should lit exch ded from the definition &' public sector activity since heir productiou is `.,rested by ,market criteria', however, it might well be gtrestioned whether or not :]Sins% other public sector activities commonly provided are not also of a oormuereial mature. And he organizational fota of a public corporation is not necessarily a reasonable dreclieator of he degree of market criteria affectation. This hr especially true of she Puerto Rican case, where institutions such as the UniverPeacocl, and Wiseman, hose public agencies that are price-chargers or profit-motivated

PF3T3;-rC,

TisiYkZIIT""-

x A.rTER.NS

any definition of government_ Yet, does the fact that a are to bP ^ 441uí i ~.n l tuition fee is levied against $hc university student by the public authority lead r^_ to the conclusion that distyursements on taublic uric=erSSíty education be excluded from public expenditure? To do so would surely introduce distortion. It appears then, that a good case can be made for adopting a byroad view of what constitutes public activity.

€►nfortuhately, however, serious and complex statistical difficulties regarding the expenditure of the public enterprise sector cause one to fall hack upon the narrower definition of governmental activity which focuses upon the outlays of the central gov~mment alone, in the process excluding most of the spending of the public corpor3tiº0s. The sole reliable data with respect to the expenditures of the Puerto Rican public corporations cover the years 19624966, and were compiled in a special and unpublished study carried out by the Puerto Rican Budget Bureau in 1966. To gather similar data for the years 19404961 would require the cooperátion of both the Puerto Rican central goernnr~nt and all of the public corporations, and even if the requisite cooperation were forthcoming the task would be of gargantuan proportions. The figures that do appear in the Puerto Rican consolidated' public setºr table for the years 19304960 (Table C-3) are this author's own rather crude estimates gathered from a variety of independent published sources. As such; they are reluctantly employed to any great extent to explain apparent changes in the publio sector's relative ecoºórnic role. The Dominican public enterprise data (Table C-1) are even more .deficient, being available (to this researcher) for the public corporations only since 1967. Thus, although it would be conceptually more appropriate to consistently use one definition ofthe public sector (that which includes the activities of all public enterprises), data deficiencies rendar impossible the use of the preferred tethodólogy. The result is that the text discussion concentrates sorely upon the activities of the central government flsc, a procedure which in reality understates the relative role of the public sector. SUMMARY OF FINDINGS Cver the period of years 4nrompassed dry this shady aggregate public expenditures in current prices multiplied rr.ny 'braes pver in both countries. From 10.6 million. pesos. in 1936 the .disbursements of the Domirdean central government rose to 29.6 million pesos in 1970€ (see Table 1);7 dense a€ the central govero-ament of Puerto Rico increased from 183 million dollars an 1928 to 975.7 million dollars in 1970 (see Table 2).s As is revealed nTable 3 the growth rate of public expenditures .as measured in current prices, over he 19404970 period outstripped that of aggregate expenditure on gross output, hereby leading to an tapward displacement (Table 1 and 2, column. 7). The public share of gross national product iii. the Republic rose from around 13 per cent in 1940 to 18 per cent iii 1970, and actually averaged over Z2 per cent for the 15 year period subsequent to 194$. The time pattern of displacemert is found to be quite irregular, and further contemplation of he data reveals that displacement in fact occurred over a much shorter time span in the 1940s, when the public portion of national output tripled before falling back to a relatively steady plateau fluctuating slightly between 20 and 26. per cent until

SOCIAL AND ECONOMIC STUDIES TABLE 1 GRoss NATIONAL PRODUCT AND CENTRAL GOVERNMENT EXPENDITURE, CURRENT AND CONSTANT PRICES AND PER CAPITA CONSTANT PRICES, DOMINICAN REPUBLIC, 1936-1970 (millions of RD$) Gross National Product

(1) Current Prices Year

(2) Constant Prices (1962= 100)

(3) Per Capita Constant Prices (in.pesos)

Central Government Expenditure

(4) Current Prices

(5) Constant. Prices (1962= 100)

(6). Per Capita Constant Prices (in pesos)

Expenditure as. Proportion of GNP " (1)

(8).

(4)1(1) (6)1(3) ~

1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 1948 1949 1950 1951 1952 1953 1954 1955• 1456 1957 195R 1959 1960 1961 1962 1963 1964

1111 120 149 163 194 218 225 257 293 335 383 455 501 510 537 :5S 63U 705 110 689 715 688 870 994. 1,482

1965 1966 1967 1968 1969 1970

949 1,043 1.096 1,145 1,298 1,453

324 331 267 259 295 262 247 282 376 459 527 542 539 583 599 670 739 753 730 781 739 870 935 989 848 953 986 1,003, 1,111 1,163

Saureesand14ues See Appendix B.

189 188 148 140 156 135 125 139 ]81 215 238 236 227 237 235 253 270 265 248 ^_5tr 236 270 282 290 241 264 265 262 282 29(1

10.6 105 1I.6 11.5 I2.0 12.0 14.2 19.2 7.6.4 29.8 ' 42.9 73.2 86.4 74.3 90.7 102.2 I29.1 129.9 107.9 127.2 144.6 153.0 1645 154.9 147.3 139.0 184.7 1895 2125 145.7>r 1.88.7 198.0 207.7 235.4 259.6

32.4 31.6 31.5 35.2 40.3 499 70.4 83.1 83.5 1055 106.5 131.7 132.6 116.0 136.8 157.2 151.5 162`? 163.1 1S0.3 151.1 184.7 175.5 193.2 123.5 16ó.5 172.2 16851 1.99.5 220.0

18.9 18.0 17.5 19.1 21:3 25.8 35.5 40.9 40.1 49.4 48.I 57.3 55.7 47.1 53.6 59.5 55.3 57.4 95.' d!0 3 48.3 57.4 52.9 56.6 35.2 46.6 46,3 44.1 50.6 54.9

10.9 10.0 9.5 11.8 13.6 13:7 19.1 285 29.5 22.2 23.7 22.5 25.8 25.5 20.3 22.9 23.0 21.7 23.2 22.5 2U.b 20,2

21.3 19.1 19.6 15.4 18.1 18.1 18.1 18.1 17.9

10.0 .9.6 11.8 13.6 13.7 19.1 28.4 29.4 22.2 23.0 20.2 2Q:8 24.5 19.9 22.8 23.5 20.5 21.7 22.4 193 20.5 21.3 18.8 19.5 14.6 17.7 17.5 16.8 17.9 18.9

F'Ui3LIt; EXPENDITURE PATTERNS

TABLE 2

GROSS NATIONAL PRODUCT AND CENTRAL GOVERNMENT

EXPENDITURE, CURRENT AND CONSTANT PRICES AND ,PER. CAPITA

CONSTANT PRICES, PUERTO RICO, 1928 4970 (millions of USS Gross NationalProduct

(1) Current Prices Year , 1928 1929 24h 1930 241 1931 215 1932 199 1933 I'79 228; 1934 1935 226: 1936 254 1937 268 1938 277 1939 264 1940 287 1941. 330 1942. 380 1943 437 1944 503 1945 553 1946, 564 1947 612 1948• 651 1949_ 719 1950 755 1951 815 1952 968 1953 I,048 1954 1.104. 1955 1,142 1956 1;198 1957 1,265 I958 I-,370 1959 1,518 1960 1,681 1961 1,839 1962 2,045 1963 2,270 1964 2,491 2,766 196á 1966 3,063 I967 3,368 1968 3;735 I969 4;126 1970 •4,602

(2) Constant Prices (1954= 100)

359 366 392 372 439 395 427 436 458 463 499 554 593' 587 605 641 635 705 732 819 879 925 1,016 1,981 .1,104 1,139 1,1$6 1,222 1,258 1,364 1,475 1,559 1,674 1,810 1,923 2,070 2,234 2,325 2,462 2,628 2,806

Souncrs and Notes: 'See appendix 9,

(3) Par Capita Constant Prices (in dollars)

234 234. 245 228 264 233 247 '248 ,255' 253 268 292 307 299 303 316 307 336 343. 378 399 415 455 488 500 510 527 542 553 590 630 655 690 733 764 808 860 886 929 979 1,035

Central Govcr~ment Expenditure.

(4)' Current Prices

18.7 18_8' 13.7 20.3 20.6 17..6 22.2 20.6 2I.3 22.8 255 29.5 29.0. 31.5 44.2 52.8 64.6 72.8 105.1 102:3 103.4 115.5 116.5 12x1:7 141.2 161,6 171.3 18'1.0 189.0 225.0 233.3 242.1 274.1 307.7 319.6 375.5 425,2 479.8 566.0 686,0 743.6 834.2 975.7

(5) Constant Prices (1954=100)

'(6) Per Capita Constant Prices (in dollars)

Expenditure as Proportion of GNP (8) (7)

(4)1(1) (6)1(3)

. 24.9 29.2 34.2 30.8 36.1 30.5 30.4 313 35.5 43.4 42.7 51.7 58.4 67.5. 81.2 95,6 115.4 119.6. 117.5 129.2 130.3 138.1 146.2 166.1 171.3' 188.9 .1825 213.7' 2I5.7 222.4 236.7 258.0 259:8 296.0 328.2 363.2 418.7 493.3 526.9 579.2 640.0

16.2 18.6 21.4 18.9 21.7 18.0 I7.6. 17.8 19.8 23.7' 229 27.3 30.3 34.4 40.7 47.I 55.9 57.0 55.1 59.6 59.2 62.0 65.5' '75.0 77.5 84.6 81.1 94.8 94.9 96.2 101.2 108.4 107.1 1,19.9 130.4 141.8 161.2 188.1 I98.9 215.7 236:1

7,8 8,2 9.4 I0.4 9.8 9.7 9.1 8.4 8.5 9.2 11.2 30,1 9.5 11.6 12, i 12.8 73.2 18.6 16.7 15.9 16.1 15.4 15.3 14.& 15.4 15.5 16.5 15.8 17.8 17.0 '159 16.3 16.7 15.6 16.5 17.1 17.3 18.5 20.4 19.9 20.2 21.2

6.9 7.9 8,7 8.3 8.2 7:T 73 7.2 7.8 9.4 8:5 9.3

9.9 11.5 13.4 14.9 18.2 17.0 16.1. 15.8 14.8 14.9 14:4 15.4 15.5 16:6 I5:4' 17.5 17:2 16:3 16:1 16,5 15.5 16.4 17.1 17.5 t8.7 21.2, 21.4 22.0 22.8

SOCIAL AND ECONOMIC STUDIE

the 19íí6s. ]'t is tlfis six year perio1 lit the 1940s which deserves deeper analysis. A similar but less dramatic upward displacement is also noted In the Puerto Rican case during the 1940s, at which time central government expenditures as a percentage of GNP rose from a low of 9.5 per cent in 1941 to a high of 18.6 per test# in .1946. That this new plateau remained at a higher level than the previou$ plateau of the 1930s is evident, i.e., displacement was not a tempgraiy phenomenon. Thus, there appears to bé strong evidence, in terms of'curreat prices, of a permanent upward displacement having occurred in both countries during the mid to late„ 194Os Before pursuing this apparent phenomenon further, the. so-called pemtanent influences ..of population and price level changes on the relative expenditure pattern must be accounted for and removed, for undoubtedly a large part of the absolute growth observed hi both he GIP and expenditure series is due to population growth and currency depreciation. Allowance for price level changes generally means elitaination of the influence of inflation, for over the period analysed the ov+~raTprice level, as measured by various price indices, lose in both cases (although it remained quite stable. in the 1'1.ºmérdcah Republic of the i.95th). The indices employed to deflate the data are evidently the best atiailab'e, and are most. appropriate in the Puerto Rican case after 1947. Jse of a wholesale price index to deflate Dominican public expendituré data is dictated by the absence of a more appropriate deflator, and the results are severely limited since it applies to the city of Saizto Domingo alone. Expenditure data. expressed in real terms are found in cohinins 2 and 5 of Tables 1 and 2. Although absolute expenditure growth is consequently diarainished, it nevertheless. exhibits a .rnultiple it~Úrease when comparison of the ..initial. year data is made with to terminal year ¡aaf.istics. Since the population of each country increased steadily over the years (with the exception of several years In the 1950s When Puerto Rican enugmticu to the United States was so great as to counteract natural growth.), growth rates of real per capita 4a1a are further loweredy refto eoh msas S and 6 of Tables I and 2. Despite removal, ermi:.e should he an of the permanent cfiucnres the tirláe pahem cif relative public expenditure growth remains essentially uncharged (compare columns 7 and g of Tables 1 and j). hu5, recourse must he had to other methods and tla#atireakdowns to explain th$ observed proportional fluctuations. PLC 'Ifl NAf. PFrUIi l=• CATEGORIES '1n order to getter itmtify th4o reasons for the upward displacement the data are disaegregated, into functional and eeonomi.c categoric. The functional categories selected are basically selfdesürhstive, and an effort war made ₹o insure comparability between the Savo country eases. One difference does stand out, however:'The bulk of Domir ica j íuttays on `Piotehou of Persons and Property' is composed, of spending on he national armed forces, whereas Puerto Rico is spared such exhaustive expendliures, since they are assumed by the United States federal government. Although it is not customary to present debt service (both principal and interest payments) as a

PUBLIC EX1ENYt1TURE PATFERNS

public

directly

separate category, nor indeed to include debt principal payments as part of public expenditure, there are several compelling reasons for thus proceeding. The public debt in both•nations is/was largely external, and since both are/were highly dependent on foreign capital the government must manage its debt in such a way ºs-to maintain good external credit standing. Such management draws on funda that might have been employed in other functions, and certainly causes a drain on the national treasury in they :particular year the amortization payment is effectuated. fá is true, of course; that this procedure involves double-counting; Le., in the year loan revenues are spent and again in the year the .principal is repaid. "However, double-counting arises in terms óf the entire time period covered by loan contraction and liquidation, a time span usually much longer than one year. Therefore, in .terns .of expenditure data relating to one year alone little double-counting occurs. Máreover, debt service payments have been linked with political policy, especially in the Republic's case, and in the final analysis this study deals with the politics of public expenditure patterns. As will be shown below, these expenditures represent a vital factor in idkntifying the causes of Dominican upward displacement in the mid-l940 ° In the Puerto Rican care debt service payments remained at a proportionally high level throughout the 1930s, and since 1350 a large portion of the increase in the Corñmon*calth's capital has been financed through bond issues floated in New York.

Only the disbursements of the central government are "accounted fgr in the functional breakdowns presented below, and .grants to municipalities comprise only those monies emanating from 'owned' central. government revenues, thereby excluding those revenues collected for the municipalities to augment administrative efficiency. Since bout nations are unitary states, such a procedure involves ignoring the disbursements of the municipal governments. Exclusion of Do minican municipal data 'hardly distorts at all the growth of Dominican public expenditure, for if grants to municipalities are subtracted from municipal spending the' total expended by the local governments never rises above 5 per cent of central fisc outlays for the entire period. However, some. distortion is introduced in .the Puerto Rican case. Clark [9 p. .149í found that iÍí 1928 municipal spending comprised approximately 50 per cent of central government spending after allowance is made for grant-financed disbursements; this proportion steadily dropped oyer the ,years, reaching about per .cent in 1945 as the Puerto Rican displacement' began to make itself msnifbst. Since that time it has fluctuated between 12 and 17 per cent. Given the difficulty of distributing municipal non— budEeta,y expenditures among the functional categories these disbursements (boor budgetary and nonbu4getary) are wholly excluded, thereby understating the magnitude of the 'true' non-commercial/trading public sector. However, the mmiicipal. otals are to be found in Table C-2 and C.3, which contain data conceming the `consolidated' public sector. Finally, central government grants to public corporations, public service entetgxises, acrd trust funds have been distributed among the categories according to "purpose; e.g., contributions to a public corporation engaged in the prorñotion of industrial development are allocated to economic development.

Th.EiLE 3

EFEP1I*TtI1

Period

1944-TSJ 1944-50 1950-60 196070 1942-4$ 193076

Gress National Product (cu7reat prices) (constant prices) i)oxu. Rep. F.R. Dom. Rep.. P.R.

9.0 13.3 6.4 .3 11.5-

9.7 1(k2 $.3 10.6 9.4 7.7

$ .4P GRoss NtTIS1NhI,. P1O»UCt, C

FP.hi. GOVERNMENT 193d-137t7 AND Pi?P'U1.EiTiltBN; D)M1NiICAAT RGPü~LiC AND P[IE*TQ `R1Go,

QJMuI.AxlvE ANNUAL GR4WTh R

4.Sa 3.9 5.5 4.1 --Z.6

añe~nni~tg Xcac of parlod 1a 1941.

3.9 3.8 5.3 6.6 3.6 5.3.

Government Expenditure (Current gait) (constant Prices) Dom. Rep. P.R. Porn. Rep. .Pi.

lt}.S 22.4 £0 5,8 $3.1

I2.4 14.9 8.9 13.5 iS:2

10:2

6.8 3.6 3.9 17.5

9.4 1I.8 6.2 10.6 12.4 @.S

Population Dom. Rep.

3.0 2.5 3.6 2,3 , 2.4 2,9

P.R.

1.3 I,7 0.6 1.5 1.7 1.4

~ ~ e~ n ~ ~

L'tT11LIC EJCI'LbiI3ITt7RE PArTEhPIá 4. CArl:cc>•Rx,

LltiZLE

Year

1.6 1.2 1.5 1.2 15 I.S 2.3 í943 NA 19•14 NA 41945 NA 1946 NA 2947 lrfA 1988 10.2 1949 11.9 1950 12.8 Í9Si 12.0 1952' 15.8 1.953 12.3 19'S4 15.3 1955 211.0 1956, 19.6 I957` 16:1 2958 19.2 39S4 I6.3 19r 0 16.8 1961' 18.4 1962 20.0 1963 20.4 1964 70.9 1965 11.7 1966 21.5 1967 15.4° ' 1968 18.5 1969 22.8 I97a 26.0 1936' 1937 1938 1939 1940 '1941 1942

Generát Admihlsua lion

CENTRAL GOVERNMENT Yrat•ái31E BY FI1NCrIQNAL 13pittINICAIV REPtT9Y:IC, p93tri970 (millions of RD$)

•1rotection of Potsons and Debt Service Property

Education

2.7 ', 3.0 3.0 33 3.5 3.6 4.0 2.22 2.9a 32a NA NA 15.0 15.1 •23.5 24.9 a. 35.1 31.0 29.6 26.4 31.6 37.7 42.5 52.3 45.5 38.8 52.2 52.5 56'.7 43.3 52.8 45.5 46.3 47.5' 47.9

1.0 i.Q 1.1 1.3 I.4 1.3 1.5 1.6 1.8 1.9' NA 3.0 3,3 3.7 4.0 4.6 8,3 7.9 7.9 9.5 10.4 11.6 11.8 11.3 9.1 9:1 13.2 17.8 24.6 18,5 26.2 28.8 30.4 36.3 42.0

1.0 1.7 1.4 1.6 14 1.3 1.6 2.5 1.2 1.9 5.7 18.0 23.0 17.1 23.8 26.6 24.9 39.3 0 0.5 1.6 3.1. 2.4 3.3 3.5 2.7 77.2 2.2 ?.5 12.1. 6.5 6.5 6.5 70.8 11.8

Gnmtsto Soaa1. Economic Municipal. Development Development Flies

0.9 0.8 0.9 0.9 1.0 0.9 1.4 1.5 2.2 2.4 NA NA 10.3 t 7.3 7.8 92 10.8 9.3 10.9 14.1 14,7 13.7 17,.8' 15.9 15.7' 16.7 18.7 23.1. 23.0 21.1 25.9 31.8 353 36.8 45.3

3.1 2.5 3.4 2.4 21 3.0 3.1 4.1 6.9 5.8 NA NA 233 18.1 17.5 23.7 32.3 27.7 40.8 54.1 62.9 66.7 66.7 49.7 52.0 46.5 49.6 57.4 63,6. 22.3 45.0 56.7 59.7 70.2 16.9

0.3 0.3 03 0.3 0.3 0.4 03 0.4 t).5 0:8 0.9 09 12 1.1 13 1.2 1.9 , 2.4 3.2 2.6 3.t 4.3 4.1 6.1 4.7 6.8 13.8 16.1 16.2' 10.9 10.8 133 11.0 11.0 9.7

Total

10.6 1dk5 11.5 1t.S' 12.0 12.0 14.2 19.2k 264b 29 tb 42:9b 732tr 884 74.3 90.7 102.2 129.3 129.9' .107.4 '127. 144.6 IS3.0 164.5 154.9. I47.3 I39.0 184.7 159.5 2123 145,7 188.7 198.0 207.7 2354 259.6

a1nciudes dtfense a ptndltv+es only, as other Inclusions{e.g., poticej are not avnilal1e. bDetsils do not add to total due to zpaclOe funetiouai category exclusions; the'

itself is,hoararer, reliable.

CSincc Dominican official' statlstiiu were presented until 1967 an the bads of s, ssdlrlg by minitrFea+ the data In thus caterpty are probably overstated during cll previous years, for all tt o diabursementa whi-ah vera o nciasslliable'lh any other category were included here. NA -• J ala not available. Soureerr Appendix B. Prrbl c' Erper.diture Data.

SOCIAL AND ECONOMIC STUDIES

56 . TABLE -S

Year

1928 1929 I930 1931, 1932 1933 1 l935 I936 3937 1938 1939 I940 1941 1942 1949.

1944

I945 1946 1947 1948. 1544 1950 195] 1952 ¡953 3954 1955 19SG 1957 19$fi 1954 1960 1961 ¡962 1963 I964 i9b5 1966 1967 ,19641 1969. 1970

CENT4tAi. GOVERNMENT EXPE2dDIT{.►RE° NY FUNCTLONAtL •CATGfáRY, ,PUERTO RiCot 1928-197.61 (¡rtilliolls of current. tTS$),

Caaeral Pratec@'on of Administra- Psrsona'and 13ebt tüta Property Service

7.1 2.3 2.8 3.1 3.3 3.0 2.8

2.9

26 2.8 3.33.4 3' 3.0

2.2 2.6 2:7 2.9 2.8 2.9 3.3 4.0 4.6 4.5 . 5,1 5.2 7.9 7.8 8.3 10.8 14,7 15.0 15.4 17.4 13.7 22.0 22.5 21.7 25.6 25.8 27.4 33.6 34.1 41.9 43.11 56.5 70.1 73.1 74.8

5.6 3.6 2:6 5.0 2.1 3.0 4.4 8.6 4.8 1.5 3-0 1.0 0.9 1.1 1.2 2.0 2.4 2.6 2.6 3.7 5.7 4.3 S.1 S..i 12,6 133 15.5 17:9 20.7 23.6 264 28.9 33.4 36.6 43.p

2.1

3.2 3.8 3.8 3.8 3.9 .r 4•5 S.l.

7.0

8.4 10.7 12.0 12.8 13.4 13.5 13:8 14.1 15.9 18.0 ¡8.6 19.? 17.9 20.1 20.9 22.7 25.9 2.4 39.5 35.1 40.0 46.2 49.5 53.7 59.8 63•0 67.1

2.8 2.6 2.7 2.1 2.3 1.9 2.1

2.7

Education

Grants to Social Economic Municipal -Tota1 Development Development, ities

4.11 4.9 4.8 5.0 5.4 4.5 -4.6 5.2 •5.5 6.2 74 ?.9 •8.0 8•I 11.7 i12 i l.á '16..1 16.7• 27.2 32.6 35.6 33.1 32.2 34•0 37.8 40.3 43.0 52.1 61.6 62.9 68.2 74.4 93.5 98.6b 106.8 1243 139;8 150.9 194,9 2R9.0 2314 276•5

2.0 2.1 3.1 33 3.3 2.0 t 5.4 t 3.8 2.3 2.5 4.2 3.9 4: 1 4.5 53 áS 13.9 17.6 32.7 30.3 21.1 32.6 35.8 38.9 44.5 50.8 56.5 56.6 55.5 72.7 69.1 63.0 79.0 79.3 84.2 101.4 I$74' 134.8 I59.? 174.9 18`3.0 223.8 264?

4.7 4.2 4.0 3.4 2t8 2.3 4.2

s.7

2: 4.2 4.6 ' 5.7 7.7 8.1 IS.? 14.5 20.6 18.5 343 253 r ' 26.7 23.8 23.1 23.9 290 342 32.0 45.7 35.0 4I.7 50,3 52.9 52.1 64.8 60-0 74.2 82.4 86.'I 228.36 1649 168.5 190.5 2.26.5

0.1 0.1 0.1 0.1 0.1

02 0.1 0.2 0.3 0.2 0.2

0.3

0.4 0.4 0:7 • 1.0 1.4 3.8 • 1.0 0.5 0.8 1.1 1? 2.8 32 3.2 5.6 3.2 4s1 2.6 2.5 5.1 43 4.6 4.4 63 6.3 64 7.4 '12.2 13.8 I5:6 18.5

18.7 19.7 20.3 20.6 17.6 22.2

20.6

21.3 22.8 25.5 29.5 29.0 313 '44.2 528• 64.6 72:6 ¡05.1 102.3' ~ .103.4 ' 115.8 I163 1243141.2:• 161.6 1713 189.0 J84.0 725.0 233.3 242:1. 214.¡ 307.7 3i9.6: 3753 425.2 479.8 566.0 686.0 743.6 834.2 975.7

5Ctutsnt and capilai gams14 public corpptatianv arstIistrihtrted ºmang 11te categoric'. bluchtdtx those sxF.endthtt 'o£the U 3ntrsity of Pu n Rica financed by' the' t'enuel gdvernrnent although for budgetary perp iee'the un1vernty ttceune a pt3lic cnrpuraiinn to 1967. cincludes central governrneer financed eaprndttttres of the' i4edical Center in Rio piedzse. 61ne'iudes current and capitsi expanditnrce of the' HiEltsrays Au,ltnr11y heginningin i11ó6. Situa•ee:.4ppe'ndix 6. JrtbVr Pzprrdütrre Thu

~ ~

PtiBUC EXPENDITURE PATTERNS ` CENTRAL ~`soV73RNbENT E7CPENIDlZ`iJli1.* BY Funtc~rao23A1~ '. eATEcloRY, DoMINICAN REF43BLIC AN1 Pi3ÉitTÓ RI"Co; I128-#97O; (percentage distribution}

TABLE 6

Protection'Year

Pcrs. and

[Debt

AáA>jnist. D.R. P.R.

Prop,. DR. P.R.

Service Ilk. P.R.

11.8 -13.6' 14.2 .. 16.3 76,5 27.0 .133 '13.1 ).4 26.3 94 15.11 9.5 13.2 10.2 9.5 12.1 77a) ]I_3' 13.3 31.1 73.3 12 10:8 10.8 9.5 10.6 11.3.a lil.0 3.8 ; , .16,1 , 8.3 6.8 4.5 7.4 .6,4 •6.41 ~ 2.7 133 Z.9 -• . 43 '24.6 1'_0 26_ó -05 3.9 1.0 8.0 22.0 1-0 4.4 26.2 7•6 4.5 26:0 6.4 19.3 1.7 30.3 1.6 6.1 ?.3 0.4 1.5 7.5 0.4 2.0 3,0 7.2 i.1, 74 2.0 1.9 7.2 1.5 2.'2 2.1 3:3 7.3' 2.4 6:2, 4.6 (i:5 1.9 &; 7.1 '3.3 d.8' 1:2 4.8 9.4 11.11 3,5 4.9 8.3 127 •s.9 3.4 4.7 1.3.9 3:3 42. 14.5 14.6 3.1 4.5 4.6 15.4 4.4 4.5 4:4 26.2

1928 1929 -' 1930 1931 •1932 1933 1934 1935 1436 15.1 3937 111.4 1938 129 1:739 d0.4 1940 12.5' 19.41 12.5 1942 ,1G2: 1943 19.14 = , 1545 3946 -• 1941 3948 12.8" 1949 16.0 1950 14'.1 1957 11.7 .1f152 12.2 9:5 1953 1954 14.4 1955 1S. 1956 7.3.6• 1957 30.5 1953 71.7 1959 I0:5 1960 1:1.4. 1961 13.» 1962 30.$ ¡963 10.8' 1964 9.Z 1965 123 1966 ] 1.44 1967 7$ 8.9 1968 1969 9,7' 1970 10.0

13i 12.2 14.2. 15:3 16{1 11.0 12.1 14.1 IS:Ii 15.4 15.0 12.9 13.4 14.3 33.5; 33.3. 13.0' 14:7 11.4 12.5 13.9 1I.7 ('t.8' tI.3 11.3 '11.3 10.9 10.4 9.'s' .8.9 9,0 9.4 9.4

8.9

9.2 9:3 9.4 9.6 827 7.8 8.4 7,6 $.9

-• -

'-25:5' 28.6: 25.9 28.7 242 30.0 28.: i.l'.Sa I.'10a I0:7° IZ4 20.3 25.9 24.4. 27.2 23.9 27.4 20.8 21.9 24:fi 25.6 33.8 30,9' 27.9 28:3 27.7 26.7 29.7 28.0 23.0 22.3 20.2 18.5

154 13.8 10.7 'I0.3 11.2 10.8 93 70.2 10.3 31.4• 10.6 9.8 9'? 9.2 15 1.6 7.1 6'.3 4.9 S.1 7.6. 6.8 7:1 8.7 117:1 +3.3 9.0 •9.2 9.8 9,6' 9.0 9,.'s 8.4 8.81 $.9 8.0 8..1 77 8.2 94

8.8 8.2

.'-' -

Grantc ta Mtiiti4ip1t1- • Development Development itics , 1:}.R. °,D:R. PR. D.R. P.R.

Economic

Sºt:i111

General

Edvratiºn D.R: P.R.

P R.'

25.1.

._ -•• 10.7 25.7 26.1 'i'1'-2 - , '22.3 24.4'. ) S.7 *3 36.7 244 16.3 13,6 -• 262 -16A' : 13.1 25.6 '11.4 18.9 •20;7 , 24.3 18.0 252 -18,4 28 85 10.8 29.2 ' 10.3 25:8: 27,2 7.6 2.9 11.0,- 2.3.8• 18.4. 7.8 ~ 26'.5 I.6 29.0 293' 18.0 2. '7:8 193 16.8 13.2 252 26.6 2.5 8.3 1.4.1 22.5 27.4 25.7 3.3 7.5 14.3 25.9 25.7 25:, 2:1 9.9 IZ.ü 21.8, 353. 22.0 7.8 27.5 2.1 12.3 21.4 1:9 17,0' &3 21.4 26.I 319 .2.7 8.3. 22.2 24.•2 '19.5 28.4 154 -32.9 -32:1 -- ' 29.6 - ' '27 1.2 26.5 1.4 313 113 20.4 23:8 27.9 30.8 9.8 20.6. 4•.5 28.2 24.5 28.4 8.6 1.4 30.7 1.9.3 19.8 I.2' 25:8 9.0 31.1 23.2 I9,2' 8,4 25.0 20_S , 1.5 24.1 335. 24.4 7.2 31,d 21.3 212 ' l.& 23.5 10.1 33.2 39.8 18.7 3.0 22.3s 11.1 29.9 425 24.2 2.0 18.5 43.5 2:6 27.6 10.2 29.4 21.4 9,0 43.6 32.3 18,5 2.7 4115 21:6 27.0 30:8 29.6 25 3.9 28.2 30.3 26.2 32.'1• 21.9 19.0 103 28.8 35.3 3.2 27.7. v.i 33.5 21.I 4.9 12.0 25.8 18.8 26.9 7:SI 30.9 10.1 ' 26.3 19.6' 22.4 '-1'2.Z 27.0 36.3 85 39.4 i0.8 27.6 29.9 7.6 29.2 7.5 28.F 18:1 29:1 34.5 15.2 28:7 22.7 '5.7' 26.7 7"3.7 23,8 24.0 2ts4. 16:3 25.5 28.6 6.7 28.7. 22.7. 53 17.0 15.4 28.1 4.7 35.6 29,8 22.8 2.7:8 26.8 17.4 27.1 3.7 28.3 29.6 23.2

ale€ease a epeu6i1ures only. A'até: lJelailsmey not add to IOIXO'prr ecnt due to founding. Scurry: Tables 4aad 5_

0.5 0S 6.5. 0.3 0.3'

i•.4. ¢.9 0.8 '1.O .t4 13 k.6 1.9 2.2 51; ~ t.0 03 9.8 •lA

131 •7.x 0.4 2:0 3:3 1.'f 2.2 1.2

1.1

2.1; 3.6 1.5 1.4 I.?' 1.5. 1.4 7.3, I.8 3.9151 39

SXIAL AND ECONOMIC SWDIRS

man. of

various

led

had

cunt

which

under

per

Convention

-American

Dominican

The affairs.

Receivership,

Customs

U.B. a

established

1907

foreign

Dominican

interventions

1869,

since accurnnlated

debt,

external

Dominican

The

one

public

official

prvate

orya.

Reference is made to Tables 4-6 to .discuss the .f tiónat expenditure ) data. The Dominican data in Table 4 covering the years 1936.1947 (1942 ex are budget figures, not actual expenditures. However, due to he consezyative nature of Dominican budgetary practices in hose years there is most likely a close approxñne tina of ,actual disbursements to projected outlays [8, p. 253) . Unfortunately, this was not the case for the four vital years (1944-1947) which witnessed the elusive upward displacement. Expenditures in these years greatly exceeded budgeted outlays because of extensive revenue rises due primarily to high, export prices; the latter subsequently increased the capacity to import, and a major portion of public revenue was derived from ,import duties and. taxes An additional problem was created in inter prating:the functional data for these four years because the m sde o€ presentation was completely revamped. .As a iesult it is necessary to omit entirely=any figures for certain functional categories in the years 1943-1947,. and .to omit, for all categories excepting debt aewice, he year 194kí. However,, since the data for the initial year and the terminal year (1942 and 2948) of the displacement period are actual and reliable expenditure figures, compensan of the changes undergone within the functional distributions is feasible, although.it is not possible to chart the exact year to year vanslions. .Although the. reliability .b1 the Dominican data may be fairly well accepted in sense,, a knowledge of the historical background of the years just-mentioned the 1930-1961 reduces one's confidence in thé validity of the official €fires. 'Under the Trujil€O dictatorship the Republic. was converted into a tightly controlled, totalitarian state, iii which unrestrained, economic tyranny was the male. The country became the fiefdom of one family Brad an ever-changing coterie of friends,. thereby blurr between goverment expenditure on public and on private account; distinction the environment it is certainly legitimate to question the validity of the data such an in preserited is the publications, and there is no alternative but to do so. Table 4 reveals he fairly áteady growth of Dominican outlays by functional category over the 19264970 period, the one sagnificant exception being debt service spending (to be discussed below). The percentage distributions presented fa Table 6 reveal that spending oú the protection of persons and property (military included) normally claimed one-quarter o€ publc resources, in stark contrast to the Puerto Micas percentage distributions. Expenditures on education only in recent years form siguificant portion of public disbui erraents, whereas outlays on economic development were consistently high, especially ist juxtaposition to those on social development. Over the 1942-1948 interval the principal determinant of the upward displacement was the 4 bt service category in 1942 debt service comprised 11.3 per cent of total _expenditures; this proportion had risen to 26.6 per cent by 1948. The reason Dominican debt payments rose so abruptly as to partially cause a tripling of the relative public expenditure level has its base in history and in 'the psyche

PUBLIC EXPENDITURE t'ATTEPJIS.

.cc'llectious were to he applied to discharging debt obiigatkms.~ A period of increasing internal debt was followed by. a LLS, military occupation from 1916 tº 19?4. By the Trujiihrliufl Treaty, of 1940 the Receivership was terminated, and from 1944 to 1946 •amortization was made at en accelerated pace, Establishment in 1947 of a central bank, the substitution as legal tender of a new Dominican peso for the previoris.medium; the dollar, and the accumulation of large gol&and foreign exdinge balances during the war and early post-war years enabled _the gove tent to totally liquidate its external debt in 1947. Deb₹ payments maintained their high relative and absolute levels in an endeavour to also liquidate The internal debt, which was accomplished in .1953? The drop in total expenditures in 1954 should be noted, foi it is due' almost entirely to changes in the debt seroice category: Thus, the `how' of the 1942494$ upward displacement;is partihlly explained. 'ro' answer the question of`why_' .iº happened is more difficult, for recourse cannot be made to the `crisis' explanation of the ?eacók=WisexuFart hypothesis. No real internal social disturbance took place. Rather, and in obvious speculation, Trujillo may be re- rded as an economic nationalist, at least in this case. His desire to'liquidate.the external :debt may well have been rooted in the sordid history of the Republic, so prone to foreign interference. it is nut difficult to .posit that .a man of so great an ego would chafe under the burden of on lahie control? In addition to the `psychological' theory of Dominican displacement, events in the:external sector allowed the :requisite revenues to be collected. The Republic is a classic export economy. During most of the period under study exports accounted for approximately 25 per cent of GNP, ,wade, as previously seated, exports and imports combined averaged up to 40 per cent of grass output. Import-export related #alt reverruc fluctuated between 40 and 50 per cent of tax•collectious. Actually, two schedules of'irrtport duties were extant, a customs duty proper and internally collected taxes on the sale, 'use, and consumption of the same goods. From 1945 to 1948 imports grew march faster the exports, rilthongh a favourable trade balance was maimtamed. World War 11 had left .the nation with shortages o; both capital and consumer goods pent-up demand for imports and large foreign exchange reserves accumulated as a result of. exceptionally hilts wnrjd martat prices, for Dominican primary exports permitted imports as a percentage of GNP to rise from $ per rent in 1945 to 23 per cent in 1947;u imporft-export related tax revenue increased from 5 to 10 per cent of GNP hlwecu 1945 ad • 1947. Mon over, he effective tax rate relent to imports (calculated by ,dividing import tax revenue by total import value) did not, at.this' time, rise s_ignifipantly.'s 'Although .upward displacement attained its peak in 194& he. subsequent decline placed the economy at s higher plateau than prior to 1942 (see Table 1,. cofuam 7). 'Exports and export prices did not continue to increase at a faster rate than national product, so that the continue. relatively high level of public spending was rrraintained by rasing the effective tax rates on consumption, itport tax revenue as a proportion of imports rose from 33 par cent in 1948 to 57 per cent in 1950. Throughout the entire decade of the 1)50s he effective import tax rate varied from 35 to 57 per cant, averaging 44 per cent. Ftarthermore, the effective tax rates not related to the external

scycL.b., AND ECONOMIC STÜDkT'cS

exemption

offered

tax

trough

sector,

private

The

development.

economic

lino

act

sector (principally indirect taxes) averaged 12 per cent of GNP after 1948, having risen from b to 12 per cent of G14P in the 1942-:948 period, and reached a maximum of 16 per '.cent in 1953 when the internal debt was liquidated. Since it is in the nature of such consumption taxes to be regressive, to tax burden on the Dominican was heavy, due in part to an extremely unequal income. distribution. Thus, Dominican displacement was partially financed by a rather high to burden on the Dominican populace. it may well have exceeded the bounds of tolerability, and certainly citizens lacked he privilege to articulate their views. This, of course, is in direct contrast to what has been concluded in other studies pertinent to more developed and/or more democratic countries. Peacock and Wiseman [2i p. 261.. state, for example, that no government, dictatorship or democracy,. "is likely to without any consideration at nil of the mews of its cffzens." A tiuism indeed, but even a nzperfthl knowledge of the Dominican Republic under Trujillo leads one to conclude that littlé, ,if any, heed was paid to citizens' desires. The Puerto Rican functional data of Table 5 fit well into their historical context. The decade of the 1930s was an era of economic stagnation, high unemployment, and u basically passive insular government. Real per capita gross output remained, for all practical purposes, almost constant throughout the epoch, its low point being reached in the heart of the depression in i933. Public measures to stimulate the economy. were; of course, cóntrary to prevailing philosophy, although the U.S:government did fund, emergency hurricane relief after the hurricanes .of 1928. and 1932. As Table 2 demonstrates, until 1939 central. government expenditure never comprised more than per cent of gross output spending (1932 a slight exception).z7 The late I 930 did witness the rapid growth of public disbursements on social and gconomic development, the latter primarily involving the construction of roads and ydroelectric plants. At this time well-doewnented political changes were occurring, changes which would. in the coming decade(s) significantly alter the structure .of the economy and the pattern of public expenditures. The formation of the reform-minded Popular Democratic Party in 1938 under the leádeiship of Luis Munoz Mauro, its election victories in 1940, and x944 .and .I948, and the. .1941 Roosevelt appointmeat: o liberal Rexford. G. Tugweil as gor'ernor combined to forge a paciflc. socio-economic revolution. Change was retarded in the early I94Os due to the constraints imposed by wartime, but accelerated abrnp₹ly as the war came to an end. 1t ,is precisely this historic period which witnessed the Puertó Rican upward displacement effect (see Table 2, column 7). Tables 5 and 6 reveal he emphasis planed upon_ publicly-promotad ecrnac nnic development in the I940s, while at the same time social development and education were not being slighted_ in the latter years of the . 94Os and the 195(ís a switch in direct emphasis was effectuated in public expenditure policy, as the promotioa of atrial development took precedence over that

to ies) denc infrastructure.

relative

late

the

increase

the

interest

economy's

develop

the

depen

own.

its

(and

corporations

public to

aid

grant

frsc

central

provided

newly-established tuns regardless of the origin (resident or non-resident) of the capital, was given primary responsibility for economic development, although the

PUBLIC EXPTaN1M'WRE PATTERNS

1960s in outtays on economic development, when road and highway constntcºion received gene ved prioriiy. . L~ettinain to té l940a. promotion of social and economic development was fashioned along twin channels, separate but closely linked. The central government itseplf established the overall reform-oriented policies with its expenditure patterns; f irthenttore, it legislated the establishment of an,eventítal myriad of semi-autonomous public corporations which also served ru carry ont'policy' objectives. The'data in Table S do not reflect the aggregate import of to public corporations, the most important at which became largely self-financing. Only cen teal governmemt grants to these bodies are, incprporated in the data, and as such understate the relative growth of the public sector. It is postulated that. many of tt.4 functions uiidertaskert by the public corposatYops might just. as well have been carried out by the central government itself;.however, operating under the political-philosophical corstraaif t of a free enterprise' systerrix the explicit presence of the pttrlic sector was reduced in rnagnitude.u$ Table. —3, the `consolidated public sector, permits one to gauge the `real' proportional growth of the Puerto Rican public sector between 1940 and ,1954, and it becomes apparent that the Puerto Rican upward displacement effect was still not quite as siigniilcant as was that ,of the Dominican Republic. What n'e today he most important public corporations (with the exceptign of he Housing and Highway Authorities) all began operations in the fiscal years I942.1945,`a Trough 30 June 194.5, actual ínsu tar govQrnrnent grants (ass opposed to appropriations) ro .these semi-public entities amounted to B22.Ó million; through.3t) June lye?, grants. totaled $6'2.7 million, whereas general fluid authorizations summed to $1.29 rWion as elf 31 tiecember 194?; through. 30 June 1950, insular grant expendlittre on public corporations had aggregated $125.9 miltion:20 Of this latter total thé Land Authority, t t industrial Development Company, and the Development Bank haac}, received almost exactly 50 per cent. Thus, part of the cause of the Puerto Rican csplacement is identified and quantified, as a large portion of to econóniic•ancl social development expenditure increase is due to these grants. Further: accentuating the relative growth of the public sector during the mid-I940s are the expenditures of the Wa`r p.naergency Programme on social "mi economic development. Spending on this temporary programme as a, mere $1.$ million on fiscal .1943, but had risen to $16.2 milion'by 1945. .. A good part of the capital expenditure increase in 19945-1946 was due to the construction and maintenance of toads financed through this programme (see Table ). The government was able to partially finance the displacement through a fortuitous set of circumstances. Although the domestic tax burden did rise, such effective rate increases cannot entirely ex lain the relative expansion of public sector diSuzrscments. World War II had cut off European exports of alcoholic beverages to tine- United States, and American domestic production derived from cereals had also decreased. The Puerto Rican ruin export industry arch thereby stimulated, and. by 1944 rum distillation and bottling had become the island's single most important manufaatsring industry. Federal (U.S.) excise tax collections on the sale of Puerto Rican nana within the U.S. reverted to the insular treasury, so thát the years 1941 to

St3CIAL AND 1rGX1Nf31KIC S73'L3DIE5

' 62

'TABLE 7

CETRAL GOVERNMENT CCtRRfiNT AND CAPITAL EXPENDITURE, 1928-1970 (millions tJ1r current pesos{dol€ars)

DOMINICAN REIUPLIC AND PuE1t7Co RicD,

Year 1928 i929 1930 1931 1932 1933 1934 1985 1936 39,37 1938 1939 1940.. 194I I942 f943. 1944 •1945 3ld•6 1947 1948 d.9,49= 1950 1951 , _3952 I953 1954 .1955 1056 1957 lr}58. 1959 1080 IR6t I962 191i3 393í+t• 1t!65. 3966 1467 19¢8' 1Ot» 1970

Cllrrenta ' Il.R. P.R. -• -

14.7 15.5. 17,3 •-18.2 .18.8 -- .. 16.5 20:0 18.4 ,<).1 19.0 8.8 '10.4 9.7 21.9 9.7 25:3 24.3 Iil.6' 10.2 s"5.1 I2.1. 3(i.: 15.5 48,9 231.9 130:0 2:.7 59.7 31•8 '89.7 52.3 86.4 56.3 84.4 49.3 36.0 ' 97.7. £5.0 72.3 .105.1 78.3 .120.2' 89.9 135.7 55.6 144.1 66.3. 763.0 80..4 164.5 94,7 193,4 102.0 204.'? ,I,07I 210.3 308.7 241.0 1064 2727 160.1 '285.7166.3 831.7. '1538 373,9 -i3ó:7 412.3 l6'7.3 414.2 342.0 562.4 163.9 622.2 171.8 700.1 1'83:! 832.:1

Carrent sis ffi of Total P.R. D:9 -85.t 83.8 83.6 84.3 88,3 85.0 65.2 80.7 79.2 76.2 74.3 71,4 65.2 66,4 72.7 70.7 6^,..7 69.2 51.5 52.0 559 51.9 62.0 '69.1 73.8. 7i,.: 86,7 87.3 66.5 93.3 88.7 132:3 713;43 73.0 7g.d

78.6 82.%,. t[7.8 89.7 9I.3. 93.7 90.1 89.3 dJ.n 89.5 85.9 85.8 6:3,8 79.7 83.7 92.6 92:4 82.0 92.3 84.5 . 8'c.6 . 8.3.1 83.4 84.3 85.1 84.0 1141, %6.2' 87.0 863• 27.5 > 86.9 57.9 88.6 694 88.2 87.* 85.9 ff3 R ]i233

Bs,? 82.9 852

Capítalb D.L P.R.. 3.S 1.7 1.9 1.8 1.4 2.8 2.1 3.? 5.5 7.-1 ¡3.1 20,9 3ii.1 250 25.7 29;9 50.8 40.0 52.3 61.0 63.7 58.3 62.5 47.Y 38.6 32.4 24.6. 23.1 2&7 911 21;1 .> 5.41' 43.3 63.b 74

4.0 3.3 2.4 2.1 LB I.I 2.2 2.2 2.3 2.4 .36 4.2 4.7 6.4 8.1 3;9 4.6 13.3 15,-í 1.5.9 1:3.0 19.5 19.3 19.6 21:0 25.9 2'1.2 2634 24.5 33.6 29.1

31.7

33.1 35.0 33,9 41.•ó a1.3 ci7•5 91.6 123.?a 1_1.4 134,1 1434

Capital as of Total B.R. P.R. -• -• -• -a 14.' I6:2 16.4 15:7 I3.7 15.0 14.8 19.3 20.8 23.8 2.5.1! 21=,6 .1.4.8 33.6 28.3 29.3 3.4.'3 30.8 48.5 48.0 44.3 3.r•t 1 35.0 30.0 26.2 23.3 33.3 1:?.2 23.5 6.2, '113 17.7 2.1.1 27.0 29.4

21.4 17.6 12.2 I0.3 8.7 6.3 9.9 10.7 10.8 10.5' 14.1 14.2• 1,6.? 20.3 183' 7.4 7.1 18;0 14,7 15.5 184 16•9 16.6 35.7 14.9 16.0 15,9 13.8 13.0 14.0 12:5 13'.1. 12.3 11.4 10:s; 1I.S 12.3 14.3 16.2 18.0 36.3 36.1 14:7

Toto! D.R. ' P.R. -. -10.6 10.5 1.7.6 12.5 12.0 12.6 14.2 19'.2 26A .29.8 •42.9 73.2 86.a 74.3 90.7 1022 129.3 12?.9 lt)7.9 127.2 144.6 153.0 164.5 154.9 14).3. 139.0 184',7 1895 213.5 245:7 188.7 298.0 20'7,7 8.35,4 259.6

18.7 I8.8 ,19.7 20.3 20.6 17.6 22.2 2Q6 21.3 228 25,5 29.5 24.0 31.5 44.2 $2.8 64.b 12.8 105.1 102.3 103.4 /.15.5 3i6.5 124:7 141:2 161.6 171.3 189,0 389.0 225.0 233.3 242.2 274.1 307.7 '3194 375.5 425.2 479.8 566.0 686.0 743,6 831.2 975.7

',lnrludci cull;st s un gnnd :.nd srVkc nnd transfcrs nnd suhsídtcs,..s r13ua31r : resl/hi.il flgu:c,,sinrr al3 r.. ¡?eud3:urns nnt;4s;amied tu 3v r_girui dlsbar.ethent. were presluned to 3ihve.l>ten nis3la un eurnent 3ec~uRi. I bJnclndee u ilul', fnr clst:st5íe a, ists; '.i., rasds, 8u;ld3ng%, m?cl:inér, . S.:uivrs• 4ppndi it. 1'vbllekkpertdil:rre277:a.

PUBLIC EXPENDITURE PATTERNS

1948 testified to the following "f . hore excise tax revenues flowing into island pi4 lic coffers (in millions of dollars, fiscal years 1941-1948); 4,14,14, 64, 37,33, 18 and 3. The government was able to conserve part of these. "exported tax balances from the abnormally high yield years of 1,944-1946 to equip the economy with social and economic development facilities once wartime shortages had been overcome. In fact, Puerto Rico's current account bn balance of payments shifted fra:n a surplus :j 1946 (and•during tine war years) to a deficit thereafter. Central government expenditures as a•percentage of GNP peaked in 1946, and leveled off at 15-16 per cent in the late 1940s and during he 1950s. After the sudden drop in off-shore excise receipts subsequent to 1947 the government returned to more steadily recurrent revenue sources to maintain its share of gross domestic expenditure.. Economic expansion permitted income tax revenues to increase át a faster rate than national income, so that only a very slight increase in dómestic effective tax rates was required to preserve expenditures close to previously attained levels. Moreover, grants from the federal government continued to provide. around 10 per •cent of total revenue, and 1pond issues were increasingly "emitted (particularly after 1960) to: finance capital spending. Thus, the essentially separate discussions of the Dominican and" Puerto Rican functional expenditure categories do offer support for the postulate that there is a probable connection between .displacement in small, open economies and social disturbances in heir larger commercial partners. In each country case events exogenous to these two dependent economics reverberated to the benefit of their public treasuries, consequently permitting increased (relatively and absohitely) public expenditure levels?t Here the simifrity ends, however, for Table 6 dramatically reveals the different uses to which these revenues were put.

The percentages in Table 6 are further significant, for a much-sought goal in both countries is that of economic growth (defined here as a sustained rise in real per capita income). The .main contrasts noted in this table are those between expenditures on the protection of persons and property, education, and social development; whereas the percentage distribution of outlays on the former is consistently'higher in the Dominican Republic due to the maintenance of military establishment, the proportions allocated to the latter two areas are consistently higher in Puerto Rico (where absolute expenditures are also greater). In terms of these factors alone it is not sürprising that Puerto Rico's real per capita GNP level rose nearly 300 per cent over tkme 1940-197'0 period, while that of the Republic increased only a bit over 50 per cent. Krueger [161 estimated that educational levels accounted for one-turd to one-half of the differences in per capita income levels between the United States and a sample of 24 less developed couifriys. Of course, it is overly simplistic to suggest that public expenditure allocation is even the principal determinant of the observed increasing rela.€ive gap between per capita gross income levels in the two countries under study, for a host of factors coree into piny (e.g., political stability). Nevertheless. Table 4•-6 are at least partially indicative of the policy implica"dons regarding public expenditure alloeatiarn .between functions.

SOCIAL AND ECONOMIC STUDIES

note

saw

well

CURRENT AND CAPITAI. EXPENDITURE CATEGORIES Table 7 breaks down public expenditures into current and capital (asset-creating) account, and from first glance it is evident that relative expenditure on capital account in the Republic was amazingly high in comparison to that in Puerto Rico, comprising over one-third of total spending from 1948 to 1960. Since capital grants to the Puerto Rican public corporations are included in this table undér current expenditure duFe to data deficiencies prior to 1946, the figures are really undarstaternents of the central government's contribution to capital formation after 1941. But even if this were accounted for the Commonwealth proportions would generally be lower than those given by the Dominican data over the 1943-1961 span. This is not surprising, however, given the greater reliance placed by the fonner'spublic policy on the róle of private capital in economic development. Furthermore, Puerto Rico's relatively greater access to and attraction for private capital diminishes its need to seek capital growth through public sector mechanisms. It is observed that Dominican expenditure on capital account grew at a faster rate than that on current account and on gross output during the 1.942-1948 interval, thereby accounting for another portion of the upward displacement (debt amortization payments, which conceputally might be classified as capital account expenditure, are not here defined as such). Again, it is neces 'ry to speculate on the grey boundary separating public expenditure for public welfare from public spending for private welfare. Curiously, and perhaps not coincidentally, many of the major Trujillo family investments coincided with capital expenditure peaks. The 1946-1948 period, when capital expenditure as a proportion of GNP doubled, witnessed the construction of a cement plant which later became the hub of the Trujillo-controlled Ozama Construction Company. As .public capital disbursements remained at high levels in the early 1950s work was completed on the giant sugar mill at Rio Haina, which became the centre of the dictator's twelve-mil. complex. On the .other hand, the years 1954.1956 public capital outlays reach almost 50 per cent of total disbursements, and two major investments which ultimately beneñtted the country can be linked to this peak. The first was the construction of a superhighway connecting Santo Domingo with he ,,interior city of Santiago, located in the heart of the Republic's richest agricultural area; the second was the International Trade Fair of 1955-1956. Also of is the drastic fall in both absolute and relative capital outlays during the tumultuous years of 1961-1965 and their recovery under the relatively stable 13alaguer regime after 1966.

CONCLUSION In the final analysis there are probably more similarities than dissimilarities to be found in Dominican and Puerto Rican public expenditure patterns over the past four decades. The dissimilarities revolve around the political decision-maki g mechanism and the overall sock-political framework, the pace of economic growth and structural change, and the public resource-consuming role of the armed forces. Undoubtedly the average Puerto Rican had (and still has) more voice in orchestrating expanded public intervention in the national economy than his Dominican counterpart. Between 1940

3 •F

?ÍiBLIC E) ENDTTURE PATTERNS

„

t ` ti it c 3

and 170 real per eapita income Ievels íit tiie Conminonwealth quadrupled, whale in the Republic they lose by approximately ;S0 per cértt. As5wñing income elasticity of "demand coefficients for most pubic goods arid. services fo be greater than one, ,such+ areal incóme rises zervea t:o rriaintsin (and' ugtrtenÍ) relative public sector :influence in domestic ecoriomit, ;affnrs; An .important taetor which continues to ffectj°,Dominican spending. patterns .are the expenditures .of the n°rn tary, an interest group whose desires must- he satist~ad by any postTrujillo pplitician who varies "his. political Iiffe.. The rather fsreeminent position of the armed, forces• is not principally due, of course,.~t9 external threats tpme nation's wclfárehut to the need to.rriáintúin in:jemal.equiilbriun.., In .addition tó the. facj (that i vvan] dhplacemeni occared in ho#h' countries ' during the 1940s, other.analogies'are appsrent.;Abnnrmal.ievents which enveloped the .developed nations in ,vrar« in the I94Us reverberated tr3 the ultiirrate benefit df the .ppens dependent écoiiomies of Puertc Rico rind *he Domitiie/in Republic, generating tiie. revenues regpired to financ.e..increased spending, and initiating chaiígés in`public attitudes toward the public sector. It is this latter pheiiomedori tiie'deimonstration effect, which, is mc=st likely- zespot~silzle for• -the longer-.nnn permanent variations' evidenced.in the data presented above Not only-does the demonstration effect operate to transform private sector consumption habits, but also alters public sector consumption forms. The drive toward economic development, an oft-expressed and fervently sought goal of each government, stfmulátes public + xpenditure growth from boot the demand and suppiz sides; i.e., economic growth requires sc eial,infrastnictúre creation, while ;at he same time growth may serve to further enhance demand for publicly provided goods and services. Ceiaaily„ .it may,, be demonstrated_ fron-t the data of Tables 4 and 5 that expenditures on social,anci economic developrnent and on.educationháve inereased at a more rapid. rate than, those on the more ₹raditionái areas (administration, piiotection of persons and property), in the Puerto Rican case beginning in the early 1940 and in_theDorn nicaú.ease`sin_ce the early 1960s.

'ü Alhóugh Pue`rto Rico's dry y,acefnent. effect Occurred hidng a..periad of socio-economic disturbance, and was accelexated by exorg r .ius factors, it. may-bé labeled, in quasi-Marx n fast ioh, 'c}.iife inevitable. Value jtsdgc.aent. as` to the dÜtiés.'of the state ►, ihad changed, and, judging by the &ec't ra1 ríartd tes g?ren the Popular Democratic ' Party, it is nigh aml~robable to assurwx that the populace desired a continuation of pre-194Q rpolicies, The mariiage of goon ;gove_ asneot "Idi ratiohal ecihoºr k policy inexorably led to a larger relative role for the State is the islaid's,affairs, anecessity dictated, so to speak, by the dynamics of the systern,. Adopted were essentially socialist measures, but a1vrays within the framework of mixed, nicderii capitalism. Although there .are oliVioars historical contrasts, the same phenomeñon-was at work in -the Dominican Republic, the- diita of the posyTrujillo years support tins státernent. It is' üiterresting°fo note that evn'wbeii the relative poverty .of both .countries is taken into -account,, their' displacemint efiects are similar to those of richer nations. In -other words, displacement is not a function of real income levels buf of prevailing attitudes toward-the public sector, attitudes which are influenced by improved inter and intra-countr~ communication, he "demonstration effect.óf affluence and welfare measures

SOCIAL AND ECONOMIC STUDIES

other

social abroad, and the conflict of political ideologies" 24 Naturally, a host of and institutional factors interact to mould the citizenry's ideas at any one point time. And finally, another possible key factor affecting the rising demand for public spending is the internal migration from rural to urban areas, the pace of which has picked up in the past decade in both countries (see Table A-2). Not only does the urban resident appear to require (and expect) more public services per capita, than does his. rural brother, but hand in hand with urbanization occur other social changes, e.g., less reliance on the extended family for social needs, thereby transferring burdens td society as a whole. In a sense an ideological evolution/revolution regarding the state's functions has converted what was formerly individual responsibility .into collective accountability. Whether or not past trends can be successfully extrapolated to the future is mere conjecture.

FOOTNOTES 1The author wishes to acknowledge a debt to Feat and Suphan Anille, Richard Bird, David Morgan, and an anonymous reader. 2See, for example, Musgrave and Culbertson [19], Peacock and Wiseman 1231, Andicand. Veverka [3]', Goffman and Mahar [Ii],.and Bird [Sj. 3The Goffman•Mahar article [111 does contain aggregate data alone for the Dominican Republic covering the period 19404963; i.e., no disaggregations are presented. Moreover, their income elasticity coefficients are based on .GNP data which were substantially underestimated during 1950-1963. Fr further comment on, this point see Mann [17].

41t is recognized that the special nature of the political relationship between Puerto Rico and the;United States further influenced transmittals.

wsF. Annie [2] does present .a `rough' estimate of Puerto .Rican national incomes-for the ,years l92Ó-1929. Tó use his data here would require calculation of a GNP value for each year on the basis of a knówn relationship between GNP and national income. Moreover, it is doubtful, on a ,,priori grounds, thst signjficant relative changes in pubhc:expendituresaccured during táiadecadet ,6See Wagner [29.1. For further. expósitions:óf Wagner's ideas see-Bird [6], Peacock and Wiseman-[23, pp. 16-2'1J;, and Musgrave and Peacock [20, pp. I-.'I, + 7Thrhughout the entireperiod•under study the Dominican peso remained at:a one to one par, with the U.S. dollar, which circulates in Puertcs Rico. T. -fact, before+1947 ti dollar was used as the Dominican national currency.. Therefóre, nosexchange rate computations,are required in order to make direct comparisons between amounts stated in either.Dominican pésos.(RD$) or doitsrs (USs). Additionally, the 'Dominican data refer tó th¢ natural year (iariaáiy l -D iíembei 3.i); whereas the Puerto Rican data refer to the fiscal year (iuly1-tune 30); '-

e data cto not include the direct expenditures of U.S. gb ernmeñi a encles in Puerto Ricó; They do -include, hówever, 'those expenditures made by the Puerto Rican central government financed with federal grants. 5An economic category disaggregatioñ normally involves two distinct expenditure breakdowns, that between outlays on goods and services as opposed to transfers, and that on current as

PUBLIC EXPENDITURE PAITLPNS

opposed to capital account. ,Given .numerous data source problems reliable figures for the former classification could nót be produced for Puerto Rico prior to 1946 nor for the Dominican Republic prior ío'1967. t0Table A-3 presents the Dominican displacement over the years 1940-1955 eliminating debt principal outlays. It is observed that this exercise does not change the pattern of displacement, although it does reduce its magnitude. 11 For further amplification of these points see Rodman ,[27], Bosch [71;and Ornes [22J. Total Dominican external indebtedness at this time amounted to over 40 million dollars, perhaps surpassing the value of national output. Refer to [28p 353]. r3"Government finances were good enough to permit President Trujillo to retire $31,000000 worth o€ internal bonds. As a result, the country is now one of the few in the world to be entirely free of debt." See [211. 1áOf course, what really is needed here is a theory of Treajillo himself. 15OVer this period the four principal Dominican exports, sugar, cacao, coffee, and tobaccó, averaged about 80 per cent of total exports.. The price of sugar between 1942 and 1948 rose from " $53 to $110 per metric ton, and export volume doubled; the price of cacao increased from $146 to $661, that of coffee from $182 to $485, and that of tobacco from $95 to $292. Data taken from 110, pp. 146.1581. 1dThe effective rate concept applies to total imports; i.e., it reveals nothing as to impart mix. During this period duty-free' capital imports rose from 20 to 34 per cent of total imports, so that the rates on consumption goods may well'have. risen.. Tax rates on a number of prime necessities (salt, shoes, vegetable lard) were quite high. tITO reiterate, direct federal agency spending is excluded. Cómntencing in .1934 the federmiliyfunded Puerto Rico Emergency Relief Administration (later renznred. The Puerto Rico Reconstruction.Administration) channeled funds toward rehabilitation and relief programmes, and is estimated to :have spent $72 million by the time-funda were'terminated. in 1941. Perloff [24,.p. 32] estimates that total federal agency contributions in relief and loans between 1933 and 1941 amounted to $230 million. These disbursements certainly served to prop up Income levels, and, as Hanson [15] points out, "pioneered in the development of economic and social programs for the PDP is wéll as in training and conditioning men and wotnen to carry them Out". l8Of course, the partial.divorcc of economics front polities may favour economic efficiency in the semiautonomous agencies; i.e., there may very well ex st a, solid economic raison d'étre favouring establishment of bodies linked to but apart from he central Govermment apparatus. Further specplatlon as to' reasons. for such extensive use of the public corporation might lead one to look at the public debt limit. In the 1940s the central government's debt-incurring capacity amounted to 10 per cent of the assessed value of taxable property. Perhaps to avoid 'this restriction recourse was made to thn establishment of public corporations aehich did not encounter this legal barriei to debt emissions. ,19A partial listing of name and purpose of the more important ones: Land Authority— acquisition and redistribution of land: Industrial Development Company (Fomentº) and Development.Bank-Industrial development and crett extension; Water Resources Authority,-electric power pzoductioni Aqueduct and Sewer Authority-sewage disposal and water supply; Agricultural Company-agricultural development. 0 T1ris serles of data taken from [26, p. 9], [12, Exhibit #331, [24, p. 380], and [13, Table #33] . 21Admittcdly, what has been estulihed is more ºf a permissive relationship than a functional one.

SOCIAL AND ECONOMIC STUDIES

22 This statement may not be totally valid as applied to Trujilio's Dominion Republic. For a thorough analysis of the relationship between per capita income levels and numerous social, economic, and political indictors, refer to Adelman and Morris [l1. Musgrave [18, p. 72] goes on to state: It follows that the relationships between per capita income and fiscal structure that are obtained front the historical view may well differ from those revealed by the cross-section approach. Low income countries today do not operate under the same technical, political, and value conditions as prevailed .in the past when now developed countries were.at similar low levels of income.

REFERENCES [I]

ADELMAN, Irma and Cynthia T. MORRIS, Society, Politics, and Economic Development:: A Quantitative Approach. Baltimore: The Johns Hopkins Press, 1967.

[2]

ANDIC, Fuat, "Research Note: National Income of Puerto Rico, 1920-1929," Caribbean Studies V.2 (1962), pp. 34-39.

[3]

ANDIC, Suphan and Jindr .ch VEVERKA, "The Growth of Government Expenditure .in Germany since the Unification," Finanzarchiv, V.23,1 (1964), pp. 169-277.

[4J

BIRD, Richard M., "The `Displacement Effect': A Critical Note," Finanzarchiv, V. 30,3 (1972), pp. 454-463.

[5]

, The Growth of Government Spending in Canada Toiºnto: Canadian Tax Foundation, 1970.

[6]

, "Wagner's Law' of Expanding State Activity," Public Finance!Finances Publiques, V. 26, 1(1971), pp. 1.26.

[7]

BOSCH, Juan, Trujillo: Causas de una tiranía sin ejemplo. Caracas: Grabados Nacionales, 1959.

[8]

BROOKINGS INSTITUTION, Refugee Settlement in the Dominican Republic. Washington: The Brookings Institution, 1942.

[9]

CLARK, Victor, eta!, Porto Rico and Its Problems. Washington: The Brookings Institution, 1930.

[10J' DIRECCION GENERAL DE ESIADISTICA 21 Años de Estadísticas. Dominicanas. Ciudad Trujillo: 1957. [I1] GOFFMAN, Irving J. and Dennis L MAZAR, "The Growth of Public Expenditures in Selected Developing Nations: Six Caribbean Countries, 1940-65," Public Finance/Finances Publiques, V. 26,, 1 (1971), pp. 57-74. [12]

GOVERNMENT OF PUERTO RICO, Annual Report of the Auditor, 1947. San Juan.

PUBLIC EXPENDITURE PATTERNS

[13] [14] [151 [161

, 4nnualReport of theAuditor,1950. San Juan. GUPTA, S.P., "Public Expenditures and Economic Growth",PublieFinanee(Fi:wnces Publiques, V. 2Z,4, (1967), pp, 433-443. HANSÓN. Lanl Parker, "warms Bourne and Puerto Rico", San Juan Star, March 22, 1973. p. 32. 1CRUEGER, Anne O., "Factor Endowments and Per Capita Income Differences Among Cnuntries,".Economic Journal, V.73 (1968): pp. 641-659.

[17] MANN, Arthur J., "The Growth of Public Expenditures in Selected Developing Nations: Six Caribbean. Countries, 1940-65—A Comment," Public Finance/Finances Publiques, V. 27,3 (1972), pp. 368-369.

[181 MUSGRÁVE, Richard A., Fiscal Systems. New Haven: Yale University Press, 1969.

f f9] [20]' [21]

6221

, and J.M. CULBERTSON, "The Growth of Public Expenditures in the United States, 1890-1948," National Tax Journal, V. 6, 2 (1953),. Pp. 97-115. and Alan T. PEACOCK, Classics in the Theory of Public Finance.

Landon: Macmillan and Co., 1958'. NEW YORK TIMES, January 6, 1954, p.. 47. ORÑES, ;Germán E., Tijtilo: Pequeño César del'Carfbe. Caracas: Editorial Las Novedades, 1958.

f2 J

PEACOCK, Alan T. and. Jack WISEMAN, The Growth of Public Expenditure in the United Kingdom. Princeton: Princeton University Press, 1961.

[24]

PERLOFF, Harvey S., Puerto Rieo's Economic Future. Chicago: University of Chicago Press, 1950.

[25]

PRYOR, Frederic L., Public Expenditures in communist and Capitalist Ntttións. Homewood: Richard D. Irwin, 1968.

[26]. PUBLIC ADMINISTRATION SERVICE, Summary Report on theAccaunting and Reporting Practices ofthePublic Service Enterprises of the Government of Puerto Rico. Chicago: 1946. [27]. RODMAN, Selden, Quisqueya. Seat₹le: University of Washington Press, 1964. [28J

SCHOENRLCH, O₹₹o, Santo Domingo: A country with a Future. New York The Macmillan Co., 1918.

[29]

WAGNER, Adolph, Fnanzwissmschaft. Leipzig: 1890 (3rd edition).

SOCIAL AND ECONOMIC STUDIES APPENDIX A

TABLE A-1

TOTAL POPULATION OF THE DOMINICAN REPUBLIC AND PUERTO Rico, 1930.1970 (in thousands)

Year

Dominican Republica

Puerto Rieob

1930 1935 1940 1945 1930 1955 1960 1965 1970,

1,256 1,484 1,674 1,889 2,136 2,554 3,047 3,513 4,006

1,535 1,695 1,862 ,. 2,031 2,202 2,232 2,340 2,562 2,711

a1 duly of each year, excluding census years of 1935, 1950 and 1970. b1 January of each year. Sources: Dominican Republic — Díreceidn General. de Estadística, Anuario Estadístico de la República Dominicana, 1951 (Ciudad Trujillo: Imprenta San Francisco, 2953), p. 445; Oi1ci a Nacional. de Estadística, República Dominicana en Cifras, 1971 .(Santo Domingo: 1971), p. 21; Puerto Rico — Puerto Rico Planning Board, Bureau of Economies and Statistics, Statistical Yearbook, Historical Statistics; U.S. Dept. of Commerce, Census of Population, 1930-70.

TABLE A-2 PERCENTAGE DISTIuaunOÑ OF RURAL AND URBAN POPULATION, DOMINICAN REPUBLIC AND PUERTO Rico, SELECTED YEARS, 192(.1970 Year 1920 1935 1950 1960

1970

Dominican Republic Rural Urban 83.4 82.0 76.2 69.7 60.2

16.6 18.0 23.8 30.3 39.8

Sources: See sources to Table A-1.

Rural

Puerto Rico Urban

78.2

2L8

70.3

29.7 4.0.5 44.2

59.5 55.8 41.9

58.1

PEJBl.1tr ÉXPEPÍD1TijIiE PAgTS1thTS TALLE A-3

Dí}MINICAN I3131~r3C3vMthC E1~I~ECT E7CCLT.fs1VE OF DEBT PRINCIPAL PehY1ViENTSa

Year

Expenctiture as %of'GNP

Year. ,

Expenditure as %ofGJP

1940 1941 1942 1943 1944 1945 1946 1947

10.3 9.5 81 10.4 12.7 12.4 16.2 20.8

1948 1949 1950 1951 1952 1953 1954 1955

20.5 16.1 16.1 15.6 19.4 16.2 20.1 22.7

a1cludes public debt interest payments. Sources. See Appendix B.

SOCIAL AND ECONOMIC STUDIES TABLE A-4

(:1)

Year 1930 1931 1931 1933 1934 1935 1936 1937 1938 1939 1940 1941 1942 1943 1944 1945 1946 1947 19433 1949 1950 1951 1952 1953 1954 3955 1956 1957 1958 1959 1960 1961 1962 196'. 1964 1965 1966 1967 3968 3969 1970

Wholesale Price Index, Dom. Rep. (1962 = 100)

37 45 61 75 74 86 104 104 89 86 96 98 98 93 93 92. I 0i 101 95 98 92 100 103 110 138 112 115 l23 118 1313

PRICE INDEXES, 19304970

PRICE INDEXES, 1930.1970 (4) (3) Implicit Price Deflator, Govt. Wholesale Price Consumer Price Consumption, Index, P.R. Index, U.S. P.R. (1954 100) (1954 = 100) (1954 = 100) (2)

53.4 46.9 40.6 38.6 41.5 45.6 473 49.1 48.5 45.8 45.8 48.8 54.7 59,5 61.0 61.7 66.7 79.1 90.9 92.2 93.6

(5) Implicit Price Deflator, Govt. Capital Exp., P.R. (1954 = 100)

54.4 68.7 70.9 72.6 73.9 76.1 88.7 92.0 87.6 81.3

68.7

64.7

85.0 87.6 89.2 89.8 89.9 96.2 96.9 100.0 99.8 103.2. 104.6 I07.5 108.1 115.8 119.0 122.7 126.6 129.3 331.6 135.0 139.3 14I.0 I43 ? 151.4

88.3 89.8 90.3 87.3 92.5 98.4 99.4 100.0 101.0 106.0 109.7 113.?. 114.5 21S.9 121'.5 125.5 128.7 131.4 135.2 136.2 338.0 141.8 148.5 358.8

SOUWLe: Column (1) - work sheet provided by the Oficina Nacional de Estadistica de In República Dominicana. Santo Domingo, January 3972: Column (2) — Economic Report of the President 1966 (Washington: U.S. Government Printing Office, 1966), p.. 257. A two ce3endar year average was taken and then converted to a 1954 base; (Column (3) — Junta de Planificación de Puerto Rico, Anwrrio E:ttadhtico, Estadísticas Risttiricas. 1959, pp. 34743. Index is for wage•eerner's lámi3les only, and base is converted to 1954; Columns (4) and (5) — Years 1940 and 1947-54: Junta de Planificación, Ingvrro y Pzoduaty, Puerto Rico, 1940 y 194360, pp. A.242 to A-243; years 1955.70: Junta de Planifieaeion, Ingreso y Producto, Por;to Rico, 1970, pp. 66.7. Column (5) is a weighted average of expenditure on gross fixed domestic investment and on neralunory and equipment.

PUBLIC EXPENDITURE PATTERNS

APPENDIX B ITT®TES AND SOURCES TO TABLES Dominican Republic GNP Data

Republica

Current GNP, 1940.1946: Pan American Union, Fiscal Receipts, Expenditures, Budgets, and Public Debt of the Latin American Republics (Washington), p. 57. The data were given as national income; since during the 1950s national income averaged SO per cent of GNP the latter was calculated dividing the national income data by O.S. Current GNP, 1947-1949: Given the apparent absence of either GNP br national income data for these three years interpolation assuming a constant growth rate of 14.2 per cent annually was utilized. Current GNP, 1950-1959: Banco Central de la RepM lira Dominican, Cuentas Nacionales de la Domáhácana Producto Bruto National, 1950-1964 (Santo Domingo: 1966), Cuado 1. Current GNP, 1960-1970: Banco Central de la Repúbíida Dominicana, York sheets, 3 January 1973. Constant GNP, ,1941-1949: The currentGNPdata were deflated by the wholesale price index for Santo Domingo. (base changed to 1962), the only alternative price indexes being a cost-of-living index and a retail price index, both fbr the capital city alone. Constant GNP, 1950-1959: Same source as current GNP' for the years 1950=1959, Cuadro 19. Dominican constant price GNP is not estimated using implicit GNP price deflators: Rather,. it is estimated extrapolating base year values by physical volume indexes for each sector. Thus, this explains the absence of an implicit gross product price deflator. Constant GNP, 1960-1970: Banco Central de Republica Dominicana, work sheets, 3 January 1973. Constant Per Capita GNP, 1941-1970: The constant GNP figure for each year is divided by the total population figure for the corresponding year (see Table A=1): Dominican Republic Public Expenditure Data Current Government Expenditure, 1936-1970: Secretaría de Estado de Finanzas, Memora, varying years, 1954-1970; the Brookings Institution, Refugee Settle. ment in the Dominican Republic (Washington: The Brookings Institution, 1942);'Direction General de Estadistica, Anuario Estadístico, years 1936-1954; Secretaria de Estado dél Tesoro y Crédito Publico,Memoria, years 1947-1953; Dirección General de Estadistica, Republica Dominican: Album Estadistico Grafito, ¡944; Banco Central de la Republica Dominican, Bokdn Mensual, years 1955-1970; Secretaria de Estado del Tesoro y Crédito Publico, Boletín

SOCIAL AND ECONOMIC-STUDIES`

ede

Especial: Evolución Fiscal durante el Peribdo 1930-1947; Dirección General de Estadistica, 21 Años Estadísticas Dominicanas (I956); Dirección General de Estadistica y Censos, Finanzas Municipales, several years; Dirección General de Rentas Internas, Leyes y Reglamentos de Rentas Internas, (1944); Cesar A. Herrera, Las Finanzas de is Republica Dominicana (Ciudad Trujillo: 1955); International Monetary Fund, International Financial Statistics, years 1948-1970; Nicolas H. Rizik, Trujillo y la Estadistica (Ciudad Trujillo: 1945); Secretarla de Estado de Finanzas, Estädisticas Fiseales de la República Dominicana, 1955-1961; Oficina Nacional de Planificación, work sheets; Oficina Nacional de Planificación, Evolución de la Economía Dominicana en el Periodo 1950.1970; Oficina Nacional del Presupues₹o, Resumen del hesupuesto, years 1971 and 1972; Oficina Nacional de Panificación; Plataforma para •el Desarrollo Económico y Social de la República Dominicana (1968); varied annual reports of the Ministries of Education, Public Works, Health, Police, and the Armed Forces. Constant Government Expenditure, 19414970: Deflated by thewholesale price index for Santo Domingo (base changed to 1962). Constant Per Capita Government Expenditure, 1941-1970: The constant figure for each year is divided by the total population figure for the corresponding year. As far as possible ,all intra•governmental transactions have been eliminated. $orne, double-counting may have occurred, but was unavoidable given the complicated nature of the :accounts and the many different sources employed. Most purely financial expenditure items (e.g., loans) were eliminated, with the exception of public debe amortization payments. These data deal only with the disbursements of the central government. All Dominican .data in this and subsequent tables refer to the calendar year (January 1-December 31). aAdditíonal spending of 57 -million, excluded here, was financed through irregular extarnal channels (mostly USAID) due to the civil war. Puerto Rican GNP Data Current GNP, 1929: Dudley Smith, Puerto Rico's Income (Washington: 1943), p. 10. Current GNP, 1930-1939: Daniel Creamer, The Net Income of the Puerto Rican Economy, ¡940-1944 (Rio Piedras: Social Science Research Center, •1948), p. 22. For each year a net income figure is given. From the official Puerto Rican } national,accounis, which present national income estimates for 1940 and 1947 'to the present, it was calculated that in 1940 GNP' was 1.275 .times net income. Therefore, all the Creamer net income data (and the Smith 1929 figure) were simply multiplied ,by 1.275 to arrive at an admittedly crude GNP estimate for each over the 19294939 period. Current GNP;' 1940: Junta de Planificaci6n de -Puerto Rico, Area de Planificación

•

PUBLIC' EXPENDITURE PATTERNS

~ 75

Econórnica'y Social, Ingresó.y Producto, Puerto Rico, 1970 (San Juan: 1971), p. 8.. Current GNP, 1941-1946: Due to the unusual and unstable conditions prevailing in the Puerto Rican economy during these years, GNP data are not officially estimated. Reference was made to Puerto Rico Planning Board, Economic Division, Economic Development of Puerto Rico, 1940-1950, 1951-1960 (San Juan: 1951), p. 162. By following the rates of increase of gross insular product for 1940-1946 contained in this publication (the absolute data are unusable since they represent large overestimates) a IS per cent constant growth rate for 1941-1944 was assumed; the subsequent growth rates for the years 1944-1445, 1945-1946, and 1946-1947 were assumed to be 10 per cent, 2 per cent, and 8.5 per cent respectively. Current.,GNP,1947-1960: Junta de Planificación de Puerto Rico, Area de Planificación Económica y Social, Ingreso y Producto, Puerto Rico, 1970 (San Juan: I971.), pp. 8-9. Current GNP, 1961-1970: Junta de Planificación, de Puerto Rico, División de Producción Económica y Valor Añadido, revised and unpublished (to date) work sheet data. Constant GNP, 1930.1939: An initial attempt at deflating the ctrrent data was made utilizing separately a Puerto Rican wholesale price index for foodstuffs and the United Sates "Bureau of Labour Statistics' overall index ofwholesale prices for the continental U.S. Both indexes 'seriously overstated the' real GNP' figures (in terms, of 1954 prices- after their bases were changed) using 1940 as a point of reference.. Therefore, an alternative procedure was followed, a. methodology conspicuous for its. lack of reliability,., Émpl'aying the U.S. wholesale price index applicable to calendar years, a tvo-calendar year average covered by each fiscal year was computed and changed Ito a 1954 base year. The current GNP data. were then deflated by this index, and the rate of annual change of these deflated figures was calculated. Each annual rate was assumed` to reflect the rate of real GNP change using rsal_ GNP in .1930,as' the .reference point .1930 real GNP was estimated by taking 1930 real GNP' as a.pioportion ofj940 real GNP (both computed by the wholesale price index) and multiplying the resulting percentage by the more reliable published' .I940 real GNP figure of $499 million; i.e., 45.1/627=O719; 4499 (0.719=359. Constant GNP, 194(}: See source to current GNP, 1940. Constant GNP, 1941-1946: A methodology sirr.3lat to that for the years 1930-1939 was followed; it is, however, probably more reliable. An index for deflating gross product for the. years 1940-1946 is presented, in. Daniel and Henrietta • Creamer, Gross Product of Puerto Rico, 1944-1946 (Rio Piedras: Social Science Research.Centre, 1949), p.. 11; and in Daniel and Henrietta Creamer, Gross Product of Puerto Rico, 1940=1944 (Rio Piedras: Social Science Research Center, 1948), p. 71,. _Subtracting the'annual rate ºf increase in the index from the annual rate of increase in. current GNP yields.an estimate of the

SOCIAL AND ECONOMIC STUDIES annual rate of increase in real GNP. Applying these percentages to the real GNP of years subsequent to 1940, the 1941-1946 data are calculated.

Cgnstant GNP, 1.947-1960: See source to current GNP,. 1947-1960. Coñs#ant•GNP, 1961-1970: See source to current GNP, 1961-1970. Cónstant Per Capita GNP, 1930-1970: Column 5 divided by the total population data contained in Table A-1. Puerto Rican Public Expenditure Data Current Government Expenditure, 1928-1930: Annual Report of the Auditor, each fiscal year; Annual Report of the Governor, each fiscal year; Harvey S. Perlóff, Puerto Rico's Economic .Future (Chicago: University of Chicago Press, 1950), p. 379; Puerto Rico Planning Board, Economic Division, Economic Development ofPuerto Rico, 1940-1950, 1951-1960 (San Juan: 1951), p. 71 and pp. 169.173; S.L. Descartes, Basic Statistics on Puerto Rico (Washington: Office of Puerto Rico, 1946); Departamento de Hacienda de Puerto Rico, Informe Anual, 1972 (San Juan: 1972), p. 26; Annual Report of the Treasurer, each fiscal year; Economic Development Administration and the Department of Agriculture and Commerce, Annual Book of Statistics of Puertó Rico Fiscal Year 1949-50, pp. 445.453; Junta de PIanificación, División de Económica, Informe Económico al Gobernador, 1950.195,1 (San Juan: 1952); various annual reports of the Departments of Education, Agriculture and Commerce, and Interior. Current Government Expenditure, 1951-1970: Departmento de Hacienda, Servkio de Contaduria, Informe Anual, each fiscal year; work shéets and various reports, Servicio de Contaduria; work sheets, Junta de PIanificación, Negociado de Planificación Económica, División de Producción Económica Y Valor ki randido; annual reports, Highways Authority; Commonwealth of Puerto • Rico,,Department of the Treasury, Expenditures and Receipts forFiscal Yews Ending June 30,.1953 and 1954 3

Constiuit Government Expenditure, 1930-1939: Due to the absence of any usable insular price index for this period the current expenditure figures were deflated by'the .U.S. wholesale price index (base changed to 1954). The rate of change of the deflated data from 1940 back to 1.930 was computed on a year to year basis; these rates were thén applied to the reliable 1940 real expenditure figure and to each subsequent year figure, thereby deriving the data appearing in columúi 5.

Constant Government Expenditure, 1940 and 1947.1970: Expenditure measured in current prices was deflatéd by several implicit price deflators. Current account expenditure was deflated by the implicit deflatár pertaining to the consump~ tion expenditures of the commonwealth central government; expenditure on capital account was deflated by my own weighted average of central government expenditure on gross fixed d.ámestic investment and on machinery and

PUBLIC EXPENDITURE PATTERNS

equipment. For the primary index data see Junta de Planifrcacidn, Ingreso y Producto, 1940 y 1947-1960, pp. A-242 to A-243; the indexes for the years 1955-1970 were derived from, primary data found in Junta de Planificacio'n, Ingreso y .Producto, 1970, pp. 66.67. Constant Government Expenditure, 394-1-1946: The annual percentages change in Creamer's government expenditures at constant prices was taken and applied to the 1944 and subsequent annual figure. For sources, see the already .cited Creamer studies under the constant GNP data for 1941-1946. In addition, the current .data were also deflated by :the Puerto Rican consumer price index changed to a 1954 base; see Junta de Planificación, Anuario Estadístico, Estadísticas Ilistdricas,• 1959 pp. 147-148.A simple .arithmetic. mean of these two series was computed,, and it, is he mean figure which appears in column 5. Constant Per Capita Expenditure, 1930-1970: Column 5 divided by population. As in the case of the .Dominican data an effort was' made to eliminate intra-government transactions and purely financial expenditures (again with the exception of public debt amortization payments). The data for the decade of the 1960s include the outlays of the Highways Authority; the University of Puerto Rico, and the Medical Center, which, although officially public corporations, must be included here for the sake of consistency; i.e., their functions had been undertaken directly by the central government prior to their creation in the 1960s, and therefore consistency demands their inclusion after such establishment. All Puerto Rican data in this and subsequent tables refer to the fiscal year 30-July 1).

APPENDIX C THE `CONSOLIDATED' PUBLIC SECTOR The data presented in the text tables fail ₹o .demonstrate the total impact of the public sector in either country, for they basically include only the non-commercial activities of the central fist. Firstly the non-commercial functions of the, municipal Pises do not appear; secondly, the trading activities of the gamut of public corporations have been largely ignored, since they usually cover their service costs by levying explicit charges. Although they are analogous to the private corporations in this sense, they .nevertheless are subject to a greater degree of public control and do not pursue profits as their ultimate end. And in Puerto Rico after 1941 and in the Dominican Republic after 1961 they undertook a host of activities that might have been carried

SOCFAL AND ECONOMIC STUDIES

out by the ,private sector in an earlier historical period. Thirdly, the public service enterprises,., the autonomous institutions, and the social security funds, although providing service without directly selling a good, nevertheless reflect public policy directives as they disburse semi-public monies, in the process affecting the economy's performance. Tables-C-1 and C-3 present data to crudely estimate the growth of the `consolidated' public sectors in each country. Transfers between areas have beén counted as expenditures only in those areas where they have actually been spent. In the Dominican- case the relative growth of the `consolidated' sector closely parallels that of the central government, and reveals that the apparent lower plateau of central government spending in the 1960s (Table I, column 7) disappears, as the public 'corporations and autonomous institutions took up former functions of the central government as well as moving into new areas; e.g., the State Sugar Corporation--Corporacion Estatal Azucarera--administers the former Trujillo sugar properties. Most of the autonomous institutions and public corporations were created after 1961, but some have existed for years; e.g., the Agricultural Bark (1945), the Dominican. Institute of Social Security (1948).However, data pertinent to their expenditures exclusive of central fist transfers could not be located, and are not therefore included in Table C-1 prior to 1962. Table C-2 provides a functional breakdown of. the Dominican 'consolidated' public sector for the year 197O and' may be compared with data for 1970 contained in Table 4.

rata

The Puerto Rican data in Table C•-3 for the yeats 1930 and 1940 do not include the capital outlays of the municipally-owned and operated water snd light companies, although they were consolidated under public corporations with island-wide responsibilities in the 1940s; they do include, however, the capital disbursements of diosa entities which might be considered forerunners of the present public corporations and public service enterprises, e.g., the Isabela Irrigation Service, established in 1928. As can be readily observed, the faster rate of increase of municipal expenditures in comparison to that of central government spending led to a slight displacement effect between 1930 and 1940. However, in general the `consolidated' figures reflect a displacement very similar to that demonstrated by the central government between 1940 and 1950. it should be pointed out that these `consolidated' data do, in a sense, exaggerate the significance of the public sector in relation to national output, for they comprehend certain disbursements on intermediate goods and on pure transfers; the GNP figure comprises spending on final output only; i.e., on payments 'to factors for current year contributions to national production. On the other hand, the exclusion of current public corporation outlays, rnañy of which represent current factor income, understatesthe proportional public sector role. The above discussion is suggestive of an area which merits further and more. penetrating analysis; i.e., the role the public corporations have played in the economic development of Puerto Rico and the Dominican Republic (and other countries)..

TABLE C-1

EXPENDITURES OF CONSOLIDATED PUBLIC SECTOR, DOMINICAN REPUBLIC, SELECTED YEARS, 1936-1970 (millions of current RD$) Central

Municipal

Autonomous

Public

Year

Government

Governments

Institutions

Corporationsa

1940

11,7

1950 1"954 58 '1962 1964 1966 196$ 1970

89.4

0.9 5.0 6.6 16.2 21.9 24.7 19.6 18,9 20.6

104.7 ' 160.4 171,1. 183.3 166.1 174,3 '223.9

cOnly capital expenditure included.

16.4 33.13 37.8 47.1 55.1 'v

NA NA NA 76.3 70.0

Total

Total as Proportion of GIN

11.2 12.6 94.4 111.3 176.6 209.4 241.8 223.5 316.6 369.6

11.5 24.6 20.7 24.9 24.1 22,3 21.4 27.7 25.4

-.f

NA-. l?ata not available. Most autonomous institutions and public corporations (organismos financieros) were established after 1961. From the standpoint of 1 bte: total expenditures the most important autonomous institutions (provide services without directly selling a good) are the Autonomous University_.oLSanto_Jlomingo-(DASD),-. the-Dominican Social Security-Institute (IDSS)rthe Dominican -1 rarianinsiitute-(IAD), the Dominican Corporation of State Enterprises (CORDE), the National Institute of Drinking Water and Sewerage (tIAPA), and the National Institute of Hydraulic Resources (INR11).. The most important public corporations (cover most of own expenses and/or sell a"good or service) are the State Sugar Corporation, the Agricultural Bank, the Dominican Electric Corporation, the National Housing Bank, and the Price Stabilization Institute. Source: Oficina Nacional de Planificación de la República Dominicana, Departamento de Programación del Sector Público Consolidado, work sheets, January 4,, 1973. ~ w

00 c

TABLE C-2

•COIVSOF.IDATi:D PUBLIC SECTOR ECP'EÍ3DIiURES BY FUNCTIONAI. CATEGORY, DÓlvtlldlcAN R1PUBI.ÍC, 1970

(millións of current RD$) Protection of Persons and Property

Debt Service

Education

Social Development

Economic Development

Total

Item

General Admini3tra• tion

Current Capital

41.0 0.7

47.0

8.4

34.5

45.2

34.4

210.4

0.7

38.0

6.9

21.4

97.2

164.9

Total

41.?

47.7

46.4

41.4

66.5

131.6

375.3

Percenta e Dlstrlbution of Total Total as Percent of GNP

11.1

1.7 3.3

12.4

1I.0 2.8

17.7

35.1 9.1

Source: See Tabla GI

3.2

4.6

c~ 100.0 25.8

TALE C-3

EXPENDITURES OF CONSOLIDATED PUBLIC SECTOR, PUERTO RICO, SELECTED YEARS, 1930-1966

(millions of current US$)

Year

Central Government

Municipal Governments

Public Corporationsa

1930

18,9

6.8

0.7

1940

27,4

11.4

1.8

1950

.104.7

16.5

1954

28.4

1962

154.7 263.6

57.1

1966

436.4

78.5

Total as Proportion of GNP C

Trust Fun dab

Total

2.0

28.4

11.8

4.3

44.9

15.6

33,1

7.7

162,0

21.5

38.0

15.3

236.4

21.4

94.9

38.8

4S4.4

22.2

179.2

55.8

749.9

24.5

alncludés capital spending only of bath public corporations and the so-called public service enterprises. The most important public corporations from a total expenditure viewpoint are the Water Resources Authority, the Aqueduct and Sewers Authority, and the Urban Renewal and Housing Corporation (CRUV); public service enterprises include 20 minor. flznds, among whích are the national lbttery; a coffee insurance programme, and the Isabela ºnd Guayama irrzgatáun services. bExxcludes federal trust funds. Sow-ce: See Appendix B; also utilized work sheet data from Office of the Governor of Puerto Rico, Bureau of the Budget. Although some of the data were gathered from Budget Bureau records they represent actual disbursements, not mere budgeted figures.

TABLE C-4

CONSOLIDATED PUBLIC SECTOR EXPENDITURES BY ECONOMIC CATEGORY, PuEltro Rico, 1966 (millions of current US$) Transfers to

Total

Expénditures

Debt Si rvice

Other Areas

Less Transfers

98.4

26.4

100.5

436.4

173.2

56.8

0.5

14.8

387.3 54.3

1.1

0.2

55.8

ñ`

53.7

16.4

8.4

78.5

631.1

288.0

93.2

115.5

1,012.3

Public Sector Area

Current Expenditures

Centra] Governments Public Corporations

311.6 157.3

Públic Service Enterprises Trust & Agency Funds

53.8 54.7

Municipalities Totals

Capital

amase totals pertinent to the disbursemeiits of the central government differ from those found in other tables due to conceptual differences. Since the principal focus of this table is on the total outlays of the entire public sector rather than on those o£ each public sector area no reconciliation is attempted. ÑA — Data not available. Source: See Table C-3.

á m

SEPA

R A TA

Número S

Arthur J. Mann

THE FISCAL SYSTEM AND INCOME DISTRIBUTION: THE CASE OF PUERTO RICO

/Public Finance Quarterly, 4 (July 1976):.

339-366/

This study, provides statisttcRl estimates of the incidence of Puerto Rfeo's fscel.sysrem. In developing .the estimates the openness of the Commonwealth's economy and its particular internal economic structure are taken into account. The tax system" is found to be slightly progressive across incoule classes, whereas the pubite expenditure structure is found to be regressive (favoring the lower income classes). Thus, the overall fiscal system redistributes real incomes from higher, to: lower income classes

THE FISCAL SYSTEM AND INCOME DISTRIBUTION.: THE CASE OF PUERTO RICO ARTHURJ: MANN University of Puerto,RicoJn Mayaguez

This paper presents estimates by family income class of the tax burden and of the incidence of publicly expended monies in. Puerto Rico for the year 1970: Since all fiscal systems contain distinct income redistributive properties, the analysis additionally ;generates, as a byproduct, both preand postfisc income distributions.. The incidence concept employed is that normally used in studies of this. nature, i.e., net fiscal incidence is defined as the final net change in- the relative current income position óf the family brought .about _by public budget. activities: Both tax and. expenditure effective rate patterns have been riieasured against a "broad" income base, AUTh OR'S VOTE: This amide is based :upon the author's study for the Puerto Rican Tai Refornz'Commissiou.entitled "La Carga de las Contribuciones, y los Beneficios de losr(*asroc Pubbeos," Puerto Riu.i 1970 ('submission made in October, 1973). The author is indebted to Foal Andie, diving I. Goffman, Riehard A. Musgrave, l"elipe Viseasillas,nnd nvo.anonymous referees for their comments. PUBLIC FINANCE QUARTERLY, Vol. 4 No. 3, Suty ,1976 1976 Sage Publications, loe. 13391

[3401 PUBLIC FINANCE QUARTERLY

which. includes monetary an impt>t~d'ncoine itels (s~eTabl$ ,,' Aá,2 for`tl~e.iricome`base components). Although the statisticái reiilfs are presented ` with 9apparerit rathentdtical, precision, an awlxeness of the many limitations of this type of inalysis is essential, for'surcly what Is produced is no rnore.ythan a reasor)able estimate. As has been noted by others,; a. principal defect of static incidence studies is that they are based upon the heroic premise that the procedure of adding in or subtracting out income changes does not alter the original income distribution. Here is a general equilibrium problem par excellence, and to resolve; it "would entáil the complete elimination of government and ,t1 ..-reallocation of public resources to the private sectot. There ifhssuthi d to be no .t

TABLE I

Tax Payments, Puerto Rico, 1970 (millions of dollars) Line

Cross Total

Tax

1. Personal Incomea 2. Corporate Incomea Excinee 3. Property° 4. 5:< ECuctoms Dutiese 6.. .Ea.tate and CI t 7= Licenses B. Lottery r, isunieippalt 10. I14sce12aneous 11: Social Insurance (a) Federal (b`) Commonwealth 12,,

Total Het of Exported Perti4n Percent

149.3 85.9 a 23.9..7 57.7 42.9 6.2 17.3 23.5 10.6 15.•1 342.0 213.6, 128:4

t Total

990.2

149..3 42.0b 20T.8 , 37.ad' 40:0 • 6.2 ' 7.5.7 23.5 ' 10.6 15.1 }42.0 213.6' 12E3.4 889,2

16.8;' 23.4:,. 4•.2 4.5 0.7 1.8 2.6 1.2 1.7 38.5 24.0 " 14.4 100.0

13.. Total, Bxéluding line 1 t 648:2 6,13 57.2 14. .,76.0. º Total, Excluding line 11(a) 77d.6 675.6 _A. SOURCES: Departamento de Hacienda de Puerto Rlco, informe Aduál 'der Socrefario, 1970 (San Juan: 1970), 7.18; Departinerlt Bf the. Treasury of Puerto RicoEcpnomy and Finances„ Puerto Rico, 1970 (San Juan: 1971), 25i work sheets of the Office of Economic and Financiar Studies óf the Treasury Department; Departaments-de Hacienda, Ñegociado de Asuntos Municipales, informe Anual del Negociado de Asuntos Municipales (San Juan: 1971.), tabla 6: work sheets of the Bureau of Economic Planning of the Puerto Rican Planning Board. H~ NOTES: e. Ope-half of ,tile part,nershrp income tax is allocated to personal income' and the other half to corporate income since.partner5hlps are táxéd.uñile( the rates applicable to-corporations, and partners are 1 txed as individuals an profits distributed

to tnem..

b. Standard caseassumpt-ionsdescripect.rn text. C. includes the portions corresponding to the central -and municipal governments. d. Compromise case assumptions described in text. e. Includes administrative costs. r. Excludes property tax already included in line 4.

Mann ¡FISCAL SYSTEM AND INCOME DISTRIBUTION ('3411

excess burden, caused by taxation and no.. consumer° surplus effectuated by ,public expenditures, no explicit distinction is made between current and capital spending, .although their temporal effects probably differ; little definitive. empirical evidence supports the shifting assumptions utilized; there may be serious but uncontrollable (for tlzesesearcher) defects in the basic data series, and the extrapolation procedures described'in the notes to Table A-I may inject an .unknown error quantity.2 THE DISTRIBUTION OF THE TAX'BURDEN

Table 1 presents a list of those taxes to which Puerto Rican residents are subject. Most of the levies are unposed by the central government, although customs duties and -federal

(United States) social security taxes (lines 5 and 1 la) do not. fall under Commonwealth jurisdiction., Since Puerto. Rico is a classic example of an open economy., tax (and expenditure) exportation is accounted for by using three different exportation coefficients: ' Coefficient I—computed by taking the ratio of nonresident investment to total investment; the denominator value is, estimated through .use of a series of incremental capital-output ratios, and the final result is a figure of 0544. Hence, it is assumed that 54:9% of those taxes fatting on capital are exported. Coefficient II—since goods produced in Puerto l~lco but, exported comprise 38%n of GNP, it is assumed that resident consumers .bear the burden of only 62%p of certain consumption taxes. Coefficient 111—since nonresident consumers accounted for 6.8% of total personal consumption outlays, it is postulated that only 93.2% of excise taxes fall upon resident taxpayers. C

Naturally, tax importation is also a distinct probability, but

since such imports would not be Puerto. Rican variables they are disregarded. The results of the tax. side of the analysis will obviously be a function of the tax shifting assumptions. used_ In the. case of most Puerto Rican taxes there is no reason to make shifting assumptions that vary from those normally employed in this

[3421 PUBLIC FINANCE QUARTERLY

type of analysis,, and these particular assumptions will not be defended. Hence, it is assumed that the personal incomo tax is not shiftable, and falls entirely on the statutory taxpayer; the excise taxes, customs duties, and municipal gross receipts. taxes are ass:urrzed to be completely shifted forward; the estate and gift taxes are assumed to burden only those families in the highest income, classes (a premise based on a sample of estate TABLE 2

Tax Shifting Assumptions

max Personal Income

Burden Fall's on Taxpayer'

Corporate Income 40% consumers 50% dividends or capital income 10% wages and salaries Excises

Coneumers

Property

Orthodox Approach: Real commercial ,land. Real commercial improvements Residential owners Residential renters Personal coroorate Personal non-corporate Revised Orthodox'Approacht .Ill commercial All residential Miesakowski Approach

Customs Duties

Consumers

EstatE and Gift. Upper income families

Exportatioñ Assumption

Distributiva Series Line of Table A-1

none

50% 62.2% none

22 12 or 23 1

coe£ficient III

coefficient I. coefficient II none none see corporate income premises none

12• 22 25 26

coefficient '1 none 25%

23 2.5,2E 23

coefficient III

none none coefficient II

10,

b a 22

License

?amities Businesses

+sat tory

"Consumers^ of lottery

none

,Consumers

none

Consumers

none

un5 cipal el?zneoua

~ooi.tl. insurance Lase A none Empioyee Portion--eni.loyee none Esployer Portion--employee Case E none Eaployee Portien--employeo none Bmployer Portion--employee(50%) consumere(50%) none

1,,17,21 1,17,.21 1,17,21 1,17, 21 22

a. Each individual excise amount is distributed by its own specific distributive series which is not found in Table A-1. b. The percentages, applicable to only the three highest income classes, are 13.6, 13.1, and 73.3.

Mann [ FISCAL :SYSTEM AND INCOME DISTRIBUTION [3431

tax records); license taxes are postulated as burdening those who directly,pay then or those who consume goods prodúced . by econºmic units if the unit initially absorbs the tax; the "lottery" tax distributes net state Pottery income among families according to their propensities to gamble (i.e., it is not shifted). The cases of the corporation .rncOme tax, tho' property tax, and the social insurance taxes do merit further elaboration. The general lack of consensus' regarding the incidence of the corporate profits tax is well kncwn, and the Puerto Rican ease, which has never been subjected to econometric analysis á la Krzyza_niak-Musgrave, may be even more complicated 'than others. The Industrial Tax Exemption Law has created á taxed and an 'exempt corporate sector, and the rorflier operates in the context .of an extremely open economy: Certainly tax exportation is a possibility, and the vast series .of market relations between the two ,corporate sectors and between the taxed corporate sector and the rest of the domestic econorhy must be considered.. Given this large numbr .of imponderables it is 'hypothesized that ,40% of the tax is shifted forward, 50% falls on corporate profits, and 10% is shifted.backward.s' With respect to the 40% presumed to be. shifted .forward; it might, be :supposed that Puerto Rico's rather highly impe'r'fect, domestic ,market structifes would suggest a =larger degree of 'shifting. liut it must be -recognized that the taxed firm might -export eitliei: to Ijiiited. States or world market, where it nay L. have to take. the i.r'rce'~as given.~ thus, 4{% tf the gross corporate tax, ox S34 4 million, is postulated` as initially reflected in higher product prices. however, since ndt all those gpocls.prcduced by the ..sxed sector are consumed domestically, tax exportation by means of the export mecbanisih is presl~.nred, Based on data pro%ided by several government agencies it was estimated that 50% of i:axed corporate sector production •j xporte.d. aad ire this manner only $17.2 million burden a esi:?eats. ' PE•gar:ding th•c 50%($43..0 million) assumed to fall on profits, it must logically .1c, hypothesized that both resident and

[344J PUBLIC FINANCE QUARTERLY

relying

enough

total

nonresident stockholder incomes are reduced in identical proportions. Using data provided by the Puerto Rican Treººsúry Department and the Planning Board's Economic Planning I?ivision, a figure of 37.8% was computed as the ratio "of the sum of dividends and retained earnings accruing to residents to after-tax corporate profits in the 'taxable corporate sector. Hence, only S16.2 million are allocated to the resident tax burden. The question arises as to which distributive series, capital income, is. the most appropriate dividend income or to distribute this amount among income classes. If distributed by ;the former the implicit assumption .appears to be that the taxed corporate capital is totally immobile and will not shift to the exempt, unincorporated, and/or external sectors. This is difficult to accept, for what in effect is then maintained is that investors in taxed companies are satisfied with a lower return than they might receive in other, areas, or that they are " locked4n" their low-return investments'. Of course, the gross to rate of return in the taxed sector .might be high compensate for a lower after-tax net return. Ifthe $l6.2 million on a are distributed by a capital income series, .one mgdified Harberger formulation, in that as the tax reduces the rate-of return on capital invested in the taxed corporate sector, capital shifts to the unincorporated or exempt sector•. As this occurs the return on, capital in the corporate sector rises, while that .on "capital in the other sectors falls. After reaching equiIibrium where the net after.-tax rates are .equal in all "sectors, it is concluded that the corporate tax burden is shifted to total capital by means of a reduced return,, tax exportation cóefficient I would then be used in this instance. To resolve the quandary of which series to use a compromise measure has been adopted, and the SI6.2 million total is distributed by both series, after which a simple arithmetic average is taken. Finally, the I `% (S8.6 million) postulated to be shifted backward is based on the existence in Puerto Rico of less than perfectly competitive labor markets. Certainly it is possible that a firm which possesses forward-shifting market power also has the intluence to shift the corporate tax backward onto wages.

Mann 7 FISCAL SYSTEb'I AND INCOME DISTRIBUTION 13451

The lesser is 'labor mobility between the taxed sector on one hand and the exempt :and unincorporated sectors on the other hand, the gréater is this potential. A high unemployinent rate (officially at 12-15%): would seem to strengthen the argument for backward-shifting, at least in those areas where job skill requirements are minimal. Moreover, rather weak unionization and/or collective bargaining at the plant level (as opposed, to the industry level), generally the case in Puerto Rico, offer further support for a backward-shifting hypothesis.. The'prvblem of the incidence of the .property tax may be even more`'complex than that of the corporation income tax, for there are four groups that are affected by this levy: consumers; renters, property owners, and capital income recipients. Such a classification leads to at least a. three-part divfs1on regarding the various points of view ón property tax incidence. T efirst point of view, here labeled the orthodbx approach, involves a disaggregation of total property tax collections into revenue from each type of property (i.e., real and personal property áhd their subdivisions—business and residential, land and improvements, owner-occupied and renter-occupied dwellings). Table 2' summarizes the shifting assumptions.appli'ed to each property type, but due to space limitations the methodology employed in the breakdown and the reasons for adopting each apecific shifting assumption are not discussed in this paper. A second point 'ºf view, here labeled the revised orthodox approach, reasons that the property tax fails 'essentially on land .arid `capital. 1n order fqr a firm to 'be able to shift its property tax forward it must possess,. substantial market power, but in I?Útto Rico it seems reasonable to assume that the property tax base is im ch less concentrated in firms with oligopolistic market power than is the .corporate tax base. Furthermore, many firms which do have such power are tax exempt in the r first price. This s~iggests that the property t<~x on commercial retil' and personal property might be distributed according to capital income, after deducting .the exported portion using coefficient I; that part of the tax burdening residential property remains similar to the orthodox assumptions.

I34 1 PUBLIC FINANCE"QUARTERT Y

A third viewpoint, here labeled. the Mieszkowslci approach, argues that the entire tax falls, op. capital income.' Although the, Mieszkowski general` equilibrium approach is subject, to a number of limitations, it is applicable to the Puerto Rican situation despite the fact that it does not consider .the property tax on land. Although each municipality imposes. its own tax rate (in addition to the central government's uniform rate), this does not seem to significantly alter the funziamental.:conclusions. Certainly it is possible that differential rates~may: induce long-run excise-like effects, thereby causing capital to move toward lowerrate municipalities, with the final result that net return rates are equalized. Thus, the entire portion of the property tax that burdens residents is distributed according to income derived from asset holdings. However,. pnIy 25% (instead of 54.9%)ís assumed exported ₹o take into account the fact that ,practically the entire btuden on residen.tiat ,property / falls on residents. Ño single approach to property tax incidence appears in the statistical tables. For use in the text tables a simple unweigbted average of each absolute total in each income class under the three approaches is taken. Thus, a "compromise" approach instead Of a "standard" approach (as in the corporate profits iax`case) is employed. The incidence of soeial insurance faxes is especially ,impor tant, givén that these impósts compx:se almost two-fifths df the overall tax burden. This high proportion may in itséld be rather surprising, and comes about because the Puerto' Rican resident is subject to two levels of social security taxes, federal and commonwealth. Moreover, the'ederal portion is so propgrfionally high due to the application of equal rates in an areaJwhere per capita income levels are less than half of those on the continent. Regarding the question of social insurance tax, incidence, it seems generally acceptable to posit nonshif~ability of the employee-paid portion of tlié tax. Controversy arises, however, as to the incidence of the employer's. portion. Brlttain's empirical work`' on the incidence of selective factor taxes in the

TABLE 3

Effective Tax Rates; Puerto Rico, 1970 (broad income base) r.• Pax 1, s'rrrnra3 income ^.nrpornto Income s. -:xci:eo• s. irqp rty 9. runtomn Duties o, Iaarate and Cift •1. Licennes 8. Lottery ?, 1:unicipal 10. :li.c ianeoua 11, .oeia7 Inn11z8nce (a) ?eleral (b) Ccnmonwealth 17. Total 13. Total, Fxclu3rig 5ºcial Insurance 14. Total, Exclulina aB1paal Social i]lnararlOe r

Tamil Income Class Less than $1,000- 82,000- 83,000- 84,000•. 85,000$1,000 31,999 $2,999 $3,999 $_gy9g9 $7,499 — 1,0 0.2 0.5 1.4 1.9 0.8 0.8 0,8 0.8 0.5 0.7 5.1 3.8 3.6 4.6 4.7 4.% 0.6 0.7 0.6 0.6 0.5 0.5 1.1 1.0 1,0 1.0 1.1 1.0 0.4 0.2 0.2 0.2 0.3 0,2 0.5 0.4 0.3 0.5 0.3 0.5 0.3 0.2 0.3 0.3 0.3 0+3 0.4 0.4 0.4 0.4 0,4 0.5 6.2 8.4 9.4 4.9 7.3 9.3 (,1 6.1 3.7 4,4 5.0 5.8 1.8 . 2.6 1.2 3.2 3.3 2 12.2 13.6 15.6 17.8 l9í9 19,7

$7,500- $10,000- $12,500- 115,000- $20,•000 $9,999 812,499 $14 99 119.992 alnd ovex 3.6 6.6 8.3 4.7 7.9 0.9 1.0 0.9 1.8 1.3 5.8 5.6 4.2 5.3 3.7 0.8 0.9 0.7 1.4 1.9 0.9 0.9 0.9 0,7 0.6 u 0.3 0.6 0.8

4ot~a! 3.4 1.0, 4.8 0.8 0.9 0.1

0.4

0.5

0,4

0.4

0.5 02 0.4 9,0 5.4 3.6 22.5

0.6 0.^ c 0.3 8.7 5.2 ~9-,,~ 23.1

0.9 0.2 0.3 7.7 4.3 ,3.4 24.6

0.9 0.2 0,2 7.1 3.4 _ w 25.0

0.5 0.2 0.2 3,3 1.5 1.8 22.0

0.5 0.2 0.3 7.8 4.9 2.9 20.2

7.3

7.4

8.3

9.4

10.4

10,5

13.5

1414

16.9

17,9

18.7

12.4

8.5

9.2

10.6

12.0

13,6

13.8

17.1

17.9

20.3

21.6.,

2b4

15.3

SOURCES: Each absolute amount of tax paid by each Income class (these quantities are hot given in this papery isexpressed as a percentage of broad Income (Table A•2, line 18) in the corresponding class.

(3481 PUBLIC FINANCE QUARTERLY

United States suggests that labor .absorbs the entire burden. While his analysis cannot be totally transferred to Puerto Rico's case it is, without doubt, suggestive. Consequently, two different shifting assumptions have been used in this paper, and each assumes that the employee share falls directly upon the employee. In the first case the employer's share is hypothesized to be completely shifted backward, in line with Brittain's results. In the second case half the employer portion is assumed shifted backward, with the remainder shifted forward. It does not really seem reasonable to propose complete forward shifting of the employer's portion in Puerto Rico, for if labor is employed in export industries that lack external market power such. transfer is not easily made; it is additionally difficult to conceive of those instances in which the domestic producer meets import competition. On .the other hand, the absence of strong collective bargaining at the industry level might serve to intensify backward shifting. The effective rates that do appear in Table 3 are computed .in a fashion similar to those for the roperty tax; i.e., they are unweighted averages of the two postulated shifting cases. From line, 12 of Table 3 it is readily perceived that the overall tax structure is progressive across the entire gamut of income lasses until the final open-ended class. Whether or not the ' effective rate decline in this latter class is significant cannot be determined, for the effective rates within it are unknown. Therefore, the policy implications of the estimates are limited to those family income groups below $20,000. The experiments contained in lines 13 and 14, first, excluding all social insurance contributions and second, excluding only 'federal social insurance collections, leave unvaried the general progressivity conclusion. Of the individual taxes the personal income tax is certainly (and unsurprisingly) the most progressives (discounting estate taxes, which do not affect all income categories); the fact that it is not as progressive as might be expected from a glance at the tax sCatutcs is due to tax base erosion caused by evasion and -~vlax e. Under the "standard" corporate tax shifting assump-

Mann / FISCAL SYSTEM AND IÑCOME DISTRIBUTION [3491

(with

little

tuns

tions a, basically proportional pattern is found until relatively high income levels, where the rates turn decidedly progressive. Excise taxes demonstrate an essentially progressive pattern until income levels of around .$10;000, from "where they turn regressive; to the outside observer such prdgressivity may seem quite surprising, but many of the -items subject to excises have been selected precisely because lower income classes do not abundantly consume them .(e.g., private motor vehicles}. In other instances the statutory rate structure is progressive and/or exemptions are granted which permit lower income families to purchase the items without paying the excise.9 The property tax, under the "average" rates presented here, reveals a proportional structure until high income levels, where it converts into a progressive levy_' 0 Social insurance cantribu illustrate a progressiveregressive pattern, which is principally due to the federal OASDHI impositions; this is due, in turn, to the taxation of only the first $7,800 (in 1970) in wages and salaries. The remaining levies, of relative importance, are found to be essentially proportional in charabter the obvious exception of estate taxes). THE DISTRIBUTION OF PUBLIC EXPENDITURE BENEFITS

revenues,

Taxes reduce family income .levels, but these same tax when spent, serve to- augment real family incomes. There are various alternative methods that might be used to distribute public expenditure benefits among family income classes, the ideal being the "benefits-received" approach. Under this approach each. family income group would estimate the "value" of public services it receives, and benefit determination would then be proportional to such a distribution. The difficulty in employing this approach is; of course, that of revealed preferences, for in order to estimate the benefits received by each family the family demand curve for the publicly .provided good must be known. The limitations imposed by the nonoperational nature of this methodology lead

[350] PUBLIC FINANCE QUARTERLY

one to fall back upon a "cost of service" approach, under which it is assumed that the cost incurred, by the public sector in benefiting éach income group is exactly equal to the value of the benefits received by each .group. Thus, the point of departure becomes the identification of those family income classes for which. given public disbursements are made—the determination of public expenditure incidence. The public expenditures to be dealt with are présented in

Table 4. This functional category classification covers the entire gamut of public disbursements, from those which are allocable TABLE 4

Public Expendituresa by F4nctionat Category, Puerto Rico, 1370 {millions of dollars} Line

Functional categoryh

1,. 2. 3. 4. 5. 6.

Education' Health & Sanitation Social Welfare Agricultural Development T,ahor Relations Transportation & Communication Housing Interest Social Insurance aS .Federal b 0olmnoswealth "General"

7. 8. 9. 10.

11.

Total

12.

Total, Excluding Federal Social Insurance

Gross Total°

Total P7et of Bxnorted Portion

Percent

248.1 146.1. 59.2 34.6 8.8

248.1 141.1 59.2 34.6 8.8

22.1 12.5 5.3 3.1 0.8

68.2 20.2 26.3 312.9 204.6 108.3 • 232.2

50.7 20.2 6.6 312.9 204.6 108.3 232.2

t 5.4 1.8 0.6 27.8 18.2

9.6

1 156.6

1,.124.4

20.7 150.0

952.0

919.8

81.8

SOURCES: Work sheets, reports, .and records of the A~cduntinr ,Division of the Treasury Dept.; work sheets of the Economic Planning Bureau of the Planning Board; work sheets and the informe' Anual df the Bureau of Municipal Affairs of the Treasury Dept. NOTES: a. Includes the expenditures of both the central and municipal governments, with doubte•countíng eliminated. Expenditures financed by giants from the United States are excluded, consistent with the purpose of measuring the redistributive effects of the Puerto Rican fiscal system in isolatlon; the exception is federal outlays on social Insurance, which must be lncludCd :since tax contributions to these same programs are included as part of the tax burden. b. Although most of the data were obtained from the Accounting Division of the Treasury Department, the categories correspond more to those :developed by the Burfget Bureau. c. Includes central government grants to public corporations. d. Includes expenditures not allocable to specific groups commerciat,, industrial, cooperative, and recreational development; protection of persons and property and consumer protection; general public administration; land conser,vatlon': ntin•classified services.

Mann j FIuCALSYSTEM AND IbICOMEDISTRIBUTION [351]

to easily dafined family income groups (s eifie=type public oútlays) to those not clearly allocable to áÍy specific group (lure public .goads). An .example of the former are outlays on sócial welfare ór On social insurance irahsfer5 (which are conceptually nothing more than negative taxes); a12 illustration

of the latter .are disbursements on h.ú protection of persons and property. Between the poles fall public. expenditures on

education, which combine characteristics of hoth. i 1 ía. the inteEest of br~vmy a detaiÍed discussion of to incidence of public expenditures is entirelSr ornftted.l 2 Table 5 summarizes the family groups the benefits (costs) are assumed TASi.E 5

PobESv Expenditure Shifting Assumptions Púnational Exper,di s` tire Category -

13xpertation,

Ffenefit ter.ei`red ba

d.Y3Elimpti0u

25 pe- ant by all so~iety iemainiag 75 isercant to iiFailia:a of students Pre-universi.ty vt:edents tiniversity students J'..l nociety Xeáilth $ospital & c.iñii patients Children in school 3u:ch p_ p_.ram BueineSi Pirmc Paeily re-a ces f.~re rocipients ~ociul Yrelf_ :e Sucia Farm Xar.t_;cs Agrícultvre Bhra farsily 3ricojpé Labgr Relations rage & ealsi3 et'rners transportation Property oee:,ers ,wej users ( toe) t'amily F~3ucation

:;aflsu~fers GS trYnapereed

Cero~aricatiCn -&ousirg Public Debt

úoo(i,^-.

Air t'marins passengero 1nbT_kd bue pat.:ssnfera Telegra;.h ._ te~ephone users Hasidents O. h•rasin¿ pra~eots Dbnlhqlae -a

Social Thourence: T~irac2 r te: tg ~ OhSDTii Direct s :ciFaentar Paine Tfneittrxo:zerz 7ir~c* z: i~fte;tts 7isab3liLy trect rccipzrr.afenertl" Bxpenditurea: o kaeumption 1 Panilied, in pror.c~rti bred ir*a:':ra ~4asurp~ion 2 Familie in gl{ce ,.ioa to 1.,n'Yxscymntioh 3 Fnr.tL:cira Au p {7artiO':i to diep:•~able r. r.ey tho4Ale

none

none none none none

29 30 35 31 2?

none

coefficient fl ncir none none none non_ nona "U1:a

a e3r1'cient II none norme norms nona 8(YC of r.entral govt, & 5Cr or rrunici?atl .

Diatributive Series Line of Table A-1

39 7 33 34 1 16 28 38. 24 41 27 32 23

nono no:ze. .r.one none

~:onY none

37 35

TABLE 6

Effective Public Expenditure Rates, Puerto Rico, 1970 (broad income base) 1*amil Incnme C1n.^s Lesa tñan 51,000- $2,000- 93,000- 14,000= i1.000 91,999 92,999 43.349 $4.99a i1.3 8.6 74.9 15.3 6.2 12.7 60.7 9.2 6.1 2.4 26.9 3.6 1.8 1.6 ').9 2.6 10.8 1.7 1.1 0.7 0.1 5. :Rtbor ?rtation9 0.2 0.2 0.2 6. Pro»epnrtatiar-Camaunication 0.6 0.8 0.9 1."• 0.7 7. 1lnuainr. 8.8 3.1 1.2 0.s 0.9 B. 1ntPr+•rt 0.1 0,1 0.1 . 0.1 -. .o i:i1 )nsurancn 16.3 23.2 18,1 9.4 12.4 (,) tn.+tr;,l 14.2 19.2 13.6 fl.2 5,8 Ii-) Co^~Mnnweslth 1.8 5.0 4.3 4.2 _J 6 10. 5:eitot.11 199.1 22.1 67.2 44.2 32.2 "^••ne,—•.1"Expen9l}uren II. ::•nnpelon 1 5.3 5.3 5.3 5.3 5.3 12. 41.3 :•Uantion 2 9.8 6.0 14.9 7.7 13. ..arunT;tinn 3 6.2 6.3 6.5 5.9 5.6 i n•: i•:t,)ct;nntl Claaaification I. B.tqcation 2. i;eatth a Sanitaticn 3. ;rrinl weltvre 4. Ar.riFultural Developmant

14. t5. 16. 17. !8. 19.

-otal t:r.nenditurts . A:'nuMrtlan 1 }:xc)u::nY. 9(a) Ar•rnntion 2 i0xclLldtr.p, 9(a) A^:nmp'inn 3 •'•ngirt; 9(a)

204.3 190.1 240,4 226.2 205,4 191.2

72.5 54.2 82.1 63.9 73.7 55.4

51.5 37.7 56.0 42.2 52.3 38.5

37,5 29.3 39.9 31,7 38.1 29.8

27.4 21+7 28.1 22.3 ?7.7 .'.2.0

í5,0ü5 9,7.499 4.9 1.4 0.3 0.6 0.2 1.4 0.1 0.1 5,1 3.6 14.1

97,500*9.999 3.4 1,0 0.5 0.2 1,8 0.1 3.8 2.0 __j 10.7

i1D.U00$12.499 2.4 0.7 + 0.3 0.2 1.9 0.1 3.8 1.9 __,j4 9,5

5.1 5.5

3.5 5.2

2.8 5.1

19.4 15.9 19,2 15.7 ,19.7 16,1

16.0 14.1 14.3 12.3 15.9 14.0

14.8 12.8 12.2 10.3 14.5 12.6

112,500- ít5,000— (20,000 $14.99 pod am $19.499 1.9 0.6, 2.4 0.6 0.4 0.5 — 0.3 0.6 0.2 0.2 0.2 0,2 1:8 2.4 1.4' 0.2 0.i 0.4 3.8 2.1 3.4 1.0 1.1 0.7 M„ 2.e y~+ 1,4 _ 8.8 9.6 5.1

441~11 5.7 3.2 1.4 0.e 0.2 1.4 05 0.2 7.2 4.7 .2.5 204

5.3

4.9

3.9

1.2 4.3

5.3 5.3

14,1 13,1 11.1 10.1 13.7 12.7

15.0 13,9 11,5 10,0 13.5 12.5

10.4 9.7 6.3 5.6 9.4 e.7

25.7 21.1 25.7 21.1' 25.7 21.1

SOURCES: Each absolute amount of public expenditure benefit received by each Income class (these quantities are not given in this paper) is expressed as a percentage of broad incorne'(Tabte A-2, fine 18) in the corresponding class. Since this procedure was followed the details may not sum to the total's. Line 10 is the sum of lines 1-9; lines 14.16, and 28 are the sums of line 10 and lines 11, 12, and 13 respectively; lines 15, 17, and 19 are computed by subtracting line 9(a) from lines 14, 16, and 16 respectively.

TABLE Effective Net Fiscal Incidence Rates, Puerta Rico, 1870 (!road income base 7

~ :.tie

-. iyem Aaouciption ta 1. Cvr4•a11 syotrm 2. F:xclv+ilnt: social 7naurnnce 3. b`acr.1•,d1ne; Fr.Aeral :oci•.1 li,aurance

Awa:umption 2h 4, cvrr,il $vatem 5. Rxc!1u$Sn1; SnC1n1 rnavr,icr. 6. ^.xri,ulinC gr.dcral ñnciai Innuranre Aaanmption 3° 7. •*v.•r,il Sv.stem 8. Szclndin Social InYurance 9. 8xt:1;,A1r.e Federal .:nc i:,l ür.urance '

Pamily Incomp C1pen bOBe than 81,000— i2,000— 73,1f00- i4,at`.'•- 7%úO6+ 81.000 4t.99g E2.999 ?7,99? t1,g9n 67.49q

i"7300f9.999

1a,000~12.499

f1Y,50oÑ14.992

Its. 000(19.j9g

{20,000 4s~d prsr

Tot*1

-9.9

.11.3

5.4

193,0

59.5

36.2

19.8

7.1

-0.5

-6.5

-8.5

.10,4

180,9

41.9

25.?

15.8

7.9

4:0

-1.2

-3.5

-6.4

-6.3

-10.4

6.0

187.2

45.4 '

27.4

17.4

a,2

2,2

-3.0

-5.2

-T.1

7.7

-10.8

5.6

2.29.1

69.1

40.7

22.3

6,4

-0.7

-8.2

-11.1

—13.4

-13.8

-15.4

5.4

216.9

51.6

29.7

18;2

6.4

3.8

-3.0

-6.0

-9.5

-10.2

.14.4

6.0

218:3

55.1

31.8

19.9

8.8

2.0

-4.

7.8•

-10.2

-11.6

.-14.9.

5.5

{ 194.1

60.7

37.1

20.4

n.0

-0.3

-6.6

-8.8

.10.8

-11.4

.12.4_

5.4

181.9

43t1

76.0

16:1

P.1

4.¢

.1.5

-3.7

-6.8

7.7

•1/.4

6.0

183.3

46.6

?.8.2

18.0.

R.5

2.4

-3.1

.5.5

•7.5

-9.2

-1t.e

5.i

SOURCES: Each •absolute amount Of t8x paid by each income class is subtracted from the absolute amount of public expenditure benefit received by each .class; the results, Which are absolute net fiscal distribution iYgufes, are then expressed' a5 percent898s Of broad Income (Table A.2, une 18) in the corresponding class. Actt)atlly, the saint results may be approximated (due to; rounding)' by subtracting lInes 1244 of Table 3 from lines 14.19 of Table 6. NOTES: a. "General" expenditures distrtbuted proportionally to broad Income. b. "General" expenditures distributed proportionally to the number of families. c. "General" expenditures distributed proportionally to disposable money Income.

[354] PUBLIC FINANCE QUARTERLY

{

to fall upon, and in its fmal column gives the distributive series in Table A-1 which is employed.13 Note should be taken that it .is postulated that certain public expenditure benefits may be exported to nonresidents. The pattern pf public expenditure incidence is presented in Table 6, from where it is readily appreciated that the overall expenditure structure (lines 14-19) is essentially regressive' ° over the entire range of income classes. Those specific components which have the: greatest influence an the ;regressive pattern are .expenditures on housing, social wolf.ºfe, Health, education, and federal OASDHI. These results are ,nát really unexpected, for outlays in the former two areas are rcarried out with the express intent of aiding low-income fanilies, while OASDHI programs principally benefit retirees or fan flies with few alternative income sotfces. Expenditures on education and health in large part show a regressive structure pimply because high-income families do not use public €aci ities. , n ~ NET FISCAL INCIDENCE

Both Lides of the Puerto Rican budget are' ow combined to estimate' the incidence of the entire fiscal system.. Defining the absolute net fiscal distribution as the distributioñ among family income groups of the costs incurred on behalf of each group less the distribution Of' taxes paid by each group, the net effective fiscal rates presented in Table 7 are merely these absolute *" figures expressed as a percentage of the corresponding group broad income. Table 7 presents the overall data uñder three alternative - "general'' expenditure assumptions in a Ufashián in which 'OASDHI: benefits and federal social insurance contributions may be excluded if so desired.l ` It is easily seen that the general pattern of net fiscal incidence is regressive, i.e., the is clearly that the fiscal structure is favorable to implication y Iow-income classes, which experience a net bendit. In contras₹, the higher income groups suffer a net burden (denoted by a negative sign). Under all "general" expenditure assumptions

~•

families in income groups up to a level of e5,Ó00 realize net benefits (lines 1., 4, and 7), whereas those "average" f~rniües ,above $5,000 experience, a net burden. The áxclusiaii of all social insurance programs. (lines ^, 5, and p8)' 6 or only federal social security (lines 3, 6,. and S) has the effect .of raising to X7500 the family income level at which families begin to suffer a., net fiscal burden. Thus,. a redistribution 51 income is effectuated through the fiscal system by rechntneling real income from higher to lower income groups. The "break-even point,' that iñeome lev=el at which net benefits turn to net burdens, cannot be. specifically identified, and it would be ,better to conceive .of it as a "break-even tange." FOrthe overall fscal system (including social insurance} this "range" probably á falls. between. $4,5,00 and $6,500•(see rigure 1).

i92.1

72.5

~ t

ur7 a01--

I~wr43~ tvres

'~.r•.r.w

u (t¡

ci)'

—.,

~ -.20 ,~.

~`—

_.:`

~ -40—' I ?

.j_,a I G 4

; . J..

I . L

i 18

20 aí'11 oYei~

7.rxrr~t'rs,0130? scup. s Ta'- .a 3, line l2¡ T' ' 6. 11ne 1' ; Tá ,.• 7. line

t i~eere 1:

ffectltre Tax, F'4úiic ahpenc3stur i~as~;

~ arid' Atet f,5cai 1: +tes 5broad

r eoma

13561 PUBLIC FINANCE QUARTERLY

Underlying the. net f.iscal incidence analysis is the existence of a budgetary deficit. .In other words, since this study has distributed $1,124.4 million of public expenditures against only $889.2 million of taxes, the gains experienced by the lower income classes do not equal the losses suffered by the upper income classes, i.e., the net aggregate gains are greater than the net aggregate .losses. And that portion of net gains that does not consist of "transfers" from. the upper income classes can be traced to the excess of expenditures over taxes. The deficit has several causes: (1) all expenditures, regardless of their source of financing, were allocated to income classes, whereas only tax incomes net of bond income were allocated in a similar manner; (2) the tax amounts assumed exported are greater than the exported expenditure amounts;17 (3) income taxes withheld • from. nonresidents and nontax incomes (from, for example, sales of public assets) are excluded from the tax burden, but do appear in the outlay totals. As a consequence,'the net fiscal rates are higher or greater than they would be in the absence of the deficit. Moreover, the presence of th.e deficit affects not only the level but the pattern of net fiscal incidence. in order to appreciate the net fiscal pattern sans deficit, it can be removed by distributing additional "taxes" of $235.2 million according to the overall distribution of the tax burden.18 If this is done the general fiscal incidence pattern remains regressive over the entire income scale, but the "break-even range" is now found at a slightly lower family income level. SUMMARY AND CONCLUSIONS

Table 8 indicates that the tax structure, although progressive, has much less influence on the redistribution of income than does the expenditure structure. For example, the first family decile received 1.7% of total income before the fiscal impact, 1.9% after taxes, and ' 33.8% afar the fiscal impact. Those principal factors that are critical in determining these results are, on the tax side, the postulated nonshiftability of the entire

Mann? FISCAL SYSTEM AND INCOME DISTIAIBÜTIÓN'[357)

net

pattern;

public

until

personal income tax and of 50% of the corporate'income'tax. relatively the progressive' structure, of selective excise taxes high dncOme levels, and the progressive pattern of Commonwealth social insurance taxes both before and after federal social security contributions turn regressive. On the expenditure side the distinctly pro-poor resultsare dependent upon the assumed and implicit utility functions underlying the distribution of public goods benefits among the family income groups. That this is an extremely critical assumption has been pointed. out by 'Aaron-McGuire (1970) and Maitál (1973). The former experimented with -arbitrary utility functions which posit that each family. "should be iinpúted a fractiºn of the totál dál'ue of the public good proportional tó the reciprocal of its marginal útiiity_ of private good expenditure" (Aaron-McGuire, 1970: 911); the latter used independent 'estimates of the válue óf the inverse of the elasticity of substitution between public and private goods. Application of the two Aaron-McGuire functions and. the Maitál function to Puerto Rican data under. a "low" quantity of goods assumption does not significantly alter the pure net distributive benefit's ely tarn to net burdens TABLE 8

The Family Income Distribution by Déciles; Puerto Rico, 9970 :Abso3.ute Proportions of Total income Percentiles Izower,rt0% 11-20% 21-30% 31-á.a ' 41-50% 51-60%. 61-7Qá 71-8016. 81-90% Upper 10%

Initial Broad

After-Pax

3.5

3.9

5.5 6.2 7.6 9.0 10.3 . 10.9 15.8 29. 5,

5,.5. 6.3 7.8 9.4 10.7 10.6 1.5. 28.x.'

Income 1.7

Income After

Piecál Impact

Income 1.9

r r3.8 5.9

3tamily

6.8 7.6 8.2 9.2 9.7' 10.3 13.6' ' ' 24.9

a. Represents the arithmetic average of the three "generaP` expºnditure assumptions.

[3581 PUSLIC'F,iNANCE QUARTERLY

in a slightly lower income range ($3,500-$4,500 iii contrast to the original $4,500-$6,500).. However, distributing the Puerto Rican data under a "high" quantity of pure public goods assumption by the second Aaron-McGuire function (1 Pi and

the Maital function does drastically change the iiot fiscal pattern, generating net fiscal benefits for families in the income classes over $15,000 while rLducing the real incomes of middle-income families (in the $2,000-$.15,000 range). While there is no doubt as to the validity of the Aarón-MtrGuim contention that the income redistributive; éffe'cts. of fiscal systems do depend upon implicitly or explicitly assumed utility functions, the form of the utility functiori(s) 'appears far from attaining a solid empirical base (with all due respect to Maital's contribution). This is a topic which certainly warrants further research, but is beyond thescope of this paper.

NOTES ~ 1. For example; see Prest (1955) and Shoup (1969:.11), 2. For excellent criticisms of these and many other limitations see Bird and De Wulf (1973) and De Well (1975). 3. Two other exportation coefficients specifically related to corporate capital are also used, and are found under the corporate income tax discussion. 4. Although It can be rationally argued that excises are neutral from both the ' incomeuses and income-sources sides, in the case of Puerto Rico it is difficult to argue that they are geographically neutral vis-a-vis both sides. The absence of trade barriers and the use of.a common currency between the island and the United States, _ its .principal trading partner; might lead one to analytically treat Puerto Rico as simply another region within a larger continental system. Thus, although tax importation is ignored in this paper, the magnitude of tax exportation may be greater than that assumed under Coefficient III. However, this effect is probably. of little import since most excise-related revenues are derived either from imported goods or from levies imposed at the producer level on goods almost entirely consumed domestically. For references on this point see McClure (1964 and 1969). 5. The original study offered four altérnative cases in addition to this "standard" or "reasmtable" case. It is to be emphasized that no empirical support for these assumptions exists. 6. of course, if the firm is a subsidiary of a large firm with market power such an effect might be counteracted. 7. This viewpoint is extensively developed in Mieszkowski (1972).

Mann / FISCAL SYSTEM ANi) INCCIME'DISTRIBUTION {359] 8. Brlftaisi (1972) has developed an elaborate theoretical and etnpir1caÍ structure to support his argument. Deran (1967) specifically studied the P,uertb Rican case, but her results are based on questionable statistical methodology. 9. Not ,given in this•paper are the effective rates applicable to specific excises, {:which vary from totally regressive on cigarettes to principally progressih'on motor vehicles. I0. Eyed under .orthodox assumptions the property tax is progressive in the higher income levels (but regressive in the lovergroups), 11. In reality, all public goods combine both characteristics. However, outlays on education (and' health) are the ohiy ones só treafed izi this "paper, as it is assumed here that one can clearly distinguish between "specific-type" public goods and pure public goods. 12. Reference may be made to pages 77409 of The ofiginai study for precisely •this discussion, 13'. The empirical justifications for the proportional allócations within each fuitctionaI category are álso omitted from this paper. Suffice it tó state that most of them are based on statistical information taken from published and unpublished public documents. 14. Regressive In the context of public expenditures has a "pro-poor," connotation; it merely refers to the fact that the effective rates decrease as family income increases; º progressive structure (of taxes, expenditures, or net fiscal benefits) finds the effective rates rising as income increases. 15. This may be done in order to isolate the redistributive properties of the Puerto Rican fiscal system alone. 16. This is done for the benefit of those who might object to the inclusion of social security "contributions" as taxes. 17. One source of ,central government revenue, off-shore excises, does not burden residents at all; they are collected by he federal government under federal excuse statutes' on sales of Puerto Rican rums in the United States, and are returned to the Commonwealth treasury. Thus, they buoy expenditures but are not reflected in domestic taxes (in 1970 they amounted to $79.6 million), 18. That this procedure is replete with deficiencies is obvious. For an excellent discussion of this point see Gillespie (1966: 1.64-173). To merely point out one of the limitations, that component of the deficit arising due to Treasury bond emissions may be equivalent to an inflation tax. Since the incidence of such a tax works from both the income-sources and income-uses sides, it is quite unlikely to be the same as the average tax burden distribution.

REFERENCES AARON, FL and M. RMcGUIRE (1970) "Public goods and income distribution." Economeuica 38 (November): 907-920. BIRD, R. M. and L. DE WULF (1973) "Taxation and income distribution in Latin America: a critical review of empirical studies." IMF Staff Papers 20 (November): 639-682.

j360J, PUBLIC FINANCE QUARTERLY BRITPAIN, 3. .A. (1972) The Payroll Tax for Social Security. Washington: Brookings.. p DERAN, E. (1967) "Changes in factor income shares under the social security tax." Rev. of;Economics and Statistics 49 (November): 627-630. DE WULE, L. (1975) "Fiscal incidence studies in developing countries:.survey and critique." IMF Staff Papers 22 (March): 61-131. GILLESPIE, W. I. (1966) The Incidence of Taxes and Public Expenditures in the Canadian .Economy. Study No. 2 of the Royal Commission on Taxation. Ottawa: Queen's Printer. MAITAL, S. (1973) "Public goods and income distribution: some further results." Econpmetrica 41 (May): 561-568: MCCLURE, C. (1964) 4'Commodity tax incidence in open economies." National Tax Journal 17 (June): 187-204. --- (1969) "The inter-regional incidence of general regional taxes." Public Finance 24 (September): 457-484. MIESZKOWSKI, P. (1972) "The property tax: .an excise tax or a profits tax?" J. of Public Economics 1. (April): 73-96. PREST, A. R. (1955) "Statistical calculations of the tax burden." Economica 22 (August): 234-245. SHOD?, C. S. (1969) Public Finance. Chicago: Aldine.

TABLE A-7 Distributive Series, Puerta Rico, 1970 (percentages)

dine

Serieo

'amily Income C1aeB Lean than 41,000- 32,000 $1.000 $1,999 82,949

1, Fagee.and Salat'iea 0.4 2.8 2. Peter9r. Renetita 6.4 3. Iaéama t:cm Persona 16.0 6.9 Outaide Rome 4. Unemployment Compeneatlen 1.6 23.3 3.1 17.2 5. Pedgral•Social Sedurity 6. Public Pensions Re'R1ved 0.4 2.9 20.1 52.2 7. Public A4aiatance 14.1 8. Paod Produced & Consumed on Farm 9.9 21 9. Lottery Prises 0.9 0.6 4.0 10, unincorporated Firm Income 11. Rental Tncone 0.9 4,5 0,2 1,2 12. D1ttidend Income 1.1 0.2 13. Partnership Incom6 0,1 •. 0.5 14. Inteoeat Income 0.2 15. Set Capital Caine 0,2 0.9 16. Residential Property lax 0,5 17. Contribution to Penalen Fandé 0.1 18. Interest Paid on Personal Debt 0.5 19. Persaral Income Tax 0.2 20. Income ltniveneity Students 14,1 9.6_ flocaiving Aid 21. "Covered" Wares and Salaries 0,7 3.9 5,3 22. Petal Conatrnpttcn 1.3 0,4 2.5 23. O9pital income 0.7 3.0 U. Air 7lanaport Expenses 1.0 3,9 25. Cvner-Cwned & Ouccpled Rartea t., 4.0 26. Rental Payments 0.2 0,9 27. Telephone 4 ieLegraph 0.1 0.2 28. Prleate Auto Operation 19.1 14.2 29. Pre-On3verait3 3eudenta 2.6 3.9 30. Univereit. Students 21.0 31.. Upe-Public Reait10 2acilitiva 26.8 29.4 19.5 32. Public fiouatng 21.2 35.7 33. Farm' Families 12.5 6.5 34. Perm Family Income 12.4 1,9 35. number of Families 1.1 4.8 36. Zanily coney Income 4.4 1.0 37. Family 3road Income 5.8 1.5 38. Transported Coods Rxpenaea 11.9 8.0 39, Owned & Rvatad Dee111nCs 43. 1.0 7.7' UrSa,, Suees^xpvaaºb

33,000.. '34,0008 99 $4.999

i.005. $ .499

57;30059,999

6i0,odÓ512,499'

£12,50º$l4 9º

85.000. S19,999

2~o,o~5 and ever

20 e

5.9 .71.6

8.5 11,13

11.2 12,7

.25,2 22.1

15,8 1,9

71.6 .10.1

6.5 5.2

24 2.0

9.7 5.2

100.9 100.0

19.5 23.4 21.1 7.8 19.3 21;0 5.1 5.1 9.0 1.7 2.8 1.9 0.0 2.2 3.2 1,8 1.0.

13.2 15,9 13.3, 14.2' 11.5 " 16.2 7,7 8.0' 8.0 1,7 3.5 4:3 1.6 '3,7 5.4 4,3 2,6

11.? 14.1 12.9 15.7 12.1 14.9 9.4 8,7 6.9 2.0 4.0 8.2 1.5 5.4 12.0 8.2 4.4

11.7 10.7 16.4 14.4 4,8 13.0 13.9 17.8 15,3 4.4 9.6 22.7 3.9 16.8 '23.5 ,,,.12.7 11,9

40.7_ 7.7 5.9 13.4 6,2 í2.2 13.7 12,1 4.7 lei 23.2 4.1 17.7 21.4 23.2 14.8

.5.9 2.3 4.2, 9.7 2.8 11,4 8.5 9.4 4.9 7.0 14.6 4.2 13.9 14.0 14,6 13.9,

1,1 0.? 1.2 9.1'

0.2 0.3 0,7 5.8 0.9 5.1 4.1 5.3 7.4 12.0 2.3 8.4 11.9 7.4 7.3 7.0

7,1 2.0 10.6 0.3 22.4 23.9 20.9 66.3 48.5 14.4 71.7 18,6 4.6 9.4 33.0

100.0 100.0 100.0 100.0 100,0 100.0 100.0 100.0 100,0 100,0 100.0 100,0 100.0 100,0 100.0 100.0 100.0

32.7 7.3 8,0 3.8 4,4 6.1 6.2 2.3 1.5 16.3 9,1 26.6 18.2 15.5 15.5 13,2 7.6 7.2 83 13.0

"20,7 10.6 9.5 5.4 4,1_ 7:3 9.6 349 4,3 14.3 10.4 19.9 17.7 9,6 13.4 12,7 9.1 '8.7 • 9.7 12.8

14.1 13.5 11,3 6.3 5.6 '8.6 11,8 5.8 8.9 11.5 11,7 4.7 8.5 5,3 9.6 11,8 10.8 10.5 11,4 12.3

6.4 27.9 22.5 14.3' 34.6 27.1 23.2 21.5 24.0 15.3 23.8 1.0 9.8 7.4 18.2 20.8 22.1 21.6 22.6 19.4

1.7 15.5 14.5 12.5 12.0 15.2 16.2 19.8 19.9 6.3 13.4

0.? 10,8 10.2 8.8 11.910.6 10,0 15.8 15.8 2.4 8.9 -

— 4.9 5,6 6.3 6.2 6.5 5.4 7.9 '7;7 0,6 -5.$

2,0 2.3 6.0 2.8 2.8 1,8 3.8 3,4 0.2 5.4 -

2,9 9.5 33.8 34.4 10.? 8.7 18,2 34.1

0.9 2.9 9.9 9.4 14.2 14.1 14.4 9.5

1.1 4.9 5,3 10.2 10.1 10.0 4.9

0.6 5.0 2.5 5.8 ,5.8 5.2 2.5

0,4 3;0 0.8 2.6 3.0 2.1 0.9' 2.?

100.0 100.0 100.0 100,b 100.0 100,0 300,0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 500,0 100.0 100.0 100.0 100.0 100,0

18.6

16.8

17.4

.21.3

10.1

2.0

0,7 9.8 5,6 7,4 5.4 4,2 7.13 3.7 9.3 7,9 7.8 11,2

3.0 0.3 3.5 3,2 .11.8 13.6. 8.6. 4.8 11,0

61 Q.Ó

(3621 PUBLIC FINANCE QUARTERLY NOTES to Table A-Z,

limit

SOURCES: } Lines 1=to 9--Eactt bne these serles is developed from work sheet data that, In their final published form, became part dl the Puerto Rican Department of Labors study entitled ingresos y Gastos de las Familias, Puerto Rico, 1963. Since the data refer to calendar year 1963 they had to be extrapolated to 1970 for use in this study. The following extrapolation procedure was developed ín consultation, with Professor Richard.A.'Musgrave of Aarvard University: (a) The 1963 series, presented in absolute dollar amounts, were converted into cumulative percentage series by family income class. (b) The 1963 groups were converted into 1370 family income groups by I of each class by the, increase in average family multiplying, the upper income over the time intérvai. The cumulative percentage (c) series were graphically located together with the 1970 family Income classes; the resulting curves yielded a 1970 percentage ° distribution based an "unequal income classes. (d) in order td return to' the "even' Income classes required by this study, Interpolation between da₹a points was carried out. The result is a percentage distribution by "even" or "equal" income groups in terms of 1970 dollars. During the entire process the implicit assumption is maintained that the relative family income position remained constant over the seven year period: A priori this seems to be a reasonable assumption,,andit is partially corroborated by noting that 1 the Gin1 'coefficients (as calculated from the Census of Population) for 1959 and 1969 are 0.5403 and 0.5311 respectively. In order to test the validity of this methodology the same procedure was applied to the 1953 study data; and the results were checked against, actual' 1963 data. Although the changes which occurred in the socioeconomic structure of Puerto Rico between 1953 and 1963 were perhaps D greater than those Which occurred between 1963 and 1970, the"derived" 1963 series very well approximated the "real" 1963 series: Lines 10 to 19—The raw data for these series were taken from work sheets prodided by the Office of Economic and Financial Studies of the Puerto Rican Treasury Department. Unfortunately they are grouped according to adjusted gross incomé levels, 'for what Is needed in this study•are data grouped 'according, to=family money Income levels. The principal differences between these two income concepts consist of the exclusion from adjusted gross income of public transfer payments and the income of those low-income families or individuals who are not legally ,required to file returns. Since both items represent a Large portion of family income in the lower income classes, the Treasury data must be adjusted berore being used. The adjustment procedure employed hero is essentially that developed by Peter Newman in conjunction with the Survey of Consumer Finances of the University of Michigan; see Peter NeWrnan, "Án Empirical Study of the Distribution of the Tax Burden in the United States, 1955-1.959" (unpublished paper, dated September, 1961). Briefly, the procedure involves calculating gross factor income by family income class, with ,gross factor Income, ,being roughly equivalent to money income ;plus imputad rent and home-produced food. less public transfers; the average family incomº-indclnd is then subtracted from gross factor income, and the average family transfer payment received pius an estimate of legally unreported income are expressed as a proportion of average money' income. These proportions, calculated for each income class, are then used to adjust the Treasury data. For example, the income' corresponding to adjusted gross income class $1,000-$1,999 is reduced by 50% and added to the next highest category ($2,000-$2,999), because on the basis of family money income (including transfers) those in this category would fait approximately in a $1,500.53,000 incomé class—if such a class existed. Although the, .$1,0:00-$1,999 class suffers an irnitiat reduction, its net loss is less, for the portion removed from the "less than $1,000" .class Is added to It. This type of adjustment' is carried but, in a similar fashion' for all the,adiusted gross income categories givan by Treasury' data. Une 20—Adapted from College Eritirance Examination Board, Study áf Student Financial Aid in Higher Education in Puerto Rleo (March, i971)

Mann¡FISCAL SYSTEM AND INCOME DISTItII3UTION {363] NOTES to Table A-1 (Continued) Line 21—Constructed by assuming that all income derived from wagesand salaries l r family income classes below $7,500 was covered by-"OA5DHi regulations in 170 (the actual maximum was $7,800). The figures in the higher income categories were computed by multiplying the number of taxable and exemptreturns in each category by $7,800. The raw data were taken from the same source as lines 10-19, and were subjected to the safne adjustment procedure. Line 22 and lines-24 tó28 —The raw data for these serles (and many others which are not given here) were taken from the 1963 Department of Labór study entitled Ingresos y Gastos de las Familias, Puerto Rico, 1963 (actually the unpublished work sheets were used). The procedure employed to update these data to 1970 was developed in consultation with Professor Richard A. 7Vlusgrave. From the survey data it was found that there. existed significant "differences irr consumption patterns between rural and urban areas: Thus, the following procedure was separately applied to the rural and,urban sectorial data: (a) Theaverage.family money Income by income class in 196'3'was Calculated. (b) The average family expenditure on each specific items in 1963 was additionally calculated. (c) From (a) and (b) 1963 average propensities to,consumº'out of money Income were computed for each income group. (d) These propensities .to consume were then graphed against average family money Income in each Income class. (e) After adjusting 1963 average family income for the 1963-1970 inflation (using the consumer price index), the relation between the average propensities to consume and 1970 adjusted family incomes was read off the curves. (,f) The rural and urban propensities to consume, until this Juncture separate, were reaggregated using population weights for each income class, (g) The derived propensities to consume were then multtplied by a distribution of money income estimated from a Planning Board analysis done especially for this study; And from these absolute expenditure series the resulting percentage dtstributfons that appear in line 22 and lines 24.28 were derived. Line 23—includes unincorporated firm Income, corporate profits net of tax and not of that portion accruing to nonresidents, money and imputed Interest and rent income, realized capital gains, and partnership profits. Line Z9—It was assumed that in urban zones the distribution of children between the ages of 6 and 18 is similar'to the distribution of urban families.by income level (data from the Census of Population); an analogous assumption was made with respect to the rural zone and children between the ages of 7 and 17. Using the totals thus derived, urban and rural matrices were developed, in which appeared the number of children corresponding to each age group and income class. Subsequently a serles of hypotheses was made in relation to school enrollment by zone, age, and income class. For example, it was assumed that only 50% of urban children between ages 12 and 14 and in the family income class or "less than $1,000" were enrolled. Finally, further reductions were made to take into account private school enrollment. Line 30—Consejo de Educacl,n Superior, Grupo de Trabajo de Planlflcacl6n Integral, Propuesta de un Plan Integral de Ayuda a los Estudiantes de las instituciones de Edueación Superior en Puerto Rico—Con Alternativas (Rio Piedras: 1969), Appendice 4, Tabla 6.

Line31—Adapted from data provided by the Office. of lnforrnation Systems Development of the Puerto Rican'Department of Health. Line 32—Adapted from data provided by the Puerto Rican Department of Housing, Under-Secretary of Planning. Lines .33 and 34—Adapted from U.S. Department of Commerce, Bureau of the Census, 1970 Census of Population, General Social and Economic Characteristics, Puerto Rico, Final Report PC(1)—053 (Washington: V,S. Govi. Printing Office, 1972), pp. 53-206.

[364) PUBLIC FINANCE:QUARTERLY' {

NOTES to Table A-1 (Continued) Line 35—Planning, ,Board, Division of Economic Projóctions, these data ware subjected to a, serles of statistical procedures described In Table A-19 of the•orlglnai study. „ " Lines 36 and 37—Frorri tines $ and 18 or Table A-2.

r ~'+i

_''

Line 38—Derived by the procedure described In lines 24-28. The proportions'of expenditures considered transported goods were estimated logically..(i.e., they are not supported emp)rically). For example, 40% of .expenditures on housing .were considered as expenditures on transported goods, while the .corresponding. percentage for food was 100%. , Line 39—The original 'percentage distributions were taken from the Puerto R'icán Labor Department publication ingresos y Gaston de las Familias, Puerto Rico. 1963, informe LA, p. 48. They were extrapolated to 1970 and weighted according tó data in U.S. Department of Commerce, 1970 .Census of Housing, Detailed Housing Characteristics, Puerto Rico, Final Report I-lC(1)—B53 (Washington: U.S. Govt.. Printing Office, 1972), pp. 53-94. Line 40—Derived by subtracting taxes paid from line 9 of Table A-2. ' Line 41—Derived by the .procedure described In lines 2428 with retárence to only the urban sector. NOTE: Details may not sum to total due to rounding. r

^' i f ►"

;

TABLE A-2

The Income (bmpanents. Puerta Ro, 1970 (millions of dollars) t~tTn I. '. d. 4. ~.

1•. 7. . R.

intacto ltem . rcng.:o and ratL3riee 3-:t"corpotat.d Aupfnese tt^t Jnccma R,;nt><1 Ino0.1e Jot•rnpt Dinidrnde '

Faa1I,t Incaae Claa4 1ºea Efian ai,o4o. 92,oL•o- a3,00a- 14,6001i,94a ;1,000 41$99 j12.999 $4.999 206.1 143.1 271.6 9.7 67.9

t10t Realizod Capita' 61132 Partnnrohtp Proftts 1'rannfer Patrmont fa

'fntal, taancy Ittooma id3n txente to

}5,00o37,49? 611.1

RI,50099.939 383.i

281.3

412,500114.}99 137.6

415.000919,99,9 58.2

l20,000 at7d ave 235.2

31.8 7.1 9.7

21.0 5.6 5.2

15'.3 4.2 1.5

139.4 15.8 9.6

574.1' 75.4 66.7

3tü,tl00, 412.499

$otal 2,424.9

19.1 6.8 12

29.9 6,0 2.9

32.6 5.2 5.5

A@.b 11,5 15.1

51.3' - 9.1 15.5

25.3 38.1

0.5 0.1 0,1 , 84.6 17+.9

0.7 '0,3 0.1'' 10?,r{ 273.7

0.7 0.6 0.2 •8₹.5 329-9

0.8 0;6 0.2 75.4 391;9

1.$ 1.6 0.3 9^.2 P110.4

1.9 1.6 0.4 50.A 513.3

2.0 1.7 0;4 34.2 368.2

2.1 1.5 0,2 19,18 209.0

2.9 3.4 0.6 6.6 92.7

26.4 26.7 2.5 r2O._ 1 427.7

39.9 40.0 5./ 594.3 3,616.4

0.4

2.6

5.5

7,9

10.4

..t.4

14.7

10.8

6.0

2,2

9.0

93.0

2.2 0.7 0.1 0.1

95.0 3.4 0.3

•

Nonay Inoome

.1', 31.

ln-kln4 fYa8e4 á 8alári40 3<0od rroduged de Cone3aa4 on Pana

3'.

Dninonrpnrated 8ue1nsc incone-in-kimt

1:_ 34It. 36. 1'!. 1r..

w t7, H

3,7

5.2

7.8

6.0

5.5

4.33

7.3

1.0

0.3

0.1

57.2

6.3

0.4

0.6

O.?

/.1'

1.,1

0:7

0.4

0.3

1,9

8.0

3.0 0.1

2.3 0.¢

3.! 1.1

5.7 2.2

17.7 6.0

113,7 6.3

14.7 3.9

9.8 2.1

11.9 1.9

19.6 2.5

105.5 26.4

12,1,

195.5

1.3 9.2 130.9

8.9

1673 24.8

j 593.1

4.369.2

31.t 3303431 ttalne J3esiden0es 0enod by Oeoopier 0.2 7ntrreat Tncaae•-13•3cin4 Ro+.ainnd 3]7nLnga lCcrninó to 33esidanta 0.3 Corpprate Tax LiefntatLeII .'>.c1•,l 1ns3e14,eeJmaatat;tl „ta¢ T./..3. Broad IncOae 44,3

2.0 0.5 •_9 193.0

2.8 1.0 1D.9 332.9

2.8 3.3 1.7 1.3. 27'.5 ,4;j t 7 361.0 458.6

j.2 3.7 3342.9

7.7 2.8 48.; 6/4.9

6.0 2,1 _1~.7 +143,1

•

8.8 1.9 17.0 254'.9

1366) PUBLIC FINANCE QUARTERLY NOTES to Table A-2 SOURCESr The gross totals of lines 1-5 and 7-8 were taken from Junta da Pianiffracíón, Negociado de Planificaclán Económica, ingreso y Producto, Puerto Rico, 1972 (San Juan: 1973), pp. 30-31. From the gross totals of lines 1.4 were subtracted the imputed items which appear in lines 10-14, the fatter entries being the product of estimates done by. the Division de Proyeccion de Factores Economicos'of the Puerto Rican Planning Board. Une I—lnciudss money wages and salaries less employee and employer contributions to social insurance; distributed by line 1, Tabie A-i. Lines 2 to 5—Distributed respectively by tines 10. 11,14, ana 12 of Table A-1. Line 6—Represents; realized capital gains, and was developed by the author from work sheet data provided by the Office of Economic and Financial Studies óf the P. R. Treasury Department. Conceptuaiiy it would have been appropriate to add to the broad income base all ca pital gains, both realized and accrued, but no estimate for Puerto Rico Is available; distributed by lino I5, Table A-i. Une 7—Includes thé partnership income tax; distributed by fine 13, Table A-1. Line 8 T- he totals for all the different public and private sector transfers received by families were taken from work sneets provided by the Junta de Planificación, Negociado de Pianificaclón Económica. Due to space constraints the breakdowns are not presented in this paper; suffice it to state that each component was distributed by the appropriate series of Table A-i. Lina 9 --Sum of lines `3-a. Lines 10 to 13—Distributed respectively by lines 1, 8, 10, and 16 of Table A-i.. Line 14—Distributed by tine 18, Table A-1; it is assumed that this series reasonably represents services rendered to persons by financial intermediaries, but the series Itself includes only personal Interest payments on personal debt. Line 15Total taken from Junta de Pianificack n, Negociado de Planüicacióa Economics, ingreso y Producto, Puerto Rica, 1974 (San Juan: 1971), 'p. 1, and, distributed by line 12, Table A4.. Line 16This imputation refers to the "standard" case assumptions regarding the incidence of the corporate profits tax which are described in the body ofd the text. Since wage-earners and stockholders experience a reduction in their, before-tax incomes due to the tax, this loss is' returned to them by this Item. Une 17Those fractions of social insurance taxes which fail on the wage-earner in reality form part of his before-tax income, and are returned to him by this item. Line 18—Sum of tines 9.17. NOTE: Detaiis may not sum horizontally to totals due to rounding.

Arthur J. Ms nn is on tlrc faculty Of the University of Puerto Rico ú: Mayaguez. Ne llas published brticles in the fields of public expenditure, tax reform; and .income distribution. He Izas- also served as consuitant to tlu2 governtnents of Puerro Rico and the Dominican Republic.

SE PA RA TA Número £i

Arhtur J. Mann y Donald Perlis (U.P.R., Recinto Universitario de Nayaguez)

UTILITY FUNCTIONS, PUBLIC GOODS AND INCOME DISTRIBUTION

jPublic Finance Quarterly, 5 (January 1977):

9-221

The results of fiscal incidence studies depend upon the underlying utility functions pertinent to the distribution of public good benefits among income classes. Generally, the use of such functions is not explicitly recognized By taking, in the first instance, an extended approach to utility based on an original AaronMcGuire formulation and, in the second instance, a new approach, it is concluded that the income-equalizing tendencies of ftsozl activities muy be overstated when more conventional analysis is employed.

UTtL1TY EUNCé'iONS, F'UBL1C GOODS,

Over the past several decades, but especially since the early I960s, a growing number of fiscal incidence studies have appeared.' Despite the recognized methodological defects of such analyses, they are duly produced and published with little apparent heed paid to their multitudinous limitations. 'Tax (and expenditure) policies are partially formulated on the basis of their conclusions, the raison d'être for doing so evidently being founded on the presumption that the educated guess of the economist is better than that of the layman. It is generally the case that these studies find a redistribution of income from Higher to lower income groups as having been effectúated" by the national. (or state) fiscal system. Moreover, the expeiiditúre side of the public budget is normally targeted as 'the prime mover toward greater income. equality. However, t'h "benefits" of public disbursements on both specific-type PUBLIC FINANCE QUARTERLY, Vol. 5 No. 1. January 1977 ©1977 Sage Publications, Inc.

191

[iol PUBLIC FINANCE QUARTERLY goods (e.g., public housiiig) and pure public goods (e.g., defense) 'may be distributed by rather poor proxy series; a further deficiency is that those series employed to alibeate pure public goods outlays among income classes entail ,the use of implicit average utility functions. Aaron and McGuire (197©) and Malta! (1973) have iñgeni ously attempted to come to grips with this problem (and, as a corollary,, with the general equilibrium quandary) by working in terms of a Lindahl solution. The former, positing a set of eight simplifying assumptions,. demonstrate that each family "should be imputed a fraction of the total value of the public good proportional to the reciprocal of its marginal utility of private good expenditure" (Aaron and McGuire, 1974: 911). Nevertheless, to carry out their analysis, they use two arbitrary utility functions apparently not supported by data. Maital (1973) attempts to inject operational content into the functions by using independent estimates of the crucial, parameter related to the marginal rate of substitution between private and public goods (he actually finds estimates of the value of the inverse of the elasticity of substitution between public and private goods, labeled ). Apportionment of pure public goods benefits' among income classes on 'the basis of Maital's 'derived utility functions reveals that public goods, provision does tend to redistribute income from high to low income classes but in :a magnitude far less than suggested by 'more conventional studies. In. this paper; we attempt to develop further' this approach in two directions. First, the Aaron-McGuire argument is extended to include specific good benefits as dependent on a utility function. Second, there is developed an alternative utility model to Maital's fundamental assumption of constant elasticity of substitution of income for public goods (an assumption made apparently for ₹he sake of convenience. rather than on the basis of some economic rationale). We have used Puerto Rican data and spending patterns, and comparisons with United States data suggest a close similarity of trends.

table 1 contains the statistical results of the most recently completed conventional fiscal incidence analysis (Mann,. 1973) of Puerto 'Rico's tax .and expenditure system (see the subheading "Conventional Assumptions"); the last six columns are based on the Aaron-McGuire (1/Y, 1/Y2 ) and Maital .(1 JY' s ) functions relating to the marginal utility of income. These three functions have been applied 'to two rather arbitrary assumptions as to the proportions of public good costs that aré álloeable between pure public goods and speck public goods (see Table 1, notes b and e). TABLE 9

Net Fiscal Distribution: Puerto Rico, 1970 (dollar amounts per family)

Pamily 3II°Ome Class.

Convéntional Asaumptionsa

.Lowb luantity Pure Public Cooda

-.i/j2

1/71.5

Lesa than !61,000 1918 2277 1887 2455 2322 1641 1907 1547 798 678 51,00041,949 }82;000-$2,999 1523 .1711 1352 697 549 ,1054 1;184 .804 .$3.000-»3,999 333 175 533 578• 176 -354 -511 $4,000-54,999 -41 -57 -466 -816 -960 55,000-17,499 -748'-954-141 -1486 -1526 '$7,500-59,999 510,000412,499' -1259-1633-2169.-2304 -2198 3i2.,500-t,14,999 -1894-2445-3074 '-3165 -2818 $15,000-$19,999 -2750-3629-4591 -4756 -3209 820,000 and over -3773-5129-5684 -5214 -2377

237.5 723 614 252 -428. -875 -1472 -2205 -2942 -4007 -3968

. c

High° Quantity Pure Public Gooda 1ZY

t YZ ' 1/Yi'5

637 41.4 " 474 283 -65. 49 301 -194 3 '240 -337 -Z7 33-578 -267 -23 -604 t -269 -278 -534 -272 -605 -329 -277 -991 157 -198 -.1485 3905 1223 -708 9633 3949

SOURCE: Data in first three columns from Mann (1973).. NOTES; a. Under A, pure public goods benefits were distributed -according to "broad" income; nnder'8, they were distributed according to the number of families in each income class; under C, the "analytical" budgetary deficit was eliminated by distributing It according to the overall tax 'burden, and'the pure public goods were then allocated as in A. b. The "low" quantity of pure public gods corresponds to the original study assumptions—i.e., 25% of expenditures on education and all expenditures on general government,,police, and economic development. C. The "high" quantity of pure public goods corresponds to the "IoW" q,4antity, assumptions in addition to the following specific goods cost proportions assigned ás pure public goods; education—0.8; health and sanitation--0.8; welfare-0.5p labor relations-0.5; agriculture—0.5; highway construction-0.5; housing—0.6; interest payments on public debt-0.2; social insurance--0.5.

t12 PUBLIC •FINANCE QUARTERLY

The Aarón-McGuire approach may he summarized asfoUow ; (1) Y' = average family income (net of the personal income tax) in the ith income group. 2 . SGB' = average specific goods benefits to a familyin~tlie th S•" # '' as calculated by the two series (low, high). (3) P = total pure public goods expenditures (low, high). (4) D' = YI + SGB' =net disposable family income in the ith group. (5), .M(D') = marginal utility of disposable. income D' (M is selected by independent means), (4) PB' = Pf [M(D1) El/M(Dk)j

(k taken over all families).

(7) NB' _ SGB' + PB' — Tax' = net family benefits in the ith group.

These are the data presented in Table 1. Use of the marginal utility of income function 1/Y does not •appear to vary drastically the distributive pattern of net fiscal benefits among family income.cl sses; the .only marginal change Its use generates is. that, under"16w" quantity assumptionsl,ae benefits turn, to net burdens in a lower income group. Much:the same can be said with respect to functions 1/Y2 and l/Yi-5 under the "low" quantity premises. However, combining ilia latter two functions with a "high" quantity of public goods does significantly affect the net benefit pattern, yielding net fiscal benefits to upper income families while reducing the real incomes of middle income families. Moreover, the net benefit accruing to the upper income ,families appears to grow in both relative and absolute terms as income levels increase. These results do not generally differ significantly from those applicable to the United States found in Aaron-M'cGúire's Table III and Maital's Table I. This, of course, is not at all surprising, since we have used their marginal utility functions. Thus, the differences may be accounted for by the distinct character of the Puerto Rican tak and expenditure structure;: but by the same token the resemblance attests to the similarity of those structures.

Mann,Perlis f UTILITY FUNCTIONS:f131 THE EXTENDED APPROACH

In Table 2, where we have carried out the process of distributing the costs of public goods to a further degree, the statistical results do offer interesting differences (relative to both the Aaron-McGuire—Maital results for the United. States and to those in our awn Táble 1). The same functions employed to generate the Table 1 data are used to calculate net fiscal benefits under an alternative approach in which specific public goods benefits, weighted according to utility, are distributed in a fashion similar to the benefits of pure public .goods.. Referring to our mathematical summary of the Aaron-McGuire approach, in the altered version we take: (4) Di = Y1 instead of Di = Yi + SGBI.

Then, in (S), M(D1) becomes M(Y1). We then convert (6) into: s SGB1 £ +s M(Y) E SGBk , B'' pt"[M(Y') 1/M(Yk)1 k • M(Yk) TABLE 2 Net Fiscal Distribution-An Extended Approach: Puerto :Rico,'1970 (dollar amounts per family(

Family Income Ys .Class Leas than $1,000 &1,000-$1,,.9.99 $2,000-$2,999 $3,000-$3,.999 $4,.090-$4,999 $5,000-$7,499 &7,.500-$9,999 =1ápó00-$12,499 &12,500-$14,999 $$15,000-$19,999 $20,000 and over

Lows Quantity _ Pure Public Goods

237 145 297 257' -1.?3 -556 -747 -1433 -2009 -1156 -3054

Highb Quantity Pure Public Goode áy 2 1r1' 5

1/Y2

11r1 • 5

•iL.

-91 -270 -355 -431 -6.94 -886 -750 -943 -733 6823 5042

-19 -130 -81 =96 -401-67.0 -602 -1026 -1202 2692 479

69 -103 , -291 93 153 -437 -542. 164 46 -681 42 -613 -76 -416 -326 -45' 744 -563 7019 -103 128 11973

SOURCES: See source for Table 1. NOTES: a and b above correspond to notes band c for Table 1.

-69 -172

-210 -23O 315 -237 -86 42 362 3526 5494

1141':.PUBLIC FINANCE QUARTERLY

which denotes the total imputed benefits (S is total government expenditure on specific public goods). Finally, (7) now ,reads: NB = B' — Tax', since SGB1 is already included in B.

for

sum

Such an approach may be justified on the grounds, that specific góód benefits are not usually given in the form of direct cash payments (with the exception of some welfare payments), and hence may be translated into cash only via utility. Only income itself (Le., cash income net of the personal income tax) is utilized iii the marginal utilities. The average specific good expenditure' on each family in each income class is calculated (under assumptions of various distributive series in each of the major functional expenditure areas: education, héalth, housing, and transportation, but excluding welfare or other cash income), and this expenditure is then translated into a cash benefit exactly as if it were 'a pure public good.in other words, the pretense is that the actual government service received by income class i is received by all income classes, and the imputed benefit to class i is computed precisely as in Aaron-McGuire. Such an assumption, though;clearly false,. would seem in no way to affect the actual benefit to those families genuinely receiving it Thus, this technique would appear to be as sound as the basic Aarón-McGuire idea of aistribution via utility upon which it is founded, and seems more appropriate than their implicit assumption that •specific goods are valued by families at direct cost'z Of course, total benefits over all families do not have to to (approximately) P + S — T (public expenditures minus taxes}, there is no reason that they should; subjective expected benefits, which utility may be interpreted to measure, need not necessarily correspond to proportional cash flows. However, we do '"normalize" the benefits by supposing the total "value" of public goods equals its cost, which is the assumption Aaron-McGuire make. The results of applying our extended approach to the estimatián of the net fiscal distribution, as presented in. Table 2, démonstrate striking comparisons to those of Table e 1. Under

Mahn, Perlis./ UTILITY.FUÑCTIONS[I5J

marginal ,utility function. :1 /Y, the low income groups receive substantially redliced.'net benefits from the fiscal system's operation; whereas .the upper income, groups enjoy a much decreased net burden.;, little change is observed in the- middle income 1rgroups ($5,000-.$.9,999). Under function :l/Y2, the alternative .approach in both high and low ;columns produces negative. benefit ,fór the lower income .classes; while providing larger positive benefits for the upper income categories: Under the,Maital (11/Y? •5) function, which might well represent' 'the most plausible or "moderate" case (for marginal utility functionsK of: the ,constant elasticity of substitution- type); govern- ; mentáI provision of a. "low" quantity 'of pure public -goods creates. ,net fiscal. ^burdens :for the lower sn.come classes and. benefits for the. upper categories, but tó ajesser extent than. they k. 1/Y2' function. Fz THE CONSUMPTION APPROACH

can; be found with the; Mahal finnctióñ. Two major faú Firstly, it is based; on,'a rigid ,constant elasticity 'of substitution A (of public¡goods for incorne). assumption, which appears to have e been arbitrarily chosen for its mathematical convenience alone. The second defective aspect follows from this, for, leis function therefore, has the form. I3Y~;,the económ'ic significance of this is to postulate infinite marginal utility at zero income, a truly implausible premise.3 Far` example, if one ounce of soup per day will, not prevent starvation hut ten punces. will, them it hardly' seems reasonable that the ten ounces are "worthy' Iess than ten times the one ounce. Indeed, it might well be' argued that marginal utility should increase slightly as a movement is,, made away from zero. Furthermore, if we distribute goods viva }, marginal utility function that is infinite at zero, we obtain infinite benefits 'at `zero income, and this certainly cannot be what Aaron-McGuire and Maital intended. In an.,.attempt to =overcome these deficiencies; we have tried to `reconstruct' utility from data on spending behavior, making, as much as possible, only economic '(rather '₹han

(16l 1PUBLICFINANCE QUARTERLY

mathematical)•.assumptions. We"cánsider₹ütility iii terms análogous,>to physical mechanics. Thus, total;-utility (U) eanLbir conceived as a "pootentiai"i; and marginal Utility (U') as 4a "force"—i.e., :a change in. potential O j*oduce's'á farce dU/dY that is=realized as a change in spending. Therefore;. XTinow takes' on .cardinal significance, indicating nót duly preference but"the extent of action taken toward the preferred good. T& be sure; , this does overlook important factors, especially t át of 'the satisfaction expected `from savings (for 'srscurity or progeny); sayings could be included as' á sort of `tinertiál'' term; but (worthwhile as it might be) the model then becomes coire spondingly difficult to handle. For his reasÓi We havir gnóred the utility of savings and in this paper- thnply , poinf out that • fuXtherstudy of this problem might bé bér'ieficiah4 Moreover, there occurs an unjustified mixing of an implicit timé' variable with the income variable Y, but it can be imagined that families "utilize" additional income by increasing consumption according to the "force" to do so—i.e., U'(Y). Thus, we simply; define U'(Y) = E'(Y)—L' ., the marginal utility .of income is ,equal to the marginal propensity tó spend. A curve based on this postulate does empirically _have the M1

:' as

.. t

TABLES

t Ñe'f•Fiscal Distribution—A Consumption Approach: Puerto`Rico; 1970 (dollar,amounts, per family), z Family,,Income# 'Class leek than 81,o0o $1,000—í1a999. 82,0oo-82,999 83.Ó0o-$3.999 $4g0Ó-$4,999` $5,000-$7.499 $7.900-$9,999 $10000=$12499 812,500-$14,999 $15,400-$19.999 i20,Ó00 and over

Pure Public Goods Via Utility i,owt Quantity high° Quantity Public Gods Public Goode 2611 ; 986 800 373 -371 -891 -1707 -2604 • -3491 -428 -5084

1661 1102 808 473 -26 -358 -1184 -1862 -2427 -2866 -810

All Public Goode Via Utility Iowa Quantity High Quantityr Public Goods Public Goods 7 Y 2609 1655 f 1088 949 y 7181 a L782, 440 ?75 -5b -447 -936 • -376 -1748 ; x.1216 -2584 -1879 -3360 -2418" T -2Ó7O -3495 -3846 -366

SOURCES: See Table 1 source. Additionalty, ,WÓPk sheets from the Puerto Rican survey of fahily income and expenditures were used. NOTES: a and b above correspond to notes b and c for Table 1.

Mann,Perils / UTILITY FUNCTIONS[171,

classical shape expected for a marginal utility function (althbugh it should be noted what was previously stated with regard to a more sophisticated model incorporating the utility of savings).5 Then, using E(Y) under the Aaron-McGuire approach, we derive the corresponding redistribution of income. Since E(Y) :is ribt given a priori in analytical form as in the case of Aaron-McGuire and Maital, but is instead given in tabular form taken from empirical data, we used a least-squares technique to fit a polynomial to the data.6 The results are shown in Table 3. Comparing the new data of Table 3 with those in Tables 1 and 2, it is found that the net fiscal pattern under :our "consumption" approach approximates most closely that of the Aaron-McGuire 1/Y function. Most striking is the distinct contrast with the Maital approach,, which yields quite opposite results. Moreover, in comparison with the conventional 'approach (see the first three columns of Table .1), the results for both our "extended" approach and our "consumption" approach with a "high" quantity of pure public goods demonstrate a much-reduced magnitude of income redistribution from high to low income classes. A GRAPHICAL SUMMARY

case

Figure I perfórms the function of visually contrasting the different 'utility approaches to the measurement of net fiscal incidence. The curves refer to effective net fiscal incidence rates and are computed by simply taking data from selected columns of Tables 1, 2, and 3 and expressing them as percentages of average family income in each family income class. Curve AA is a graphical exposition of the second column of Table ,1 and as such is representative of the pattern of effective rates generated' by conventional analysis; in this pure public good' benefits are distributed proportionally to the total number of families, an assumption 'tantamount to presuming constant marginal utility of income. The curve, not unexpectedly, continually desceñds.

(266) E* (1.94)

^ 50 '

40-

CODE.

M CC

~•~•

C -10 — á a ~ -20 44 C, w w

..••

'r -,.r-

TT1.

`..__ •~

' ~rB

. ---

E ~k

~++

-2 and over

Income.($i,000) Figure 1: Net Fiscal incidence Ratea

~r, In

Mann, Perlis I UTILITY FUNGI IONS 1191

Curve BE, corresponding to the 1 /YI 5 function with a "high" quantity of pure public goods (Table 1), bears the appearance of a "skewed V_" The shape of curve CC (functioú 1/YL5 and a "low" quantity—Table 2) is not easily charac,terrized, but falls entirely below the "zero redistribution line" until high income levels. In diametric opposition to AA, curve DD. (function 1YI.S with a "high" quantity—Table 2) reveals constantly ascending rates. Finally, curve EE, corresponding to the second column óf Table 3 (our "consumption" approach), behaves .quite similarly to curve ,AA with the significant exception of the two upper income classes, whére it ascends iñstead, of continuing downward.

CAiHCLUSipAI

We have attempted to develop further the Aaron-McGuire contention that the income redistributive effects of 'public ,budgets depend on implicitly assumed utility functions. By, distributing all public goods via utility, we have demonstrated` that the apparently strong "pit-poor" tendencies of most fiscal systems that emerge from conventional analyses may be even more misleading than were shown by Aaron-McGuire and Maital. Whether in fact the tendency is toward or away from greater equality will not be clear as long as the empirical basis of utility itself remains clouded. We hope that future efforts to find appropriate economically based utility models will be fruitful. As an added inference, it might also be concluded that the undertaking of further conventional fiscal incidence studies is generally subject to sharply diminishing returns, and, as has been pointed out by others, time might be better spent analyzing the incidence of limited and specific public expenditure. programs.

[2tl]; PiU3L1C FIIdANCE QUARTERLY ~

x ,

tVOThS

1. For two of the most recent examples, see Musgrave etaL (1974) and Reynolds and Stnólensky (1974). For an excellent critique of those relating to underdeveloped countries, see Bird and De Wulf (1973). 2. Asa corollary .of the preceding analysis, it should also be noted that SGBL is no logger considered to represent disposable income in the Aaron-McGuhe sense.•-This provides a y to assess, in cash terms, the utility of market items. We imagine the government to be supplying iba good to all families in equal "utils" and then apply the, Aaron-McGuire procedure to this new "pdre public good." Admittedly, with some items it may be Quite difficult to estimate the number of "utils" provided by specific goods to those families in different income categories. given this limitation, it is very tempting to assume along with Aaron and McGuire that most items considered together enter all persons' (or families') utility functions similarly, however dubious such a premise may be. 3. To demonstrate this, jet

vMR. Y MRS py

~P/y ¡ ' ply

where MRS is the marginal rate of substitution: between public gooda (P) and income (y). Then,

DMRSpy o ply

~ r

. .Pf Y MRSpy

. If P/Y =- x, then ~ = MRS' • x¡MRS = xiog' (MRS), f~= flog' (MRS) C + t~logx = log'MRS du áU Kx~= MRS' =

_aII

= a (PlY)—~= BY~

at the icitai expenditure 4. One result generated by the inclusion of savings is that curve is apparently not concave, but that it may take the following form:

Mann, Perils / UTILITY FUNCTIONS (211 t

L5O

•~

slope=~ /2 .

x l Income Figura la

It would be ºf interest to exmri e marginal propensities to consume for very high income classes, in order.to~ee 111/2 is tic limiting tendency. 5, indeed, our data eva:i show the slope of 11(Y) increasing. slglitly for incomes dose to zero. 6. Near the last data pºet (Y = $28,000), the derivative of the polynomial was badly behaved since no further data points were available to affect the least squares fit; hence, we used the polynomial ag an analytic form of G(Y) only for Y < $28,000, and we assigned, purely by inspection of the polynomial's derivative, the value of 0.2 to G(Y) for Y == $28,000. We are grateful to Drs. John Cºmella and Ramon Sarraga for pcovldb and implementing a curvediitting ,program from the Arecibo Observatory for use on our PDP-1() computer_

REFEREi1iCES AARON, H. and M. McGUIRE (1970) "Public goods and income distribution." Econometrica 38 (November): 907-220. BIRD, R. M. and L. H. lie W.IJLF (19 `3) "Taxation and hw..ome distribution in Latin America:. a critical review of empirical studies." Internationar Monetary Fund S.üfPapers 20 (November): '639682. MAiTAL, S. (1973) "Public goods and. Income distribution: some further results." Fconornetrica 41 (May)' 561-568. MANN, A. 1. (1973) "La carga ie las conYsit u- tones y ,as beneficios de los gastos publicar, Puerto Rico, 1970 [The tax burden and public axper'3iture benefits! Study prepared for the Puerto Ritnn Tax Reforttt `ommivsion.

[22 PUBLIC FINANCE QUARTERLY t 's MUSCRAVE, R. A., K. D. CASE, and H. LEONARD (1974) "The .distribution ~--fiscai burdens and benefits."'Public Finance Q. 2(Julq): 259-311. REYNOLDS, M. and E. SMOLENSKY (1974) "The post fise distribution: l9á1 1970 compared." National Tax J. 27 (December): 515-530.

Arthur 1. Mann is Associate Professor of Economics at the University of Puerto Rim at Mtryaguez. He has served as consultant to several Puerto Rican government commissions and agencies, the government of the DomMlcan Republic, the Organization of American States (IICAL and private industry. Donald Perlis is currently Assistant Professor of Mathematics at the University of Puerto Rico at Mayaguez. He received his Ph.D. in mathematics from New York University úi 1972. His research interests include mathe,Túttkal logic; the, philosophy of science, and mathematical economics

i íb=licaciones de la ,. Unidad de..Y sayi'gaci:one's Económicas

TEMAS 'SOBRE ECONOMIA DE PUERTO RICO Serie de Conferencias y poros Núm. 1:

Jose A. Herrero, La economía de Puerto Rico: E1 presente critico, noviembre 1976.

Núm. 2':

Jaime Santiago, Impacto de la recesión en puerto Rico, febrero 1976.

Núm. 3: Jaime A. Santiago, Objectives and Strategy for Economic_ DevelopM menta A Challenge, julio 1976. -`` Núm. 4: Jaime A. Santiago, Conferencia sobre economía y población, septiembre 1976. Núm. 5: Rubén A. Vilches, Current Labor Force Perspectives & Problems in Puerto Rico, octubre 1976. Núm. 6: Jaime A. Santiago, La situációa presupuestaria de 1976 y 1977 y sus efectos, sobre la economía, diciembre 1976. Núm.. 7: -

Elías R. As;ón, .Comentarios. 'sobre. las rec.oméndacióñes'•dC1 uso de hs fondos de las corporaciones 936, mayo:-1977. Serie de Ensayos y Monografías

Núm. 1: Alejandro Asmar, Análisis breve del Informe Tobin, junio .1976. Y

._.. .Nút"n. Z:- - Sámuel Torre's Román, is problemática económica de Puerto Rico, diciembre 1976. • •Núm. 3: Angel, L: Ruíz; Enfoque de insumo-producto para determinar una ..política de sustitución de importaciones en Puerto Rico,'mayo 1977. Núm. 4: Angel A. Rivera, Modelo de costo-beneficio para la evaluación de proyectosque sustituyan importaciones, junio 1977. Serie de Temas Relacionados Núm. 1: Walter Bruckman, Diseño y método de investiftación en la ciencia económica, abril 1977. Núm. 2: Stephen J. Hiemstra, Perspectives on Food Program: Evaluation and, Research, mayo 1977. Núm. 3: Angel L. Ruíz, Las conferencias cimeras de Rambouillet y Puerto Rico, mayo 1977. (Continúa al dorso)

TEMAS DIVERSOS DE ECONOMIA Núm. 1: Fuat y Suphán Andic, Public_Finance, Development, and the Third -World, dieembre 1976. Núm. 2: Paul W. Strassman, Housing Priorities in Developing Countries: A Planning Model, enero 1977-. William J.. Baumol•, Quasi Optimality. A Price Systém, marzo 1977.

Núm. 3:

The Price We Must Pay for

Núm. 4: Angel L, Ruíz, La recuperación económi.~a'norteamericana y perspectivas para 1977, junio 1977. Núm. 5: } J.' ilanek, Selfmanagement, Workers' Manageuréñ't'" and Labor Management f in Theory and Practice: A Comparative Study_ julio 1977. J. Vanek, The Ahsurdity or the•ERi ch.Men's Trade Doctrine and Institutions for the Presentes World Economy and an Attempt . • to Reformu13te ; agosto .1977.

Ñúm. 6:

.,SEPARATAS Núm. 1: Richard A. Foo:er, the Economic Approach to Law, 1976 1 ' '~Ñüm.`2:

Richard A; Nusgrave, ET.,_ OT.,`.and S~Br.T, 1976.

;Núm. 3:

Fuat M. Andic_y• Arthur Mann., SécularTeñdéncies in the °Inequality df Earnings .in Puerto Rico, febrero 19'77:? .

Núm, 4:

Arthur J. Mann, Public Expeadi.ture Patterns in the Dominican Republic and Puerto Rico, 1930-1970, septiembre 1977.

Núm. 5: Arthur J. Mann, The Fiscal sfem and Income Distribution: •• Case of Puerto Rico, septie b.re 1977.'

The

Núm. 6: Arthur J. Mann y Donald Perils, Utility Functions, Public Goods, an&.Income' Distribu.tica, septiembre 1977: