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\author{Emmanuel Saez}
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\title{Graduate Public Economics \\
Introduction and Road Map} \onlyslides{1-300}

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\begin{center}
{\bf PUBLIC ECONOMICS DEFINITION}
\end{center}
Public Economics = Study
of the Role of the Government in the Economy

Government is instrumental in most aspects of economic life:

1) Government in charge of huge regulatory structure

2) Taxes: modern governments collect 30-45\% of GDP in taxes

3) Expenditures: tax revenue funds traditional public goods (infrastructure, public order and safety, defense), Public education, Retirement benefits, Health care, Income Support

4) Macro-economic stabilization through central bank (interest rate, inflation control), fiscal stimulus, bailout policies

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\begin{center}
{\bf Two General Rules for Government Intervention}
\end{center}

1) Failure of 1st Welfare Theorem: Government intervention can help
if there are market or individual failures

2) Fallacy of the 2nd Welfare Theorem: Distortionary Government
intervention is required to reduce economic inequality
\end{slide}

\begin{slide}
\begin{center}
{\bf Role 1: 1st Welfare Theorem Failure}
\end{center}

{\bf 1st Welfare Theorem:} If (1) no externalities, (2) perfect
competition, (3) perfect information, (4) agents are rational,
then Private market equilibrium is Pareto efficient

Government intervention may be desirable if:

1) Externalities require govt interventions (Pigouvian
taxes/subsidies, public good provision)

2) Imperfect competition requires regulation (typically studied in
Industrial Organization)

3) Imperfect or Asymmetric Information (e.g., adverse
selection may call for mandatory insurance)

4) Agents are not rational ({\bf = individual failures}
analyzed in behavioral economics, field in huge expansion): e.g.,
myopic or hyperbolic agents may not save enough for retirement

\end{slide}

\begin{slide}
\begin{center}
{\bf Role 2: 2nd Welfare Theorem Fallacy}
\end{center}

Even with no market failures, free market outcome might generate
substantial inequality. Inequality is seen as the biggest issue
with capitalism

{\bf 2nd Welfare Theorem:} Any Pareto Efficient outcome can be
reached by (1) Suitable redistribution of initial endowments
[individualized {\bf lump-sum} taxes based on indiv.
characteristics and not behavior], (2) Then letting markets work
freely

$\Rightarrow$ No conflict between efficiency and equity [1st best taxation]

In reality, redistribution of initial endowments is not feasible
(information pb) $\Rightarrow$ govt needs to use {\bf distortionary} taxes
and transfers  $\Rightarrow$ Conflict between
efficiency and equity [2nd best taxation]

This class will focus primarily but not exclusively on role 2

\end{slide}

\begin{slide}
\begin{center}
{\bf Normative vs. Positive Public Economics}
\end{center}

{\bf Normative Public Economics:} Analysis of How Things Should be
(e.g., should the government intervene in health insurance market?
how high should taxes be?, etc.)



{\bf Positive Public Economics:} Analysis of How Things Really Are
(e.g., Does govt provided health care crowd out private health
care insurance? Do higher taxes reduce labor supply?)

Positive Public Economics is a required 1st step before we can
complete Normative Public Economics

Positive analysis is primarily empirical and Normative analysis is
primarily theoretical

Positive Public Economics overlaps with Labor Economics

{\bf Political Economy} is a positive analysis of govt outcomes
[public choice is political economy from a libertarian view]


\end{slide}


\begin{slide}
\begin{center}
{\bf Paternalism vs. Individual Failures}
\end{center}

In many situations, individuals may not or do not seem to act in
their best interests [e.g., many individuals are not able to save
for retirement]

Two Polar Views on such situations:

1) {\bf Paternalism [Libertarian Chicago View]} Individual
failures do not exist and govt wants to impose on individuals its
own preferences against individuals' will


2) {\bf Individual Failures [Behavioral Economics View]}
Individual Failures exist: Self-control problems, Cognitive
Limitations

Key way to distinguish those 2 views: Under Paternalism,
individuals should be opposed to govt programs such as Social
Security. If individuals understand they have failures, they will
tend to support govt programs such as Social Security.

\end{slide}


\begin{slide}
\begin{center}
{\bf Plan for 230B Lectures}
\end{center}
1) {\bf Labor Income Taxation and Redistribution:} (a) Normative Aspects: Optimal Income Taxes and Transfers,
(b) Empirical Aspects: Labor Supply and Taxes and Transfers, (c) Tax Enforcement Issues

2) {\bf Social Insurance:} (a) Social Security and Retirement and Savings Decisions, (b) Unemployment and Disability Insurance

3) {\bf Capital Income Taxation and Redistribution} (a) Empirical Aspects: Wealth Accumulation, Savings, and Taxation, (b) Normative Aspects: Optimal Capital Income Taxation

\end{slide}

\begin{slide}
\begin{center}
{\bf Income Inequality: Labor vs. Capital Income}
\end{center}
Individuals derive market income (before tax) from {\bf labor} and
{\bf capital}: $z=wl+rk$ where $w$ is wage, $l$ is labor supply,
$k$ is capital, $r$ is rate of return on capital

1) {\bf Labor income inequality} is due to differences in working abilities
(education, talent, physical ability, etc.), work effort (hours of
work, effort on the job, etc.), and luck (labor effort might
succeed or not)

2) {\bf Capital income inequality} is due to differences in
wealth $k$ (due to past saving behavior and inheritances
received), and in rates of return $r$ (varies dramatically
overtime and across assets)

\end{slide}

\begin{slide}
\begin{center}
{\bf Income Inequality: Labor vs. Capital Income}
\end{center}

1) Capital Income (or wealth) is more concentrated than Labor
Income: Top 1\% wealth holders have 1/3 of total wealth. Top 1\%
labor income earners have about 15\% of total labor income. [Top
1\% incomes have 20\% of total income]

2) Labor income is around 80\% of aggregate market income from
National Accounts (capital income is 20\%). Fairly constant
overtime and across industrialized countries.

[In GDP, gross capital share is higher (30\%) because it includes
depreciation of capital]

[In taxable income, capital income share is lower (15\%) because
it excludes imputed rents of homeowners, returns on pension funds,
etc.]

\end{slide}

\begin{slide}
\begin{center}
{\bf Income Inequality Measurement}
\end{center}
Inequality can be measured by indexes such as Gini, log-variance,
quantile income shares which are functions of the income
distribution $F(z)$

Gini = 2 * area between 45 degree line and Lorenz curve

Lorenz curve $L(p)$ at percentile $p$ is fraction of total income
earned by individuals below percentile $p$

$0 \leq L(p) \leq p$

Gini=0 means perfect equality

Gini=1 means complete inequality (top person has all the income)


\end{slide}

\begin{slide}
\begin{center}
{\bf Key Empirical Facts on Income Inequality}
\end{center}
1) In the US, labor income inequality has increased substantially
since 1970: debate between skilled biased technological progress
view vs. institution view (min wage and Unions)

2) In the US, top income shares dropped dramatically from 1929 to
1950 and increased dramatically from 1980 to 2007 [Piketty and
Saez]

3) Top incomes used to be primarily capital income. Now, top
incomes are divided 50/50 between labor and capital income (due to
explosion of top labor incomes with stock-options, bonuses, etc.)

4) Fall in top income shares from 1900-1950 happened in most
OECD countries. Surge in top income shares has happened primarily
in English speaking countries, not as much in Continental Europe
and Japan

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\begin{center}
{\bf Govt Redistribution with Taxes and Transfers}
\end{center}

Govt taxes individuals based on income and consumption and
provides transfers: $z$ is pre-tax income, $y=z-T(z)+B(z)$ is
post-tax income

1) If inequality in $y$ is less than inequality in $z$
$\Leftrightarrow$ tax and transfer system is redistributive (or
progressive)

2) If inequality in $y$ is more than inequality in $z$
$\Leftrightarrow$ tax and transfer system is regressive

a) If $y=z \cdot (1-t)$ with constant $t$, tax/transfer system is
neutral

b) If $y=z \cdot (1-t)+G$ where $G$ is a universal (lumpsum)
allowance, then tax/transfer system is progressive

c) If $y=z-T$ where $T$ is a uniform tax (poll tax), then
tax/transfer system is regressive
\end{slide}


\begin{slide}
\begin{center}
{\bf Federal US Tax System: Overview}
\end{center}
1) Individual income tax (on both labor+capital income)
[progressive](40\% of fed tax revenue)

2) Payroll taxes (on labor income) financing social security programs [about
neutral] (40\% of revenue)

3) Corporate income tax (on capital income) [progressive if incidence on
capital income] (15\% of revenue)

4) Estate taxes (on capital income) [very progressive] (2\% of
revenue)

5) Minor excise taxes (mostly labor income) [regressive] (3\%
of revenue)

\end{slide}


\begin{slide}
\begin{center}
{\bf State+Local Tax System: Overview}
\end{center}
1) Individual+Corporate income taxes
[progressive] (30\% of state+local tax revenue)

2) Sales + Excise taxes (tax on consumption = income - savings) [about neutral] (30\% of
revenue)

3) Real estate property taxes (on capital income)
[slightly progressive] (30\% of revenue)

http://www.census.gov/govs/www/qtax.html

\end{slide}


\begin{slide}
\begin{center}
{\bf US Tax System: Progressivity and Evolution}
\end{center}

{\bf 1) Medium Term Changes:} Federal Tax Progressivity has declined
since 1970 but govt redistribution remains substantial especially
when including transfers (Medicaid, Social Security, UI, DI,
various income support programs)

{\bf 2) Long Term Changes:} Before 1913, US taxes were primarily
tariffs, excises, and real estate property taxes [slightly
regressive], no transfer programs (and hence small govt)

http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml
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%\begin{slide}
%\begin{center}
%{\bf Why has govt grown so much over 20th century?}
%\end{center}
%
%1) {\bf Demand Side Argument: Wagner law} Govt provided goods
%(education, health, social insurance) are luxury goods
%
%2) {\bf Supply Side Argument: Tax Enforcement Ability} Ability of govt to tax
%increases dramatically over the course of economic development
%[easy to tax large companies which need careful records for their
%operations]
%
%
%\end{slide}

\begin{slide}
\begin{center}
{\bf REFERENCES CITED}
\end{center}
{\small

Kleven, Henrik, Claus Kreiner, and Emmanuel Saez ``Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal Intermediaries,'' NBER Working Paper No. 15218, August 2009.
\href{http://www.nber.org/papers/w15218} {(web)}

Kopczuk, Wojciech, Emmanuel Saez, and Jae Song ``Earnings Inequality and Mobility in the United States: Evidence from Social Security Data since 1937,'' Quarterly Journal of Economics 125(1), 2010, 91-128. \href{http://www.econ.berkeley.edu/~saez/kopczuk-saez-songQJE10mobility.pdf} {(web)}

{\bf Piketty, Thomas and Emmanuel Saez ``Income Inequality in the United States, 1913-1998'', Quarterly Journal of Economics, 118(1), 2003, 1-39. \href{http://links.jstor.org/stable/pdfplus/25053897.pdf} {(web)} }

{\bf Piketty, Thomas and Emmanuel Saez ``How Progressive is the U.S. Federal Tax System? A Historical and International Perspective,'' Journal of Economic Perspectives, 21(1), Winter 2007, 3-24.
 \href{http://www.econ.berkeley.edu/~saez/piketty-saezJEP07taxprog.pdf} {(web)} }

}


\end{slide}

\begin{slide}
\begin{center}
{\bf GENERAL BOOK REFERENCES}
\end{center}
{\small

\textbf{Graduate Level}

Atkinson, A.B. and J. Stiglitz, Lectures on Public Economics, New York: McGraw Hill, 1980.

Auerbach, A. and M. Feldstein, eds., Handbook of Public Economics, 4 Volumes, Amsterdam: North Holland, 1985, 1987, 2002, and 2002.
\href{http://www.sciencedirect.com/science/handbooks/15734420/} {(web)}


Auerbach, A., Chetty, R., M. Feldstein, and E. Saez, eds., Handbook of Public Economics, Volume 5,
Amsterdam: North Holland, 2013
\href{http://elsa.berkeley.edu/~burch/confhand.htm} {(web)}

Kaplow, L. The Theory of Taxation and Public Economics.  Princeton University Press, 2008.

Mirrlees, J. Reforming the Tax System for the 21st Century The Mirrlees Review, Oxford University Press, (2 volumes) 2009 and 2010.
\href{http://www.ifs.org.uk/mirrleesReview} {(web)}

Salani\'e, B. The Economics of Taxation, Cambridge: MIT Press, 2nd Edition 2010.

\textbf{Under-Graduate Level}

Gruber, J. Public Finance and Public Policies, 3rd edition, Worth Publishers, 2010.

Rosen, H. Public Finance, 7th edition, McGraw Hill, 2005.

Stiglitz, J. Economics of the Public Sector,  3rd edition, Norton, 1999.

Slemrod, J. and J. Bakija. Taxing Ourselves: A Citizen's Guide to the Debate over Taxes. MIT Press, 2004.

}

\end{slide}

\begin{slide}
\begin{center}
{\bf REFERENCES ON EMPIRICAL METHODS:}
\end{center}
{\small


Angrist, J. and A. Krueger, ``Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments,'' Journal of Economic Perspectives, 15 (4), 2001, 69-87 \href{http://www.jstor.org/stable/pdfplus/2696517.pdf} {(web)}

Angrist, J. and Steve Pischke  Mostly Harmless Econometrics: An Empiricist's Companion, Princeton University Press, 2009.

Bertrand, M. E. Duflo et S. Mullainhatan, ``How Much Should we Trust Differences-in-Differences Estimates?,'' Quarterly Journal of Economics, Vol. 119, No. 1, 2004, pp. 249-275. \href{http://www.jstor.org/stable/pdfplus/25098683.pdf} {(web)}

Imbens, Guido and Jeffrey Wooldridge (2007) What's New in Econometrics? NBER SUMMER INSTITUTE MINI COURSE 2007. \href{http://www.nber.org/minicourse3.html} {(web)}

Meyer, B. ``Natural and Quasi-Experiments in Economics,'' Journal of Business and Economic Statistics, 13(2), April 1995, 151-161. \href{http://www.jstor.org/stable/pdfplus/1392369.pdf} {(web)}

}
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