PUBLIC ECONOMICS AND FINANCE:
THE ECONOMICS OF TAXATION
CEU, Economics Department
Course: 2 credits
The course analyzes the effect of taxation
on the economy: partial and general equilibrium tax incidence, optimal
corrective and income taxation, taxes and labor supply, taxation and savings, taxation and firm behavior, and a comparison
of theoretical versus actual tax codes. Its approach mixes theories (like optimal income tax schemes) and empirical assessments
(like estimates of the elasticity of reported taxable income to marginal tax rates); and there is emphasis both on normative (like
optimal policies) and positive (like revenue implications of tax changes) aspects of public economics. It draws heavily on
formal models and methods, particularly from microeconomics and econometrics.
Core and additional textbooks:
A. Atkinson and J. Stiglitz, Lectures
in Public Economics (New York,
McGraw Hill, 1980)
G. Myles, Public Economics (New York: Cambridge University Press, 1995)
J. Laffont, Fundamentals of Public Economics (Cambridge: MIT Press, 1988)
A. Auerbach and M. Feldstein, Handbook of Public Economics, Volumes 1 & 2
(Amsterdam: North Holland, 1985 and 1987)
B. Salanié: The Economics of Taxation (London, MIT Press, 2003)
I. The incidence of taxation (2.5 lectures)
General Budget of the European Union
for the Financial Year 2005, The figures, European
Atkinson-Stiglitz chapter 6
M. Feldstein and C. Horioka: Domestic Savings and International Capital Flows, Economic
Journal 90 (1980), 314-329.
D. Cutler: Tax Reform and the Stock Market: An Asset Price Approach, American Economic
Review 78 (1988), 1107-1117.
L. Summers: The Asset Price Approach to the Analysis of Capital Income Taxation,
Proceedings of the National Tax Association (1983), 112-120.
J. Poterba: Tax Subsidies to Owner-Occupied Housing: An Asset Market Approach,
Quarterly Journal of Economics 99 (1984), 729-752.
A. Auerbach and L. Kotlikoff: Dynamic Fiscal Policy (Cambridge: Cambridge University
II. Commodity taxation (2 lectures)
J. Hausman: Exact Consumer Surplus and
Deadweight Loss, American Economic Review 81
Atkinson-Stiglitz chapter 12
Myles chapter 4
E. Ahmand and N. Stern: The Theory of Reform and Indian Indirect Taxes, Journal of
Public Economics 25 (1984), 259-298.
R. Barro: On the Determination of the Public Debt, Journal of Political Economy 87 (1979),
D. Niepelt: Tax Smoothing versus Tax Shifting, Review of Economic Dynamics 7 (2004),
C. Hevia and J. P. Nicolini: Optimal Devaluations, University of Chicago, mimeo (2003)
(Available at http://repec.org/esLATM04/up.11051.1084582208.pdf)
III. Corrective Taxation (1 lecture)
Laffont chapter 1
Myles chapter 10
P. Diamond: Consumption Externalities and Imperfect Corrective Pricing, Bell Journal of
Economics 4 (1973), 526-538.
M. Weitzman: Prices vs. Quantities, Review of Economic Studies 41 (1974)
fP. Diamond and J. Hausman: Contingent Valuation: Is Some Number Better than No Number?,
Journal of Economic Perspectives 8 (Fall 1994), 45-64.
IV. Taxation of Labor Income (3 lectures)
Myles chapter 5, 7
Atkinson-Stiglitz chapter 13
P. Diamond: Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal
Marginal Tax Rates, American Economic Review 88 (1998), 83-95.
G. Akerlof: The Economics of Tagging as Applied to the Optimal Income Tax, American
Economic Review 68 (1978), 8-19.
J. Stiglitz: Pareto Efficient and Optimal Taxation and the New Welfare Economics, in Handbook
J. Hausman: Taxes and Labor Supply, in Handbook Volume 1.
T. Macurdy: Work Disincentive Effects of Taxes: A Reexamination of Some Evidence,
American Economic Review 80 (1992), 243-249.
T. Mroz: The Sensitivity of an Empirical Model of Married Women's Hours of Work to
Economic and Statistical Assumptions, Econometrica 55 (1987), 765-800.
N. Eissa: Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a
Natural Experiment, NBER Working Paper 5023, 1995.
A. Goolsbee: What Happens When You Tax the Rich? Evidence from Executive Compensation,
American Economic Review 108 (2000), 352-378.
A. Bovenberg, J. Graafland and R. de Mooij: Tax Reform and the Dutch Labour Market: An
Applied General Equilibrium Approach", Journal of Public Economics 78 (2000), 193-214.
M. Feldstein: The Effects of Marginal Tax Rates on Taxable Income: A Panel Study
of the 1986 Tax Reform, Journal of Political Economy 103 (1995), 551-571.
M. Feldstein and D. Feenberg: The Effect of Increased Tax Rates on Taxable Income and
Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases. NBER
Working Paper 5370, published in Tax Policy and the Economy, Volume 10, edited by James
Poterba MIT Press, 1996, pp. 89-118.
G. Auten, and R. Carroll: The effect of income taxes on household income. Review of
Economics and Statistics 81 (1999), pp. 681-693.
M. Mercader-Prats: On the Distributive and Incentive Effects of the Spanish Income Tax:
A Comparison of 1980 and 1994, European Economic Review 41 (1997), 609-617.
V. Taxation and Savings (1.5 lectures)
Atkinson-Stiglitz chapters 3,4
Myles chapter 7
M. Feldstein: The Welfare Cost of Capital Income Taxation, Journal of Political Economy 86
R. Lucas: Supply-Side Economics. An Analytical Review, Oxford Economic Papers 42 (1990),
R. Hall: Intertemporal Substitution in Consumption, Journal of Political Economy 96
L. Summers: Capital Taxation and Accumulation in a Life Cycle Model, American Economic
Review 71 (1981), 533-544.
E. Engen, W. Gale and J. Scholz: Do Saving Incentives Work? Brookings Papers on Economic
Activity, 1994:2, 85-180.
J. Poterba, S. Venti and D. Wise: How Retirement Saving Programs Increase Saving,
Journal of Economic Perspectives 10 (1996).
J. Banks, R. Blundell and S. Tanner: Is There a Retirement-Savings Puzzle? American
Economic Review 88 (1998), 769-788.
VI. Taxation and Firm Behavior (1.5 lectures)
R. Caballero: Aggregate Investment, in
Handbook of Macroeconomics, chapter 12
Atkinson-Stiglitz chapters 4,5
Myles chapter 8
A. Auerbach: The Tax Reform Act of 1986 and the Cost of Capital, Journal of Economic
Perspectives 1 (1987), 73-86.
M. Devereux and M. Pearson: European Tax Harmonization and Production Efficiency,
European Economic Review 39 (1995), 1657-1681.
J. Cummins, K. Hassett and R. G. Hubbard: A Reconsideration of Investment Behavior Using
Tax .Reforms as Natural Experiments, Brookings Papers on Economic Activity 1987:2, 141-195.
R. Gordon and B. Malkiel: Corporation Finance, in H. Aaron and J. Pechman, eds., How Taxes
Affect Economic Behavior, Brookings, 1981, 131-198.
M. Miller: Debt and Taxes, Journal of Finance 32 (1977), 261-275.
A. Auerbach: Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric,
Brookings Papers on Economic Activity, 1988:2, 595-631
L. Burman and W. Randolph: Measuring Permanent Responses to Capital Gains Tax
Changes in Panel Data, American Economic Review 84 (1994), 794-809.
VII. Public Economics: Theory and Policy (0.5 lecture)
Atkinson-Stiglitz chapters 10, 18
A. Harberger: The Other Side of Tax Reform, in Dornbusch, ed., : Policymaking in
the Open Economy, 1993.
Grading will be based on problem set assignments
(10-15%) and a final exam (85-90%).