personal taxation and behavior chapter 18. labor supply hours of leisure per week income per week 0t...
TRANSCRIPT
Labor Supply
Hours of leisure per week
Inco
me
per w
eek
0 T
time endowment
D|Slope| = w
F
G
Leisure Worki
ii
iiiE1
Income
18-2
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D|Slope| = w
F
G
ii
iiiE1
i
I
E2|Slope| = (1-t)w
H
G’
Hours of work before tax
Hours of work after
tax
18-3
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D
F
G
ii
iiiE1
i
J
E3
H
K
Hours of work before tax
Hours of work after
tax
18-4
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D
F
NE1
P
E4
Hours of work before tax
|Slope| = w
|Slope| = (1-t1)w|Slope| = (1-t2)w
|Slope| = (1-t2)w
(1-t1)$5,000
(1-t1)$5,000 + (1-t2$5,000
18-5
Empirical Findings
• Eissa [2001] – For males aged 20-60, the effect of changes in the
net wage on hours worked is small and often statistically insignificant• Elasticity of approximately 0.05
– For married females, the hours of work and labor force participation decisions are quite sensitive to changes in the net wage, although it has gotten smaller over time. • Elasticity of approximately 0.40
18-6
Some Caveats
• Demand-side considerations• Individual versus group effects• Other dimensions of labor supply: Human
Capital• The compensation package• The expenditure side
18-7
Taxes and Human Capital Accumulation
• Human capital• Investing in human capital
– B – C > 0– (1 – t)B – (1 – t)C = (1 – t)(B – C>) 0– Income versus substitution effects
• Shortcomings of model– Returns uncertain– Explicit costs– Other taxes– Progressive taxes
18-8
Labor Supply and Tax Revenues
Hours per week
Wag
e ra
te p
er h
our
SL
w
L0
(1-t1)w
L1
db
a c
(1-t2)we
f
L2
k
(1-t3)wh i
L3
j
(1-tA)w
LA18-9
Debate Over the Laffer Curve
• The Laffer curve and the elasticity of labor supply
• Where on the Laffer curve is the economy operating?
• Other ways tax rates can affect tax revenues• Determining the optimal tax rate• Is maximizing tax revenue a valid goal?
18-11
Saving and the Life-Cycle Model
Present consumption (c0)
Futu
re c
onsu
mpti
on c
1
Endowment point
I0
I1
M
N
ІSlopeІ = 1 + r
E1
c0*
c1*
iii
iii
Saving
18-12
Deductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpti
on c
1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
E1
c0*
c1*
Saving before tax
Q
P
A
c0t
c1t
Savingaftertax
18-13
Deductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpti
on c
1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
E1
c0*
c1*
Saving before tax
Q
P
A
c0t
c1t
Savingaftertax
18-14
Nondeductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpti
on c
1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
c1*
Q
P
A
c1t
18-15
Some Additional Considerations
• Real net rate of return• Many assets• Private saving versus social saving• Validity of life-cycle model• Empirical evidence: effect of taxation on saving
– Problems using the regression approach• Specification issues• Measurement issues
– Joint Committee on Taxation [2005]
18-16
Tax-Preferred Savings Accounts
• Types of tax-preferred savings accounts and how they work
• Are contributions to these accounts new saving?
• Administrative details and effect on saving: insights from Behavioral Economics
18-17
Taxes and the Capital Shortage
• Taxes and investment• Taxes and excess burden• Closed versus open economy
18-18
Housing Decisions
• Effects of the income tax on housing decisions– Rnet = R – I + ΔV
• Implicit rent not taxed• Deductibility of mortgage interest and
property tax payments• The decision to rent or buy
18-19
Proposals for Change
• Critique of subsidy for owner-occupied housing– Are there significant positive externalities?– Impact on distribution of income – Incentive to take on risky mortgages, contributing to the
housing and financial crisis of 2008-2009• Political feasibility of taxing imputed rent• Reform proposals
– Elimination of deduction for property tax and mortgage interest
– Placing an upper-limit on deductions– Convert mortgage interest deduction into a credit
18-20
Portfolio Composition
• Tobin’s model of portfolio composition• Impact of proportional tax with full loss offset
– Impact on return– Impact on risk
• Empirical evidence
18-21
A Note on Politics and Elasticities
• Ambiguity about effect of taxation on behavior• Importance of elasticities• “Convenient” beliefs about elasticities
18-22