Download ECON 621-001 Public Finance

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James Alm
Office: 112 Economics
Phone: 492-8291
Office Hours: 12:30 - 2:00 pm,
or by appointment
PUBLIC FINANCE
ECONOMICS 621
Fall 1984
Course Description
Economics 621 is the first of a two-course graduate seminar in public finance . During
the year-long seminar we will analyze the principles of government expenditures and
taxation. The focus of the first semester is on taxation. Specific topics include
the incidence, excess burden, and allocative effects of taxation , and the application
of general pr inciples of taxation to the United States tax structure. Government
expenditures will be emphasized in the second course.
Course Requirements
There will be two examinations: a midterm exam worth 30 percent of the final grade,
and a comprehensive final exam worth 40 percent. The remaining 30 percent will be
based on a research paper that analyzes some topic discussed in the course.
There will also be biweekly assignments . I encourage you to work with other students
on these assignments. Although the assignments will not be collected and graded,
question from them will appear on the exams.
Note that this is a graduate course in economics and it requires that you have adequate preparation in graduate theory, especially price theory . If you have not taken
graduate theory courses, or if you have questions about the course requirements,
please see me .
Textbooks
Required:
Anthony B. Atkinson and Joseph E. Stiglitz, Lectures in Public Economics
(New York: McGraw-Hill Book Company, 1980).
Robin W. Boadway and David E. Wildasin, Public Sector Economics, Second
Edition (Boston: Little, Brown, and Company, 1984) .
Joseph A. Pechman, Federal Tax Policy, Fourth Edition (Washington, D.C.:
The Brookings Institution, 1983).
Recommended:
Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and
Practice, Fourth Edition (New York: McGraw-Hill Book Company, 1984).
Course Outline
I.
II.
Welfare Economics and the Need for Government
Principles of Taxation
A. Ethics of Taxation
B. Incidence of Taxation
C. Excess Burden of Taxation
D. Effects of Taxation on Individual and Firm Choices
E. Tax Evasion and Avoidance
F. Choice of the Optimal Tax Structure
III.
IV.
V.
The
A.
B.
C.
D.
E.
F.
G.
United States Tax System
Individual Income Tax
Payroll Tax
Corporation Income Tax
Sales and Excise Taxes
Property, Estate, and Gift Taxes
Debt Finance
Incidence of the Tax System
Tax Reform
Numerical Methods in Tax Analysis
Reading List
I.
II.
Welfare Economics and the Need for Government
Musgrave and Musgrave (M&M), chapter 1.
Boadway and Wildasin (B&W), chapters 1,2,3.
Musgrave, R.A. (1959), The Theory of Public Finance, chapter 1.
Bator, F.M. (1957), "The Simple Analytics of Welfare Maximization,"
American Economic Review, 47, 22-59.
Bator, F .M. ( 1958), "The Anatomy of Market Failure," Quarterly Journal
of Economics, 72, 351-379.
Atkinson and Stiglitz (A&S), lecture 11.
Principles of Taxation:
A. Ethics of Taxation
M&M, chapters 5,10,11.
B&W, chapter 10.
Musgrave, R.A., The Theory of Public Finance, chapters 4,5.
Blum, W.J. and H. Kalven (1963), The Uneasy Case for Progressive
Taxation.
B.
Incidence of Taxation
1. Concepts of Incidence
M&M, chapter 12.
Musgrave, R.A., The Theory of Public Finance, chapter 10.
2. Theory
M&M, chapter 13.
B&W, chapter 12.
Break, G.F. (1974), in A.S. Blinder, et al, eds., The Economics of
Public Finance, 122- 179.
A&S, lectures 6,7.
Mieszkowski, P.M. (1967), "On the Theory of Tax Incidence," Journal
of Political Economy, 75, 250-262.
Mclure, C.E. (1975), "General Equilibrium Incidence Analysis: The
Harberger Model After Ten Years," Journal of Public Economics, 4,
125-161.
Harberger, A.C. (1962), "The Incidence of the Corporation Income
Tax," Journal of Political Economy, 70, 215-240.
Mieszkowski, P.M. (1972), "The Property Tax: An Excise or a
Profits Tax?" Journal of Public Economics, 1, 73- 96.
Mclure, C.E. (1977), "The New View of the Property Tax: A Caveat,"
National Tax Journal, 30, 69-76.
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C.
Excess Burden of Taxation
M&M, chapter 14.
B&W, chapter 9.
Break, G.F. (1974), in A.S. Blinder, et al, eds., The Economics of
Public Finance, 221-230.
Harberger, A.C. (1971), "Three Basic Postulates for Applied Welfare
Analysis," Journal of Economic Literature, 9, 785-797.
, (1964), "Taxation, Resource Allocation, and Welfare," in The
-=R-o~l-e of Direct and Indirect Taxes in the Federal Reserve System~S-70
___ , (1964), "The Measurement of Waste," Papers and Proceedings of
the American Economic Association, 54, 58-76.
Silberberg, E. (1972), "Duality and the Many Consumer's Surpluses,"
American Economic Review, 62, 942-952.
Richter, D.K. ( 1977), "Games Pythagoreans Play," Public Finance
Quarterly, 5, 495-515.
Willig, R.D. (1976), "Consumer ' s Surplus Without Apology," American
Economic Review, 66, 589-597.
McKenzie, G.W. and I . F. Pearce (1982), "Welfare Measurement--A Synthesis," American Economic Review, 72, 669-682.
Morey, E. R. ( 1984) , "Confuser Surplus," American Economic Review, 74,
163-173.
D.
Effects of Taxation on Individual and Firm Choices
B&W, chapter 11 •
Break, G.W. (1974), in A.S. Blinder, et~, eds., The Economics of
Public Finance, 179-221.
1. Labor Supply
A&S, lecture 2 .
Hausman, J.A. (1981), "Labor Supply," in H.J. Aaron and J . A. Pechman
eds., How Taxes Affect Economic Behavior.
2. Saving
A&S, lecture 3.
Summers, L. H. (1982), "Tax Policy, The Rate of Return, and Savings,"
NBER Working Paper No. 995.
3. Portfolio Choice
A&S, lecture 4.
4. Firm Investment and Financial Structure
A&S, lecture 5.
Auerbach, A.A. (1983), "Taxation, Corporate Financial Policy, and
the Cost of Capital," Journal of Economic Literature, 21, 905-40.
Stiglitz, J . E. (1976), "The Corporation Tax," Journal of Public
Economics, 5, 303-311.
E.
Tax Evasion and Avoidance
Allingham, M.G. and A. Sandmo, "Income Tax Evasion : A Theoretical
Analysis," Journal of Public Economics, 1, 323-338.
Sisson, C.A. (1981), "Tax Evasion: A Survey of Major Determinants and
Policy Instruments of Control," Int'l Monetary Fund Working Paper.
Clotfelter, C.T. (1983), "Tax Evasion and Tax Rates: An Analysis of
Individual Tax Returns," Review of Economics and Statistics, 65,
363-37 3.
F.
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Choice of the Optimal Tax Structure
Sandmo, A. ( 197 6) , "Optimal Tax at ion: An Introduction to the Literature," Journal of Public Economics, 6, 37-54.
Bradford, D.F. and H.S. Rosen (1976), "The Optimal Taxation of Commodities and Income," American Economic Review, Papers and Proceedings,
66, 94-101.
Baskin, M.J . (1980), "Factor Supply and the Relationships Between the
Choice of Tax Base, Tax Rates, and the Unit of Account in the Design
of an Optimal Tax System," in H.J. Aaron and M. J. Baskin, eds., The
Economics of Taxation.
1. Optimal Commodity of Taxation
Diamond, P.A. and J.A. Mirilees (1971), "Optimal Taxation and Public
Production," American Economic Review, 61, 8-27 and 261-278.
A&S, lecture 12.
2. Optimal Income Taxation
Atkinson, A. B. (1973), "How Progressive Should the Income Tax Be?"
in M. Parkin and A.R. Nobay, eds., Essays in Modern Economics.
A&S, lecture 13.
3. Optimal Tax Mix
Atkinson, A. B. and J.E. Stiglitz ( 1976), "The Design of Tax
Structure: Direct Versus Indirect Taxation," Journal of Public
Economics, 6, 55-76.
A&S, lecture 14.
III.
The United States Tax Structure
M&M, Chapter 15 .
B&W, chapter 13.
A.
Individual Income Tax
M&M, chapters 16,17.
Pechman, chapter 4.
1. Definition of the Base
Goode, R. (1977), "The Economic Definition of Income," in
J.A. Pechman, ed., Comprehensive Income Taxation.
, R. (1976), The Individual Income Tax, Chapters 2,5,6,7,9.
Due, J. F. ( 1977) , "Per son al Deduct ions," in J. A. Pechman, ed. ,
Comprehensive Income Taxation.
2. Effect on Labor Supply
3. Effect on Saving
4. Effect on Portfolio Choice
5. Tax Preference and Expenditures
Clotfelter, C.T. and C.E. Steurle (1981), "Charitable Contributions,"
in H. J. Aaron and J.A. Pechman, How Taxes Affect Economic Behavior.
Woodbury, S .A. ( 1983), "Substitution Between Wage and Nonwage
Benefits," American Economic Review, 73, 166-182.
Long, J . E. and FA. Scott, Jr. (1984), "The Impact of the 1981 Tax Act
on Fringe Benefits and Federal Tax Revenues," National Tax Journal,
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37, 185-194.
6. Inflation and the Individual Income Tax
Aaron, H.J . (1976), ed., Inflation and the Income Tax.
Goode, R. (1976), The Individual Income Tax, 8.
Wetzler, J.W. (1977), "Capital Gains and Losses," in J.A. Pechman,
ed . , Comprehensive Income Taxation .
Feldstein, M.F. {1983T Capital Income Taxation.
Congressional Budget Office t1~SO), "Indexing the Individual Income
Tax for Inflation."
Zubrow, R.A. and J. Alm (1984), "Who Benefits from Indexation?"
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7. Revenue Elasticity of the Individual Income Tax
Pechman, J.A. (1973) "Responsiveness of the Federal Individual Income
Tax to Changes in Income," Brookings Papers on Economics Activity,
2, 385-413.
B.
Payroll Tax
M&M, chapter 23.
Pechman, chapter 7.
B&W, chapter 14.
Feldstein, M.F. (1974), Social Security, Induced Retirement, and
Aggregate Capital Accumulation," Journal of Political Economy, 82,
905-926.
Leimer, D.R. and S.D. Lesnoy (1982), "Social Security and Private
Saving: New Time-series Evidence," Journal of Political Economy, 90,
606-629.
C.
Corporation Income Tax
M&M, chapter 18,19.
Pechman, chapter 5.
Krzyniak, M. and R.A. Musgrave (1964), The Shifting of the Corporation
Income Tax.
Gordon, R.J. ( 1967) , "The Incidence of the Corporation Income Tax in
U.S. Manufacturing, 1925-1968," American Economic Review, 57,
731-758.
Cragg, J.C., A.C. Harberger, and P.M. Mieszkowski (1967), "Empirical
Evidence on the Incidence of the Corporation Income Tax," Journal of
Political Economy, 75, 811-821.
Feldstein, M.F. (1983), Capital Income Taxation.
Gravelle, J.G. (1982), "Effects of the 1981 Depreciation Revisions on
the Taxation of Income from Business Capital," National Tax Journal,
35, 1-20.
Feldstein, M.F. ( 1981), "Adjusting Depreciation in an Inflationary
Economy: Indexing versus Acceleration," National Tax Journal, 34,
29-43.
Hulten, C.R. and F.C. Wykoff (1981), "Economic Depreciation and
Accelerated Depreciation: An Evaluation of the Conable-Jones 10-5-3
Proposal," National Tax Journal, 34, 45-60.
Feldstein, M.F. and L. Summers (1979), "Inflation and the Taxation of
Income in the Corporate Sector," National Tax Journal, 32, 445-470.
D.
Sales and Excise Taxes
M&M, chapter 20.
Pechman, chapter 6.
E.
Property, Estate, and Gift Taxes
M&M, chapters 21,22.
Pechman, chapter 8.
F.
Debt Finance
M&M, chapter 33.
Barro, R.J. (1974), "Are Government Bonds Net Wealth?"
Political Economr, 82, 1095-1117.
Buchanan, J.M. (1958 , Public Principles of Public Debt.
G.
Journal of
Incidence of the Tax System
M&M, chapter 12.
Pechman, J.A. and B.A. Okner (1974), Who Bears the Tax Burden?
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IV.
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Tax Reform
Feldstein, M.F. ( 1976), "On the Theory of Tax Reform, Journal of Public
Economics, 6, 77-104.
United State Department of the Treasury (1977), Blueprints for Basic Tax
Reform.
Goode, R. (1980), "The Superiority of the Income Tax," in J .A. Pechman, ed.,
What Should Be Taxed: Income or Expenditure?
Bradford, D.F. (1980), "The Case for a Personal Consumption Tax," in J.A.
Pechman, ed . , What Should Be Taxed: Income or Expenditure?
Andrews, W.D. (1980), "A Supplemental Personal Expenditure Tax," in J.A.
Pechman, ed., What Should Be Taxed: Income or Expenditure?
Alm, J. (1984), "Tax Reform and the Value Added Tax," Harvard Journal of Law
and Public Policy.
Hall, R.E. and A. Rabushka (1983), Low Tax, Simple Tax, Flat Tax.
Walken, C.E. and M.A . Bloomfield (1983), New Directions in Federal Tax
Policy for the 1980s.
Congressional Budget Office (1983), "Revising the Individual Income Tax.
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V.
Numerical Methods in Tax Analysis
Shoven, J .8. (1983), "Applied General Equilibrium Tax Modeling, IMF Staff
Papers, 30, 394-420.
Scarf, H.E. and J. B. Shoven (1984), Applied General Equilibrium Analysis.
Shoven, J.B. and J . Whalley ( 1972), "A General Equilibrium Cal cul at ion of
the Effects of Differential Taxation of Income from Capital in the U.S., 11
Journal of Public Economics, 1, 281-321.
Fullerton, D.A., T. King, J.B. Shoven, and J. Whalley (1981), "Corporate Tax
Integration in the United States: A General Equilibrium Approach,"
American Economic Review, 71, 677-691 .
Fullerton, D.A. (1982), "On the Possibility of an Inverse Relationship
Between Tax Rates and Government Revenues," Journal of Public Economics,
19, 3-22 .
Ballard, C.L., J.B. Shoven, and J. Whalley (1982), "The Welfare Cost of
Distortions in the United States Tax System: A General Equilibrium
Approach," NBER Working Paper No. 1043.
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