Economics 641 Public Economics: Expenditure & Taxation Course Outline and Reading List Winter 2012

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1 Professor Anindya Sen Hagey Hall, Room 241 Phone: ext Economics 641 Public Economics: Expenditure & Taxation Course Outline and Reading List Winter 2012 Website: Class Schedule: 1:00-2:20TTh, EV From a broad perspective, government expenditure is a consequence of the failure of markets to allocate resources in a welfare enhancing manner. In a similar fashion, taxes are often interpreted as a remedy to various market inefficiencies. Therefore, the natural questions which arise are: When does market failure occur? And if government intervention occurs, is it efficient? What is efficiency and is it the same as welfare? Does equalization imply efficiency? How much income should the government redistribute? What is the amount of taxation that is required to finance government expenditure? How can tax revenue be raised efficiency? What is the effect of taxes on labor and income? The course will focus on various theories and empirical work that offer explanations to these questions. In order to demonstrate the relevance of these theories, I will also spend a fair amount of time on topics that are contemporary and quite relevant to Canadian public policy. There is no required textbook. The course will be taught through journal articles. Grading: Class presentation 10% Short paper 20% Midterm 25% Final exam 40% Class participation 5% 1

2 A. Expenditure 1. Welfare Walrasian Equilibrium, Pareto Efficiency, First and Second Theorems of Welfare Economics, Total Surplus, Compensating and Equivalent Variation, Theory of Second Best Hines, James R Jr., Three Sides of Harberger Triangles. Journal of Economic Perspectives 13(2), Spring 1999, pp Charles Blackorby, Economic Policy in a Second Best Environment. Canadian Journal of Economics 24(3), 1990, pp Public Goods, Government Response, and Fiscal Federalism The Samuelson Model, Public Goods and Pareto Optimality, Tiebout Sorting, The Flypaper Effect Day, Kathleen M. Interprovincial Migration and Local Public Goods, Canadian Journal of Economics 25(1), February 1992, pp Boadway, R. and F. Flatters, 1982, Efficiency and equalization payments in a federal system of government, Canadian Journal of Economics 15, Smart, M., 1998, Taxation and deadweight loss in a system of intergovernmental transfers, Canadian Journal of Economics 31. Knight, Brian. Endogenous Federal Grants and Crowd-Out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program. American Economic Review 92(1), March 2002, pp J. Hines and R. Thaler, 1995, Anomalies: The Flypaper Effect. Journal of Economic Perspectives, 9: Stuart Landon, Melville L. McMillan, Vijay Muralidharan, and Mark Parsons: Does Health-Care Spending Crowd Out Other Provincial Government Expenditures?, Canadian Public Policy, 32(2), June 2006, pp Income Redistribution Cash Versus In Kind Transfers, Potential Pareto Improvement Criterion Blackorby C. and D. Donaldson, Cash versus Kind, Self-Selection, and Efficient Transfers, American Economics Review, 78(4), September

3 Besley, Timothy, and Stephen Coate, Workfare versus Welfare: Incentive Arguments for Work Requirements in Poverty-Alleviation Programs, American Economic Review 82(1), March Baker, Michael, Payne, A Abigail; and Michael Smart, An Empirical Study of Matching Grants: The 'Cap on CAP.' Journal of Public Economics, 72(2), May 1999, pp Michael Baker & Jonathan Gruber & Kevin Milligan, 2008, Universal Child Care, Maternal Labor Supply, and Family Well-Being. Journal of Political Economy, University of Chicago Press, vol. 116(4), pages , 08. Janet Currie and Firouz Gahvari, 2008, Transfers in Cash and In-Kind: Theory Meets the Data, Journal of Economic Literature 46 #2, June 2008, Kevin Milligan, Incentive effects of social assistance: A regression discontinuity approach, with Thomas Lemieux, Journal of Econometrics, Vol. 142, No. 2 (February 2008), pp Kevin Milligan, The tale of the tails: Canadian Income Inequality in the 1980s and 1990s with Marc Frenette and David Green. Canadian Journal of Economics, Vol. 40, No. 3 (August 2007), pp Kevin Milligan, The integration of child tax credits and welfare: Evidence from the Canadian National Child Benefit program with Mark Stabile, Journal of Public Economics, Vol. 91, No. 1-2 (February, 2007), pp Michael Smart: Equalization and Stabilization, Canadian Public Policy, 30(2), June 2004, pp Hum, Derek and Wayne Simpson, Economic Response to a Guaranteed Annual Income: Experience from Canada and the United States, Journal of Labor Economics, 11(1), January 1993, pp Osberg, Lars, Poverty in Canada and the United States: Measurement, Trends, and Implications, Canadian Journal of Economics, 33(4), November 2000, pp Public Choice Democracy, Lindahl Prices, Median Voter Theorem, Logrolling, Special Interests, Arrow Impossibility Theorem, Niskannen Theory of Bureaucracy Besley, Timothy and Burgess, Robin, The Political Economy of Government Responsiveness: Theory and Evidence from India, Quarterly Journal of Economics 117(4), November 2002, pp

4 Moretti, Enrico, Lee, D., Butler, M. Do Voters Affect or Elect Policies? Evidence from the U.S. House, Quarterly Journal of Economics, 119(3), 2004 Daron Acemoglu, Simon Johnson, James A. Robinson, and Pierre Yared Income and Democracy. American Economic Review 2008, 98(3), pp Daron Acemoglu, Simon Johnson and James Robinson, Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution. November 2002, Quarterly Journal of Economics, volume 117, pp Externalities Negative and Positive Externalities, Pigouvian Taxes, The Coase Theorem Sacerdote, Bruce, Peer Effects with Random Assignment: Results for Dartmouth Roommates, Quarterly Journal of Economics, 116(2), May 2001, pp Oreopoulos, Philip, The Long-Run Consequences of Living in a Poor Neighborhood, Quarterly Journal of Economics, 118(4), Nov Crime Levitt, Steven, Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime, American Economic Review, 87(3), June Klick, Jonathan; Tabarrok, Alexander, Using Terror Alert Levels to Estimate the Effect of Police on Crime, Journal of Law and Economics, vol. 48, no. 1, April 2005, pp Evans, William N; Owens, Emily G COPS and Crime. Journal of Public Economics, vol. 91, no. 1-2, February 2007, pp Corman, Hope; Mocan, Naci, Carrots, Sticks, and Broken Windows. Journal of Law and Economics, vol. 48, no. 1, April 2005, pp Donohue, John J. and Steven Levitt, The Impact of Legalized Abortion on Crime, Quarterly Journal of Economics, May Optimal Size of Government Shleifer, Andrei. Regulation and Distrust (with P. Aghion, Y. Algan, and P. Cahuc), Quarterly Journal of Economics, August, Shleifer, Andrei. The Age of Milton Friedman Journal of Economic Literature, March,

5 Shleifer, Andrei. Does Competition Destroy Ethical Behavior? American Economic Review Papers and Proceedings, May, Shleifer, Andrei. Do Institutions Cause Growth? (with E. Glaeser, R. La Porta, and F. Lopez-de- Silanes), Journal of Economic Growth, September, Mulligan, Casey, and Gary Becker. Deadweight Costs and the Size of Government. Journal of Law and Economics 46(2), pp J. Stephen Ferris and Stanley L. Winer: Just How Much Bigger Is Government in Canada? A Comparative Analysis of the Size and Structure of the Public Sectors in Canada and the United States, , Canadian Public Policy, 33(2), June 2007, pp B. Taxation 1. Measuring Deadweight Loss Feldstein, M., 1995, The effects of tax rates on taxable income: A panel study of the 1986 Tax Reform Act, Journal of Political Economy 103, Sillamaa, M. and M. Veall, 2001, The effect of marginal tax rates on taxable income: A study of the 1988 tax flattening in Canada, Journal of Public Economics 80, Saez, E., J. Slemrod, and S. Giertz, 2010, The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review, Journal of Economic Literature, forthcoming. 2. Optimal taxation Sarah E.West and Roberton C.Williams III, 2007, Optimal taxation and cross-price effects on labor supply: Estimates of the optimal gas tax, Journal of Public Economics, Volume 91, Issues 3-4, April 2007, Pages Income taxation Diamond, P., 1998, Optimal income taxation: An example with a U-shaped pattern of optimal marginal tax rates, American Economic Review 88, Brewer, Mike, Emmanuel Saez, and Andrew Shephard, 2010, Means-testing and Tax Rates on Earnings, in Dimensions of Tax Design: the Mirrlees Review, J. Mirrlees, et al. (eds), Oxford University Press. Emmanuel Saez and Michael R. Veall, 2005, The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence, American Economic Review, Vol. 95, No. 3 (Jun., 2005), pp Behavioural Public Economics Becker, Gary and KevinMurphy, A Theory of Rational Addiction, Journal of Political Economy, Bernheim, B. Douglas, 2009, Behavioral Welfare Economics, Journal of the European Economic Association, Vol. 7, No. 2-3, Pages

6 Chetty, Raj, Adam Looney and Kory Kroft, Salience and Taxation: Theory and Evidence, American Economic Review, vol. 99(4), pages , September. Finkelstein, Amy, 2009, EZ-Tax: Tax Salience and Tax Rates, Quarterly Journal of Economics, Vol. 124, No. 3, Pages Ted O Donoghue and Matthew Rabin, 2003, Studying Optimal Paternalism, Illustrated by a Model of Sin Taxes, American Economic Review Papers and Proceedings, 93(2), May 2003, Tax competition J.Wilson, 1999, Theories of tax competition, National Tax Journal, 52, Kanbur, R. and M. Keen 1993, Jeux sans frontieres: Tax competition and tax coordination when countries differ in size, American Economic Review, 83, Wildasin, D., 1991, Income redistribution in a common labor market, American Economic Review 81, M. Feldstein and M. Wrobel, 1998, Can state taxes redistribute income? Journal of Public Economics 68, J.B. Burbidge, K. Cuff and J. Leach (2006) Tax Competition with Heterogeneous Firms, Journal of Public Economics, 90, pp Tax Incidence, Tax Harmonization, and Estates Besley and Rosen, Sales Taxes and Prices, National Tax Journal, June Sen, Anindya, Overshifting, Firm Conduct, and Tax Incidence in Concentrated Industries: Empirical Evidence from the Canadian Cigarette Industry Slemrod and Kopczuk, Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity, Review of Economics and Statistics, May 2003, 85(2), pp International taxation Hines, James R., 1996, Altered states: Taxes and the location of foreign direct investment in America, American Economic Review 86(5), Qing Hong and Michael Smart, 2010, In praise of tax havens: International tax planning and foreign direct investment, European Economic Review 54,