S10 MyCh15C - Chapter 15 Government spending and its...

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Chapter 15 Government spending and its financing (Conclusion) 1.Fiscal policy: incentives, tax reforms and tax distortion 2.Deficits and debt 3.US Social Security 4. Deficits and inflation 1
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Fiscal policy: incentives, tax reforms and tax distortion Tax rate and incentives Y Income tax: T(Y) T/Y : Average rate 2
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Fiscal policy: incentives, tax reforms and tax distortion Tax rate and incentives Y T(Y) T/Y : Average rate dT/dY : Marginal rate 3
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4 The high average rate makes people feeling poor: hence work more;
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5 The high average rate makes people feeling poor: hence work more; the high marginal rate discourages people trying harder: hence work less.
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Fiscal policy: incentives, tax reforms and tax distortion Tax rate, incentives, and labor supply Households w N NS Income Effect Raising Average Rate 6
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Fiscal policy: incentives, tax reforms and tax distortion Tax rate, incentives, and labor supply Households w N NS Income Effect Raising Average Rate Raising Marginal Rate w N NS Substitution 7
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Fiscal policy: incentives, tax reforms and tax distortion Tax reform in the 1980s Congress reduced tax rates twice The highest marginal tax rate on labor income At the beginning of the decade 50% The 1981 tax act (ERTA): tax reduction in 3 stages, phased in until 1984 Tax reform, 1986, again reduced personal tax rates, By then, 28% Supply-side economics: 8
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Fiscal policy: incentives, tax reforms and tax distortion Tax reform 1981 Both marginal and average tax rates declined in the 1981 tax cut - The decline in the marginal tax rate should lead to increased labor supply - The decline in the average tax rate should lead to decreased labor supply Expectation - Overall effect is ambiguous and may be small ???
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This note was uploaded on 06/01/2010 for the course ECON 3140 at Cornell University (Engineering School).

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S10 MyCh15C - Chapter 15 Government spending and its...

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