lecture4a.ppt

lecture4a.ppt - Lecture4:Equity Considerations...

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    Lecture 4:  Equity  Considerations
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    What is the most efficient tax? Lump-sum tax In fact, even this can lead to sizeable efficiency losses if enforcement difficult Gogol’s Dead Souls focused on this People avoid registering births Experience under Thatcher in the U.K.: People move and avoid registering at their new location Example from U.S. dependents’ deduction
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    Overview of lecture Is there a plausible “objective function” that governments should implicitly maximize in their choice of tax policy? If so, what are its characteristics? Do governments in fact act to maximize such an objective function? Many of the top economists during the past two hundred years have focused on this question. However debatable the answers, they play a central role in discussion of tax policy
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    What objective function should the  government pursue? Utilitarianism: Maximize the sum of individual utilities, for any given amount of revenue collected. Original advocate was Jeremy Bentham He presumed that “utility” would eventually be measurable Presumption that utility function is concave, so declining marginal utility of income [Graph on blackboard]
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    What then is the best tax structure? To their surprise, economists then concluded that all revenue should come from the richest individual. (Bill Gates?) Led to a painful (in hindsight) discussion of the exquisite tastes of the rich compared with the simpler needs of the poor (Note that this discussion ignored offsetting efficiency costs. Not recognized until much later.)
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  Counter reaction Samuelson urged that economists focus solely on what is observable: revealed preference orderings – “ordinal utility” Arrow then tried to reconstruct an objective function for policy simply based on revealed preference information. But the only objective function satisfying
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This note was uploaded on 11/03/2009 for the course ACCT 130 taught by Professor Huxhold during the Spring '09 term at UCSD.

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lecture4a.ppt - Lecture4:Equity Considerations...

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