ECONOMICS 5402: PUBLIC ECONOMICS: TAXATION Fall Term, 2010

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1 Carleton University, Department of Economics ECONOMICS 5402: PUBLIC ECONOMICS: TAXATION Fall Term, 2010 Instructor: Stefan Dodds Office: Loeb D897 Office Hours: Mondays, 10:00-11:00am and Wednesdays 1:00-2:00pm Telephone: ext Webpage: sdodds/teach5402.html Introduction: This course is an introduction to a variety of topics in the theory of taxation. We will consider the effect of taxation on behavior in a number of contexts, as well as studying the normative topic of optimal taxation. Special attention is paid to the joint issues of equity and efficiency, and the role of taxation as a device for redistribution. We will also look at a sampling of other topics such as tax evasion and in-kind transfers. Lecture Time and Place: at half-time. Wednesdays, 8:35-11:25pm, Southam Hall, Room 315. We will take a break Course Texts: The following required text is available at the campus bookstore (you may also want to check websites such as Amazon.ca for availability): Hindriks, Jean and Gareth D. Myles (2006), Intermediate Public Economics (Cambridge, MA: MIT Press). There is also a solutions manual available which gives detailed answers to text problems, which is optional. The text concerns Public Economics generally (as opposed to just taxation), and would be useful to have if you are planning to take more courses in this field. It is not particularly technical, compared to some other books. There are several other books on course reserve at the library which cover similar areas and can be used as complementary texts: Atkinson, A. B. and J.E. Stiglitz (1980), Lectures on Public Economics (New York: McGraw Hill). Boadway, R. and D. Wildasin (1984), Public Sector Economics (Boston: Little, Brown). Cullis, J. and P. Jones (1998), Public Finance and Public Choice (Oxford, UK: Oxford University Press). Leach, J. (2004), A Course in Public Economics (Cambridge, UK: Cambridge University Press). Myles, G. (1995), Public Economics (Cambridge, UK: Cambridge University Press). Also on reserve is the Handbook Series in Public Economics: Auerbach, A. and M. Feldstein, editors. (2002), Handbook of Public Economics, Volumes 1-3 (Amsterdam: Elsevier). Remember also that some topics in this course will build on material you may have covered as an undergraduate student. Don t hesitate to go back to your undergraduate text to get a better understanding of the issues. A good one (that you may have used already) is H. Rosen, B. Dahlby, R. Smith and P. Boothe (2003), Public Finance in Canada (Toronto: McGraw Hill). 1

2 Evaluation: There are three grade-requirements for this course: Midterm test 25% Assignments (2) 25% (12.5% each) Final exam 50% The test will take place during the regular class time. It is tentatively scheduled for October 27, The final examination will be scheduled by the University. Students who do not write the test for legitimate reasons may have the midterm weight transferred to the final, at the discretion of the Instructor. Failure to write the final examination will result in a grade of ABS. To write a deferred exam students must contact the Registrar s Office. Note on the Assignments: Students are permitted (even expected) to work and study together, but should write up their work on their own and in their own words unless otherwise specified. For information on instructional offences, please see section 14 of the graduate calendar. Standing in this course is determined by the instructor subject to the approval of the Faculty Dean. This means that grades submitted by the instructor may be subject to revision. No grades are final until they have been approved by the Dean. Accommodations: You may need special arrangements to meet your academic obligations during the term. (See http : // guide.htm for more information). For an accommodation request the processes are as follows: Pregnancy obligation: write to me with any requests for academic accommodation during the first two weeks of class, or as soon as possible after the need for accommodation is known to exist. Religious obligation: write to me with any requests for academic accommodation during the first two weeks of class, or as soon as possible after the need for accommodation is known to exist. Students with disabilities requiring academic accommodations in this course should contact a coordinator at the Paul Menton Centre for Students with Disabilities (PMC) to complete the necessary letters of accommodation. After registering with the PMC, make an appointment to meet and discuss your needs with me at least two weeks prior to the midterm test. Those students missing this deadline will not be provided with accommodations for the midterm. Course Outline and Readings: You are normally responsible for the material we cover in class, as well as for some readings that I will specifically mention. The list is a reference guide for the topics we will discuss. Many of these items are on course reserve at the Carleton Library. Many of the articles are also available in electronic form through the library. If you have trouble getting any of the reading material listed here, please contact me for help. Methodological Issues and Overview: Hindricks and Myles, Chapters 1, 3, 4. J. Slemrod (1990), Optimal Taxation and Optimal Tax Systems, Journal of Economic Perspectives, 4 (1), R. Boadway (1997), Public Economics and the Theory of Public Policy, Canadian Journal of Economics, 30,

3 Results from Welfare Economics: Hindricks and Myles, Chapter 2, 12. Cullis and Jones, Chapter 1 R. Lipsey (2007), Reflections on the general theory of second best at its golden jubilee, International Tax and Public Finance, 14, Tax Incidence and the Welfare Costs of Taxation Hindricks and Myles, Chapter 14.2 and Cullis and Jones, Sections , 7.7 Boadway and Wildasin, Sections and 12.8 Browning, E.K. (1976), The Marginal Cost of Public Funds, Journal of Political Economy, 84 (2), Usher, D. (2006), The Marginal Cost of Public Funds Is the Ratio of Mean Income to Median Income, Public Finance Review, 34 (6), Smart, M. and R. Bird (2009), The Economic Incidence of Replacing a Retail Sales Tax with a Value-Added Tax: Evidence from Canadian Experience, Canadian Public Policy, 35 (1), Commodity Taxation Hindricks and Myles, Chapter 14 Atkinson and Stiglitz, Lecture 12 R. Cornes and T. Sandler (1996), The Theory of Externalities, Public Goods and Club Goods 2nd Edition (Cambridge University Press), section 6.6 (on amending the Samuelson conditions for public goods to account for the excess burden of taxation). T. O Donoghue, and M. Rabin (2003), Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes American Economic Review, 93 (2), T. O Donoghue, and M. Rabin (2006), Optimal Sin Taxes Journal of Public Economics, 90 (10-11), C. Brett (2006), Some Marginalist Intuition Concerning the Optimal Commodity Tax Problem, Journal of Economic Education, 37 (4), J. Hines Jr. (2007), Taxing Consumption and Other Sins, Journal of Economic Perspectives, 21 (1), P. Sorenson (2007), The theory of optimal taxation: what is the policy relevance? International Tax and Public Finance, 14 (4), Optimal Income Taxation, Redistribution and Labour Response to Taxation Hindricks and Myles, Chapter 15 Atkinson and Stiglitz, Lectures 2, 13, 14 Cullis and Jones, Chapter 15 Boadway and Wildasin, Chapters 9, 10 J. Hausman, Taxes and Labour Supply in Handbook of Public Economics, Chapter 4 (Vol. 1). J. Stiglitz, A Pareto Efficient and Optimal Taxation and the New New Welfare Economics, in Handbook of Public Economics, Chapter 15 (Vol. 2). G. Akerlof (1978), The Economics of Tagging as Applied to the Optimal Income Tax, Welfare Programs and Manpower Planning, American Economic Review 68,

4 J. Mirrlees (1997), Information and Incentives: The Economics of Carrots and Sticks, Economic Journal, 107, N. Rowe and F. Woolley (1999), The Efficiency Case for Universality, Canadian Journal of Economics, 32(3), K. Roed and S. Strom (2002), Progressive Taxes and the Labour Market: Is the Trade-Off between Equality and Efficiency Inevitable? Journal of Economic Surveys, 16, B. Salanie (2002), Optimal Demogrants with Imperfect Tagging, Economics Letters, 75 (3), L. Kaplow (2008), Optimal Policy with Heterogeneous Preferences, The B.E. Journal of Economic Analysis & Policy, 8 (1) (Advances), Article 40. Tax Evasion Hindricks and Myles, Chapter 16 Cullis and Jones, Chapter 8 J. Slemrod and S. Yitzhaki, Tax Avoidance, Evasion and Administration in Handbook of Public Economics, Chapter 22 (Vol. 3). M. Allingham and A. Sandmo (1972), Income Tax Evasion: A Theoretical Analysis, Journal of Public Economics, 1, D. Usher (1986), Tax Evasion and the Marginal Cost of Public Funds, Economic Inquiry, 24, J. Gordon (1989), Individual morality and reputation costs as deterrents to tax evasion, European Economic Review, 33, J. Alm, B. Jackson and M. McKee (1992), Institutional Uncertainty and Taxpayer Compliance, American Economic Review, 82 (4), J. Andreoni, B. Erard and J. Feinstein (1998), Tax Compliance, Journal of Economic Literature, 36, R. Boadway and M. Sato (2000), The Optimality of Punishing only the Innocent: The Case of Tax Evasion, International Tax and Public Finance, 7, J. Slemrod (2007), Cheating Ourselves: The economics of tax evasion, Journal of Economic Perspectives, 21 (1), Dynamic Issues: Savings and Time Consistency Hindricks and Myles, Chapter 20. Atkinson and Stiglitz, Lecture 3. S. Fischer (1980), Dynamic Inconsistency, Cooperation and the Benevolent Dissembling Government, Journal of Economic Dynamics and Control, 2, R. Boadway and Michael Keen (1998), Evasion and Time Consistency in the Taxation of Capital Income, International Economic Review, 39 (2), pp K. Konrad (2001), Privacy and Time-Consistent Optimal Labor Income Taxation, Journal of Public Economics, 79, J. Gruber and B. Koszegi (2004), Tax Incidence When Individuals Are Time-Inconsistent: The Case of Cigarette Excise Taxes, Journal of Public Economics, 88, In Kind Transfers C. Blackorby and D. Donaldson (1988), Cash versus Kind, Self-selection and Efficient Transfers, American Economic Review, 78,

5 N. Bruce and M. Waldman (1991), Transfers in Kind: How they can be Efficient and Non- Paternalistic, American Economic Review, 81, C. Thum and M. Thum (2001), Repeated Interaction and the Public Provision of Private Goods, Scandinavian Journal of Economics, 103, J. Currie and F. Gahvari (2008), Transfers in Cash and In Kind: Theory Meets the Data, Journal of Economic Literature, 46 (2),