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University of Wisconsin–Madison, Department of Economics
Economics 741: Public Finance and Fiscal Policy
Office: 7454 Social Science Professor Scholz
E-mail: firstname.lastname@example.org Fall 2011-12
Office Hours: 12:30-2:00pm Mondays or by appointment
Economics 741 examines the literature in several applied, empirical areas of public economics, focusing particularly on tax and expenditure policy. The purpose of this course is to gain an understanding of the literature and to develop insight into current research issues in the field. The reading list is too long to be covered in this course. It is provided to give some of the important citations in the areas I will cover. Pay very close attention to papers marked ** and read papers marked with *. The prerequisites for the course are Economics 711 and 713 and a graduate level course in econometrics.
Papers and Texts:
There is no required textbook for the course. Some useful textbooks in public economics are given at the beginning of this reading list. Gruber has written a nice undergraduate public economics text, which you should read sometime if you are doing public economics as your major field.
Monday and Wednesday, 11:00-12:15, Social Science 6101. If I am able to travel with my sore leg, I will reschedule the Monday, October 17 lecture. I will try not to reschedule other classes though things may come up that force me to. I apologize for the inconvenience. I will make up all rescheduled lectures at a mutually convenient time.
I will assign three (or so) problem sets that will be collected and (lightly) graded. You should feel free to work together on these, but you must turn in your own work. The problem sets will sometimes make use of the statistical packages Stata or Gauss, available for classroom and research use in the social science computer center. If you have not yet done so, please become familiar with the computer center on the third floor of social science and get whatever authorization you need to use their machines.
You will write a term paper for the course on a mutually agreeable public economics topic. Grades will be based on a combination of problem sets (40 percent), the term paper (50 percent), and class participation (10 percent).
Course Web Site:
I will post course material at http://www.ssc.wisc.edu/~scholz/Teaching_742/741syl_2011.pdf
For students in the public economics field, a field paper is due August, 2012. If you are writing a field paper in Public, start talking to me about it or Professors Wolfe, Taber, or Walker sometime this semester. Professors Taber and Walker will conduct an informal public / applied econometrics reading group in the Spring which will be required for students doing the public field.
A blurb about the Economics Department grievance procedure is on the last page of the syllabus.
Journal Abbreviations for the Syllabus
AER American Economic Review BPEA Brookings Papers on Economic Activity
Econ Econometrica JEL Journal of Economic Literature
JEP Journal of Economic Perspectives JHR Journal of Human Resources
JPE Journal of Political Economy JPubE Journal of Public Economics
NTJ National Tax Journal QJE Quarterly Journal of Economics
Useful General References
Atkinson, A. and J. Stiglitz, Lectures in Public Economics, New York: McGraw Hill, 1980
Auerbach, A. and M. Feldstein, Handbook of Public Economics, Volumes 1-4, Amsterdam: North Holland, 1985, 1987, 2002, and 2002
Gruber, Jonathan. Public Finance and Public Policy,1st edition, Worth Publishers, 2005 (unusually good undergraduate text)
Hindriks, Jean and Gareth D. Myles, Intermediate Public Economics, MIT Press, 2006
Kaplow, Louis, The Theory of Taxation and Public Economics, Princeton University Press, 2008
Laffont, J.J., Fundamentals of Public Economics, Cambridge, MA: MIT Press, 1988
Myles, G. Public Economics, Cambridge: Cambridge University Press, 1995
Salanie, B., The Economics of Taxation, Cambridge, MIT Press, 2003
Sheshinski, Eytan, The Economic Theory of Annuities, Princeton University Press, 2008
Tresch, Richard. Public Finance: A Normative Theory. Academic Press, 2002
Useful Advice to Economists (read on your own)
McCloskey, Donald, "Economical Writing," Economic Inquiry, April, 1985, 187-222
Hamermesh, Daniel S., "The Young Economist's Guide to Professional Etiquette," JEP, Winter, 1992, 169-179
Thomson, William, A Guide for the Young Economist, MIT Press, 2001
I. Tax and Expenditure Incidence
* R. Chetty, A. Looney, and K. Kroft. “Salience and Taxation: Theory and Evidence,” AER 99(4): 1145-1177, 2009.
* 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.
* Cutler, David, “Tax Reform and the Stock Market: An Asset Price Approach,” AER, December, 1988, 1107-1117
* L. Linden and J. Rockoff, “There Goes the Neighborhood? Estimates of the Impact of Crime Risk on Property Values from Megan's Laws,” AER, 98(3): 1103-1127, 2008.
* L. Summers, “Some Simple Economics of Mandated Benefits,” American Economic Review, 79(2), May 1989, 177-183.
* J. Gruber, “The Incidence of Mandated Maternity Benefits,” AER, 84(3), June 1994, 622-641.
Friedman, John N., “The Incidence of the Medicare Prescription Drug Benefit: Using Asset Prices to Assess its Impact on Drug Makers,” mimeo, January, 2009
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
C. Ruhm, “The Economic Consequences Of Parental Leave Mandates: Lessons From Europe,” Quarterly Journal of Economics 113(1): 285-317, 1998.
A. Atkinson and J. Stiglitz. Lectures on Public Economics, New York: McGraw Hill, 1980. Chapter 6.
L. Kotlikoff and L. Summers. “Tax Incidence,” in A. Auerbach and M. Feldstein, Volume 2, 1043-1092. Particularly: Sections 0, 1, 2, 3.1, and 4.4.
J. Poterba. “Lifetime Incidence and the Distributional Burden of Excise Taxes,” AER, 79(2), May 1989, 325-330.
B. Salanie. The Economics of Taxation, Cambridge: MIT Press, 2003, Chapter 1.
J. Adda and F. Cornaglia. “Taxes, Cigarette Consumption and Smoking Intensity,” AER, 96(4): 1013—1028, 2006.
T. Besley and H. Rosen. “Sales Taxes and Prices: An Empirical Analysis,” NTJ 52, (1999).
J. Doyle and K. Samphantharak. “$2.00 Gas! Studying the Effects of a Gas Tax Moratorium,” Journal of Public Economics, April 2008.
J. Gruber and B. Koszegi. “Tax Incidence when Individuals are Time-Inconsistent: The Case of Cigarette Excise TaxesAbstract:
One of the most cogent criticisms of excise taxes is their regressivity, with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups. We argue that traditional quantity-based measures of incidence are only appropriate under a very restrictive ‘‘time-consistent’’ model of consumption of sin goods. A model that is much more consistent with existing evidence on smoking decisions is a time-inconsistent formulation where excise taxes on cigarettes serve a self-control function that is valued by smokers who would like to quit but cannot. This self-control function benefits lower income groups more, since they have a significantly higher price sensitivity of smoking. Calibrations show that, as a result, cigarette taxes are much less regressive than previously assumed, and are even progressive for a wide variety of parameter values.,” Journal of Public Economics (2004), 88(9-10), 1959-1987.
A. Auerbach, “Who Bears the Corporate Tax? A Review of What We Know,” NBER Working Paper No. 11686, October 2005.
P. Diamond. “Tax Incidence in a Two-Good Model,” Journal of Public Economics, 9(3), June 1978, 283-299.
D. Feenberg, A. Mitrusi, and J. Poterba. “Distributional Effects of Adopting a National Retail Sales Tax,” in J. Poterba, ed., Tax Policy and the Economy, Volume 11, 49-89, Cambridge, MA: MIT Press, 1997.
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, Volume 2, Sections 2.2.1-2.2.3 and 2.3.
J. Pechman. Who Paid the Taxes, 1967-85, Washington, D.C.: The Brookings Institution, 1986, Chapters 1, 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.
Gravelle, Jane and Laurence Kotlikoff, "The Incidence and Efficiency Costs of Corporate Taxation when Corporate and Noncorporate Firms Produce the Same Goods," JPE, 1989
Joint Committee on Taxation, "Methodology and Issues in Measuring Changes in the Distribution of Tax Burdens," Joint Committee Print, June 14, 1993
Gruber, Jonathan and Alan Krueger, "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," Tax Policy and the Economy, D. Bradford (ed.), NBER and MIT Press, 1991, 111-143
II. A Brief (once over lightly) discussion of Efficiency and Optimal Taxation
* Diamond, Peter and Emmanuel Saez, “The Case for a Progressive Tax: From Basic Research to Policy Recommendations,” Journal of Economic Perspectives, forthcoming
* Bernheim, B. Douglas, “Emmanuel Saez: 2009 John Bates Clark Medalist,” Journal of Economic Perspectives, Summer, 2010
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.
Kaplow, Louis, “Taxation,” Handbook of Law and Economics, Vol. 1, A.M. Polinsky and S. Shavell (eds.), 2007, 647-755
Auerbach, Alan J. and James R. Hines, “Taxation and Economic Efficiency,” Handbook of Public Economics, Vol. 3, 1347-1421
Ballard, Charles, Donald Fullerton, John Shoven and John Whalley, General Equilibrium Analysis of U.S. Tax Policies, Chicago: University of Chicago Press, 1985
McLure, Charles, "General Equilibrium Incidence Analysis: The Harberger Model After Ten Years," JPubE, February, 1975
Shoven, John and John Whalley, "Applied General Equilibrium Models of Taxation and International Trade," JEL, September, 1984
Whalley, John, "Lessons From General Equilibrium Models," in Uneasy Compromise: Problems of a Hybrid Income-Consumption Tax, H. Aaron, H. Galper, J. Pechman (eds.), The Brookings Institution, 1990
Parry, Ian W. H. and Kenneth A. Small, “Does Britain or the United States Have the Right Gasoline Tax?” American Economic Review, September, 2005, 1276-1289
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.
R. Chetty, “Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods,” Annual Review of Economics 1: 451-488, 2009.
P. Diamond and D. McFadden, “Some Uses of the Expenditure Function in Public Finance,” Journal of Public Economics 3 (1974), 3-21.
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.
J. Hines, “Three Sides of Harberger Triangles,” Journal of Economic Perspectives, 13(2), Spring 1999, 167-188.
J. Slemrod, “Optimal Taxation and Optimal Tax Systems,” Journal of Economic Perspectives, 4(1), Winter 1990, 157-178.
D. Albouy, “The Unequal Geographic Burden of Federal Taxation,” JPE, 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.
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.
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.
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.
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, 2003, Chapter 4.
M. Golosov, A. Tsyvinski, and I. Werning “New Dynamic Public Finance: a User’s Guide,” NBER Macro Annual 2006
C. Chamley, “Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives,” Econometrica, 54 (1986), 607-622.
E. Farhi and I. Werning, “Inequality, Social Discounting and Estate Taxation” Journal of Political Economy 115: 365-402, 2007.
M. Feldstein, “The Welfare Cost of Capital Income Taxation,” Journal of Political Economy 86 (1978), 329-52.
K. Judd, “Redistributive Taxation in a Simple Perfect Foresight Model,” Journal of Public Economics 28 (1985), 59-83.
N. Kocherlakota, “Zero Expected Wealth Taxes: A Mirrlees Approach to Dynamic Optimal Taxation,” Econometrica 73, 2005.
III. Behavioral Effects of Taxation: Tax Rates and Taxable Income
** Saez, Emmanuel, Joel Slemrod and Seth Giertz, "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," JEL, forthcoming
* Feldstein, Martin, "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform," JPE, June 1995, 551-572
* Gruber, Jonathan and Emmanuel Saez, “The Elasticity of Taxable Income: Evidence and Implications,” JPubE, April 2002
* M. Bianchi, B. Gudmundsson, and G. Zoega, “Iceland’s Natural Experiment in Supply-Side Economics,” AER, 91, December 2001, 1564-1579
* Emmanuel Saez and Michael R. Veall, “The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence,” AER, June 2005, 95(3), 831-849
Goolsbee, Austan, “What Happens When You Tax the Rich? Evidence From Executive Compensation,” JPE, April 2000, 352-78
Slemrod, Joel, “Methodological Issues in Measuring and Interpreting Taxable Income Elasticities,” NTJ, December, 1998, 773-88