Karin Mayr Office room number 5.310, Oskar-Morgenstern-Platz 1 (OMP), 5th floor. Office hours: by appointment.

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1 UK PUBLIC SPENDING AND TAXATION (MA) Summer Term 2014, 8 ECTS, in English. Lecturer Karin Mayr (karin.mayr@univie.ac.at). Office room number 5.310, Oskar-Morgenstern-Platz 1 (OMP), 5th floor. Office hours: by appointment. Time and Place Mondays, , SR 1, OMP, ground floor and Tuesdays, , SR 5, OMP, 1st floor. Mid-term exam: Monday, April 28, , HS 9, OMP 1, 1st floor. Final exam: Monday, June 30, , HS 8, OMP, 1st floor. NOTE: We will have 2-hour block sessions for student presentations from Monday, 2 June to Tuesday, 24 June. There will be no lecture on Tuesday, 29 April. Description This course covers three broad topics in public economics related to the taxation and spending activities of governments: A) Optimal taxation, B) Fiscal federalism and C) Social security. We will mostly be using the textbooks of Hindriks and Myles (2006) and Myles (1995) as well as journal articles on these topics. The course covers key theoretical contributions and summarizes important results from the empirical literature. Assessment There will be a mid-term and a final exam each worth 35% of the grade. Furthermore, every participant (individually or in groups depending on the total number of course participants) will i) prepare a journal article from the provided reading list on one of the topics covered and present it in class for about 45 minutes followed by 15 minutes of discussion and ii) discuss another journal article from the list both in a written report and in class during the presentation of the respective article. These assignments are worth another 20% and 10% of the grade. A minimum of 50% of the total is necessary for passing the course. Note that signing off the course is possible only before the midterm exam; a grade will be given to all participants still signed in after this date. Readings In the first part of this course, we will review chapters from Auerbach and Feldstein (eds.), Handbook of Public Economics, Vol 3-4, Hindriks and Myles (2006), Intermediate Public Economics, MIT Press (HM) and Myles (1995) Public Economics, Cambridge University Press (M), as well as journal articles as specified. Supplementary material can be found in the textbooks by Atkinson and Stiglitz (1980), Lectures on Public Economics, McGraw-Hill (AS), Pines, Sadka and Zilcha (1998), Topics in

2 Public Economics, Cambridge University Press (PSZ) and Salanié (2003), The Economics of Taxation, MIT Press (S). In the second part of the course, students will choose and present related journal articles from a reading list (see below). Your choice of journal articles for presentation and discussion has to be sent to me via by May 4 at the latest (first come first serve). The slides (notes) for presentation and discussion have to be sent to me via no later than one week in advance. Language The course is taught in English. Prerequisites Good knowledge in macro-, microeconomics and econometrics as well as linear algebra as taught, for example, in the curriculum for Economics (Bakkalaureatsstudium VWL). Detailed course syllabus This course syllabus lists the topics and main references that will be discussed in each lecture, as well as a list of additional journal articles to be presented and discussed by students in class. Slides and other linked material will be available from the course website (via password) A. Tax Incidence and Efficiency. Auerbach, A. (1985), The Theory of Excess Burden and Optimal Taxation, in: Handbook of Public Economics, Vol. 1, edited by A. Auerbach and M. Feldstein, Amsterdam, The Netherlands: North Holland, 1985, pp , ISBN: , Auerbach, A., and J. Hines (2002), Taxation and Economic Efficiency, in: Handbook of Public Economics, Vol. 3, edited by A. Auerbach and M. Feldstein, Amsterdam, The Netherlands: North Holland, , ISBN: , Fullerton, D. and G.E. Metcalf (2002), Tax Incidence, in: Handbook of Public Economics, Vol. 4, edited by A. Auerbach and M. Feldstein, Amsterdam, The Netherlands: North Holland, B. Optimal taxation. This part is about the classic problem of how to choose the rates of various taxes to meet a given tax revenue requirement and, at the same time, minimize the efficiency loss from taxation. B.1 Optimal commodity taxation. We consider the optimal taxation of commodities: we first review different ways of measuring the efficiency loss of taxation in case of a tax on a single good, and then determine tax rules in partial equilibrium (inverse elasticity rule) and in general equilibrium (Ramsey taxation).

3 HM Chapter 15, AS Chapter 12, S Chapter 3; Diamond, P. A. and J. A. Mirrlees (1971), Optimal Taxation and Public Production 1: Production Efficiency and 2: Tax Rules, American Economic Review, 61, 8-27 and , Mankiw, N.G., M. Weinzierl and D. Yagan (2009), Optimal Taxation in Theory and Practice, Journal of Economic Perspectives, 23 (4), B.2 Optimal income taxation. We review major results from the Mirrlees model of optimal taxation of labor income (upper and lower limits of tax rates, zero marginal tax rate at the top), introducing the notion of agent monotonicity and incentive compatibility, and the Atkinson-Stiglitz result on mixed taxation of income and commodities. HM Chapter 16, S Chapter 4; Atkinson, A. B. and J. E. Stiglitz (1976), The Design of the Tax Structure: Direct versus Indirect Taxation, Journal of Public Economics, 6, 55-75, Diamond, P. (1998), Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates, American Economic Review, 88, 83-95, Mirrlees, J. (1971), Exploration in the Theory of Optimal Income Taxation, Review of Economic Studies, 38, , Piketty, T. and E. Saez (2012), Optimal Labor Income Taxation, NBER Working Paper 18521, forthcoming in Handbook of Public Economics, Volume 5, Saez, E. (2001), Using Elasticities to Derive Optimal Income Tax Rates, Review of Economic Studies, 68, C. Fiscal federalism. We investigate positive and normative aspects of tax and spending policies when there is more than one level of government. In particular, we analyse the effects of tax competition, which arises when the tax base is mobile across jurisdictions, for the cases of capital taxation, income taxation and commodity taxation. HM Chapter 20-21, PSZ 12; Alesina, A. and E. Spolaore (1997), On the Number and Size of Nations, Quarterly Journal of Economics, 112, , Epple, D. and T. Romer (1991), Mobility and Redistribution, Journal of Political Economy, 99, , Oates, W. E. (1972), Fiscal Federalism, New York: Harcourt Brace Jovanovich, Samuelson, P. A. (1954), The Pure Theory of Public Expenditure, Review of Economics and Statistics, 36, , Tiebout, C. (1956), A Pure Theory of Local Expenditures, Journal of Political Economy, 64,

4 D. Social insurance. We investigate market failure due to asymmetric information and moral hazard in the context of insurance markets. We then focus on the examples of unemployment insurance and pension insurance, or social security (insurance against lifetime uncertainty), in particular, and consider ways for Pareto-improving government interventions. HM Chapter 9, M 14.6, PSZ 14; Baily, M. N. (1978), Some aspects of optimal unemployment insurance, Journal of Public Economics, 10(3), , Bound, J. (1989), The health and earnings of rejected disability insurance applicants, American Economic Review, 79, , Chetty, R. (2006), A general formula for the optimal level of social insurance, Journal of Public Economics, 90(10-11), , Chetty, R. (2008), Moral hazard versus liquidity and optimal unemployment insurance, Journal of Political Economy, 116(2), , Chetty, R. and A. Finkelstein (2013), Social insurance: Connecting theory to data, Handbook of Public Economics, Vol. 5, , Chetty, R. and A. Szeidl (2007), Consumption commitments and risk preferences, Quarterly Journal of Economics, 122(2), , Feldstein, M. (1985), The optimal level of social security benefits, Quarterly Journal of Economics, 100(2), , Gruber, J. (1997), The consumption smoothing benefits of unemployment insurance, American Economic Review, 87(1), , Gruber, J. (2000), Disability insurance benefits and labor supply, Journal of Political Economy, 108(6), , Krueger, A.B. and B.D. Meyer (2002), Labor supply effects of social insurance, in: A.J. Auerbach and M. Feldstein (eds.), Handbook of Public Economics, ed. 1, vol. 4, ch. 33, , Meyer, B.D. (1990), Unemployment insurance and unemployment spells, Econometrica, 58(4), , Parsons, D.O. (1980), The decline in male labor force participation, Journal of Political Economy, 88, D. Reading list for student presentations. A. Tax Incidence and Efficiency Tax Incidence Besley, T. and H. Rosen (1999), Sales taxes and prices: an empirical analysis, National Tax Journal, 52, Goolsbee, A., M.F. Lovenheim, and J. Slemrod (2010), Playing with fire: cigarettes, taxes, and competition from the internet, American Economic Journal: Economic Policy, 2(1),

5 Efficiency Albouy, D. (2009), The unequal geographic burden of federal taxation, Journal of Political Economy, 117(4), , Bento, A.M., L.H. Goulder, M.R. Jacobsen and R.H. von Haefen (2009), Distributional and efficiency impacts of increased US gasoline taxes, American Economic Review, 99(3), , Feldstein, M. (1995), The effect of marginal tax rates on taxable income: a panel study of the 1986 tax reform act, Journal of Political Economy, 103, , Gorodnichenko, Y., J. Martinez-Vazquez and K. Sabirianova Peter (2009), Myth and reality of flat tax reform: micro estimates of tax evasion response and welfare effects in Russia, Journal of Political Economy, 117(3), B. Optimal Taxation Commodity Taxation Belan, P., S. Gauthier and G. Laroque (2008), Optimal grouping of commodities for indirect taxation, Journal of Public Economics, 92 (7), Income Taxation: Estimating Labor Supply Elasticities Altonji, J. and C. Paxson (1992), Labor supply, hours constraints, and job mobility, Journal of Human Resources, 27(2), , Blau, F.D. and L.M. Kahn (2007), Changes in the labor supply behavior of married women: , Journal of Labor Economics, 25(3), , Hausman, J. (1985), Taxes and labor supply, in: A. Auerbach and M. Feldstein, eds, Handbook of Public Finance, Vol I, North Holland, sections 1-3, MaCurdy, T. (1981), An empirical model of labor supply in a life cycle setting, Journal of Political Economy, 89(6), Income Taxation: Taxable Income Elasticities Feldstein, M. (1995), The effect of marginal tax rates on taxable income: a panel study of the 1986 tax reform act, Journal of Political Economy, 103(3), , Goolsbee, A. (2001), What happens when you tax the rich? Evidence from executive compensation, Journal of Political Economy, Gruber, J. and E. Saez (2002), The elasticity of taxable income: evidence and implications, Journal of Public Economics, 84, 1-32, Kleven, H., C. Landais and E. Saez (2013), Taxation and international mobility of superstars: evidence from the European football market, American Economic Review, 103(5), , Saez, E. (2010), Do taxpayers bunch at kink points? American Economic Journal: Economic Policy, 2(3), , Saez, E., J. Slemrod and S. Giertz (2009), The elasticity of taxable income with respect to marginal tax rates: a critical review, Journal of Economic Literature, 50(1), 3-50.

6 C. Fiscal Federalism Fiscal competition Baldwin, R. and P. Krugman (2004), Agglomeration, interaction, and tax harmonization, European Economic Review, 48, 1-23, Brueckner, J. and L. Saavedra (2001), Do local governments engage in strategic tax competition? National Tax Journal, 54, , Hines, J. (1999), Lessons from behavioral responses to international taxation, National Tax Journal, 52, D. Social Insurance Empirical testing of adverse selection and moral hazard Chiappori, P.A., F. Durand and P.Y. Geoffard (1998), Moral hazard and the demand for physicians services: first lessons from a French natural experiment, European Economic Review, 42, , Finkelstein, A. and J. Poterba (2004), Adverse selection in insurance markets: policyholder evidence from the UK annuity market, Journal of Political Economy, 112, Unemployment insurance and worker behavior Card, D., R. Chetty and A. Weber (2007), Cash-on-hand and competing models of intertemporal behavior: new evidence from the labor market, Quarterly Journal of Economics, 122(4),