econ 208 marek kapicka lecture 9 taxation. midterm in a week! i’ll post older midterms some...
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Econ 208
Marek KapickaLecture 9Taxation
Midterm in a week! I’ll post older midterms Some Multiple Choice questions 2 longer questions
Similar to PS1, PS2, PS3, Q1-2 in Mid 2011, Q1-2 in Mid 2010
Know: competitive equilibrium: how to solve, what each step MEANS.
Know: Pareto Optimum Today’s class will be included. Wednesday
will not.
Where are we?
1. Introduction: A model with no Government
2. Government Policies1. The Effects of Government Spending2. Government Taxation and Government
Debt
What To Read
Read Today:
DLS, Chapter 13.2,13.4 The Region, Minneapolis Fed: “European
Vacation”, on the web Next time:
The Washington Post:"Where does the Laffer curve bend? "
Today
Government Taxation 1) The data 2) The effects on Labor Supply 3) The effects on Government
Revenue 4) The effects on GDP
Data on US TaxationFederal Government Revenue
Data on US TaxationAverage Marginal Income Taxes
Taxation
Lump-Sum tax vs. Distortive tax Lump sum tax does not depend on
the actions of the consumer With distortive taxation, the
welfare theorems fail Competitive equilibrium is not Pareto
optimal
Why Distortive Taxation? In reality, lump-sum tax is infeasible
Lump sum means everyone pays the same amount but some people have no wealth
If differences among people are taken into account then a distorting tax is the only possibility
What are the effects of a flat tax on Labor Supply? Government Revenue? GDP? Capital Accumulation?
Where we are
Government Taxation 1) The data 2) The effects on Labor Supply 3) The effects on Government
Revenue 4) The effects on GDP
2) The Effects on Labor SupplyAn Example
Utility of a household
Household problem:
1),(
1LCLCU
wLtCts
LC
)1( ..
1max
1
2) The Effects on Labor Supply
Solution:
Labor Supply decreases in the tax rate
1)1(max
1LwLt
L
1
])1[( wtL
The model and the data E. Prescott (2004). “Why Do Americans Work So Much More Than Europeans?
U.S. vs. France
1990’s: French productivity higher, but labor
supply much lower GDP per person lower in France than
in the USA 1970’s:
French productivity lower, but labor supply slightly higher
Ohanian, Raffo, Rogerson: A more comprehensive study
Compare all the OECD countries for 1956-2004 period
How much can we explain by taxes?
Look for alternative explanations as well.
Conclusion: Taxes are the most important factor behind changes in labor supply
Ohanian, Raffo, Rogerson: The data
Ohanian, Raffo, Rogerson: The Results
Ohanian, Raffo, Rogerson: Other Factors
Compute a labor supply wedge:
Our model predicts that the wedge is equal to the tax rate. What if other factors, outside of the model, affect it as well?
Look at measure of employment protection, union density, unemployment benefit replacement rate, duration benefits
Δ𝑡=1−𝑀𝑅𝑆𝑙 ,𝑐
𝑀 𝑃𝑁
Ohanian, Raffo, Rogerson: Other Factors
3) The Effects on Tax Revenue
Government’s Tax revenue
Revenue is not linear in the tax rate!
If tax rate increases, Tax per one unit of labor supply
increases but labor supply decreases
11
)1( wtttwLT
Laffer Curve
Government’s revenue against the tax rate
t
T
0% 100%11+1/𝛾
Empirical Evidence
1981 Reagan Tax Cuts Overall, tax revenues have decreased However, for the tope earners the tac
cuts have raised collections Maximum tax rate: 70% 50% Increase in revenue from top (>200000)
earners: 3% in 1982 9% in 1983 23% in 1984
4) The Effect on GDP
Christina Romer/ David Romer Classify all tax changes into
Endogenous tax changes: Spending driven tax changes Recession driven tax changes
Exogenous tax changes Belief motivated tax cuts Deficit driven tax increases
Only exogenous tax changes will identify the effect on GDP
A timeline of tax changes
Exogenous tax changes
Endogenous tax changes
A response to a tax increase of 1% of GDP
Main result
Tax increases have large negative effects on output/ labor supply