CHAPTER 18 Personal Taxation and Behavior Copyright © 2010 by the McGraw-Hill Companies, Inc. All...
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Transcript of CHAPTER 18 Personal Taxation and Behavior Copyright © 2010 by the McGraw-Hill Companies, Inc. All...
CHAPTER 18
Personal Taxation and Behavior
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
18-2
Labor Supply
Hours of leisure per week
Inco
me
per w
eek
0 T
time endowment
D|Slope| = w
F
G
Leisure Worki
ii
iiiE1
Income
18-3
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D|Slope| = w
F
G
ii
iiiE1
i
I
E2|Slope| = (1-t)w
H
G’
Hours of work before tax
Hours of work after
tax
18-4
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D
F
G
ii
iiiE1
i
J
E3
H
K
Hours of work before tax
Hours of work after
tax
18-5
Effects of Taxation
Hours of leisure per week
Inco
me
per w
eek
0 T
D
F
NE1
P
E4
Hours of work before tax
|Slope| = w
|Slope| = (1-t1)w|Slope| = (1-t2)w
|Slope| = (1-t2)w
(1-t1)$5,000
(1-t1)$5,000 + (1-t2$5,000
18-6
Empirical Findings
• Eissa [2001] • Males• Females
18-7
Some Caveats
• Demand-side considerations• Individual versus group effects• Other dimensions of labor supply• The compensation package• The expenditure side
18-8
Labor Supply and Tax Revenues
Hours per week
Wag
e ra
te p
er h
our
SL
w
L0
(1-t1)w
L1
db
a c
(1-t2)we
f
L2
k
(1-t3)wh i
L3
j
(1-tA)w
LA
18-9
Tax Rates versus tax revenue – Laffer Curve
Tax rate
Tax
reve
nue
t1 t2 tA t3
18-10
Debate Over the Laffer Curve
• The Laffer curve and the elasticity of labor supply
• Where on the Laffer curve is the economy operating?
• Empirical estimates of the elasticity of labor supply
• Other ways tax rates can affect tax revenues• Determining the optimal tax rate
18-11
Saving
Present consumption (c0)
Futu
re c
onsu
mpt
ion
c 1
Endowment point
I0
I1
M
N
ІSlopeІ = 1 + r
E1
c0*
c1*
iii
iii
Saving
18-12
Deductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpt
ion
c 1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
E1
c0*
c1*
Saving before tax
Q
P
A
c0t
c1t
Savingaftertax
18-13
Deductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpt
ion
c 1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
E1
c0*
c1*
Saving before tax
Q
P
A
c0t
c1t
Savingaftertax
18-14
Nondeductible Interest Payments and Taxable Interest Receipts
Present consumption (c0)
Futu
re c
onsu
mpt
ion
c 1
I0
I1
M
N
After-tax budget lineІSlopeІ = 1 + (1-t)r
c1*
Q
P
A
c1t
18-15
Some Additional Considerations
• Real net rate of return• Many assets• Private saving versus social saving• Validity of life-cycle model• Empirical evidence: the effect of taxation on
saving
18-16
Tax-Preferred Savings Accounts
• Types of tax-preferred savings accounts and how they work
• Are contributions to these accounts new saving?
• Administrative details and effect on saving: insights from Behavioral Economics
18-17
Taxes and the Capital Shortage
• Taxes and investment• Taxes and excess burden• Closed versus open economy• Empirical evidence
18-18
Housing Decisions
• Effects of the income tax on housing decisions– Rnet = R – I + ΔV
• Implicit rent not taxed• Deductibility of mortgage interest and
property tax payments• The decision to rent or buy
18-19
Proposals for Change• Critique of subsidy for owner-occupied housing
– Are there significant positive externalities?– Impact on distribution of income – Incentive to take on risky mortgages, contributing to the
housing and financial crisis of 2008-2009• Political feasibility of taxing imputed rent• Reform proposals
– Elimination of deduction for property tax and mortgage interest– Placing an upper-limit on deductions– An efficient solution
18-20
Portfolio Composition
• Tobin’s model of portfolio composition• Impact of proportional tax with full loss offset
– Impact on return– Impact on risk
• Empirical evidence
18-21
A Note on Politics and Elasticities
• Ambiguity about effect of taxation on behavior
• Importance of elasticities• “Convenient” beliefs about elasticities
18-22
Taxes and Human Capital Accumulation
• Human capital• Investing in human capital
– B – C > 0– (1 – t)B – (1 – t)C = (1 – t)(B – C>) 0– Income versus substitution effects
• Shortcomings of model– Returns uncertain– Explicit costs– Other taxes– Progressive taxes
18-23
Effect of Taxation on Saving
• Problems using the regression approach– Specification issues– Measurement issues
• Joint Committee on Taxation [2005]