Recitation 6
Practice Problem 1
Taxpayers income is given by y and the objective is to maximize the expected
income. The tax rate is given by t = 0.4 . Given the amount of tax evasion
E, the tax paid if evasion is successful is given by t(y E). If cheatin
Public Economics Problem Set #1
Due: September 23rd in class
1. Pawel has an exciting life. He works (1 L)% of the time and in his remaining L% of the time he enjoys (both reading
and owning) books (B) that he bought. His preferences are represented by a
Public Economics
Problem Set #2
Due: October 7th in class
T
1. The demand for smartphones is given by D(p) = 400 p + p5 , where p is the price of a smartphone and pT is the
price of a tablet (a substitute for smartphones). The supply is given by S(p) = 4
1
PE 3 & 4 - Chapter 19 & 20: Tax
Tax incidence
2 types of taxes
Specific excise tax = specific amount of tax
Shifts demand or supply curve by fixed amount (ex. quantity rises 5 units)
Ad valorem tax = fixed percentage of tax
Shifts demand or supply
1
18: Taxation in practice (Ch 18, 22, 23, 24)
Types of taxation
Taxation of earnings (payroll tax)
Taxation of individual income
Taxation of corporate income
Taxes on gifts and estates
Wealth and property taxation
Consumption taxation
Excise taxes, sales
Public Economics Problem Set #3
Due: October 21st in class
1. Suppose that you have a job paying $2500 per month. With 10 percent probability, you may get sick and your monthly earnings
will be reduced by $900. Assume that you spend all of your income on
1
22, 23: Optimal taxation III capital taxation
Taxation of saving
2 period model = 2 periods of consumption, C1 and C2
Keys to remember:
For income in period 1, consume part (C1) and save part (S)
For part thats saved (S), there is interest (r) and t
1
15, 16, 17: Welfare Programs (Ch 17)
US low income support
Temporary Aid for Needy Families = benefits for low income families with children
Conditions
On a temporary basis (limit of 5 years over lifetime, no more than 2 years in
a row)
Has work requi
1
Lec 20, 21: Optimal Taxation II income tax
Optimal income tax
I = wL
I = income, w = wage rate, L = labor supply
Wage rate is often a proxy for ability
Gov can only observe income by itself
Income generally doesnt tell anything about a persons abilit
1
19: Optimal Taxation I commodity taxation
Optimal taxation
Want to structure taxation so that maximize welfare + minimize excess burden, given the
revenue to be collected (R)
By 2nd welfare theorem: if the gov can impose arbitrary taxes, optimal taxat
1
5 & 6: Chapter 5 & 6 - Externalities
Intro
Standard economic model assumes that consumers affect each other only through their effect
on prices
Not true in some circumstances
Externalities = when the activity of one entity (a firm or a consumer) affe
1
7 & 8: Chapter 12 Social Insurance
Intro
Many programs provided by gov are insurance programs
Ex. social security (retirement and disability), Medicare, unemployment insurance, veterans
medical care, workers compensation
Participation is compulsory
Chapter 13: Social Security
How Social Security Works
Social Security: Federal program that taxes workers to provide income support to the elderly
Workers pay tax on earnings; tax is deposited into a trust fund invested in government bonds
Annuity payment
1
PE 2: Ch 2 and 3 Economic and Empirical Tools
Preferences = judge multiple goods; assume have rational preferences
Utility function = math rep of preferences
Indifference = set of bundles where have same utilities
2 different utility functions may have
Optimal taxation
Optimal commodity taxation
The problem: given revenue to be collected (R), how should
taxation be structured in order to maximize welfare (minimize
excess burden).
The optimal way of taxation if the government is able to impose
arbitrary
Types of taxation
I
Taxation of earnings payroll tax
I
Taxation of individual income
I
Taxation of corporate income
I
Taxes on gifts and estates
I
Wealth and property taxation
I
Taxation in the U.S.
Consumption taxation excise taxes, sales tax, VAT, other
Behavioral responses
Strength of responsiveness of individual decisions to taxation
is the critical piece of information necessary for estimating the
cost of taxation, incidence and determining the optimal policy
In the context of income tax, labor supply
Stylized facts about income inequality in the U.S.
I
I
I
I
I
I
I
Share of income by quintile in the U.S.
Income is very unequally distributed
Not just in the U.S., although the U.S. is on the high side
Income inequality evolved over time. Illustrated usin
1
Lec 24, 25: Behavioral responses to taxation (Ch 21)
Intro: Behavioral responses
Key to estimating cost of taxation, incidence, + determining optimal policy = strength of
responsiveness to individual decisions to taxation
For income tax, key is labor su