EC325 LT

Question 1

Inequality Definition

Answer 1

Measures differences across individuals (relative deprivation) at different levels of the income distribution. EG amount of income to the poor relative to the rich

Question 2

Poverty Definition

Answer 2

A measure of the absolute or relative deprivation of the people at the bottom of the income distribution. EG amount of income to the poor relative to a minimally acceptable income (poverty line)

Question 3

Eligibility types of transfer programs

Answer 3

Universal programs: equal access to benefits for all citizens

Means-tested programs: access is restricted by income and assets

Categorical programs: access is restricted by personal characteristics like disability or age

(can be both means tested and categorical)

Question 4

Benefit types of transfer programs

Answer 4

Cash programs: provision of cash benefits

In kind programs: provision or subsidisation of goods or services such as medical care

Question 5

Okun’s Leaky Bucket and Moral Hazard with benefits

Answer 5

The income redistribution process is like a leaky bucket: we are carrying money from the rich to the poor but some of the money leaks out. 2 types of MH cause the leak:

• The not so poor masquerade as poor to qualify for higher benefits: makes social programs more expensive
• The rich masquerade as not so rich to pay less income tax: reduces tax revenue for social programs

These leaks imply that a redistributive tax transfer scheme imposing a $1 cost on the rich will be able to give less than $1 to the poor. The Difference is the moral hazard cost

As earnings capacity (w) is only known to each individual there is an information constraint which means an earnings based welfare program is only second best. Government can only observe wage (wh).

Question 6

How governments can better target truly low ability individuals given information constraint

Answer 6

1. Tagging: move from earnings based to categorical programs. If we can find characteristics which are observable to the government, negatively correlated with earnings capacity and immutable to the individual we can target benefits accordingly.
2. Move from cash transfers to in kind programs to induce self revelation. CA is consumer sovereignty
3. Ordeal mechanisms: introduce pure deadweight cost on recipients such as long admin or training required to access benefits. Cost of this is incomplete takeup which could be due to stigma, imperfect information or transaction costs associated with takeup

Question 7

Extensive and Intensive margins within labour supply context

Answer 7

Intensive Margin:
- Hours worked for those who are working

Extensive Margin:
- Labour force participation

Question 8

Kleven-Landais-Saez research on migration

Answer 8

Estimated impact of taxation on the international mobility of top european players

• Used variation in tax policy and labour market regulation. Considered effect of top marginal tax rate - good approximation for wage of top players
• EG Beckham Law passed in spain in 2005, imposed a flat tax rate of 24% to foreigners for first 6 years
• Identifying assumption: parralel trends in the DiD approach - requires there being no comtemporaneous and differential change in the trend between spain and synthetic spain (the control group created)

FINDINGS:

• elasticity of location w.r.t. net of tax rate is 0.4 in the whole sample (overall migration effect)
• Elasticity much larger for foreign rather than domestic players

Validate findings for other segments of high skilled labour market such as inventors (moretti & Wilson)

Question 9

Factor share trend

Answer 9

Recently rising across all countries and across all industries

Question 10

Capital and Labour income inequality?

Answer 10

Much more inequality within capital income

Labour inequality
In US: rising recently
In Europe and Japan: fairly flat

Question 11

Why is labour inequality rising in US?

Answer 11

• Race between education and technology
• International forces - China shock
• Sharp drops in non college employment opportunities
• Labour market institutions: long decline in US minimum wage, less power for labour unions
• Tax and transfer systems: drop in top marginal income tax rates

Question 12

5 data sources for wealth distribution estimation

Answer 12

1. Household Surveys
2. Wealth tax data
3. Billionaire rankings
4. Inheritance tax data - mortality multiplier
5. Income tax data

Question 13

Europe wealth inequality facts

Answer 13

• Extreme during 19th century - top 10% owned about 90%, top 1% owned 60%
• Sharp decline following WW1, great depression and ww2
• Increasing since 70s/80s but still lower than during 19th century

Question 14

USA wealth inequality facts

Answer 14

• Before ww1, wealth less concentrated than in Europe
• Substantial fall in inequality in the 30s and 40s
• Gradually increasing since 70s
• Now much more unequal than Europe (the great reversal)

Question 15

how does r-g affect wealth inequality

Answer 15

When r-g&raquo_space; 0, existing wealth (grows at rate r) accumulates faster than ability
to build savings from labour income (grows at rate g). This magnifies preexisting wealth inequality.

Question 16

What is the history of r-g in Europe and the US

Answer 16

Across time: post WW2 period, effective r−g small or even negative, decrease in wealth inequality.

Across countries: US vs Europe, US had high g in 19th century so lower inequality.

Question 17

How to measure inherited wealth in total W

Answer 17

Wealth = inherited wealth + self-made wealth.

Wbt = integral of fBs.ds (f is integral symbol) for t-30

Question 18

Reasons for imposing commodity taxes

Answer 18

1. satisfy a revenue requirement - Ramsey Taxation
2. redistribution from rich to poor - Ramsey tax with equity concern
3. Correct an externality: Pigouvian Taxation
4. Correct an Internality: Paternalistic Taxation

Question 19

Issues with tax differentiation

Answer 19

1. Ignorance: we lack knowledge of elasticities
2. Admin/complexity: may be costly
3. Creation of new goods: how to treat new goods? Goods may be put to market for tax avoidance
4. Political economy: lobbying/bribery for good treatment

Question 20

Reasons FOR differentiation

Answer 20

Ramsey rule

Equity concerns

externalities

internalities and paternalism

Question 21

First best vs second best tax

Answer 21

First best would tax based on earnings ability, however this is subject to asymmetric information so the government can observe actual earnings. This is in part a choice variable so can create distortionary behavioural responses and there is thus an equity efficiency trade-off. Optimal tax theory therefore analyses the second best tax scheme.

Question 22

Ways of altering taxable income

Answer 22

1. Labour income: intensive/extensive margin, effort etc
2. Capital income: savings, portfolio choice
3. Tax evasion
4. Tax avoidance

Question 23

Failings of life cycle model and alternative models

Answer 23

Failure is that there is excess sensitivity. Empirical response to shock is bigger than that predicted by consumption smoothing.

Alternatives are
Liquidity constraint model
Precautionary saving model
Quasi Hyperbolic discounting model (self control problem)

Question 24

AS Model parameters

Answer 24

True income: y bar
Reported income: y
evasion amount: e
tax rate: t
probability of detection: p
fine rate: theta