Public Economics: Tax & Transfer Policies

(Master PPD, Paris School of Economics)

Thomas Piketty

Academic year 2010-2011


Syllabus & Course Material

(November 16th 2010)

(check on line for updated versions)


Email :

Office hours: Tuesdays 9h-12h, Jourdan B101

Course web page :


The objective of this course is to present the basic tools and concepts of modern public economics, with special emphasis on the incidence of tax and transfer policies, both in developed countries (EU, US) and in the developing world.


The course will be organized in 8 lectures of 3 hours. In order to validate the course, students are required (1) to attend and actively participate to all lectures; (2) to take the exam.


Students can also choose to make one formal presentation during the lectures; possible presentation topics are listed in the syllabus (pres1,2, etc.). The presentation grade will then be averaged with the exam grade. Given the limited number of presentation topics, students choosing this option should pick a topic and inform the teacher by mail as soon as possible. Presentations can be prepared by at most two students and should be 15mn-long (no more than 5-10 presentation slides).

See students presentation in this directory.


Lecture 1: Tuesday September 21st 2010, 14h-17h, Grande salle Jourdan

Lecture 2: Tuesday September 28th 2010, 14h-17h, Grande salle Jourdan

Lecture 3: Tuesday October 12th 2010, 14h-17h, Grande salle Jourdan

Lecture 4: Tuesday October 19th 2010, 14h-17h, Grande salle Jourdan

Lecture 5: Tuesday October 26th 2010, 14h-17h, Grande salle Jourdan

Lecture 6: Tuesday November 2nd 2010, 14h-17h, Grande salle Jourdan

Lecture 7: Tuesday November 9th 2010, 14h-17h, Grande salle Jourdan

Lecture 8: Tuesday November 16th 2010, 14h-17h, Grande salle Jourdan

Exam: Tuesday November 23rd 2010, 14h-17h, Salle CIUP Collège néerlandais


General textbooks


A. Atkinson & J. Stiglitz, Lectures in Public Economics, McGraw Hill, 1980

A. Auerbach & M. Feldstein, Handbook of Public Economics, North Holland, 1985-2002 (4 volumes)

P. Lindert, Growing Public, Cambridge University Press, 2004

J. Mirrlees, Reforming the Tax System for the 21st Century – The Mirrlees Review, Oxford Univfersity Press, 2010

B. Salanié, Théorie économique de la fiscalité, Economica, 2002 (The Economics of Taxation, MIT Press, 2003)


Lecture 1. Taxes & Transfers: Why and How Much?


Basic rationales for taxes and transfers:


(1) Public good provision: raising tax revenue to finance public goods


(2) Redistribution: designing taxes & transfers in order to implement a fair distribution of income, wealth and welfare


(3) Externalities: Pigouvian corrective tax and subsidy schemes so to induce private agents to internalize external effects (e.g. global warming, carbon tax)


(4) Stabilization: taxes & transfers can also serve as automatic stabilizers and reduce macroeconomic volatility (mostly a by-product of tax and transfer systems)


Rationales (1), (2), (4) = taxes/transfers generate Pareto improvements and correspond to failures of the first welfare theorem


Rationale (3) = taxes/transfers shift the economy to another (second-best) Pareto optimum (illusory lump-sum payments of the second welfare theorem)


Basic facts about taxes and transfers in rich countries:


Total taxes T = about 40%-50% of national income Y

I.e. T = τY with τ = 40%-50%


Total monetary transfers YT = about 20% of national income Y

(=pay-as-ou-go pensions, unemployment & family benefits, means-tested transfers,..)


Disposable household income YD = Y-T+YT = about 70%-80% of national income Y


Other government spendings = about 20%-30% of national income

Typically: 1/3 education + 1/3 health + 1/3 police, defense, roads, etc.

(=in-kind transfers)


(National income Y = GDP – capital depreciation + net foreign factor income)

(Typically Y = about 85% GDP)


“Taxation Trends in the European Union”, Eurostat 2009 [article in pdf format]

[Selected Tables]


Typically: T = 1/3 indirect taxes + 1/3 direct taxes + 1/3 social contributions

But: large variations across countries

And: this decomposition is not really meaningful; what matters is the factor income decomposition (capital vs labor) and the consumption vs saving decomposition


In poor countries: T = as low as 10%-20% of national income Y



Lectures 2 & 3. Tax Incidence Through the Lenses of National Accounts


Tax incidence problem = the central issue of public economics = who pays what?


Very complex issue; opening up the black box of national accounts tax aggregates is a useful starting point


Basic equations:


National income = capital income + labor income = consumption + savings

Y = F(K,L) = YK+YL = C+S


Total taxes = capital taxes + labor taxes + consumption taxes

T = τY = TK+TL+TC = τKYK + τLYL + τC C


[Implicit labor vs capital vs consumption tax rates in the EU (Eurostat estimates)]

Typically, τL=35%-40%, τK=25%-30%, τC=20%-25%.

But these computations make assumptions about tax incidence.


One approach: look at factor shares and wealth-income ratios and analyze how they respond to historical and international variations in tax structures.

Illustration with French national accounts:

[Selected figures on factor shares and wealth-income ratios in France 1820-2008]


Methodological issues on the measurement of factor shares:

National income Y = Yc + Yg + Yh + Yse  (+ net foreign factor income)

= net income of corporate sector Yc = YKc+YLc (= corporate profits + corporate wages)

+ net income of govt sector Yg = YLg (= govt sector wages) (=100% labor income)

+ net income of housing sector Yh (=YKh (=rental income) (=100% capital income)

+ net income of self-employment sector Yse = YKse+YLse (=somewhat arbitrary)

[Course notes on the measurement of factor shares and wealth-income ratios]


What can conclude about tax incidence from the stability of factor shares & ratios? Not much: for a proper study of tax incidence, one needs micro data. But at least with macro data one can refute a number of naïve views.


(1) “Employer social contributions are paid by employers”: NO: the long-run & cross-country stability of factor shares suggests that social contributions and payroll taxes have been paid by labor; standard model

(theoretical model: Cobb-Douglas production function Y = F(K,L) = KαL1-α)

(elasticity of substitution K-L = 1, labor demand elasticy = 1 price & volume effects exactly compensate stable factor shares, regardless of supply elasticities)


(2) “Capital taxes are shifted to labor via lower capital accumulation”: NO: the long-run & cross-country stability of wealth-income ratios suggests that capital taxes have been paid by capital

(theoretical model: the long run elasticity of saving (capital supply) must be small; or at least no bigger than long run elasticity of labor supply (human capital))



Microeconomic estimates of tax incidence allow for better identification:


- illustration with the incidence of housing benefits (pres1: Jonhattan Goupille):

G. Fack "Are Housing Benefits An Effective Way To redistribute Income? Evidence From a Natural Experiment In France", Labour Economics 2006 [article in pdf format]


- illustration with the incidence of value added taxes (VAT) (pres2: Robert Klein):

C. Carbonnier, “Who Pays Sales Taxes ? Evidence from French VAT Reforms, 1987-1999”, Journal of Public Economics 2007 [article in pdf format]


But some key tax issues can only be addressed with (imperfect) macro data:


- illustration with EU corporate tax competition(pres3:Georges Vivien Houngbonon)

 J. Piotrowska & W. Vanborren, “The corporate income tax rate-revenue paradox: Evidence in the EU”, EC Taxation Papers, 2008 [article in pdf format] 


- illustration with EU savings taxation directive (pres4: Rakesh Gupta):

T. Hemmelgarn & G. Nicodème, “Tax Co-ordination in Europe: Assessing the first years of the EU savings taxation directive”, EC Taxation Papers, 2009 [article in pdf format] 


See also G. Zucman, “The missing wealth of nations”, 2010 [article in pdf format]



Lecture 4. Pigouvian corrective taxation: illustration with carbon taxes


Basic theoretical model and optimal tax formulas with externalities: U(c,e,E)

Course notes on optimal corrective taxation of externalities


Putting numbers into the optimal tax formulas:

EU comparisons of energy & environmental taxes (Eurostat 2009) (pres4)

Stern Report on the economic costs of global warming [Stern 2006 Report]  and Quinet Report on the price of the carbon ton [Rapport Quinet 2008]  (pres5: Roy Dauvergne, Marlon Seror)


On time discounting:

O. Guéant, R. Guesnerie & J.M. Lasry, “Ecological intuition vs economic reason”, PSE Working Paper, 2009 [article in pdf format]  (pres6: Irene Clavijo)


See R. Guesnerie, "Pour une politique climatique globale", 2010



Lecture 5. Income Taxes over Time and across Countries


Current income tax schedules in France & the US: marginal tax rates t’(y) vs average tax rates t(y)/y [tax schedules in excel format]


Historical evolution of income tax in France & the US [Selected figures]

(figure 1: fraction of population subject to income tax) (figure 2: top marginal rate)


International perspectives:

A. Atkinson & T. Piketty, Top incomes over the 20th Century, OUP 2007 & 2010

A. Atkinson, T. Piketty & E. Saez, “Top incomes in the long run of history”, forthcoming Journal of Economic Literature 2010 [article in pdf format]


On current evolutions in the developing world:

T. Piketty & N. Qian, « Income inequality and progressive income taxation in China and India: 1986-2015 », AEJ 2009 [article in pdf format]


On the political economy of fiscal development:

Besley-Persson, “On the Origins of State Capacity”,2009 [article in pdfformat] (pres7: Yang Huang & Theu Dinh)

Kleven-Kreiner-Saez, “Why Can Modern Governments Tax so much?”, 2009, [article in pdf format])


On the impact of income taxes vs wealth taxes on overall tax progressivity:

T. Piketty et E. Saez, « How progressive is the U.S. federal tax system ? A historical and international perspective », JEP, 2006 [article in pdf format]



Lecture 6. Optimal Redistributive Taxation of Labor Income


Basic theoretical result: U-shaped pattern of marginal rates = relatively consistent with observed patterns, for reasons which seem relatively in line with those captured by the theory (except for the top Roosevelt-type tax rates)


Course notes on optimal redistributive taxation of labor income


Mirrlees, J., "An exploration in the theory of optimum income taxation", RES 1971

Diamond, P., “Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Rates”, AER 1998 [article in pdf format]

Saez, “Using Elasticities to Derive Optimal Income Tax Rates”, RES 2001 [article en format pdf]


Observed pattern of marginal rates in France


Empirical estimates of labor supply elasticities:

E. Saez, J. Slemrod and S. Gierz, “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review”, NBER 2009 [article en format pdf] (pres8: Marianne Tenand)


Roosevelt-type tax rates & recent surge in US top incomes



Lecture 7. Wealth and Capital Taxes over Time and across Countries


Current inheritance and wealth tax schedules in France & the US: marginal tax rates t’(w) vs average tax rates t(w)/w  [tax schedules in excel format]


On the historical evolution of inheritance taxes:

K. Scheve & D. Stasavadge, “Democracy, War & Wealth – Evidence from Two Centuries of Inheritance Taxation”, 2010  [article in pdf format]  (pres9: Alejandro del Valle & Liviu Stirbat)


On the recent evolution of the French wealth tax (ISF) :

Zucman, G., “Les hauts patrimoines fuient-ils l’ISF? Une estimation sur la période 1995-2006 », PSE Master Thesis, 2008 [article in pdf format]  (pres10 : Olivier Trecco)



Lecture 8. Optimal Taxation of Consumption, Savings and Wealth


Basic theoretical result = zero optimal capital tax rate = mechanical implication of Atkinson-Stiglitz no-differential-commodity-tax result to intertemporal consumption (=relies on several assumptions: 100% lifecycle wealth (zero inheritance) & perfect capital markets; or infinite horizon & perfect capital markets)

 Pb = formulas get very complicated in more realistic settings (i.e. finite horizon models with inheritance, and/or models with imperfect capital markets) = an area where much progress is needed


Course notes on optimal redistributive taxation of capital and capital income


On international capital mobility and corporate tax shifting :


M. Feldstein & F. Horioka, “Domestic savings and international capital flows”, Economic Journal 1980 [article in pdf format] (pres11: Christoph Schinke & Michael Mbate)
Desai-Foley-Hines, “Labor and capital shares of the corportate tax burden: international evidence”, 2007 [article en format pdf] (pres12: Nassima Abdelghafour & Manon Falquerho)
Moore-Kasten, “Do Wages Rise when Corporate Tax Rates Fall?”, 2009 [article en format pdf] (pres13)
Hasset-Mathur, “Taxes and wages”, 2006 [article en format pdf] (pres14)