Public Economics: Tax & Transfer Policies

(Master PPD, Paris School of Economics)

Thomas Piketty

Academic year 2009-2010

Syllabus & Course Material

(March 22^nd 2010)

(check on line for updated versions)

Email : piketty@ens.fr

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

Course web page : http://piketty.pse.ens.fr/fichiers/enseig/pubecon/PubEconSyll2009-2010.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 (EU, US) and in the developing world. The course will be organized in 8 lectures of 3 hours. There will be no formal exam. In order to validate the course, students are required (1) to attend and actively participate to all lectures; (2) to make one formal presentation during the lectures; possible presentation topics are listed below (pres1, pres2, etc.). Students wishing to validate the course should choose a presentation topic and inform the teacher as soon as possible.

Lecture 1: Monday March 8^th 2010, 14h-17h, CIUP Arménie

Lecture 2: Monday March 15^th 2010, 14h-17h, CIUP Arménie

Lecture 3: Monday March 22^th 2010, 15h-18h, Jourdan salle 8

Lecture 4: Wednesday March 31^st2010, 14h-17h, CIUP Arménie

Lecture 5: Tuesday April 6^th 2010, 14h-17h, Jourdan salle E101

Lecture 6: Monday April 12^th 2010, 14h-17h, Jourdan salle 10

Lecture 7: Monday April 26^th 2010, 14h-17h, Jourdan salle E101

Lecture 8: Monday May 3^rd 2010, 14h-17h, Jourdan salle E101

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 21^st 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: comparing taxes/GDP and transfers/GDP ratios across countries (or, preferably, taxes/Y & transfers/Y ratios, with Y = national income = GDP – capital depreciation + net foreign factor income)

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

[Selected Tables]

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

Y = F(K,L) = Y_K+Y_L= C+S (=Y_g+Y_h+Y_se+Y_c)

T = τY = T_K+T_L+T_C = τ_KY_K + τ_LY_L + τ_C C

Illustration with French national accounts:

- computing ratios between aggregate taxes/transfers and national income (pres1)

- computing capital vs labor shares and wealth-income ratios (pres2)

- computing labor taxes, capital taxes and consumption taxes (pres3)

[TEE, France 2007 (in excel format)] [in pdf format]

[Course notes on capital vs labor shares and wealth-income ratios]

(pres1-3: Tristan Mouyna-Hainry)

Typical application: what can conclude about tax incidence from functional distribution stability?

Answer: not much; it all depends on long run elasticity of labor and capital supply; one also needs K/Y data, not only data on Y_K vs Y_L

[Selected figures from French National accounts]

Illustration with European national accounts:

[Selected tables on implicit labor vs capital vs consumption tax rates]

- to what extent are these comparisons of fiscal structures reliable? What do they tell us about tax incidence? (pres4)

(pres4: Antoine Clapier)

National accounts perspective vs microeconomic estimates of tax incidence:

- illustration with EU corporate tax competition:

J. Piotrowska & W. Vanborren, “The corporate income tax rate-revenue paradox: Evidence in the EU”, EC Taxation Papers, 2008 [article in pdf format] (pres5)

(pres5: Maria Baez)

- illustration with EU savings taxation directive:

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] (pres6)

(pres6: Elsa Allman)

- illustration with the VAT incidence question:

C. Carbonnier, “Who Pays Sales Taxes ? Evidence from French VAT Reforms, 1987-1999”, Journal of Public Economics 2007 [article in pdf format] (pres7)

(pres7: Colin Majean)

(see also T. Besley & H. Rosen, “Sales Taxes and Prices: An Empirical Analysis”, National Tax Journal, 1999 [article in pdf format])

(see also Fack 2007 on housing subsidies)

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 (pres8)

Stern Report on the economic costs of global warming [Stern 2006 Report] (pres9)

Quinet Report on the price of the carbon ton [Rapport Quinet 2008] (pres10)

(pres8: Loïse Jeannin)

(pres9: Kenneth Houngbédji)

(pres10: Esther Regnier)

The carbon tax debate and the double dividend hypothesis: Andrea Garnero

On time discounting:

O. Guéant, R. Guesnerie & J.M. Lasry, “Ecological intuition vs economic reason”, PSE Working Paper, 2009 [article in pdf format] (pres11)

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] (pres12)

Historical evolution of income tax in France & the US (pres13)

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

[Selected figures]

(pres13: Arthur Jatteau)

International perspectives:

A. Atkinson & T. Piketty, Top incomes over the 20^th 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] (pres14)

(pres14: Carolina Alban)

(see also Kleven-Kreiner-Saez, “Why Can Modern Governments Tax so much?”, 2009, [article in pdf format]) (pres15)

(pres15: Quentin Roquigny)

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 », Journal of economic perspectives, 2006 [article in pdf format] (pres16)

(pres16: Daniel Outré)

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] (pres17)

(see also G. Akerlof, “The Economics of Tagging as Applied to the Optimal Income Tax”, American Economic Review 1978 [article in pdf format]) (pres18)

(pres17: Nicholas McSpedden-Brown)

(pres18: Margaux Vinez)

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] (pres19)

(pres19: Ricardo Estrada)

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] (pres20)

(pres20: Viridiana Garcia)

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] (pres21)

(pres21: Nicolas Frémeaux)

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] (pres22)

(pres22 : Thierry Ly)

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