readinglist

PUBLIC ECONOMICS LECTURES Raj Chetty and Gregory A. Bruich Harvard University This is the first of two courses in the graduate public economics sequence at Harvard. This one-semester course covers basic issues in the optimal design of tax and social insurance policies, with emphasis on combining theoretical models with empirical evidence. Topics include efficiency costs and incidence of taxation, income taxation, transfer and welfare programs, public goods and externalities, optimal social insurance (excluding social security), and welfare analysis in behavioral models. The course consists of 24 lectures, each lasting 1.5 hours. The slides and reading list are divided into seven parts: Part 1: Introduction Part 2: Tax Incidence [3 lectures] Part 3: Efficiency Cost of Taxation [3 lectures] Part 4: Optimal Taxation [5 lectures] Part 5: Income Taxation and Labor Supply [4 lectures] Part 6: Social Insurance [5 lectures] Part 7: Public Goods and Externalities [4 lectures] We would like to thank Emmanuel Saez, Jon Gruber, Day Manoli, and many other colleagues whose comments and lecture notes contributed to the development of these slides. Tax Incidence and Efficiency Tax Incidence Partial Equilibrium Incidence A. Atkinson and J. Stiglitz. Lectures on Public Economics, New York: McGraw Hill, 1980. Chapter 6. R. Chetty, A. Looney, and K. Kroft. “Salience and Taxation: Theory and Evidence.” American Economic Review 99(4): 1145-1177, 2009. Section V.C. L. Kotlikoff and L. Summers. “Tax Incidence,” in A. Auerbach and M. Feldstein, Volume 2, 1043-1092. Required reading: Sections 0, 1, 2, 3.1, and 4.4. B. Salanie. The Economics of Taxation, Cambridge: MIT Press, 2003, Chapter 1. E.G. Weyl and M. Fabinger, “Pass-Through as an Economic Tool,” Univ. of Chicago mimeo., 2012 Empirical Applications J. Adda and F. Cornaglia. “Taxes, Cigarette Consumption and Smoking Intensity,” American Economic Review, 96(4): 1013—1028, 2006. T. Besley and H. Rosen. “Sales Taxes and Prices: An Empirical Analysis”, National Tax Journal 52, (1999). J. Doyle and K. Samphantharak. “$2.00 Gas! Studying the Effects of a Gas Tax Moratorium.” Journal of Public Economics, April 2008. W. Evans, J. Ringel, and D. Stech. “Tobacco Taxes and Public Policy to Discourage Smoking,” in Tax Policy and the Economy, vol. 13, ed. J. Poterba, MIT Press: Cambridge, 1999. Goolsbee, Austan, Michael F. Lovenheim, and Joel Slemrod. 2010. "Playing with Fire: Cigarettes, Taxes, and Competition from the Internet." American Economic Journal: Economic Policy, 2(1): 131–54 J. Gruber and B. Koszegi. “Tax Incidence when Individuals are Time-Inconsistent: The Case of Cigarette Excise Taxes,” Journal of Public Economics (2004), 88(9-10), 1959-1987. S. F. Hamilton, "Excise Taxes with Multiproduct Transactions," American Economic Review, vol. 99(1), pages 458-71, March, 2009. Hastings, Justine, and Ebonya Washington. 2010. "The First of the Month Effect: Consumer Behavior and Store Responses." American Economic Journal: Economic Policy, 2(2): 142–62. R. Kerschbamer and G. Kirchsteiger, 2000. “Theoretically robust but empirically invalid? An experimental investigation into tax equivalence,” Economic Theory, 16: 719-734. J. Poterba. “Lifetime Incidence and the Distributional Burden of Excise Taxes,” American Economic Review 79 (May 1989), 325-330. J. Rothstein. “Is the EITC as Good as an NIT? Conditional Cash Transfers and Tax Incidence,” American Economic Journal: Economic Policy, 2(1), February 2010, 177-208. General Equilibrium Incidence A. Auerbach, “Who Bears the Corporate Tax? A Review of What We Know” NBER Working Paper 11686, October 2005. C. Davidson and L. Martin, “General Equilibrium Incidence Under Imperfect Competition: A Quantity-Setting Supergame Analysis”, Journal of Political Economy, 93(6), December 1985, 1212-1223. P. Diamond. “Tax Incidence in a Two-Good Model,” Journal of Public Economics, 9(3), June 1978, 283-299. A. Harberger. “The Incidence of the Corporation Income Tax,” Journal of Political Economy, 1962, 215-240. L. Kotlikoff and L. Summers. “Tax Incidence,” in A. Auerbach and M. Feldstein, Handbook of Public Economics, Volume 2, Sections 2.2.1-2.2.3 and 2.3. N. Stern. “The Effects of Taxation, Price Controls, and Government Intervention in Oligopoly and Monopolistic Competition”, Journal of Public Economics, 32(2), March 1987, 133-158. Open Economy Applications D. Bradford, “Factor Prices May Be Constant but Factor Returns are Not,” Economic Letters, volume 1, 1978, 199-203. * M. Feldstein and C. Horioka, “Domestic Savings and International Capital Flows”, Economic Journal, 90(358), June 1980, 314-329. L. Kotlikoff and L. Summers, “Tax Incidence”, in A. Auerbach and M. Feldstein, Volume 2, 1043-1092, Section 3.1. Capitalization and the Asset Price Approach D. Cutler, “Tax Reform and the Stock Market: An Asset Price Approach,” American Economic Review, 78(5), December 1988, 1107-1117, esp. Sections I-III. * J. Friedman, “The Incidence of the Medicare Prescription Drug Benefit: Using Asset Prices to Assess Its Impact on Drug Makers,” Harvard Kennedy School Working Paper, 2009. J. Gyourko and J. Tracy, “The Structure of Local Public Finance and the Quality of Life,” Journal of Political Economy, 99(4), August 1991, 774-806. * L. Linden and J. Rockoff “There Goes the Neighborhood? Estimates of the Impact of Crime Risk on Property Values from Megan's Laws,” American Economic Review 98(3): 1103-1127, 2008. D. Lyon, “The Effect of the Investment Tax Credit on the Value of the Firm,” Journal of Public Economics, 38(2), March 1989, 227-247. J. Poterba, “Tax Subsidies to Owner-Occupied Housing: An Asset Market Approach,” Quarterly Journal of Economics, 99(4), November 1984, 729-752. J. Roback, “Wages, Rents, and the Quality of Life”, Journal of Political Economy, 1982, 1257- 1276. K. Rosen, “The Impact of Proposition 13 on House Prices in Northern California: A Test of the Interjurisdictional Capitalization Hypothesis”, Journal of Political Economy, 90(1), February 1982, 191-200. L. Summers, “The Asset Price Approach to the Analysis of Capital Income Taxation”, Proceedings of the National Tax Association, 1983, 112-120. Mandated Benefits D. Acemoglu and J. Angrist, “Consequences of Employment Protection? The Case of the Americans with Disabilities Act,’’ Journal of Political Economy 109(5) 915-957, 2001 D. Cutler, and B. Madrian, “Labor Market Implications of Rising Health Insurance Costs”, RAND Journal of Economics, Autumn 1998, 509-530. J. Gruber, “The Incidence of Mandated Maternity Benefits,” American Economic Review, 84(3), June 1994, 622-641. J. Gruber and A. Krueger “The Incidence of Mandated Workers Compensation”, in D. Bradford, ed., Tax Policy and the Economy, Volume 5, 111-143, Cambridge, MA: MIT Press, 1991. J. Gruber, “The Incidence of Payroll Taxation: Evidence from Chile.” Journal of Labor Economics 15, 1997, S73-S91. J. Kolstad and A. Kowalski, “Mandate-Based Health Reform and the Labor Market: Evidence from the Massachusetts Reform” NBER Working Paper No. 17933, 2012 C. Ruhm, “The Economic Consequences Of Parental Leave Mandates: Lessons From Europe,” Quarterly Journal of Economics 113(1): 285-317, 1998. L. Summers, “Some Simple Economics of Mandated Benefits,” American Economic Review, 79(2), May 1989, 177-183. Excess Burden Theory A. Auerbach, “The Theory of Excess Burden and Optimal Taxation”, in A. Auerbach and M. Feldstein, Handbook of Public Economics, Volume 1, 61-127. Amsterdam: North Holland, 1985. Sections 1, 2, 3.1, and 4. A. Auerbach, J. Hines , “Taxation and Economic Efficiency”, in A. Auerbach and M. Feldstein, Handbook of Public Economics, Volume 3, Chapter 21, Amsterdam: North Holland, 2002. C. Ballard, D. Fullerton, J. Shoven, and J. Whalley, A General Equilibrium Model for Tax Policy Evaluation, Chicago: University of Chicago Press, 1985, Chapters 2, 3. * C. Ballard, J. Shoven, and J. Whalley., “General Equilibrium Computations of the Marginal Welfare Cost of Taxes in the United States”, American Economic Review, March 1985, 128-138. E. Browning, “On the marginal welfare cost of taxation.” American Economic Review 77: 11–23, 1987. D. Bernheim and A. Rangel, 2009. “Beyond Revealed Preference: Choice-Theoretic Foundations for Behavioral Welfare Economics,” Quarterly Journal of Economics, 124(1): pages 51-104. Blomquist, Sören, Vidar Christiansen, and Luca Micheletto. 2010. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates." American Economic Journal: Economic Policy, 2(2): 1–27. R. Chetty, “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods.” Annual Review of Economics 1: 451-488, 2009. Sections 2 and 6. R. Chetty, A. Looney, and K. Kroft. “Salience and Taxation: Theory and Evidence.” American Economic Review 99(4): 1145-1177, 2009. Section V.C. Chipman, John S. and James C. Moore. “Compensating Variation, Consumer's Surplus and Welfare.” American Economic Review, 70(5), 1980, 933-49. D. Corlett and E. Hauge, “Complementarity and the Excess Burden of Taxation.” Review of Economic Studies 21(1): 21-30, 1953 P. Diamond and D. McFadden, “Some Uses of the Expenditure Function in Public Finance,” Journal of Public Economics 3 (1974), 3-21. D. Fullerton, “Reconciling Recent Estimates of the Marginal Welfare Cost of Taxation”, American Economic Review, 81(1), March 1991, 302-308. * A. Harberger, “The Measurement of Waste”, American Economic Review, 54(3), 1964, 58-76. J. Hausman, “Exact Consumers Surplus and Deadweight Loss”, American Economic Review, 71(4), September 1981, 662-676. J. Hausman and W. Newey, “Nonparametric Estimation of Exact Consumers Surplus and Deadweight Loss,” Econometrica 63 (1995), 1445-1476. James J. Heckman, "Building Bridges between Structural and Program Evaluation Approaches to Evaluating Policy," Journal of Economic Literature, vol. 48(2), pages 356-98, June, 2010. S. Mullainathan, W. Congdon, and J. Kling, "Behavioral Economics and Tax Policy" National Tax Journal, 62, 2009, 375-86. Applications D. Albouy, "The Unequal Geographic Burden of Federal Taxation," Journal of Political Economy, vol. 117(4), pages 635-667, 08, 2009. A. M. Bento and Lawrence H. Goulder and Mark R. Jacobsen and Roger H. von Haefen, "Distributional and Efficiency Impacts of Increased US Gasoline Taxes," American Economic Review, vol. 99(3), pages 667-99, June, 2009. * R. Chetty. “Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance.” American Economic Journal: Economic Policy: 1(2): 31–52, 2009. M. Feldstein, “Tax Avoidance and the Deadweight Loss of the Income Tax,” Review of Economics and Statistics, 81(4), November 1999, 674-680. M. Feldstein, “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act,” Journal of Political Economy 103: 551-572, 1995. K. Gallagher and E. Muehlegger, 2008. “Giving Green to Get Green: Incentives and Consumer Adoption of Hybrid Vehicle Technology,” Journal of Environmental Economics and Management, 61(1): 1-15, January 2011. A. Goolsbee, “The Value of Broadband and the Deadweight Loss of Taxing New Technologies,” Contributions to Economic Analysis & Policy (B.E. Press Journals), 5(1), 2006. Yuriy Gorodnichenko and Jorge Martinez-Vazquez and Klara Sabirianova Peter, "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," Journal of Political Economy, vol. 117(3), pages 504-554, 06, 2009 * L. Goulder and R. Williams. "The Substantial Bias from Ignoring General Equilibrium Effects in Estimating Excess Burden, and a Practical Solution," Journal of Political Economy, 2003, 111:898-927. * J. Marion and E. Muehlegger. “Measuring Illegal Activity and the Effects of Regulatory Innovation: Tax Evasion and the Dyeing of Untaxed Diesel,” Journal of Political Economy 116:4, p.633-666, August 2008. * J. Poterba, “Taxation and Housing: Old Questions, New Answers,” American Economic Review 82(2): 237-242, May 1992. Optimal Taxation Commodity Taxation E. Ahmad and N. Stern, “The Theory of Reform and Indian Indirect Taxes”, Journal of Public Economics, 25(3), December 1984, 259-298. A. Atkinson and J. Stiglitz, Lectures on Public Economics, New York: McGraw Hill, 1980. Chapter 12-1,12-2, and 12-5. A. Auerbach, “The Theory of Excess Burden and Optimal Taxation”, in A. Auerbach and M. Feldstein, Handbook of Public Economics, 1985, Volume 1, 61-127, Section 5. A. Auerbach and J. Hines, “Taxation and Economic Efficiency,” in A. Auerbach and M. Feldstein, 2002, Handbook of Public Economics, Volume 3, 61-125. T. Besley and I. Jewitt, “Uniform Taxation and Consumer Preferences”, Journal of Public Economics, September 1995, 58, 73-84. Boadway, Robin, and Motohiro Sato. "Optimal Tax Design and Enforcement with an Informal Sector." American Economic Journal: Economic Policy, 1(1): 1–27, 2009. R. Burgess and N. Stern, “Taxation and Development”, Journal of Economic Literature, 31(2), 1993, 762-830. P. Diamond, “A Many-Person Ramsey Tax Rule,” Journal of Public Economics, 4, 1975, 335- 342. P. Diamond and J. Mirrlees, “Optimal Taxation and Public Production,” American Economic Review, 61, 1971, 8-27 and 261-278. * T. O’Donoghue, and M. Rabin, 2006. “Optimal Sin Taxes.” Journal of Public Economics 90: 1825-1849.. F. Ramsey, “A Contribution to the Theory of Taxation”, Economic Journal, 37, 1927, 47-61. A. Sandmo, “Optimal Taxation: An Introduction to the Literature”, Journal of Public Economics, 6(1-2), July-Aug 1976, 37-54. Taxation of Savings D. Bernheim, "Taxation and Saving", in A. Auerbach and M. Feldstein, Handbook of Public Economics, Volume 3, Chapter 18, Amsterdam: North Holland, 2002, Section 4. D. Bernheim, A. Frandkin, and I. Popov, “The Welfare Economics of Default Options: A Theoretical and Empirical Analysis of 401(k) Plans” NBER Working Paper 17587, November 2011. D. Bernheim and D. Garrett. "The Effects Of Financial Education In The Workplace: Evidence From A Survey Of Households," Journal of Public Economics, 87(7-8), August 2003, 1487-1519. E. Bronchetti, T. Dee, D. Huffman, and E. Magenheim, "When a Nudge Isn't Enough: Defaults and Saving Among Low-Income Tax Filers" NBER Working Paper 16887, March 2011. D. Card and M. Ransom, "Pension Plan Characteristics and Framing Effects in Employee Savings Behavior," Review of Economics and Statistics, 93(1), February 2011, 228-243. * G. Carroll, J. Choi, D. Laibson, B. Madrian and A. Metrick, "Optimal Defaults and Active Decisions," Quarterly Journal of Economics, 124(4), November 2009, 1639-1674. R. Chetty, J. Friedman, S. Leth-Petersen, and T. Nielsen, "Active vs. Passive Decisions and Crowd-out in Retirement Savings: Evidence from Denmark," Harvard Univ. Working Paper, 2012. J. Choi, D. Laibson and B. Madrian “Reducing the Complexity Costs of 401(k) Participation Through Quick Enrollment", in D.A. Wise, Developments in the Economics of Aging, Chicago: University of Chicago Press, March 2009. Also available as NBER Working Paper 11979. J. Choi, D. Laibson, B. Madrian, and A. Metrick, "Optimal Defaults", American Economic Review, 93, 2003, 180-185. E. Duflo, W. Gale, J. Liebman and P. Orszag, E. Saez, "Saving Incentives for Low- and Middle-Income Families: Evidence from a Field Experiment with H&R Block," Quarterly Journal of Economics, 121(4), 2006, 1311-1346. E. Duflo and E.Saez, "The Role of Information and Social Interactions in Retirement Plan Decisions: Evidence from a Randomized Experiment", Quarterly Journal of Economics, 118, 2003, 815-842. G. Engelhardt and A. Kumar, "Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study", Journal of Public Economics, 91(10): 1920-1943, 2007. * E. Engen, W. Gale and J. Scholz, "The Illusory Effects of Saving Incentives on Saving," Journal of Economic Perspectives, 10(4), 1996, 113-38. W. Gale and J. Scholz, "IRAs and Household Saving", American Economic Review, 84, 1994, 1233-1260. A. Gelber, "How do 401(k)s Affect Saving? Evidence from Changes in 401(k) Eligibility," American Economic Journal: Economic Policy, 3:4, 2011, 103-122. B. Madrian and D. Shea, "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior", Quarterly Journal of Economics, 116(4), November 2001, 1149-1187. * J. Poterba, S. Venti, and D. Wise, "How Retirement Saving Programs Increase Saving" Journal of Economic Perspectives, 10, Fall 1996, 91-112. R. Thaler and S. Benartzi, "Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving", Journal of Political Economy,112(S1), February 2004, 164-187. S. Venti and D. Wise, "Have IRAs Increased U.S. Saving? Evidence from Consumer Expenditure Surveys", Quarterly Journal of Economics, 105, 1990, 661-698. Income Taxation Atkinson, A.B., Stiglitz, J.E., “The design of tax structure: Direct versus indirect taxation.” Journal of Public Economics 6, 1976, 55-75. * M. Brewer, E. Saez, and A. Shephard “Means Testing and Tax Rates on Earnings”, IFS Working Paper, The Mirrlees Review: Reforming the Tax System for the 21st Century, Oxford University Press, 2009. R. Chetty, “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods.” Annual Review of Economics 1: 451-488, 2009. Section 4. * P. Diamond, “Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates”, American Economic Review, 88, March 1998, 83-95. P. Diamond and E. Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” Journal of Economic Perspectives, 25(4): 165-190, 2011. M. Golosov, A. Tsyvinski, and I. Werning "New Dynamic Public Finance: a User's Guide" NBER Macro Annual 2006. G. Laroque, 2005 “Indirect taxation is superfluous under separability and taste homogeneity: A simple proof”, Economic Letters, 87, 141-144. N. G. Mankiw and M. Weinzierl. "The Optimal Taxation of Height: A Case Study of Utilitarian Income Redistribution." American Economic Journal: Economic Policy 2, no. 1 (2010): 155-176. N.G. Mankiw, M. Weinzierl, and D. Yagan, 2009."Optimal Taxation in Theory and Practice," Journal of Economic Perspectives, vol. 23(4), pages 147-74, Fall. J. Mirrlees, “An Exploration in the Theory of Optimal Income Taxation”, Review of Economic Studies, 38, 1971, 175-208. T. Piketty, "Implementation of First-Best Allocations via Generalized Tax Schedules," Journal of Economic Theory, vol. 61(1), October 1993, 23-41. T. Piketty and E. Saez, “Income Inequality in the United States, 1913-1998”, Quarterly Journal of Economics, 116, 2003, 1-39. T. Piketty, E. Saez, and S. Stantcheva, "Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities" NBER Working Paper 17616, November 2011. E. Sadka, “On Income Distribution, Incentives Effects and Optimal Income Taxation”, Review of Economic Studies, 43(2), 1976, 261-268. E. Saez, “Using Elasticities to Derive Optimal Income Tax Rates”, Review of Economics Studies, 68, 2001, 205-229, Sections 1-3 and 5. B. Salanie, The Economics of Taxation, Cambridge: MIT Press, 2011. J. Slemrod, “Optimal Taxation and Optimal Tax Systems”, Journal of Economic Perspectives, 4(1), Winter 1990, 157-178. J. Stiglitz, “Pareto Efficient and Optimal Taxation and the New New Welfare Economics”, in A. Auerbach and M. Feldstein, Volume 2, 991-1041. Transfer Programs G. Akerlof, “The Economics of Tagging as Applied to the Optimal Income Tax”, American Economic Review, 68(1), March 1978, 8-19. A.B. Atkinson, “Income Maintenance and Social Insurance,” in A. Auerbach and M. Feldstein, eds., Handbook of