Econ 208 Marek Kapicka Lecture 10 Taxation

Midterm 9:30-10:45, be here at 9:25

Taxing “Idle Rich”? 04/18/the-man-who-cant-be-taxed/ 04/18/the-man-who-cant-be-taxed/

4) The Effect on GDP Christina Romer/ David Romer Classify all tax changes into Endogenous tax changes: Spending driven tax changes Recession driven tax changes Exogenous tax changes Belief motivated tax cuts Deficit driven tax increases Only exogenous tax changes will identify the effect on GDP

A timeline of tax changes

Exogenous tax changes

Endogenous tax changes

A response to a tax increase of 1% of GDP

Where are we? Introduction: A model with no Government The Effects of Government Spending Government Taxation and Government Debt Labor Taxation Taxation and Redistribution

Fiscal policy may aim to change income or consumption inequality Will have an example when It is optimal to reduce income inequality even if A (distorting) flat tax is used There are costs in terms of production

An example: 2 productivity levels Two types of people: Low productivity: wages w L High productivity: wages w H >w L ½ of population is of low productivity, ½ is of high productivity Utility:

Taxes High productivity people are taxed at rate t Low productivity people get a transfer v

Low productivity people Subject to Solution

High productivity people Subject to Solution

Government Budget constraint: Express utility as a function of t only: where k=w H /w L >1

Welfare and Production Assume that the society’s welfare is given by Big and controversial assumption! We have

Welfare and Production Welfare is maximized at Production is decreasing in t:

Conclusions There is a trade-off between efficiency and redistribution What matters: How the government weights the utility of different individuals Distribution of skills in the population