Transcript Soviet Collective Farms

Public Sector Economics
Taxes and Market Distortions – Theory
Main Lessons
• rational foundations of policy distortions
• how policy distortions are a result of “incomplete
markets”
• why labor supply is so important
• tax equivalencies
• wealth vs. substitution effect of a tax
• rigorous definition of deadweight cost
• the “taxable income elasticity”
• measuring marginal tax rates
• public policy needs market analysis
• applications of the results to other economics
fields
Rational Foundations
• Olson’s Logic of Collective Action
– people do not voluntarily and unilaterally pay taxes (in the
amount they are forced to pay) or otherwise contribute to
collective goods, even if they appreciate the way tax
revenues are used, because they rely on others to make the
contribution
– restaurant example
– is this logic correct?
• in large groups?
• how else can tax distortions be explained?
• tax payments vs. user fees
– eg., Feldstein-Samwick on SS “contributions”
– mandatory employee benefits
• voluntary contributions
– what is their motivation? how fast are they “crowded out?”
– might business taxes be more distortionary?
• “excessive” tax compliance, “insufficient” take-up
Soviet Collective Farms
“…the land was no longer
theirs. They could work that
land, but there was no
guarantee that they could
harvest the crop.”
Dolot, Miron (2011)
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Soviet Collective Farms
“the Soviet economy is
proof that, contrary to what
many skeptics had earlier
believed, a socialist
command economy can
function and even thrive.”
Paul Samuelson and
William Nordhaus (1989!)
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Soviet Collective Farms
“[surprised:] Private
allotments of land on the
collective farm often have
much higher, not lower
productivity than the
collectivized sectors.”
Paul Samuelson (1976)
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Rational Foundations (cont’d)
How complete are markets in Public Finance?
• complete enough that:
– profits are zero
– goods (factor) prices equal marginal cost (product)
• not so complete that there are contracts on untaxed
goods (otherwise lump sum taxation is possible)
• not a complete set of policy contingent claims @
• insufficient substitutes for complete markets. eg,
– altruism
– voluntary provision
Labor Tax Conversion Factors
Wealth vs. Substitution Effects
c
dg
dg
0
n
substitution effect
wealth effect
combined effect
Table 5.1. Sliding Scale Exchange Subsidies
as a function of household income for the calendar year
Income as a
ratio to FPL
1
1.33
1.5
2
2.5
3
4
4+
Percentage of income
owed as premium
2%
3%
4%
6.3%
8.05%
9.5%
9.5%
full premium
Discount on out-of-pocket cost
(jumps when crossing thresholds)
80%
80%
57%
10%
0%
0%
0%
0%
Notes on interval
premium percentage is constant on this interval, jumping at 1.33
premium percentage is constant on this interval
premium jumps here because the premium cap is eliminated
Notes: (a) the first column indicates the bottom threshold of the income interval
(b) income percentages change continuously between thresholds unless otherwise noted.
(c) FPL = federal poverty line.
(d) Income percentages for 2015-18, and any year thereafter in which the exchange subsides are less than 0.504% of GDP, are indexed to the excess
of health cost inflation over income growth.
Figure 5.1. 2016 health payments as a function of family income and
policy type
Payments by subsidy-eligible participants, ratio to FPL
1
full price
0.9
family of 4, parents aged 50, actual
0.8
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1
1.5
2
2.5
3
3.5
family income, ratio to FPL
4
4.5
5
Figure 5.1. 2016 health payments as a function of family income and
policy type
Payments by subsidy-eligible participants, ratio to FPL
1
full price
0.9
family of 4, parents aged 50, actual
0.8
family of 4, 28% approx.
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
1
1.5
2
2.5
3
3.5
family income, ratio to FPL
4
4.5
5
Table 5.3. The ACA can erase the reward to work for exchange plan participants
An example of how unemployment can be "free" under the ACA
Scenario for the calendar year
10 months employed
Employed all year
Income sources
Employment
UI (only replaces half)
All sources
10 months
1 month
11 months
12 months
0 months
12 months
Work-related expense bases (number of months where expenses accrue)
IIT
11 months
12 months
Payroll tax
10 months
12 months
Work expense
10 months
12 months
Difference =
consequence of working
12 months rather than 10
2 months
-1 month
1 month
1 month
2 months
2 months
Expense amounts at the margin
IIT (including exchange subsidies) @ 64%
Employee payroll @ 7.65%
Work expense @ 10%
All expenses
0.6 months
0.2 months
0.2 months
1.0 months
Income sources net of work-related expenses
0.0 months
Notes: IIT denotes individual income taxes. UI denotes unemployment insurance benefits. To illustrate simply the economics of a 50
percent UI replacement rate, UI is assumed to fully replace employment income for half of the time unemployed rather than replacing half
of the income all of the time. The marginal rate is 15 percent for normal federal and state taxes, plus 21 percent for EITC phaseout, plus
28 percent loss of exchange subsidies that are based on calendar-year income. UI is taxable by the IIT, but not by the payroll tax.
Nonlinear Budget Constraints
Instances of Nonlinear Taxation
• deductions
• employment-related tax breaks
– tax exempt savings
– health expenditures
– consumption at work, fringes
• tax evasion
• EITC [Earned Income Tax Credit]
• “progressivity”
[continuous and kinked versions]
• “compliance costs”
• effort
Table 3.2. The distribution of marginal penalty amounts among employees not offered coverage
Coverage year 2016. Dollar amounts in 2014 $.
Number of
penalties triggered by the
full-time
marginal employee
possible frequency distributions
employees
number
amount
w/o ACA
w/ ACA
average
< 49
0
0
0.650
0.650
0.650
49
10
$31,630
0.033
0.094
0.063
first
30
are
exempt
50
10.5
$33,212
0.022
0
0.011
51+
1
$3,163
0.296
0.256
0.276
Employee-weighted average $ amount: $2,684
$3,783
$3,233
Notes: Assumes zero part-time employees and ignores the "look back" for determining large-employer status.
The possible frequencies are employee-weighted and are for purposes of illustration.
Deadweight Loss
• also known as deadweight cost, excess burden
• 5 definitions
–
–
–
–
effect of policy on indirect utility (measured in “utils”)
area under the Marshallian demand curve (measured in $)
area under the Hicksian demand curve
additional income required to achieve old (pre-policy) utility
at new prices
– income change required to achieve new utility at old (prepolicy) prices
• equivalence results
• the “taxable income elasticity”
Nontaxed Activity as a Composite Good
• tax avoidance can occur on many margins
–
–
–
–
–
–
–
hours per week
weeks per year
work or not work
cheat or not cheat
occupational choice
compensation composition
…
• taxable income elasticity as a summary statistic
Market Analysis
Measuring “the Marginal Tax Rate”
• MTR = statutory tax rate?
– on a particular margin – substitution between tax base and
untaxed activities
– “tax base” may be of limited interest economically. eg.,
• model may be about “capital,” but only some capital income is
taxable
• model about “cigarettes,” but there are legal and illegal cigarette sales
• MTR = average tax rate?
– “progressivity”
– marginal vs. average substitution