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income tax discourages female labor supply; more women work part-time Laffer curve: a graph of the tax rate-tax revenue relationship Relative price of consumption now:reflected in net interest rate, depends on: - real interest rate - tax on interest income - extent to which interest costs are tax-deductible life-cycle model:the theory that individuals’ consumption and saving’s decisions during a given year are based on a planning process that considers lifetime circumstances Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
Taxation reducessaving if: - substitution effect > income effect Taxation increases saving if: - income effect > substitution effect iii) taxation and risk takingTax reduces net return of risky asset °less risk taking; tax reduces risk (loss is tax deductible) °more risk taking theory:effect is ambiguous Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
iv) taxation and housing - Haig-Simons definition: > income = net increase in power to consume > income = consumption + saving - all income should be taxed - expenses incurred to earn income should be subtracted from taxable income - income = rental value – interest + Δvalue ²The effects of taxation on labor supply, saving and risk takingare ambiguous; - income effect versus substitution effect ²Empirical evidence exists, but open to debate - taxing income probably reduces labor supply, especially among secondary earners ²Dutch income tax results in excessive mortgage-financed home ownership Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
Chapter 20 – Deficit finance Fiscal deficit: government expenditures minus revenues - flow variable Government debt:the total amount owed at a given point in time = sum of all past deficits - stock variable surplus:the excess of revenues over spending during a period of time internal debt:the amount that a government owes to its own citizens external debt:the amount a government owes to foreigners Rules of the European Monetary Union: - deficit ≤ 3% GDP - debt ≤ 60% GDP - medium term objective 0.5% GDP (for NL) Domar: debt sustainable if debt ratio is constant - debt ratio: debt as % of GDP Lerner’s viewif debt is held by own citizens Lerner’s viewif debt is held by foreigners, it depends: It creates no burden for future generation as a whole If loan is used for consumption: consumption of future generation is reduced Future generation has debt, but also bonds °cancels out If loan is used for investment, there is only a burden on future generation if: marginal rate of return on public investment < marginal costs of funds We owe it to ourselves But:one group of citizens pays the other °effect on income distribution NB: problems with Lerner’s view: - ignores that people die - you may not be around when debt is repaid - people born later may not have profited from debt spending - ‘generation’ means here: everyone alive at a given time °‘generation’ means everyone born in the
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