Three Challenges for Public Finance

Pierre Pestieau surveys the views of the public-finance profession about its recent past and future directions. The many enthusiastic and positive responses he received brightened up his own prior pessimism about the field, although he remains concerned that the profession is distracted by elegant theoretical exercises that are too restictive to be instructive for important policy questions. As an example of an overlooked question he cites the publicpolicy implications of economic openness. I am definitely in the camp of optimists about the future of public finance. Moreover, I believe that public-finance economists are thinking carefully about many of the key policy issues of the day--witness the large group of newly minted Ph.Ds doing fascinating and immediately relevant work in health economics. It is also notable that the issues raised by openness are attracting more and more attention in the public-finance profession. Because I am optimistic, I will focus not on the past but rather on the future directions of public finance. I will identify three areas of research that I believe are important challenges for the profession. Because of my own limited perspective, these challenges relate exclusively to the taxation wing of public finance and are oriented toward a North American perspective. Two of the challenges I discuss were ranked in the Pestieau survey as being among the most important future directions, so that my emphasis is not entirely idiosyncratic. One challenge is precisely the topic he singled out--the fiscal implications of openness. The three key challenges that I see confronting tax economists in the 1990s are