My 5 cents (primarily from an economic perspective):
For me, the rationale for public expenditure (and thus taxes, unless the government has another source of income like oil) is for the production of public goods.
The standard textbook definition of a public good is a good which is non-excludable (my consumption of the good does not adversely impact your consumption of the good) and non-rivalrous (people cannot be excluded from consuming the good).
- Public goods that should be produced by the government
Examples: Political institutions, Law Enforcement, Court Systems for Arbitration, National Defense
I find these pretty self-explanatory. If you disagree, then feel free to take it up with your local militia.
- Public goods that should be regulated, but not necessarily produced, by government
Examples: Intellectual achievements, Environmental Protection
These goods frequently - absent some sort of regulation - suffer from market failure. But by creating patents, for instance, scientific achievements can be turned into market goods. Similarly, assigning property rights to environmental resources (or often the opposite: pollution) through cap-and-trade systems, one can create markets (and ideally, market efficiency) for otherwise non-excludable goods.
- Semi-public goods that could be produced either by governments, markets or a combination
Examples: Health care, Infrastructure, Education
This category is a mess. Strictly speaking, for instance, health care (except infectious diseases) is a private good. However, health care suffers from information asymmetry, meaning that consumers/patients have a very hard time identifying their actual need for health care. Infrastructure can (and is often) provided by private institutions. However, much of infrastructure is characterized by massive economies of scale, leading to the formation of natural monopolies (which are unlikely to produce goods efficiently). Education has public good components: It is beneficial to the individual getting the education, but it is also beneficial to society as a whole.
In all of these cases, however, who should produce the good is a matter of efficiency: An efficiently run government (however, see below) is probably better at delivering health care than the market. An inefficiently run government should probably restrict itself to regulation rather than production of these goods.
- Private (market) goods
Get Off My Lawn, G-Man!
(Not an exhaustive list of examples.)
Some caveats:
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The value of public goods. Who gets to decide what constitutes a public good? And what its value is? The value of a market good is its price. What is the value of Affirmative Action, The British Monarchy, Biodiversity, § 295-C of the Pakistan Penal Code, and the Max Planck Society?
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Excess burden of taxation. Taxes generate dead-weight losses, so if the government is using taxpayer money to produce something, it needs to produce value
exceeding the tax revenue to be efficient. For some goods, this is easily achieved: The economic benefits of private property rights vastly exceed the costs of enforcing them, for instance. The economic benefits of criminalizing marijuana (if any), on the other hand, well... just saying.
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Efficiency as a goal. Governments - unlike markets - are not
supposed to be (only) efficient. They are supposed to be accountable to voters, transparent, and responsive to all 23,587 additional stakeholders. Private companies, on the other hand: MR=MC. This puts government at a disadvantage compared to markets, as a guiding principle cannot be formulated by the requirement of maximizing two (or more) functions at once. However, if one designed governments to be exclusively efficient, they would probably also be more prone to corruption as the necessary checks and balances would not be in place. Thus spoke Aristotle.
20 Jun 2013, 1:27 pm
