Public Economics: Tax & Transfer Policies
(Master PPD, Paris School of Economics)
Thomas Piketty
Academic year 2011-2012
Syllabus & Course Material
(November 14th 2011)
(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/teaching/10/18
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 is organized in 8 lectures of 3 hours. To validate the course, students are required (1) to attend and actively participate to all lectures; (2) to take the exam.
Lecture 1: Tuesday September 27th 2011, 14h-17h, Grande salle Jourdan
Lecture 2: Tuesday October 4th 2011, 14h-17h, Grande salle Jourdan
Lecture 3: Tuesday October 11th 2011, 14h-17h, Grande salle Jourdan
Lecture 4: Tuesday October 18th 2011, 14h-17h, Grande salle Jourdan
Lecture 5: Tuesday October 24th 2011, 14h-17h, Grande salle Jourdan
Lecture 6: Tuesday November 8th 2011, 14h-17h, Grande salle Jourdan
Lecture 7: Tuesday November 15th 2011, 14h-17h, Grande salle Jourdan
Lecture 8/Exam: Tuesday November 22nd 2011, 14h-17h, Grande salle Jourdan
General references
A. Atkinson & J. Stiglitz, Lectures in Public Economics, McGraw Hill, 1980
A. Auerbach & M. Feldstein, Handbook of Public Economics, 1985-2002 (4 volumes)
P. Diamond & E. Saez, "The Case for a Progressive Tax: From Basic Research to Policy Recommendations", Journal of Economic Perspectives 2011
P. Lindert, Growing Public, Cambridge University Press, 2004
J. Mirrlees, Reforming the Tax System for the 21st Century – The Mirrlees Review, Oxford University Press, 2010
B. Salanié, Théorie économique de la fiscalité, Economica, 2002 (The Economics of Taxation, MIT Press, 2003)
C. Landais, T. Piketty & E. Saez, Pour une révolution fiscale - Un impôt sur le revenu pour le 21e siècle, Le Seuil, 2011, www.revolution-fiscale.fr
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 2011 [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
Lecture 2. 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))
(pb: many models, e.g. dynastic infinite-horizon model, routinely assume infinite elasticity of capital supply... with the obvious zero-capital-tax conclusion...)
Microeconomic estimates of tax incidence allow for better identification:
- illustration with the incidence of housing benefits:
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):
C. Carbonnier, “Who Pays Sales Taxes ? Evidence from French VAT Reforms, 1987-1999”, Journal of Public Economics 2007 [article in pdf format]
Lecture 3. 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)
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]
On time discounting: r* = δ + Γg
Stern 2008 (Chapter 2B): δ=0,1%, g=1,3% Γ=1, so r*=1,4%
Nordhaus: δ=0,1%, g=1,3% Γ=3, so r*=4,0%
See Nordhaus, "Critical Assumptions in the Stern Review on Climate Change", Science 2007; and JEL 2007 symposium
See also R. Guesnerie, "Calcul économique et développement durable", Revue économique 2004
O. Guéant, R. Guesnerie & J.M. Lasry, “Ecological intuition vs economic reason”, PSE Working Paper, 2009 [article in pdf format]
R. Guesnerie, "Pour une politique climatique globale", 2010
Lecture 4. 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] [Other 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 2011 [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]
(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 5. 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]
Roosevelt-type tax rates & recent surge in US top incomes
T. Piketty, E. Saez & S. Stantcheva, "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities", WP 2011
Lecture 6. Inheritance and Capital Taxes over Time and across Countries
Eurostat 2010 : total tax burden EU27 = 39% of GDP, incl. 9% in capital taxes (US: 28%, incl. 8% in capital taxes)
Diversity of capital taxes: stock-based (one-off inheritance and transfer taxes, annual property or wealth taxes) or flow-based (corporate income taxes, taxes on capital income: rental income, interest, dividend, k gains etc.)
Typically: inheritance taxes <1% GDP (say, 5%-10% of a 10% tax base)
+ annual wealth & property taxes 1%-2% GDP (say, 1% of a 100%-200% tax base)
+ corporate tax 2%-3% GDP (say, 20%-30% of a 10% tax base)
+ capital income tax 2%-3% GDP (say, 20%-30% of a 10% tax base)
Historical evolution of capital shares and wealth-income ratios
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]
Estate or bequest taxes (the total wealth left by decedents) vs inheritance taxes (the wealth received by each successor)
(succession vs part successorale)
(US-UK vs France-Germany)
Historical evolution of top inheritance tax rates [Figures]
On the historical evolution of inheritance taxes:
K. Scheve & D. Stasavadge, “Democracy, War & Wealth – Evidence from Two Centuries of Inheritance Taxation”, 2011 [article in pdf format]
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]
Lecture 7. Optimal Taxation of Inheritance & Capital
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)
Course notes on optimal redistributive taxation of capital and capital income
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
Some (limited) progress:
T. Piketty & E. Saez, "A Theory of Optimal Capital Taxation", WP 2011 Slides
On international capital mobility, tax competition and the residence principle of taxation:
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]
J. Piotrowska & W. Vanborren, “The corporate income tax rate-revenue paradox: Evidence in the EU”, EC Taxation Papers, 2008 [article in pdf format]
G. Zucman, “The missing wealth of nations”, 2010 [article in pdf format]