Public Economics: Tax & Transfer Policies
(Master
PPD,
Thomas
Piketty
Academic
year 2010-2011
Syllabus & Course Material
(November 16th 2010)
(check on line for
updated versions)
Email : piketty@ens.fr
Office hours:
Tuesdays 9h-12h, Jourdan B101
Course web page : http://piketty.pse.ens.fr/fichiers/enseig/pubecon/PubEcon.htm
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 (
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
A.
Atkinson & J. Stiglitz, Lectures in Public Economics, McGraw Hill,
1980
A.
Auerbach & M. Feldstein, Handbook of Public Economics,
P.
Lindert, Growing Public,
J.
Mirrlees, Reforming the Tax System for the 21st Century – The
Mirrlees Review,
B. Salanié, Théorie économique de la
fiscalité, Economica, 2002 (The Economics of Taxation, MIT
Press, 2003)
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]
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-
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
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
Historical evolution of income
tax in
(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
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
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
Empirical estimates of labor supply elasticities: