Download ECON 621-001 Public Finance

'·
James Alm
Office: 112 Economi cs
Phone: 492-8291
Office Hours: 12:30 - 2:00 pm,
or by appointment
PUBLIC FINANCE
ECONOMICS 621
Fall 1985
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 ta xation, and the application
of general principles 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. The paper
is due no later than December 1.
There will also be student presentations and biweekly assi gnments . I encourage you to
work with other students on the assignments . Although the assignments will not be
collected and graded, questions from them will appear on the exams.
Textbooks
There are three required textbooks:
Anthony B. Atkinson and Joseph E. Stiglitz, Lectures in Public Eco.nomics
(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) .
Also reconmended is:
Richard A. Musgrave and Peggy B. Musgrave, Public Finance in Theory and
Practice, Fourth Edition (New York: McGraw-Hill Book Company, 1984) .
Articles will be avilable at Kinko's.
Course Outline
I. Welfare Economics and the Need for Government
II. Principles of Taxation
A. Ethics of Taxation
B. Incidence of Taxation
c. Excess Burden of Taxation
D. Choice of the Optimal Tax Structure
III.
IV.
The United States Tax System
A. Individual Income Tax
B. Payro 11 Tax
C. Corporation Income Tax
D. Sales and Excise Taxes
E. Property, Estate, and Gift Taxes
F. Debt Finance
G. Incidence of the Tax System
Numerical Methods in Tax Analysis
2
Reading List
I. 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 .
II.
Principles of Taxation:
A. Ethics of Taxation
M&M, cha~ters 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.
8. 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.
..
r
C.
D.
3
Excess Burden of Taxation
M&~. chapter 14.
B&W, chapter 9.
Break, G.F . (1974), in A.S. Blinder, et!}_, 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~5-70
- ~ - ' (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, 49~-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.
Choice of the Optimal Tax Structure
Sandmo, A. {1976), "Optimal Taxation : 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.
.
Boskin, M.J . (1980), "Factor Supply and the Relationships Between the
Choice of Tax Base, Tax Rates, and the Unit of Account in the Des ign
of an Optimal Tax System," in H.J. Aaron and M.J. Boskin, eds., The
Economics of Taxation.
~
Diamond, P.A. and J.A. Mirilees (1971), "O pt imal Taxation and Public
Production," American Economic Review, 61, 8-27 and 261-278.
Atkinson, A.B. {1973), "How Progressive Should the Income Tax Be?" in
M. Parkin and A.R. Nobay, eds., Essays in Modern Economics.
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, lectures 12-14.
III.
The United States Tax Structure
A. Individual Income Tax
1. Introduction
M&M, Chapter 16, 17.
Pechman, Chapter 4.
2. Definition of the Base
Goode, R. (1977), "The Economic Definition of Income," in J.A.
Pechman, ed., Comprehensive Income Taxation.
(1976), The Individual Income Tax, chapters
2,5,6,7,9.
Due, J.F. (1977), "Personal Deductions," in J.A. Pechman, ed.,
Comprehensive Income Taxation.
4
3.
Effects on Labor Supp1y
A&S, lecture 2.
Hausman, J.A. (1981), "Labor Supply," in H. J. Aaron and J.A.
Pechman, eds., How Taxes Affect Economic Behavior.
Bosworth, B.P. (1984), Tax Incentives and Economic Growth,
chapter 5.
4.
Effects on Saving
A&S, 1ecture 3.
Bosworth, B. P. (1984), Tax Incentives and Economic Growth,
chapter 3.
5.
Effects on Portfolio Choice
A&S, lecture 4.
6.
Tax Preferences and Expenditures
a. Charitab1e Contributions
Feldstein, M.F. (1975), "The Income Tax and Charitable
Contributions: Part !-~Aggregate and Distributional Effects,"
National Tax Journal, 28, 81-100.
Clotfelter, C.T. and C.E. Steurle (1981), "Charitab1e
Contributions," in H.J. Aaron and J.A. Pechman, eds., How Taxes
Affect Economic Behavior.
b. Fringe Benefits
Wooodbury, S.A. (1983), "Substi t ution Between Wage and Nonwage
Benefits," American Economic Review, 73, 166-182.
Long, J.E. and F.A. Scott (1984), "The Impact of the 1981 Tax
Act on Fringe Benefits and Federal Tax Revenues," Nationa1 Tax
Journal , 37, 185-194.
c. Housing
Hendershott, P. (1980), "Real User Costs and the Demand for
Sing1e-Family Housing," Brookings Papers on Economic Activity,
No. 2, 401-444.
Follain, James R., Jr. (1982), "Does Inf1ation Affect Real
Behavior: The Case of Housing," Southern Economic Journal, 48,
570-582.
d. We1fare Cost
Browning, J.M . (1979), "Estimating the Welfare Cost of Tax
Preferences," Public Finance Quarterly, 7, 199-219~
7.
Tax Evasion and Avoidance
A11ingham, M.G.· and A. Sandmo (1972), "Income Tax Evasion: A
Theoretica1 Ana1ysis," Journal of Pub1ic Economics 1, 323-338.
Clotfelter, C.T. (1983), "Tax Evasion and Tax Rates: An Ana1ysis of
Individua1 Tax Returns," Review of Economics and Statistics, 65,
363-373.
Slemrod, J. and N. Sorum (1984), "The Comp1iance Cost of the U.S.
Individua1 Income Tax System," National Tax Journal, 37, 461-474 .
5
8.
Inflation and the Individual Income Tax
Aaron, H.J. (1976), ed., Inflation and the Income Tax .
Goode, R. (1976), The Individual Income Tax, chapter 8.
Wetzler, J.W. (1977), "Capital Gains and Losses," in J.A. Pechman,
ed., Comprehensive Income Taxation.
Feldstein, M. F. (1983), Capital Income Taxation.
Congressional Budget Office (1980), "Indexing the Individual Income
Tax for Inflation."
Zubrow, R.A. and J. Alm (1984), "Who Benefits from Indexation?"
9.
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.
8.
Payroll Tax
M&M, chapter 23.
Pechman, chapter 7.
B&W, chapter 14.
Samuelson, P.A. (1959), "An Exact Consumption-loan Model of Interest with or
without the Social Contrivance of Money," Journal of Political Economy, 66,
467-482.
Feldstein, M.F . (1974), Social Security, Induced Retirement, and Aggregate
905-926 .
Capital Accumulation," Journal of Political Economy, 82,
Leimer, D.R. and S.D. Lesnoy (1982), "Social Security and Private Saving :
New Time-series Evidence," Journal of Political Economy, 90,
606-629.
Pechman, J.A. (1983), Economic Effects of Social Security .
C.
Corporation Income Tax
M&M, chapters 18,19 .
Pechman, chapter 5.
Congressional Budget Office (1985), "Revising the Corporate Income Tax."
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.
731-758.
Manufacturing , 1925-1968, 11 American Economic Review, 57,
Cragg, J . C., A. C. Harberger , and P.M. Mieszkowski (1967), "Empirical
Evidence on the Incidence of the Corporation Income Tax, 11 Journal of
Political Economy, 75, 811-821.
Feldstein, M.F. (1983), Capital Income Taxation.
Gravell~, J.G. (1982)~ "Effects of the 1981 Depreciation Revisions on the
Taxation of Income from Business Capital," National Tax Journal, 35, 1-20.
Hulten, C.R. and F.C. Wykoff (1981), "Economic Depreciation and Accelerated
Depreciation: An Evaluation of the Conable-Jones 10-5-3 Proposal , 11 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 .
Auerbach, A.A. (1983), "Taxation, Corporate Financial Policy, and the Cost of
Capital," Journal of Economic Literature, 21, 905-940.
D.
Sales and Excise Taxes
M&M, chapter 20 .
Pechman, chapter 6.
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?" Journal of
Political Economy, 82, 1095-1117 .
Buchanan, J.M. (1958), Public Principles of Public Debt.
G.
Incidence of the Tax System
M&M, chapter 12.
Pechman, J.A. and B.A. Okner (1974), Who Bears the Tax Burden?
IV.
Numerical Methods in Tax Analysis
Shoven, J.B. (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 Calculation of
the Effects of Differential Taxation of Income from Capital in the U.S.,"
Journal of Public Economics, 1, 281-321.
Fullerton, D.A., T. King, J.B. Shaven, 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 (1985), "The Welfare Cost of
the United States Tax System: A General Equilibrium
Approach,° National Tax Journal, 38, 125-140.