WEBVTT 00:00:00.000 --> 00:00:02.464 align:middle line:90% [SQUEAKING] 00:00:02.464 --> 00:00:03.937 align:middle line:90% [RUSTLING] 00:00:03.937 --> 00:00:04.919 align:middle line:90% [CLICKING] 00:00:04.919 --> 00:00:09.440 align:middle line:90% 00:00:09.440 --> 00:00:11.440 align:middle line:84% JONATHAN GRUBER: Why don't we go on and continue 00:00:11.440 --> 00:00:14.720 align:middle line:84% our discussion of chapter 17, which is talking 00:00:14.720 --> 00:00:17.040 align:middle line:90% about redistribution policy? 00:00:17.040 --> 00:00:20.440 align:middle line:84% If you recall, we were talking about assuming government 00:00:20.440 --> 00:00:23.000 align:middle line:90% that wants to redistribute. 00:00:23.000 --> 00:00:25.120 align:middle line:84% We were talking about ways the government could. 00:00:25.120 --> 00:00:28.000 align:middle line:84% We said, obviously, initial ways just with a pure cash transfer 00:00:28.000 --> 00:00:29.160 align:middle line:90% program. 00:00:29.160 --> 00:00:31.240 align:middle line:84% But we talked about how the pure cash transfer 00:00:31.240 --> 00:00:35.020 align:middle line:84% program has limitations in achieving all its goals 00:00:35.020 --> 00:00:38.400 align:middle line:84% and that's why people have tried to augment the pure cash 00:00:38.400 --> 00:00:41.020 align:middle line:84% transfer program with various features. 00:00:41.020 --> 00:00:45.000 align:middle line:90% 00:00:45.000 --> 00:00:49.000 align:middle line:84% One feature was creating categorical transfers 00:00:49.000 --> 00:00:53.720 align:middle line:84% to try to target or tag people who are needy. 00:00:53.720 --> 00:00:57.520 align:middle line:84% The other was to create transfers that are in-kind 00:00:57.520 --> 00:01:01.920 align:middle line:84% to try to get people to self-select into the people who 00:01:01.920 --> 00:01:04.360 align:middle line:84% really need transfers versus those who don't. 00:01:04.360 --> 00:01:07.000 align:middle line:84% And the third was to increase outside options 00:01:07.000 --> 00:01:09.720 align:middle line:84% so people didn't need to rely on transfers as much. 00:01:09.720 --> 00:01:11.820 align:middle line:84% We talked about a couple of ways of doing that. 00:01:11.820 --> 00:01:15.840 align:middle line:84% We talked about training, the minimum wage, 00:01:15.840 --> 00:01:17.640 align:middle line:90% and wage subsidies. 00:01:17.640 --> 00:01:22.080 align:middle line:84% I want to talk about two others here. 00:01:22.080 --> 00:01:27.160 align:middle line:84% The first is-- so this is fourth on the list of ways 00:01:27.160 --> 00:01:32.920 align:middle line:84% to increase the outside option would be childcare subsidies 00:01:32.920 --> 00:01:34.840 align:middle line:90% or provision of childcare. 00:01:34.840 --> 00:01:37.520 align:middle line:84% So a major barrier towards female labor 00:01:37.520 --> 00:01:40.398 align:middle line:84% force participation, all family participation 00:01:40.398 --> 00:01:42.440 align:middle line:84% but, once again, traditionally female labor force 00:01:42.440 --> 00:01:47.400 align:middle line:84% participation, is the high cost of childcare. 00:01:47.400 --> 00:01:50.378 align:middle line:84% Most women work today even when their kids are very small. 00:01:50.378 --> 00:01:52.420 align:middle line:84% Most families-- once again, I'm being too sexist. 00:01:52.420 --> 00:01:54.600 align:middle line:84% Most families have two earners, even when 00:01:54.600 --> 00:01:56.060 align:middle line:90% the children are very small. 00:01:56.060 --> 00:01:58.880 align:middle line:90% 00:01:58.880 --> 00:02:01.080 align:middle line:84% Traditionally, and continuing today, 00:02:01.080 --> 00:02:05.000 align:middle line:84% the parent whose work suffers the most from childbearing 00:02:05.000 --> 00:02:07.160 align:middle line:90% is the mom. 00:02:07.160 --> 00:02:11.920 align:middle line:84% And as a result, many women, particularly single women, 00:02:11.920 --> 00:02:15.160 align:middle line:84% could end up on welfare because they can't afford to work. 00:02:15.160 --> 00:02:17.275 align:middle line:84% Basically, the net wage, if you think about it, 00:02:17.275 --> 00:02:19.400 align:middle line:84% if you think about modeling it, what you care about 00:02:19.400 --> 00:02:22.720 align:middle line:84% is the net wage after tax and the cost of childcare. 00:02:22.720 --> 00:02:24.400 align:middle line:84% If you have to pay a lot for childcare, 00:02:24.400 --> 00:02:27.120 align:middle line:84% working is not worth it so you go on welfare instead. 00:02:27.120 --> 00:02:29.480 align:middle line:84% So a clear way to increase outside options 00:02:29.480 --> 00:02:32.480 align:middle line:84% is to provide childcare, at least to subsidize it, 00:02:32.480 --> 00:02:36.480 align:middle line:84% so that it becomes an option instead of going on welfare. 00:02:36.480 --> 00:02:43.120 align:middle line:84% And indeed, it's been shown that the elasticity of female labor 00:02:43.120 --> 00:02:45.000 align:middle line:84% supply with respect to childcare subsidies 00:02:45.000 --> 00:02:49.240 align:middle line:84% is very high, that, basically, subsidizing childcare can 00:02:49.240 --> 00:02:51.680 align:middle line:84% have a major effect on increasing the odds that women 00:02:51.680 --> 00:02:53.320 align:middle line:90% go to work. 00:02:53.320 --> 00:02:55.067 align:middle line:84% There's a number of cool studies of this. 00:02:55.067 --> 00:02:57.150 align:middle line:84% One of my favorites is done by an MIT grad student 00:02:57.150 --> 00:03:00.150 align:middle line:84% decades ago where he said, look, what's 00:03:00.150 --> 00:03:04.990 align:middle line:84% the largest form of free child care in America? 00:03:04.990 --> 00:03:07.430 align:middle line:90% It's called kindergarten. 00:03:07.430 --> 00:03:09.910 align:middle line:84% Basically, suddenly the state takes your kids 00:03:09.910 --> 00:03:11.820 align:middle line:84% off your hands for half a day or a full day. 00:03:11.820 --> 00:03:14.070 align:middle line:84% And it turns out whether you get the form of childcare 00:03:14.070 --> 00:03:16.230 align:middle line:84% is a function of your child's birth date. 00:03:16.230 --> 00:03:18.930 align:middle line:84% So kids born in a certain-- in a typical state, 00:03:18.930 --> 00:03:26.630 align:middle line:84% a kid born on August 31 can enter kindergarten 00:03:26.630 --> 00:03:27.723 align:middle line:90% when they're 5. 00:03:27.723 --> 00:03:29.390 align:middle line:84% One born on September 1 is going to have 00:03:29.390 --> 00:03:32.350 align:middle line:84% to wait almost all the way until they're 6 to enter kind-- 00:03:32.350 --> 00:03:35.470 align:middle line:84% So he had a different quasi experiment 00:03:35.470 --> 00:03:39.830 align:middle line:84% of kids born on two days apart who have almost one full year 00:03:39.830 --> 00:03:41.332 align:middle line:90% extra of childcare. 00:03:41.332 --> 00:03:43.790 align:middle line:84% And he found that women with kids born a little bit earlier 00:03:43.790 --> 00:03:46.170 align:middle line:84% are much more likely to go to work, unsurprisingly. 00:03:46.170 --> 00:03:47.170 align:middle line:90% There's lots of studies. 00:03:47.170 --> 00:03:50.070 align:middle line:84% I did a study of a massive expansion of childcare 00:03:50.070 --> 00:03:51.830 align:middle line:84% in Canada, where it happened in Quebec 00:03:51.830 --> 00:03:53.330 align:middle line:90% and not the rest of Canada. 00:03:53.330 --> 00:03:55.430 align:middle line:84% We found a huge increase in women's work. 00:03:55.430 --> 00:03:59.070 align:middle line:84% Basically, female labor supply is very elastic with respect 00:03:59.070 --> 00:04:01.350 align:middle line:90% to subsidies to child care. 00:04:01.350 --> 00:04:04.430 align:middle line:84% So that's another way to increase outside outcomes. 00:04:04.430 --> 00:04:07.590 align:middle line:84% But now we get into an interesting feature 00:04:07.590 --> 00:04:09.102 align:middle line:84% where subsidizing wages just, well, 00:04:09.102 --> 00:04:11.310 align:middle line:84% you increase the outside outcomes but it costs money. 00:04:11.310 --> 00:04:13.560 align:middle line:84% If you're starting to subsidize childcare, 00:04:13.560 --> 00:04:15.310 align:middle line:84% you have another question, which is, well, 00:04:15.310 --> 00:04:17.510 align:middle line:90% is it good for the kids or not? 00:04:17.510 --> 00:04:19.610 align:middle line:84% So basically, we're going to subsidize childcare. 00:04:19.610 --> 00:04:21.089 align:middle line:84% Maybe we'll get women off welfare. 00:04:21.089 --> 00:04:23.070 align:middle line:84% But if it turns to be-- it turns out 00:04:23.070 --> 00:04:26.310 align:middle line:84% that that's bad for kids, that may not be a trade-off we really 00:04:26.310 --> 00:04:28.430 align:middle line:90% want to take. 00:04:28.430 --> 00:04:29.990 align:middle line:84% And there's now a huge literature 00:04:29.990 --> 00:04:33.110 align:middle line:84% studying the effect of putting kids 00:04:33.110 --> 00:04:36.830 align:middle line:84% in childcare in preschool on the kids' short run and long run 00:04:36.830 --> 00:04:37.882 align:middle line:90% outcomes. 00:04:37.882 --> 00:04:39.590 align:middle line:84% And this literature-- with the literature 00:04:39.590 --> 00:04:40.590 align:middle line:84% as vast as this one, there's going 00:04:40.590 --> 00:04:41.990 align:middle line:90% to be a difference of opinion. 00:04:41.990 --> 00:04:46.650 align:middle line:84% But my rough summary would be that if you expand-- 00:04:46.650 --> 00:04:51.510 align:middle line:84% if you put kids in childcare that's relatively low quality, 00:04:51.510 --> 00:04:53.630 align:middle line:84% it is worse for the kids' outcomes 00:04:53.630 --> 00:04:55.510 align:middle line:84% than not having them in child care. 00:04:55.510 --> 00:04:58.610 align:middle line:84% If you put kids in child care that's relatively high quality, 00:04:58.610 --> 00:04:59.590 align:middle line:90% it's better. 00:04:59.590 --> 00:05:00.570 align:middle line:90% So there's experiments. 00:05:00.570 --> 00:05:02.528 align:middle line:84% For example, there's actually randomized trials 00:05:02.528 --> 00:05:04.350 align:middle line:84% of kids being put in very high quality 00:05:04.350 --> 00:05:06.390 align:middle line:84% childcare and preschool programs that 00:05:06.390 --> 00:05:08.830 align:middle line:84% show enormous benefits in the long run in terms 00:05:08.830 --> 00:05:11.390 align:middle line:84% of improved child earnings, reduced odds of engaging 00:05:11.390 --> 00:05:12.613 align:middle line:90% in crime, et cetera. 00:05:12.613 --> 00:05:14.030 align:middle line:84% There's also articles like the one 00:05:14.030 --> 00:05:16.630 align:middle line:84% I did in Canada where they overnight massively expanded 00:05:16.630 --> 00:05:18.230 align:middle line:84% the entitlement to child care so they 00:05:18.230 --> 00:05:21.130 align:middle line:84% had to bring in a bunch of unqualified people to teach it, 00:05:21.130 --> 00:05:22.630 align:middle line:90% presumably. 00:05:22.630 --> 00:05:24.210 align:middle line:84% And that looked bad for the kids. 00:05:24.210 --> 00:05:26.990 align:middle line:84% We found that kids who were brought in the child care system 00:05:26.990 --> 00:05:29.198 align:middle line:84% had worse outcomes in the short run and the long run, 00:05:29.198 --> 00:05:32.470 align:middle line:84% more likely to commit crime, lower education later in life. 00:05:32.470 --> 00:05:34.910 align:middle line:84% So it turns out that whether you expand 00:05:34.910 --> 00:05:36.910 align:middle line:84% childcare is good or bad for kids really depends 00:05:36.910 --> 00:05:38.245 align:middle line:90% on the nature of the childcare. 00:05:38.245 --> 00:05:39.870 align:middle line:84% And this is, once again, another reason 00:05:39.870 --> 00:05:41.710 align:middle line:84% we're trying to avoid thinking in black and white terms 00:05:41.710 --> 00:05:43.550 align:middle line:84% about policy making in this class. 00:05:43.550 --> 00:05:45.510 align:middle line:90% It's not childcare good or bad. 00:05:45.510 --> 00:05:47.870 align:middle line:84% It's the nature of the childcare that matters. 00:05:47.870 --> 00:05:48.590 align:middle line:90% OK. 00:05:48.590 --> 00:05:51.630 align:middle line:84% So basically, if you expand childcare in a way that's high 00:05:51.630 --> 00:05:54.750 align:middle line:84% enough quality, you can both expand the opportunities 00:05:54.750 --> 00:05:58.750 align:middle line:84% for women to go to work and also potentially benefit their kids. 00:05:58.750 --> 00:05:59.330 align:middle line:90% OK. 00:05:59.330 --> 00:06:03.870 align:middle line:84% So that's another way to increase outside outcomes. 00:06:03.870 --> 00:06:07.250 align:middle line:84% A different way, which not a lot of folks 00:06:07.250 --> 00:06:08.750 align:middle line:84% have thought about but it's actually 00:06:08.750 --> 00:06:12.710 align:middle line:84% quite interesting and important, is child support. 00:06:12.710 --> 00:06:17.393 align:middle line:84% So when kids-- when they're single parents, 00:06:17.393 --> 00:06:19.310 align:middle line:84% either through a kid being born out of wedlock 00:06:19.310 --> 00:06:24.370 align:middle line:84% or through divorce, the absent parent often owes child support. 00:06:24.370 --> 00:06:28.630 align:middle line:84% It's a payment that's imposed by the absent parent by the courts 00:06:28.630 --> 00:06:31.430 align:middle line:84% to support the children that are left behind. 00:06:31.430 --> 00:06:32.110 align:middle line:90% OK. 00:06:32.110 --> 00:06:35.030 align:middle line:84% So the idea is if you get divorced, 00:06:35.030 --> 00:06:37.570 align:middle line:90% there's a custody hearing. 00:06:37.570 --> 00:06:38.730 align:middle line:90% There's a divorce hearing. 00:06:38.730 --> 00:06:41.310 align:middle line:84% As part of that divorce hearing, they establish some support 00:06:41.310 --> 00:06:43.750 align:middle line:84% that the higher earning spouse gives the lower-- 00:06:43.750 --> 00:06:46.470 align:middle line:84% gives to the-- or that the spouse who's higher earning 00:06:46.470 --> 00:06:50.270 align:middle line:84% gives to maybe the spouse that's more responsible for taking 00:06:50.270 --> 00:06:51.990 align:middle line:90% care of their children. 00:06:51.990 --> 00:06:55.630 align:middle line:84% The problem is, less than half of the child support 00:06:55.630 --> 00:06:58.790 align:middle line:84% orders awarded in the US are actually paid. 00:06:58.790 --> 00:07:01.870 align:middle line:84% Many, many people, once again, traditionally, dads, 00:07:01.870 --> 00:07:04.870 align:middle line:84% don't pay the child support owed to their traditionally 00:07:04.870 --> 00:07:06.950 align:middle line:84% lower earning wives who traditionally end up 00:07:06.950 --> 00:07:08.510 align:middle line:90% with the kids. 00:07:08.510 --> 00:07:09.350 align:middle line:90% OK. 00:07:09.350 --> 00:07:11.790 align:middle line:84% So basically, we have this problem 00:07:11.790 --> 00:07:14.270 align:middle line:84% that women aren't getting when they owed-- are not 00:07:14.270 --> 00:07:15.910 align:middle line:90% getting what they are owed. 00:07:15.910 --> 00:07:18.257 align:middle line:84% Since they're not getting what they're owed-- 00:07:18.257 --> 00:07:20.090 align:middle line:84% since they're not getting what they're owed, 00:07:20.090 --> 00:07:22.170 align:middle line:90% they can't afford child care. 00:07:22.170 --> 00:07:24.810 align:middle line:84% They can't afford things for the kids so they don't go to work 00:07:24.810 --> 00:07:26.830 align:middle line:90% and they end up in welfare. 00:07:26.830 --> 00:07:28.770 align:middle line:84% So when an argument's been made is we could, 00:07:28.770 --> 00:07:32.790 align:middle line:84% by increasing child support payments, by increasing-- 00:07:32.790 --> 00:07:36.570 align:middle line:84% by making efforts to increase the collection of child support, 00:07:36.570 --> 00:07:38.870 align:middle line:84% we can help women and actually get them off welfare 00:07:38.870 --> 00:07:41.450 align:middle line:84% eventually by increasing their outside option in this case, 00:07:41.450 --> 00:07:44.350 align:middle line:90% which is having child support. 00:07:44.350 --> 00:07:47.230 align:middle line:90% OK. 00:07:47.230 --> 00:07:50.860 align:middle line:84% And indeed, this is a real, like, universally pretty popular 00:07:50.860 --> 00:07:51.740 align:middle line:90% policy. 00:07:51.740 --> 00:07:53.560 align:middle line:84% I mean, indeed, we even created a term. 00:07:53.560 --> 00:07:55.433 align:middle line:84% It's called the deadbeat dads or the dads 00:07:55.433 --> 00:07:56.600 align:middle line:90% who don't pay child support. 00:07:56.600 --> 00:07:58.480 align:middle line:84% Now, my father-in-law is a deadbeat dad. 00:07:58.480 --> 00:07:59.703 align:middle line:90% I'm sympathetic to this. 00:07:59.703 --> 00:08:01.620 align:middle line:84% I mean, what can you like more than beating up 00:08:01.620 --> 00:08:02.520 align:middle line:90% on deadbeat dads? 00:08:02.520 --> 00:08:06.180 align:middle line:84% So actually, we've very much tightened 00:08:06.180 --> 00:08:08.640 align:middle line:84% the terms in which we collect child support. 00:08:08.640 --> 00:08:10.460 align:middle line:84% We've made it much harder for parents 00:08:10.460 --> 00:08:12.860 align:middle line:90% not to pay their child support. 00:08:12.860 --> 00:08:17.020 align:middle line:84% But what's interesting is it's not clear, as morally upstanding 00:08:17.020 --> 00:08:20.540 align:middle line:84% as that sounds, it's not clear it's good public policy. 00:08:20.540 --> 00:08:22.340 align:middle line:90% And here's why. 00:08:22.340 --> 00:08:26.660 align:middle line:84% When a woman's on welfare and you increase child support 00:08:26.660 --> 00:08:30.580 align:middle line:84% payments, that essentially goes to the state 00:08:30.580 --> 00:08:32.120 align:middle line:84% to offset the cost of her welfare. 00:08:32.120 --> 00:08:34.559 align:middle line:84% The state grabs that and says, oh, you're on welfare. 00:08:34.559 --> 00:08:37.140 align:middle line:84% We're going to take that and offset the cost of welfare. 00:08:37.140 --> 00:08:38.559 align:middle line:84% So think about a woman on welfare. 00:08:38.559 --> 00:08:41.299 align:middle line:84% So if it gets her off welfare, that saves the state money. 00:08:41.299 --> 00:08:44.640 align:middle line:84% But if she stays on welfare, it saves the state money, too, 00:08:44.640 --> 00:08:46.780 align:middle line:84% but they just take the child support money 00:08:46.780 --> 00:08:50.020 align:middle line:84% and they keep it to offset the cost of being on welfare. 00:08:50.020 --> 00:08:54.760 align:middle line:84% Well, think now about how good a deal that is for the woman. 00:08:54.760 --> 00:08:55.900 align:middle line:90% It's not a good deal. 00:08:55.900 --> 00:08:58.340 align:middle line:84% She's basically getting the same welfare payment anyway. 00:08:58.340 --> 00:09:00.583 align:middle line:84% It's just it's coming-- she's getting the same check 00:09:00.583 --> 00:09:01.500 align:middle line:90% at the end of the day. 00:09:01.500 --> 00:09:03.780 align:middle line:84% It's just being financed by her ex-husband 00:09:03.780 --> 00:09:06.620 align:middle line:84% rather than being financed by the state. 00:09:06.620 --> 00:09:09.080 align:middle line:84% So for the woman who stays on welfare, 00:09:09.080 --> 00:09:10.163 align:middle line:90% it's not really a benefit. 00:09:10.163 --> 00:09:12.497 align:middle line:84% For the woman where it can actually get her off welfare, 00:09:12.497 --> 00:09:13.360 align:middle line:90% it is a benefit. 00:09:13.360 --> 00:09:15.120 align:middle line:84% So if she can keep it, it's a benefit. 00:09:15.120 --> 00:09:17.500 align:middle line:84% But if it just goes to offset your welfare, it's not. 00:09:17.500 --> 00:09:19.420 align:middle line:90% People understand that? 00:09:19.420 --> 00:09:20.300 align:middle line:90% OK. 00:09:20.300 --> 00:09:21.980 align:middle line:90% Now let's go further. 00:09:21.980 --> 00:09:24.060 align:middle line:90% Who are the deadbeat dads? 00:09:24.060 --> 00:09:26.900 align:middle line:84% They're often pretty low income folk. 00:09:26.900 --> 00:09:28.460 align:middle line:84% They're often people who are actually 00:09:28.460 --> 00:09:32.540 align:middle line:84% themselves not of many means and struggling to get by. 00:09:32.540 --> 00:09:35.160 align:middle line:84% So now let's rephrase this public policy. 00:09:35.160 --> 00:09:36.940 align:middle line:84% What if I told you there was a policy that 00:09:36.940 --> 00:09:42.115 align:middle line:84% taxed low income men to support the state's spending money. 00:09:42.115 --> 00:09:44.740 align:middle line:84% You'd be like, ooh, that doesn't sound like such a good policy. 00:09:44.740 --> 00:09:46.780 align:middle line:84% Well, that's what this policy is. 00:09:46.780 --> 00:09:48.653 align:middle line:84% The deadbeat dads are low income men. 00:09:48.653 --> 00:09:50.820 align:middle line:84% You take their money to offset what the state spends 00:09:50.820 --> 00:09:52.100 align:middle line:90% on their wives. 00:09:52.100 --> 00:09:56.580 align:middle line:84% That suddenly doesn't sound like necessarily such a good policy. 00:09:56.580 --> 00:10:00.500 align:middle line:84% So basically, it's not entirely clear. 00:10:00.500 --> 00:10:03.140 align:middle line:84% Really, in some sense, it depends a lot 00:10:03.140 --> 00:10:07.540 align:middle line:84% on the moral case for it, which depends 00:10:07.540 --> 00:10:11.500 align:middle line:84% a lot on whether it stops dads from becoming deadbeat dads. 00:10:11.500 --> 00:10:13.080 align:middle line:90% It's a complicated policy. 00:10:13.080 --> 00:10:14.980 align:middle line:84% As I said to you, the policy is-- 00:10:14.980 --> 00:10:16.900 align:middle line:84% let's say I said to you, whether someone's 00:10:16.900 --> 00:10:18.560 align:middle line:84% a deadbeat dad is written in their DNA. 00:10:18.560 --> 00:10:19.560 align:middle line:90% Nothing can change that. 00:10:19.560 --> 00:10:21.020 align:middle line:90% It's not elastic. 00:10:21.020 --> 00:10:23.180 align:middle line:84% Then the trade-off is, on the one hand, 00:10:23.180 --> 00:10:25.400 align:middle line:84% you're going after these deadbeat dads for money. 00:10:25.400 --> 00:10:27.100 align:middle line:84% On the other hand, you're just offsetting other state income 00:10:27.100 --> 00:10:27.720 align:middle line:90% tax revenue. 00:10:27.720 --> 00:10:29.340 align:middle line:90% It's not clear it's a good idea. 00:10:29.340 --> 00:10:32.000 align:middle line:84% But if it stops people from becoming deadbeat dads, 00:10:32.000 --> 00:10:33.477 align:middle line:90% that might be a good idea. 00:10:33.477 --> 00:10:35.060 align:middle line:84% It might be a good idea if it actually 00:10:35.060 --> 00:10:37.520 align:middle line:84% can get-- if people say, well, wait a second, 00:10:37.520 --> 00:10:39.780 align:middle line:84% I don't want to leave my family because I'm 00:10:39.780 --> 00:10:41.740 align:middle line:84% going to have a big tax bill at the end. 00:10:41.740 --> 00:10:43.220 align:middle line:90% Maybe it's a good idea. 00:10:43.220 --> 00:10:50.900 align:middle line:84% The evidence on that, however, is actually the opposite. 00:10:50.900 --> 00:10:54.140 align:middle line:84% So it turns out the evidence is that when you strengthen 00:10:54.140 --> 00:10:57.380 align:middle line:84% paternal identification loss, when you are better 00:10:57.380 --> 00:11:00.060 align:middle line:84% at finding fathers and making them pay, 00:11:00.060 --> 00:11:03.740 align:middle line:84% they are less involved in their kids' lives. 00:11:03.740 --> 00:11:05.660 align:middle line:90% Why is that? 00:11:05.660 --> 00:11:07.260 align:middle line:84% When you're better at finding-- yeah. 00:11:07.260 --> 00:11:08.603 align:middle line:90% STUDENT: [INAUDIBLE] 00:11:08.603 --> 00:11:09.520 align:middle line:90% JONATHAN GRUBER: Yeah. 00:11:09.520 --> 00:11:10.600 align:middle line:84% You're giving them money so you're like, fine, 00:11:10.600 --> 00:11:12.580 align:middle line:84% I'm going to spend less time with them. 00:11:12.580 --> 00:11:16.940 align:middle line:84% So actually, it turns out that may backfire. 00:11:16.940 --> 00:11:18.900 align:middle line:90% Now once again, I don't-- 00:11:18.900 --> 00:11:20.820 align:middle line:90% once again, I'm sympathetic. 00:11:20.820 --> 00:11:23.000 align:middle line:84% As I said, I'm sympathetic to this personally. 00:11:23.000 --> 00:11:26.500 align:middle line:84% But it's, once again, a good example of why economists 00:11:26.500 --> 00:11:27.520 align:middle line:90% think things through. 00:11:27.520 --> 00:11:30.780 align:middle line:84% It's not obvious that this is a great way 00:11:30.780 --> 00:11:33.060 align:middle line:84% to solve the iron triangle problem, to collect money 00:11:33.060 --> 00:11:35.480 align:middle line:84% from these low income men when it doesn't actually, 00:11:35.480 --> 00:11:37.688 align:middle line:84% obviously make them any more committed to their kids. 00:11:37.688 --> 00:11:39.820 align:middle line:90% It just offsets state costs. 00:11:39.820 --> 00:11:40.800 align:middle line:90% OK. 00:11:40.800 --> 00:11:42.780 align:middle line:84% Sort of an interesting thought exercise 00:11:42.780 --> 00:11:45.322 align:middle line:84% about how you think through a policy, which on its face space 00:11:45.322 --> 00:11:47.260 align:middle line:84% sounds like a no brainer, but in practice it's 00:11:47.260 --> 00:11:48.440 align:middle line:90% a little more complicated. 00:11:48.440 --> 00:11:51.420 align:middle line:90% 00:11:51.420 --> 00:11:55.620 align:middle line:84% And then finally, the last thing on the list 00:11:55.620 --> 00:11:58.700 align:middle line:84% to improve outside outcomes is you can remove 00:11:58.700 --> 00:12:01.280 align:middle line:90% what we can call transfer lock. 00:12:01.280 --> 00:12:06.140 align:middle line:90% 00:12:06.140 --> 00:12:08.740 align:middle line:90% We talked about job lock. 00:12:08.740 --> 00:12:10.680 align:middle line:84% Let's talk instead about transfer lock. 00:12:10.680 --> 00:12:14.460 align:middle line:84% And this is illustrated in figure 17.9, the first page 00:12:14.460 --> 00:12:17.740 align:middle line:90% of the handout you have today. 00:12:17.740 --> 00:12:21.940 align:middle line:84% The way Medicaid used to work is you got it 00:12:21.940 --> 00:12:23.980 align:middle line:90% if you were on welfare. 00:12:23.980 --> 00:12:26.820 align:middle line:84% But when you left welfare, when you left what was then 00:12:26.820 --> 00:12:30.240 align:middle line:84% called AFDC, now called TANF, when you left it, 00:12:30.240 --> 00:12:32.080 align:middle line:84% you not only gave up your cash benefit, 00:12:32.080 --> 00:12:34.460 align:middle line:90% you lost your health insurance. 00:12:34.460 --> 00:12:36.980 align:middle line:90% You lost your Medicaid. 00:12:36.980 --> 00:12:37.740 align:middle line:90% OK. 00:12:37.740 --> 00:12:39.940 align:middle line:84% What did that do to people's budget constraints? 00:12:39.940 --> 00:12:42.620 align:middle line:84% Well, let's go back to figure 17.9. 00:12:42.620 --> 00:12:45.370 align:middle line:84% Remind yourself of the figure in the last lecture. 00:12:45.370 --> 00:12:50.530 align:middle line:84% A to C is the pre-welfare budget constraint. 00:12:50.530 --> 00:12:53.250 align:middle line:84% With a 50% tax rate, the post-welfare budget constraint 00:12:53.250 --> 00:12:55.130 align:middle line:90% goes ABDC. 00:12:55.130 --> 00:12:57.570 align:middle line:90% Remember that from last time. 00:12:57.570 --> 00:13:01.250 align:middle line:84% Now let's imagine that, when you're on welfare but when 00:13:01.250 --> 00:13:04.610 align:middle line:84% you're not, you also get health insurance and the health 00:13:04.610 --> 00:13:07.437 align:middle line:90% insurance is worth $2,000. 00:13:07.437 --> 00:13:09.270 align:middle line:84% What does that do to your budget constraint? 00:13:09.270 --> 00:13:12.010 align:middle line:84% Well, it says as long as you're on welfare, 00:13:12.010 --> 00:13:13.710 align:middle line:90% you're getting $2,000 extra. 00:13:13.710 --> 00:13:18.730 align:middle line:84% So it shifts the welfare segment up by 2,000. 00:13:18.730 --> 00:13:20.290 align:middle line:90% Look at what that does. 00:13:20.290 --> 00:13:24.570 align:middle line:84% That creates an enormous disincentive to labor supply 00:13:24.570 --> 00:13:30.370 align:middle line:84% at the top of that graph, between $27,520 and $25,520. 00:13:30.370 --> 00:13:35.650 align:middle line:84% Indeed, you would never want to earn $26,000. 00:13:35.650 --> 00:13:39.593 align:middle line:84% Because you earn $26,000, you're off welfare and you give up 00:13:39.593 --> 00:13:40.510 align:middle line:90% your health insurance. 00:13:40.510 --> 00:13:41.927 align:middle line:84% You'd rather continue to earn just 00:13:41.927 --> 00:13:44.290 align:middle line:84% below that to make sure you keep your health insurance. 00:13:44.290 --> 00:13:48.010 align:middle line:84% So just as having health insurance on your job 00:13:48.010 --> 00:13:50.090 align:middle line:84% can lead you to not leave your job, 00:13:50.090 --> 00:13:52.450 align:middle line:84% having health insurance tied to welfare 00:13:52.450 --> 00:13:55.610 align:middle line:84% can lead you to not want to leave welfare. 00:13:55.610 --> 00:13:57.660 align:middle line:84% And indeed, that was a major motivation 00:13:57.660 --> 00:13:59.910 align:middle line:84% for actually the previous round of health care reform, 00:13:59.910 --> 00:14:01.202 align:middle line:90% the Clinton health care reform. 00:14:01.202 --> 00:14:02.940 align:middle line:84% One way he motivated it was to say, 00:14:02.940 --> 00:14:05.190 align:middle line:84% we need universal health care to get women off welfare 00:14:05.190 --> 00:14:08.410 align:middle line:84% because being on welfare was so unpopular. 00:14:08.410 --> 00:14:12.210 align:middle line:84% And in fact, the evidence is that when you-- the evidence 00:14:12.210 --> 00:14:13.727 align:middle line:84% is-- it's modest, but it suggests 00:14:13.727 --> 00:14:15.310 align:middle line:84% that when you expand health insurance, 00:14:15.310 --> 00:14:17.450 align:middle line:90% you do get women off welfare. 00:14:17.450 --> 00:14:19.170 align:middle line:90% OK. 00:14:19.170 --> 00:14:24.650 align:middle line:84% So that's kind of what I wanted to say about how 00:14:24.650 --> 00:14:26.690 align:middle line:90% we think about designing this. 00:14:26.690 --> 00:14:31.250 align:middle line:84% I want to cover two other things before we move on to taxation. 00:14:31.250 --> 00:14:35.050 align:middle line:84% The first is I want to talk about welfare reform. 00:14:35.050 --> 00:14:40.010 align:middle line:84% This was a major public policy change in 1996. 00:14:40.010 --> 00:14:45.850 align:middle line:84% In 1996, Bill Clinton was a fairly unpopular president 00:14:45.850 --> 00:14:46.590 align:middle line:90% at that point. 00:14:46.590 --> 00:14:49.330 align:middle line:84% His effort at universal health care had failed. 00:14:49.330 --> 00:14:51.730 align:middle line:84% He decided he wanted to really tack to the middle, 00:14:51.730 --> 00:14:54.870 align:middle line:84% to try to attract a broader coalition of voters. 00:14:54.870 --> 00:14:58.650 align:middle line:84% And he decided one way to do so was to really go 00:14:58.650 --> 00:15:03.410 align:middle line:84% after what people perceived as the undeserving welfare 00:15:03.410 --> 00:15:04.570 align:middle line:90% recipients. 00:15:04.570 --> 00:15:06.710 align:middle line:84% And so he worked with Congress, actually, 00:15:06.710 --> 00:15:08.730 align:middle line:84% many Republican members of Congress, 00:15:08.730 --> 00:15:11.090 align:middle line:84% to actually design a fundamental change to the way 00:15:11.090 --> 00:15:13.250 align:middle line:90% our welfare program worked. 00:15:13.250 --> 00:15:15.970 align:middle line:84% In particular, the most fundamental change 00:15:15.970 --> 00:15:19.450 align:middle line:84% was it set time limits on how long people could be on welfare. 00:15:19.450 --> 00:15:23.890 align:middle line:84% Before 1996, you could be on welfare, 00:15:23.890 --> 00:15:26.770 align:middle line:84% then called AFTC, now called TANF, 00:15:26.770 --> 00:15:29.010 align:middle line:90% you could be on that forever. 00:15:29.010 --> 00:15:31.770 align:middle line:84% As long as your income was low enough, you never had to leave. 00:15:31.770 --> 00:15:34.770 align:middle line:84% What they did-- and this is when the name changed to TANF. 00:15:34.770 --> 00:15:40.233 align:middle line:84% What they did is they set a time limit on how long 00:15:40.233 --> 00:15:41.150 align:middle line:90% you can be on welfare. 00:15:41.150 --> 00:15:43.317 align:middle line:84% You could be on welfare only for two years at a time 00:15:43.317 --> 00:15:45.570 align:middle line:84% and five years for your whole life. 00:15:45.570 --> 00:15:47.370 align:middle line:90% They set a time limit. 00:15:47.370 --> 00:15:53.130 align:middle line:84% Moreover, they changed the way cash welfare was financed. 00:15:53.130 --> 00:15:55.890 align:middle line:84% It used to be that it was financed in the same way 00:15:55.890 --> 00:15:58.443 align:middle line:84% programs like Medicaid is, through a matching grant. 00:15:58.443 --> 00:16:00.610 align:middle line:84% Every dollar the state spent, the federal government 00:16:00.610 --> 00:16:01.690 align:middle line:90% matched it. 00:16:01.690 --> 00:16:03.447 align:middle line:84% Instead, they gave states a block grant. 00:16:03.447 --> 00:16:06.030 align:middle line:84% They said, we're going to take what you're spending on welfare 00:16:06.030 --> 00:16:11.388 align:middle line:84% in 1994, give you that amount, raise it by inflation, 00:16:11.388 --> 00:16:13.430 align:middle line:84% but it doesn't matter how many people on welfare. 00:16:13.430 --> 00:16:15.050 align:middle line:90% That's the only amount you get. 00:16:15.050 --> 00:16:17.550 align:middle line:84% In other words, if we go back to our health care lectures, 00:16:17.550 --> 00:16:20.170 align:middle line:84% they moved from retrospective reimbursement 00:16:20.170 --> 00:16:21.778 align:middle line:90% to prospective reimbursement. 00:16:21.778 --> 00:16:24.070 align:middle line:84% Instead of paying them for every new person on welfare, 00:16:24.070 --> 00:16:25.573 align:middle line:90% they will give you a flat check. 00:16:25.573 --> 00:16:26.990 align:middle line:84% We're going to look the other way. 00:16:26.990 --> 00:16:27.865 align:middle line:90% You do what you want. 00:16:27.865 --> 00:16:29.450 align:middle line:84% You kick everyone off welfare, great. 00:16:29.450 --> 00:16:30.777 align:middle line:90% You get to keep all that money. 00:16:30.777 --> 00:16:33.110 align:middle line:84% You get double your roll of welfare, tough luck for you. 00:16:33.110 --> 00:16:35.010 align:middle line:84% We're not giving you any more money. 00:16:35.010 --> 00:16:38.130 align:middle line:84% So this is a major change in the incentive structure 00:16:38.130 --> 00:16:41.250 align:middle line:84% for bringing people onto the welfare program in the state. 00:16:41.250 --> 00:16:43.090 align:middle line:90% OK. 00:16:43.090 --> 00:16:48.675 align:middle line:84% So what did-- there's also a number of efforts 00:16:48.675 --> 00:16:51.050 align:middle line:84% to try to limit unwed motherhood since people were really 00:16:51.050 --> 00:16:53.070 align:middle line:84% worried that welfare was causing unwed motherhood, 00:16:53.070 --> 00:16:54.737 align:middle line:84% even though the evidence said otherwise. 00:16:54.737 --> 00:16:56.370 align:middle line:84% There were things like they capped 00:16:56.370 --> 00:16:58.290 align:middle line:84% how many benefits you could get if you had additional kids 00:16:58.290 --> 00:16:59.310 align:middle line:90% and things like that. 00:16:59.310 --> 00:17:01.847 align:middle line:90% Yeah. 00:17:01.847 --> 00:17:03.930 align:middle line:84% STUDENT: Is that grant also insensitive to changes 00:17:03.930 --> 00:17:05.650 align:middle line:90% in overall state population? 00:17:05.650 --> 00:17:07.202 align:middle line:84% JONATHAN GRUBER: It's per capita. 00:17:07.202 --> 00:17:07.869 align:middle line:90% It's per capita. 00:17:07.869 --> 00:17:10.670 align:middle line:84% And it's inflated by population and inflation 00:17:10.670 --> 00:17:12.609 align:middle line:90% but not by enrollment. 00:17:12.609 --> 00:17:15.210 align:middle line:84% So what effect did this law have? 00:17:15.210 --> 00:17:18.150 align:middle line:84% Well, the enrollment in welfare was dramatic. 00:17:18.150 --> 00:17:20.290 align:middle line:90% Look at figure 17.10. 00:17:20.290 --> 00:17:25.930 align:middle line:84% Figure 17.10 shows the number of recipients of welfare. 00:17:25.930 --> 00:17:32.490 align:middle line:84% And it fell from, about at its peak in 1995-- 00:17:32.490 --> 00:17:39.120 align:middle line:84% I'm sorry-- its peak in 1995 of about 15 million people, 00:17:39.120 --> 00:17:41.960 align:middle line:84% it fell down to about four million people, 00:17:41.960 --> 00:17:45.800 align:middle line:84% a massive, massive reduction in welfare rolls. 00:17:45.800 --> 00:17:47.480 align:middle line:90% Unprecedented. 00:17:47.480 --> 00:17:48.280 align:middle line:90% OK. 00:17:48.280 --> 00:17:49.780 align:middle line:84% So that was the first thing you did. 00:17:49.780 --> 00:17:53.000 align:middle line:84% Now, the question there is, was that because of welfare reform? 00:17:53.000 --> 00:17:55.440 align:middle line:84% It turns out that also corresponds 00:17:55.440 --> 00:17:58.120 align:middle line:90% with a massive economic boom. 00:17:58.120 --> 00:18:00.720 align:middle line:84% And maybe people would have left welfare anyway 00:18:00.720 --> 00:18:03.000 align:middle line:84% because the economy was getting better. 00:18:03.000 --> 00:18:04.740 align:middle line:84% So people have tried to study this. 00:18:04.740 --> 00:18:07.680 align:middle line:84% And they've decided probably about a third of this decrease 00:18:07.680 --> 00:18:10.880 align:middle line:84% was due to the reform, about 2/3 was due to better economic 00:18:10.880 --> 00:18:12.280 align:middle line:90% conditions. 00:18:12.280 --> 00:18:14.840 align:middle line:84% So it had a meaningful effect on enrollment. 00:18:14.840 --> 00:18:16.180 align:middle line:90% That's the first conclusion. 00:18:16.180 --> 00:18:18.440 align:middle line:84% The second question is, what will this 00:18:18.440 --> 00:18:21.740 align:middle line:84% do to the well-being of single women? 00:18:21.740 --> 00:18:23.640 align:middle line:84% We're taking all those women off welfare. 00:18:23.640 --> 00:18:26.197 align:middle line:84% And this is a very important lesson 00:18:26.197 --> 00:18:28.280 align:middle line:84% for those of you who want to go on and work deeper 00:18:28.280 --> 00:18:31.640 align:middle line:84% in policy, which is that, at the time 00:18:31.640 --> 00:18:35.640 align:middle line:84% this happened when I taught this class in 1996-- 00:18:35.640 --> 00:18:36.520 align:middle line:90% OK. 00:18:36.520 --> 00:18:38.320 align:middle line:90% Much younger. 00:18:38.320 --> 00:18:39.140 align:middle line:90% You weren't born. 00:18:39.140 --> 00:18:40.140 align:middle line:90% I was much younger. 00:18:40.140 --> 00:18:41.740 align:middle line:90% I taught this class in 1996. 00:18:41.740 --> 00:18:44.920 align:middle line:84% I said, this is going to be a fucking disaster. 00:18:44.920 --> 00:18:46.057 align:middle line:90% Based on what? 00:18:46.057 --> 00:18:47.140 align:middle line:90% Well, based on two things. 00:18:47.140 --> 00:18:49.560 align:middle line:84% First of all, there was a large literature 00:18:49.560 --> 00:18:52.620 align:middle line:84% which showed that if you cut welfare benefits, 00:18:52.620 --> 00:18:55.160 align:middle line:84% it doesn't cause women to work any harder. 00:18:55.160 --> 00:18:56.660 align:middle line:84% So it's not like by cutting welfare, 00:18:56.660 --> 00:18:58.880 align:middle line:84% these women are going to make it up by working more. 00:18:58.880 --> 00:19:01.680 align:middle line:84% They're just going to have lower income. 00:19:01.680 --> 00:19:04.440 align:middle line:84% Second of all, it showed that-- there was a paper 00:19:04.440 --> 00:19:07.447 align:middle line:84% that I've written that, much like I showed for UI, 00:19:07.447 --> 00:19:09.780 align:middle line:84% I showed for welfare that when you cut welfare benefits, 00:19:09.780 --> 00:19:12.040 align:middle line:90% women consume a lot less. 00:19:12.040 --> 00:19:15.200 align:middle line:84% So it looked like there was big consumption smoothing benefits 00:19:15.200 --> 00:19:17.357 align:middle line:90% and not a lot of moral hazard. 00:19:17.357 --> 00:19:19.440 align:middle line:84% As a result, my feeling was, when you dramatically 00:19:19.440 --> 00:19:21.900 align:middle line:84% reduce this program, people are going to suffer. 00:19:21.900 --> 00:19:23.640 align:middle line:84% Their lives are going to get worse. 00:19:23.640 --> 00:19:25.340 align:middle line:84% And that was the general feeling. 00:19:25.340 --> 00:19:28.600 align:middle line:84% Indeed, many people left the Clinton administration 00:19:28.600 --> 00:19:29.300 align:middle line:90% in protest. 00:19:29.300 --> 00:19:32.840 align:middle line:84% It was really viewed as a betrayal of progressive cause 00:19:32.840 --> 00:19:34.360 align:middle line:90% to do this. 00:19:34.360 --> 00:19:35.920 align:middle line:90% What happened? 00:19:35.920 --> 00:19:38.480 align:middle line:84% What happened was not at all what we predicted. 00:19:38.480 --> 00:19:41.360 align:middle line:84% What happened was women responded massively 00:19:41.360 --> 00:19:43.000 align:middle line:90% by going to work. 00:19:43.000 --> 00:19:45.180 align:middle line:84% And actually, their standard of living didn't fall. 00:19:45.180 --> 00:19:47.440 align:middle line:90% If anything, it rose. 00:19:47.440 --> 00:19:50.000 align:middle line:84% So actually, not at all what the previous research would have 00:19:50.000 --> 00:19:52.120 align:middle line:90% predicted. 00:19:52.120 --> 00:19:53.140 align:middle line:90% What's going on? 00:19:53.140 --> 00:19:55.600 align:middle line:84% What's going on is this is-- what's 00:19:55.600 --> 00:19:58.143 align:middle line:84% going on is what Josh Angrist won the Nobel Prize for, 00:19:58.143 --> 00:20:00.560 align:middle line:84% which is the difference between when you look at something 00:20:00.560 --> 00:20:02.238 align:middle line:90% locally versus big changes. 00:20:02.238 --> 00:20:04.280 align:middle line:84% We were looking at what happens to little change. 00:20:04.280 --> 00:20:06.560 align:middle line:84% If you change benefits by $100, yeah, people 00:20:06.560 --> 00:20:08.100 align:middle line:84% don't work anymore, more or less. 00:20:08.100 --> 00:20:10.100 align:middle line:84% When you say we're getting rid of your benefits, 00:20:10.100 --> 00:20:13.775 align:middle line:84% people go to work, that this change was so dramatic 00:20:13.775 --> 00:20:15.400 align:middle line:84% that it shifted the whole nature of how 00:20:15.400 --> 00:20:16.960 align:middle line:90% people thought about work. 00:20:16.960 --> 00:20:18.560 align:middle line:84% And it was so out of bounds from what 00:20:18.560 --> 00:20:20.760 align:middle line:84% previous studies had covered that it turned out well 00:20:20.760 --> 00:20:21.260 align:middle line:90% for them. 00:20:21.260 --> 00:20:24.960 align:middle line:84% Didn't cause mass starvation among single moms. 00:20:24.960 --> 00:20:27.718 align:middle line:84% Actually, if anything, their incomes went up a bit 00:20:27.718 --> 00:20:29.260 align:middle line:84% because, on average, they left work-- 00:20:29.260 --> 00:20:31.320 align:middle line:84% they left welfare and went to work. 00:20:31.320 --> 00:20:35.120 align:middle line:84% So this was a very surprising finding. 00:20:35.120 --> 00:20:37.800 align:middle line:84% So basically, this is viewed by many 00:20:37.800 --> 00:20:39.860 align:middle line:84% as saying welfare reform's kind of success. 00:20:39.860 --> 00:20:44.680 align:middle line:84% We lowered the welfare rolls and we didn't actually 00:20:44.680 --> 00:20:47.080 align:middle line:90% cause material suffering. 00:20:47.080 --> 00:20:49.200 align:middle line:90% OK. 00:20:49.200 --> 00:20:52.080 align:middle line:90% Now two caveats to that. 00:20:52.080 --> 00:20:55.500 align:middle line:84% The first caveat is, on average, women's income went up, 00:20:55.500 --> 00:20:57.800 align:middle line:84% but some women at the bottom did suffer. 00:20:57.800 --> 00:20:59.342 align:middle line:84% So there's a distributional component 00:20:59.342 --> 00:21:01.758 align:middle line:84% and how you feel about that depends on your social welfare 00:21:01.758 --> 00:21:02.320 align:middle line:90% function. 00:21:02.320 --> 00:21:04.583 align:middle line:84% But it didn't-- it's not that it caused no suffering. 00:21:04.583 --> 00:21:06.000 align:middle line:84% Some women who couldn't go to work 00:21:06.000 --> 00:21:08.240 align:middle line:84% did suffer from these time limits. 00:21:08.240 --> 00:21:08.860 align:middle line:90% OK. 00:21:08.860 --> 00:21:11.640 align:middle line:84% So there was a distributional aspect that offsets that a bit. 00:21:11.640 --> 00:21:14.160 align:middle line:84% The other thing is, once again, ultimately 00:21:14.160 --> 00:21:16.360 align:middle line:84% what did it mean for the next generation? 00:21:16.360 --> 00:21:19.478 align:middle line:84% What did it mean for the next generation of kids? 00:21:19.478 --> 00:21:21.020 align:middle line:84% Actually, no, that's the third thing. 00:21:21.020 --> 00:21:23.353 align:middle line:84% The second thing, which is quite interesting once again, 00:21:23.353 --> 00:21:26.180 align:middle line:84% ethically and morally, which is what is utility? 00:21:26.180 --> 00:21:29.920 align:middle line:84% Utility is a function of consumption and leisure. 00:21:29.920 --> 00:21:33.030 align:middle line:84% What I'm saying is consumption went up. 00:21:33.030 --> 00:21:34.190 align:middle line:90% Everybody says, yay. 00:21:34.190 --> 00:21:35.130 align:middle line:90% Consumption went up. 00:21:35.130 --> 00:21:37.070 align:middle line:84% Look, these women were worse off. 00:21:37.070 --> 00:21:39.310 align:middle line:84% Well, leisure clearly went way down. 00:21:39.310 --> 00:21:41.150 align:middle line:84% But no one seems to care about that. 00:21:41.150 --> 00:21:43.753 align:middle line:84% No one seems to care about the leisure of single moms. 00:21:43.753 --> 00:21:45.170 align:middle line:84% They say, well, consumption is up. 00:21:45.170 --> 00:21:46.470 align:middle line:90% That's all I care about. 00:21:46.470 --> 00:21:47.230 align:middle line:90% Why? 00:21:47.230 --> 00:21:50.190 align:middle line:84% Because the view was that their leisure-- 00:21:50.190 --> 00:21:52.272 align:middle line:84% that we didn't value the leisure. 00:21:52.272 --> 00:21:54.230 align:middle line:84% The view was, well, this leisure is something-- 00:21:54.230 --> 00:21:55.510 align:middle line:90% they should be at work. 00:21:55.510 --> 00:21:59.710 align:middle line:84% Basically, a moral view of work, work as a good. 00:21:59.710 --> 00:22:01.430 align:middle line:84% And actually, whether that's true or not 00:22:01.430 --> 00:22:03.627 align:middle line:84% depends a bit on what influenced it has on the kids. 00:22:03.627 --> 00:22:05.710 align:middle line:84% Part of the argument was what was called a welfare 00:22:05.710 --> 00:22:08.630 align:middle line:84% culture of dependency, that basically by these women not 00:22:08.630 --> 00:22:11.750 align:middle line:84% working, they were setting a bad example for their kids. 00:22:11.750 --> 00:22:13.690 align:middle line:84% And that basically, once women went to work, 00:22:13.690 --> 00:22:15.440 align:middle line:84% it would set a good example for their kids 00:22:15.440 --> 00:22:18.510 align:middle line:84% so we shouldn't really value a loss in leisure. 00:22:18.510 --> 00:22:21.790 align:middle line:84% That raises the third issue which is what about the kids? 00:22:21.790 --> 00:22:25.290 align:middle line:84% And the evidence is really unclear on this, on what it did, 00:22:25.290 --> 00:22:27.650 align:middle line:84% whether it was good or bad for kids, welfare reform. 00:22:27.650 --> 00:22:29.950 align:middle line:84% Even though it's now far in the rearview mirror, 00:22:29.950 --> 00:22:33.270 align:middle line:84% there still hasn't been a really good comprehensive study 00:22:33.270 --> 00:22:36.090 align:middle line:84% of the next generation effects of welfare reform. 00:22:36.090 --> 00:22:36.590 align:middle line:90% Yeah. 00:22:36.590 --> 00:22:38.275 align:middle line:84% STUDENT: Why do you think that is? 00:22:38.275 --> 00:22:40.150 align:middle line:84% JONATHAN GRUBER: Partly because it was really 00:22:40.150 --> 00:22:41.680 align:middle line:90% pretty much a national change. 00:22:41.680 --> 00:22:43.930 align:middle line:84% It was a national change when the economy was booming. 00:22:43.930 --> 00:22:45.830 align:middle line:90% It's hard to separate out. 00:22:45.830 --> 00:22:49.550 align:middle line:84% There's not really a sharp design to study it very well. 00:22:49.550 --> 00:22:51.370 align:middle line:84% STUDENT: So unless a new design evolves? 00:22:51.370 --> 00:22:51.870 align:middle line:90% JONATHAN GRUBER: Yeah. 00:22:51.870 --> 00:22:54.590 align:middle line:84% It's something you have to think of something pretty clever 00:22:54.590 --> 00:22:56.310 align:middle line:90% to go after that. 00:22:56.310 --> 00:22:59.710 align:middle line:84% So anyway, a lot of stuff there, a lot of information. 00:22:59.710 --> 00:23:02.910 align:middle line:84% Once again, the main thing I want you to take away from this, 00:23:02.910 --> 00:23:05.173 align:middle line:84% not be tested on any institutional details. 00:23:05.173 --> 00:23:06.590 align:middle line:84% The main thing I want to take away 00:23:06.590 --> 00:23:10.100 align:middle line:84% is how to think about the pros and cons of policy changes. 00:23:10.100 --> 00:23:12.350 align:middle line:84% That's what we're trying to build the intuition of how 00:23:12.350 --> 00:23:14.750 align:middle line:84% we think about all the aspects that 00:23:14.750 --> 00:23:16.090 align:middle line:90% go along with policy change. 00:23:16.090 --> 00:23:18.230 align:middle line:84% That's what I want you to take away from it. 00:23:18.230 --> 00:23:19.430 align:middle line:90% OK. 00:23:19.430 --> 00:23:21.710 align:middle line:90% Questions about that? 00:23:21.710 --> 00:23:22.310 align:middle line:90% OK. 00:23:22.310 --> 00:23:25.870 align:middle line:84% Last thing in chapter 17, inequality 00:23:25.870 --> 00:23:27.010 align:middle line:90% continues to be a problem. 00:23:27.010 --> 00:23:31.030 align:middle line:84% One great way to see this is in figure 17.11. 00:23:31.030 --> 00:23:33.030 align:middle line:84% Valerie, once again, has a typo in this figure. 00:23:33.030 --> 00:23:35.850 align:middle line:90% That x-axis is not 0.06%. 00:23:35.850 --> 00:23:38.170 align:middle line:90% The x-axis is in percent. 00:23:38.170 --> 00:23:41.110 align:middle line:84% Just there's a typo in the y-axis rather. 00:23:41.110 --> 00:23:46.550 align:middle line:84% This basically shows the income distribution 00:23:46.550 --> 00:23:50.030 align:middle line:84% against the percentage change in income over the 2006 00:23:50.030 --> 00:23:56.470 align:middle line:84% to 2000-- over the period, I'm sorry, from 1980 to 2014. 00:23:56.470 --> 00:23:59.870 align:middle line:84% So each point in this graph is, at each point 00:23:59.870 --> 00:24:02.470 align:middle line:84% in income distribution, how did incomes 00:24:02.470 --> 00:24:05.550 align:middle line:90% evolve from 1980 to 2014? 00:24:05.550 --> 00:24:08.870 align:middle line:84% And what you see is incredible inequality evolution of income. 00:24:08.870 --> 00:24:10.370 align:middle line:84% The richest people got much richer. 00:24:10.370 --> 00:24:12.703 align:middle line:84% So if you're at the very top of the income distribution, 00:24:12.703 --> 00:24:14.310 align:middle line:84% your income grew on average 6% a year. 00:24:14.310 --> 00:24:17.990 align:middle line:84% If you're at the bottom, your income fell or grew very little. 00:24:17.990 --> 00:24:20.730 align:middle line:84% And this has motivated folks to think, look, 00:24:20.730 --> 00:24:22.090 align:middle line:90% we're just not getting it done. 00:24:22.090 --> 00:24:23.630 align:middle line:84% The existing set of programs are not 00:24:23.630 --> 00:24:25.290 align:middle line:84% solving the problem of inequality. 00:24:25.290 --> 00:24:29.790 align:middle line:84% And we need to move to a system of Universal Basic Income, UBI. 00:24:29.790 --> 00:24:33.190 align:middle line:84% UBI is like, look, let's not worry about 00:24:33.190 --> 00:24:35.690 align:middle line:84% all these moral hazard effects and we're targeting everyone. 00:24:35.690 --> 00:24:37.590 align:middle line:90% Let's give everyone money. 00:24:37.590 --> 00:24:39.950 align:middle line:84% Let's just say, look, we're going to give you money 00:24:39.950 --> 00:24:42.890 align:middle line:84% and it's not going to depend on your income. 00:24:42.890 --> 00:24:45.128 align:middle line:90% There's no tall y term. 00:24:45.128 --> 00:24:47.170 align:middle line:84% We're just going to give everyone $1,000 a month, 00:24:47.170 --> 00:24:48.310 align:middle line:90% for example. 00:24:48.310 --> 00:24:51.430 align:middle line:84% So there's no moral hazard because we're not making 00:24:51.430 --> 00:24:53.110 align:middle line:90% you work less to get the money. 00:24:53.110 --> 00:24:54.950 align:middle line:90% We're just giving you the money. 00:24:54.950 --> 00:24:57.035 align:middle line:84% And indeed, there's a number of studies 00:24:57.035 --> 00:24:58.910 align:middle line:84% which show when you do universal basic income 00:24:58.910 --> 00:25:02.737 align:middle line:84% kind of interventions, it doesn't lower labor supply. 00:25:02.737 --> 00:25:05.070 align:middle line:84% There's a cool study actually, I talk about in the book, 00:25:05.070 --> 00:25:07.950 align:middle line:84% Alaska actually has universal basic income program. 00:25:07.950 --> 00:25:09.930 align:middle line:84% They collect so much in oil revenues, 00:25:09.930 --> 00:25:11.892 align:middle line:84% everyone who lives in Alaska-- you guys ever 00:25:11.892 --> 00:25:12.850 align:middle line:90% see The Simpsons movie? 00:25:12.850 --> 00:25:14.410 align:middle line:84% They talk about the Simpsons movie. 00:25:14.410 --> 00:25:17.590 align:middle line:84% Everyone in Alaska gets a check every year for a couple grand. 00:25:17.590 --> 00:25:18.970 align:middle line:90% It doesn't affect labor supply. 00:25:18.970 --> 00:25:21.110 align:middle line:84% And now there's been a number of UBI studies 00:25:21.110 --> 00:25:23.150 align:middle line:84% on small populations which have shown 00:25:23.150 --> 00:25:27.510 align:middle line:84% that giving people this UBI does not change their labor supply. 00:25:27.510 --> 00:25:28.170 align:middle line:90% OK. 00:25:28.170 --> 00:25:30.295 align:middle line:84% So the idea is, look, we just give people the money 00:25:30.295 --> 00:25:31.910 align:middle line:84% without changing the labor supply. 00:25:31.910 --> 00:25:32.910 align:middle line:90% Problem solved. 00:25:32.910 --> 00:25:33.410 align:middle line:90% OK. 00:25:33.410 --> 00:25:35.270 align:middle line:84% But remember, there were three things 00:25:35.270 --> 00:25:37.230 align:middle line:90% that caused the iron triangle. 00:25:37.230 --> 00:25:39.170 align:middle line:90% There was helping out poor. 00:25:39.170 --> 00:25:41.330 align:middle line:84% There was redistributing to the neediest. 00:25:41.330 --> 00:25:42.370 align:middle line:90% Well, UBI does that. 00:25:42.370 --> 00:25:44.030 align:middle line:90% The neediest get money. 00:25:44.030 --> 00:25:46.950 align:middle line:84% There was not disincentivizing labor supply. 00:25:46.950 --> 00:25:47.870 align:middle line:90% UBI does that. 00:25:47.870 --> 00:25:49.630 align:middle line:84% Doesn't disincentive labor supply. 00:25:49.630 --> 00:25:53.150 align:middle line:84% But the third was the government budget constraint. 00:25:53.150 --> 00:25:59.650 align:middle line:84% $1,000 a month for every family in America would cost $1.6 00:25:59.650 --> 00:26:01.950 align:middle line:90% trillion a year. 00:26:01.950 --> 00:26:02.550 align:middle line:90% OK. 00:26:02.550 --> 00:26:06.990 align:middle line:84% That is the cost of the Medicare and Medicaid program combined. 00:26:06.990 --> 00:26:09.290 align:middle line:90% That is not happening. 00:26:09.290 --> 00:26:10.828 align:middle line:90% That's unaffordable. 00:26:10.828 --> 00:26:11.370 align:middle line:90% No, it's not. 00:26:11.370 --> 00:26:12.130 align:middle line:90% Is it unaffordable? 00:26:12.130 --> 00:26:14.588 align:middle line:84% Well, I mean, basically it's the definition of how high you 00:26:14.588 --> 00:26:16.350 align:middle line:90% think taxes can go in America. 00:26:16.350 --> 00:26:18.345 align:middle line:84% But in current political climate, 00:26:18.345 --> 00:26:19.970 align:middle line:84% certainly in today's political climate, 00:26:19.970 --> 00:26:22.470 align:middle line:84% even in yesterday's political climate, 00:26:22.470 --> 00:26:26.460 align:middle line:84% it is not something that's likely to really be possible. 00:26:26.460 --> 00:26:29.460 align:middle line:84% So basically, the problem is that, essentially, 00:26:29.460 --> 00:26:35.860 align:middle line:84% a truly untargeted UBI has the benefit of not causing 00:26:35.860 --> 00:26:37.460 align:middle line:90% distortions to labor supply. 00:26:37.460 --> 00:26:39.260 align:middle line:84% But it's a problem of being too expensive. 00:26:39.260 --> 00:26:42.340 align:middle line:84% And this is essentially the equity efficiency trade-off. 00:26:42.340 --> 00:26:44.620 align:middle line:84% We can get rid of the efficiency costs 00:26:44.620 --> 00:26:46.700 align:middle line:90% if we spend enough money on it. 00:26:46.700 --> 00:26:48.720 align:middle line:84% But then where does that money come from? 00:26:48.720 --> 00:26:50.860 align:middle line:84% Well, let's go back to Okun's leaky bucket. 00:26:50.860 --> 00:26:52.580 align:middle line:84% Remember, there were three sources 00:26:52.580 --> 00:26:54.220 align:middle line:90% of leak in Okun's bucket. 00:26:54.220 --> 00:26:55.862 align:middle line:90% There was administrative costs. 00:26:55.862 --> 00:26:58.320 align:middle line:84% There was the fact that when you give money to poor people, 00:26:58.320 --> 00:26:59.475 align:middle line:90% they might work less. 00:26:59.475 --> 00:27:02.100 align:middle line:84% But the third leak was you have to tax the rich people to raise 00:27:02.100 --> 00:27:05.180 align:middle line:84% the money, and that might cause them to work less. 00:27:05.180 --> 00:27:07.300 align:middle line:84% And so this is a great segue onto the next part 00:27:07.300 --> 00:27:12.420 align:middle line:84% of the course, which is, well, why not just send $1.6 trillion 00:27:12.420 --> 00:27:13.080 align:middle line:90% to people? 00:27:13.080 --> 00:27:14.320 align:middle line:90% Why not just do that. 00:27:14.320 --> 00:27:16.860 align:middle line:84% Why not just tax everybody and then give it back 00:27:16.860 --> 00:27:18.423 align:middle line:90% to universal basic income? 00:27:18.423 --> 00:27:20.340 align:middle line:84% And why not just tax the rich and give it back 00:27:20.340 --> 00:27:21.620 align:middle line:90% to universal basic income? 00:27:21.620 --> 00:27:24.245 align:middle line:84% And that's going to be the segue to the next part of the course 00:27:24.245 --> 00:27:24.820 align:middle line:90% question. 00:27:24.820 --> 00:27:27.300 align:middle line:84% STUDENT: Could you explain again why this has an effect on labor? 00:27:27.300 --> 00:27:28.383 align:middle line:90% JONATHAN GRUBER: Oh, sure. 00:27:28.383 --> 00:27:31.720 align:middle line:84% Because if you think about why welfare affects labor supply, 00:27:31.720 --> 00:27:33.700 align:middle line:84% it's because in order to qualify, remember, 00:27:33.700 --> 00:27:37.900 align:middle line:84% what the benefit you get is a grant minus a tax times 00:27:37.900 --> 00:27:39.020 align:middle line:90% what you earn. 00:27:39.020 --> 00:27:41.380 align:middle line:90% This is just a grant. 00:27:41.380 --> 00:27:42.853 align:middle line:84% So there's no tax on your earnings. 00:27:42.853 --> 00:27:45.020 align:middle line:84% So it's just literally I'm saying whatever you earn, 00:27:45.020 --> 00:27:47.020 align:middle line:84% I'm also going to send you $1,000 bucks a month. 00:27:47.020 --> 00:27:49.540 align:middle line:84% Now there could be an income effect. 00:27:49.540 --> 00:27:51.820 align:middle line:84% You're richer, you might work less. 00:27:51.820 --> 00:27:53.788 align:middle line:84% But it turns out that's just really small. 00:27:53.788 --> 00:27:56.080 align:middle line:84% It doesn't really seem to affect people's labor supply. 00:27:56.080 --> 00:27:56.580 align:middle line:90% Yeah. 00:27:56.580 --> 00:27:59.262 align:middle line:84% STUDENT: [INAUDIBLE] when there [INAUDIBLE] and then people 00:27:59.262 --> 00:28:00.720 align:middle line:84% were trying to return back to work, 00:28:00.720 --> 00:28:02.137 align:middle line:84% there were a lot of, I don't know, 00:28:02.137 --> 00:28:04.820 align:middle line:84% people saying that laborers having more money 00:28:04.820 --> 00:28:05.983 align:middle line:90% causes them to work less. 00:28:05.983 --> 00:28:07.400 align:middle line:84% And I don't know this whole thing. 00:28:07.400 --> 00:28:08.460 align:middle line:90% But there's no evidence? 00:28:08.460 --> 00:28:10.543 align:middle line:84% JONATHAN GRUBER: There is, basically, the evidence 00:28:10.543 --> 00:28:12.960 align:middle line:84% is that it did not cause them to work less. 00:28:12.960 --> 00:28:16.580 align:middle line:84% It did cause them to be much choosier 00:28:16.580 --> 00:28:18.780 align:middle line:84% and essentially look for better jobs. 00:28:18.780 --> 00:28:21.180 align:middle line:84% In some sense, look for jobs that essentially made people 00:28:21.180 --> 00:28:23.200 align:middle line:84% realize, wait a second, I don't have to rush back to work, 00:28:23.200 --> 00:28:24.180 align:middle line:84% but actually it doesn't really seem 00:28:24.180 --> 00:28:25.560 align:middle line:84% to have caused them to work less. 00:28:25.560 --> 00:28:27.160 align:middle line:84% But that's hard because we're coming out of COVID. 00:28:27.160 --> 00:28:27.960 align:middle line:90% It's hard to separate that. 00:28:27.960 --> 00:28:30.060 align:middle line:84% We have real experiments which show it doesn't 00:28:30.060 --> 00:28:30.880 align:middle line:90% cause people to work less. 00:28:30.880 --> 00:28:31.922 align:middle line:90% But it's a good question. 00:28:31.922 --> 00:28:35.260 align:middle line:84% Essentially, we did, during COVID, we sent everyone a check. 00:28:35.260 --> 00:28:36.103 align:middle line:90% Yeah. 00:28:36.103 --> 00:28:37.520 align:middle line:84% STUDENT: [INAUDIBLE] during COVID, 00:28:37.520 --> 00:28:39.180 align:middle line:90% which gave them a longer float. 00:28:39.180 --> 00:28:39.500 align:middle line:90% JONATHAN GRUBER: Yeah. 00:28:39.500 --> 00:28:41.900 align:middle line:84% I mean, the idea is we didn't actually want them to work. 00:28:41.900 --> 00:28:44.403 align:middle line:84% COVID was so weird because we liked the moral hazard. 00:28:44.403 --> 00:28:45.820 align:middle line:84% It's not moral hazard anymore when 00:28:45.820 --> 00:28:47.220 align:middle line:84% you don't want people to go to work because they're 00:28:47.220 --> 00:28:48.275 align:middle line:90% going to get sick. 00:28:48.275 --> 00:28:49.400 align:middle line:90% Then it's not moral hazard. 00:28:49.400 --> 00:28:51.400 align:middle line:84% It's actually the intended effect of the policy. 00:28:51.400 --> 00:28:54.940 align:middle line:84% It's a very hard episode to learn from in that sense. 00:28:54.940 --> 00:28:58.980 align:middle line:84% So the bottom line is the best way 00:28:58.980 --> 00:29:00.760 align:middle line:84% to get around the moral hazard problem-- 00:29:00.760 --> 00:29:02.000 align:middle line:84% did I answer your question, by the way, 00:29:02.000 --> 00:29:02.860 align:middle line:84% about why it doesn't cause-- that's why we 00:29:02.860 --> 00:29:04.110 align:middle line:90% have the moral hazard problem. 00:29:04.110 --> 00:29:06.220 align:middle line:84% Let's just give everyone the money. 00:29:06.220 --> 00:29:07.040 align:middle line:90% Why not? 00:29:07.040 --> 00:29:08.740 align:middle line:84% Well, we got to raise that money. 00:29:08.740 --> 00:29:11.540 align:middle line:84% And that leads to the last section of the class. 00:29:11.540 --> 00:29:14.300 align:middle line:84% First section of class was externalities and public goods. 00:29:14.300 --> 00:29:17.000 align:middle line:84% Middle section was social insurance and redistribution. 00:29:17.000 --> 00:29:20.500 align:middle line:84% Now we come to the last part of the class, which is taxation. 00:29:20.500 --> 00:29:22.340 align:middle line:90% The fun's over, kids. 00:29:22.340 --> 00:29:23.660 align:middle line:90% We've been spending the money. 00:29:23.660 --> 00:29:24.940 align:middle line:90% Now we've got to raise it. 00:29:24.940 --> 00:29:28.780 align:middle line:84% And this is a great segue to why not just have a UBI program? 00:29:28.780 --> 00:29:32.580 align:middle line:84% And the answer is because of the problems with taxation. 00:29:32.580 --> 00:29:34.460 align:middle line:84% So how are we going to-- now we're going 00:29:34.460 --> 00:29:36.500 align:middle line:90% to shift our focus to taxation. 00:29:36.500 --> 00:29:38.860 align:middle line:84% How is this part of the course going to work? 00:29:38.860 --> 00:29:41.540 align:middle line:84% The way it's going to work is that-- 00:29:41.540 --> 00:29:44.100 align:middle line:84% the way it's going to work is that we're going to start today 00:29:44.100 --> 00:29:46.300 align:middle line:84% and next time with chapter 18, which 00:29:46.300 --> 00:29:48.080 align:middle line:84% talks about the basics of taxation, 00:29:48.080 --> 00:29:52.300 align:middle line:84% sets the institutional framework for thinking about taxation. 00:29:52.300 --> 00:29:56.780 align:middle line:84% We're then going to move on to chapter 19 and 20, which 00:29:56.780 --> 00:30:00.920 align:middle line:84% are the theory of taxation, one focused on fairness, 00:30:00.920 --> 00:30:03.540 align:middle line:90% one focused on efficiency. 00:30:03.540 --> 00:30:07.460 align:middle line:84% Then chapters 21 through 24 are different studies 00:30:07.460 --> 00:30:11.477 align:middle line:84% of different kinds of taxes, like chapter 13, 14, 15, 16, 00:30:11.477 --> 00:30:13.560 align:middle line:84% were different kinds of social insurance programs, 00:30:13.560 --> 00:30:15.000 align:middle line:84% We're going to learn about different kinds of taxes, 00:30:15.000 --> 00:30:17.740 align:middle line:84% learn about how tax affect people's decisions to work? 00:30:17.740 --> 00:30:20.540 align:middle line:84% We'll talk about how tax affect people's decisions 00:30:20.540 --> 00:30:22.920 align:middle line:84% to save, how people's decisions to invest, 00:30:22.920 --> 00:30:24.620 align:middle line:90% how they affect corporations. 00:30:24.620 --> 00:30:27.113 align:middle line:84% Then finally, chapter 25 will wrap it all together 00:30:27.113 --> 00:30:28.780 align:middle line:84% and talk about how the government should 00:30:28.780 --> 00:30:30.980 align:middle line:84% change tax policy given what we've learned 00:30:30.980 --> 00:30:32.740 align:middle line:90% from all these chapters. 00:30:32.740 --> 00:30:33.500 align:middle line:90% OK. 00:30:33.500 --> 00:30:35.980 align:middle line:84% That's how we're going to roll forward. 00:30:35.980 --> 00:30:37.940 align:middle line:90% So we'll start with chapter 18. 00:30:37.940 --> 00:30:40.613 align:middle line:84% And chapter 18, much like the social insurance chapters, 00:30:40.613 --> 00:30:42.780 align:middle line:84% started with the details of how our social insurance 00:30:42.780 --> 00:30:44.940 align:middle line:90% programs work. 00:30:44.940 --> 00:30:48.100 align:middle line:84% Chapter 18 is going to start our tax discussion by explaining 00:30:48.100 --> 00:30:49.820 align:middle line:90% how taxation works. 00:30:49.820 --> 00:30:51.660 align:middle line:84% And the first thing we'll do is say, look, 00:30:51.660 --> 00:30:55.500 align:middle line:84% there are multiple kinds of taxes in the US. 00:30:55.500 --> 00:31:03.860 align:middle line:84% And if you look at figure 18.1, this 00:31:03.860 --> 00:31:07.020 align:middle line:84% shows you the different kinds of taxes. 00:31:07.020 --> 00:31:11.300 align:middle line:84% The first kind of tax is taxes on earnings. 00:31:11.300 --> 00:31:17.420 align:middle line:84% That would be the green Social Security contributions. 00:31:17.420 --> 00:31:20.450 align:middle line:84% These are your payroll taxes, the taxes 00:31:20.450 --> 00:31:25.010 align:middle line:84% you pay on your wages, what finances our social insurance 00:31:25.010 --> 00:31:25.810 align:middle line:90% programs. 00:31:25.810 --> 00:31:27.770 align:middle line:90% We've discussed them. 00:31:27.770 --> 00:31:30.330 align:middle line:84% The second type are income taxes. 00:31:30.330 --> 00:31:31.610 align:middle line:90% That's the biggest source. 00:31:31.610 --> 00:31:34.410 align:middle line:84% That's in the salmon or whatever color that is. 00:31:34.410 --> 00:31:37.665 align:middle line:90% That is taxes on your income. 00:31:37.665 --> 00:31:38.790 align:middle line:90% You may say, wait a second. 00:31:38.790 --> 00:31:40.690 align:middle line:84% Aren't payroll taxes taxes on your income? 00:31:40.690 --> 00:31:43.310 align:middle line:84% Payroll taxes are taxes on part of your income, 00:31:43.310 --> 00:31:45.662 align:middle line:84% the part of your income that comes from employment. 00:31:45.662 --> 00:31:48.370 align:middle line:84% But people have income from lots of sources, at least rich people 00:31:48.370 --> 00:31:53.330 align:middle line:84% do, such as investment income, royalties from writing a book, 00:31:53.330 --> 00:31:55.890 align:middle line:84% lottery winnings, all sorts of things. 00:31:55.890 --> 00:31:58.310 align:middle line:84% And income tax taxes all your income, 00:31:58.310 --> 00:32:02.010 align:middle line:84% not just your earned income, not just what you earn on the job. 00:32:02.010 --> 00:32:04.690 align:middle line:90% That's the second kind of tax. 00:32:04.690 --> 00:32:07.070 align:middle line:84% The third kind of tax is taxes on corporate income. 00:32:07.070 --> 00:32:09.310 align:middle line:84% I've described individual income taxes, I'm sorry. 00:32:09.310 --> 00:32:13.410 align:middle line:84% Corporate income taxes tax the net profits of firms, 00:32:13.410 --> 00:32:15.970 align:middle line:90% of corporations. 00:32:15.970 --> 00:32:18.490 align:middle line:84% That, as you can see, only represents about 5% 00:32:18.490 --> 00:32:20.290 align:middle line:84% of the total government tax base. 00:32:20.290 --> 00:32:23.490 align:middle line:84% So if you look at the right hand column, 00:32:23.490 --> 00:32:25.810 align:middle line:84% Social Security contributions are about a quarter. 00:32:25.810 --> 00:32:27.510 align:middle line:90% Income taxes are almost 40%. 00:32:27.510 --> 00:32:31.010 align:middle line:84% Corporate tax are 5%, so a very small share of the pie 00:32:31.010 --> 00:32:32.890 align:middle line:90% that we raise. 00:32:32.890 --> 00:32:38.050 align:middle line:84% The fourth type of tax is taxes on wealth. 00:32:38.050 --> 00:32:40.370 align:middle line:84% And this is fundamentally different than all the kinds 00:32:40.370 --> 00:32:41.930 align:middle line:90% of taxes. 00:32:41.930 --> 00:32:46.210 align:middle line:84% Taxes on income are taxes on flows. 00:32:46.210 --> 00:32:50.170 align:middle line:84% Taxes on wealth are taxes on stocks, 00:32:50.170 --> 00:32:53.283 align:middle line:84% not stocks like in the stock market, but a stock of goods. 00:32:53.283 --> 00:32:55.950 align:middle line:84% So the most important of these, and by far the most significant, 00:32:55.950 --> 00:32:57.970 align:middle line:90% is the property tax. 00:32:57.970 --> 00:33:00.823 align:middle line:84% You pay a tax every year on the value of your house, 00:33:00.823 --> 00:33:02.990 align:middle line:84% not on some flow of services you got from the house, 00:33:02.990 --> 00:33:04.740 align:middle line:84% but literally on what your house is worth. 00:33:04.740 --> 00:33:07.330 align:middle line:84% That's very different than other kinds of taxes 00:33:07.330 --> 00:33:09.330 align:middle line:84% because you're literally paying a tax every year 00:33:09.330 --> 00:33:13.370 align:middle line:84% on an asset value, not on what you earned that year. 00:33:13.370 --> 00:33:20.490 align:middle line:84% Those are about 10% of total government revenues. 00:33:20.490 --> 00:33:22.590 align:middle line:84% Finally, we have taxes on consumption. 00:33:22.590 --> 00:33:25.010 align:middle line:90% This is, once again, a flow tax. 00:33:25.010 --> 00:33:25.810 align:middle line:90% OK. 00:33:25.810 --> 00:33:28.770 align:middle line:84% This is basically a tax not on what you 00:33:28.770 --> 00:33:32.010 align:middle line:90% make but on what you consume. 00:33:32.010 --> 00:33:34.630 align:middle line:84% The most prominent of these, of course, are sales taxes. 00:33:34.630 --> 00:33:37.850 align:middle line:84% Massachusetts we have a 6 and 1/4% sales tax. 00:33:37.850 --> 00:33:41.428 align:middle line:84% But this also includes excise taxes. 00:33:41.428 --> 00:33:42.970 align:middle line:84% For example, when you buy cigarettes, 00:33:42.970 --> 00:33:44.930 align:middle line:84% there's an extra tax on cigarettes. 00:33:44.930 --> 00:33:46.370 align:middle line:90% There's a gas tax. 00:33:46.370 --> 00:33:48.490 align:middle line:90% There's an alcohol tax. 00:33:48.490 --> 00:33:53.450 align:middle line:84% Excise taxes are sales taxes on specific goods 00:33:53.450 --> 00:33:57.050 align:middle line:84% where sales taxes are general taxes on all sales. 00:33:57.050 --> 00:34:00.850 align:middle line:84% So both sales taxes and excise taxes 00:34:00.850 --> 00:34:03.210 align:middle line:84% go in the category of consumption taxes. 00:34:03.210 --> 00:34:05.610 align:middle line:84% Now you notice at the federal level, 00:34:05.610 --> 00:34:09.449 align:middle line:84% we don't raise very much at all for consumption taxes. 00:34:09.449 --> 00:34:12.472 align:middle line:84% But at the state level, we raise a lot. 00:34:12.472 --> 00:34:14.889 align:middle line:84% So consumption tax at the federal level, the federal level 00:34:14.889 --> 00:34:17.290 align:middle line:90% has no federal sales tax. 00:34:17.290 --> 00:34:20.090 align:middle line:84% The consumption tax revenue at the federal level-- this 00:34:20.090 --> 00:34:21.503 align:middle line:90% is the upper left. 00:34:21.503 --> 00:34:23.170 align:middle line:84% The consumption tax at the federal level 00:34:23.170 --> 00:34:24.250 align:middle line:90% comes from excise taxes. 00:34:24.250 --> 00:34:28.610 align:middle line:84% There are federal excise tax on alcohol, on gas, on cigarettes. 00:34:28.610 --> 00:34:31.370 align:middle line:84% At the state level, the consumption tax revenue 00:34:31.370 --> 00:34:33.850 align:middle line:84% comes mainly from sales taxes, although also 00:34:33.850 --> 00:34:37.530 align:middle line:90% from some state excise taxes. 00:34:37.530 --> 00:34:40.050 align:middle line:90% So those are the kinds of taxes. 00:34:40.050 --> 00:34:42.409 align:middle line:84% You can see here how they're distributed. 00:34:42.409 --> 00:34:45.929 align:middle line:84% We can also compare ourselves to the rest of the world. 00:34:45.929 --> 00:34:50.650 align:middle line:84% So for example, in the US, we raise about 25% 00:34:50.650 --> 00:34:52.510 align:middle line:90% from payroll tax contributions. 00:34:52.510 --> 00:34:56.170 align:middle line:84% So does the average OECD nation on the bottom right. 00:34:56.170 --> 00:34:59.050 align:middle line:84% On the other hand, if you look at Denmark, 00:34:59.050 --> 00:35:01.750 align:middle line:84% they raise very little from payroll taxation. 00:35:01.750 --> 00:35:05.770 align:middle line:84% 0.1% comes from Social Security contributions. 00:35:05.770 --> 00:35:11.070 align:middle line:84% The OECD average income tax is 24%. 00:35:11.070 --> 00:35:12.850 align:middle line:90% That's much below the US. 00:35:12.850 --> 00:35:16.890 align:middle line:84% But once again, in Denmark, it's higher than the US. 00:35:16.890 --> 00:35:18.130 align:middle line:90% OK. 00:35:18.130 --> 00:35:20.610 align:middle line:84% And other countries raise much more revenues 00:35:20.610 --> 00:35:21.710 align:middle line:90% from the consumption tax. 00:35:21.710 --> 00:35:23.230 align:middle line:84% And we'll talk about that in chapter 25. 00:35:23.230 --> 00:35:24.010 align:middle line:84% That's because they have something 00:35:24.010 --> 00:35:25.730 align:middle line:84% called the value added tax, which is 00:35:25.730 --> 00:35:27.848 align:middle line:90% a form of national sales tax. 00:35:27.848 --> 00:35:29.390 align:middle line:84% So relative to the rest of the world, 00:35:29.390 --> 00:35:33.850 align:middle line:84% we raise comparable amounts in payroll taxes, 00:35:33.850 --> 00:35:39.388 align:middle line:84% more in income taxes, less in taxes on consumption, 00:35:39.388 --> 00:35:40.930 align:middle line:84% and somewhat less on corporate income 00:35:40.930 --> 00:35:43.513 align:middle line:84% taxes, although once again that varies a lot across countries. 00:35:43.513 --> 00:35:46.390 align:middle line:84% In Norway, 16% comes from corporate income tax. 00:35:46.390 --> 00:35:48.830 align:middle line:90% In Denmark, it's only 6.5%. 00:35:48.830 --> 00:35:49.330 align:middle line:90% Yeah. 00:35:49.330 --> 00:35:51.038 align:middle line:84% STUDENT: Maybe I missed it, but could you 00:35:51.038 --> 00:35:53.125 align:middle line:84% explain where on the pie tariffs would fall under? 00:35:53.125 --> 00:35:54.750 align:middle line:84% JONATHAN GRUBER: You did not miss that. 00:35:54.750 --> 00:35:55.625 align:middle line:90% That's a great point. 00:35:55.625 --> 00:35:57.810 align:middle line:84% We have to start talking about tariffs. 00:35:57.810 --> 00:35:59.270 align:middle line:90% Tariffs are not taxes. 00:35:59.270 --> 00:36:01.250 align:middle line:84% And they would not be counted as taxes 00:36:01.250 --> 00:36:03.050 align:middle line:84% but they would be a source of revenue. 00:36:03.050 --> 00:36:05.570 align:middle line:84% They would really be in the consumption tax bucket. 00:36:05.570 --> 00:36:07.290 align:middle line:90% It's a tax on consumption. 00:36:07.290 --> 00:36:10.090 align:middle line:84% It's a sales tax but only on specific goods. 00:36:10.090 --> 00:36:11.670 align:middle line:90% It's kind of like an excise tax. 00:36:11.670 --> 00:36:14.340 align:middle line:84% The difference is-- yeah, it's basically an excise tax. 00:36:14.340 --> 00:36:18.800 align:middle line:84% But instead of on cigarettes, it's just on things from China. 00:36:18.800 --> 00:36:19.400 align:middle line:90% Yeah. 00:36:19.400 --> 00:36:20.900 align:middle line:84% STUDENT: Besides tariffs and I guess 00:36:20.900 --> 00:36:23.000 align:middle line:84% fines, what are some other sources of revenue that 00:36:23.000 --> 00:36:25.140 align:middle line:90% are not taxes? 00:36:25.140 --> 00:36:26.640 align:middle line:84% JONATHAN GRUBER: There aren't a lot. 00:36:26.640 --> 00:36:30.960 align:middle line:84% One of the most interesting ones is auctioning the spectrum. 00:36:30.960 --> 00:36:34.840 align:middle line:84% So it turns out one of the most valuable assets in the last 50 00:36:34.840 --> 00:36:37.640 align:middle line:84% years is the airwaves because of cell phones, 00:36:37.640 --> 00:36:40.200 align:middle line:84% and satellites, and things like that. 00:36:40.200 --> 00:36:42.760 align:middle line:84% The government is the one that has the property 00:36:42.760 --> 00:36:45.123 align:middle line:90% right to those airwaves. 00:36:45.123 --> 00:36:47.540 align:middle line:84% For decades, they would just say if someone came and said, 00:36:47.540 --> 00:36:49.660 align:middle line:84% look, I want to run on this frequency, they'd say, great, 00:36:49.660 --> 00:36:50.320 align:middle line:90% have it. 00:36:50.320 --> 00:36:52.020 align:middle line:84% Then an economist said, wait a second. 00:36:52.020 --> 00:36:54.540 align:middle line:84% That is a valuable asset you're giving away. 00:36:54.540 --> 00:36:56.800 align:middle line:84% And we started setting up spectrum auctions. 00:36:56.800 --> 00:36:58.897 align:middle line:84% And the government raises billions of dollars 00:36:58.897 --> 00:37:00.480 align:middle line:84% from actually auctioning off the right 00:37:00.480 --> 00:37:02.840 align:middle line:84% to use those various frequencies in the air, which 00:37:02.840 --> 00:37:03.580 align:middle line:90% is kind of cool. 00:37:03.580 --> 00:37:05.940 align:middle line:84% Once again, a positive role for economists. 00:37:05.940 --> 00:37:07.900 align:middle line:84% We want to tell those stories these days. 00:37:07.900 --> 00:37:10.180 align:middle line:84% On a day like today, there are positive stories 00:37:10.180 --> 00:37:12.680 align:middle line:84% that, basically, economists realized that the government was 00:37:12.680 --> 00:37:15.760 align:middle line:84% giving away for free and could actually raise revenues off it. 00:37:15.760 --> 00:37:16.300 align:middle line:90% Yeah. 00:37:16.300 --> 00:37:18.200 align:middle line:90% STUDENT: Are lotteries revenue? 00:37:18.200 --> 00:37:19.020 align:middle line:84% JONATHAN GRUBER: That's a great point. 00:37:19.020 --> 00:37:21.145 align:middle line:84% Lotteries are also a significant source of revenue. 00:37:21.145 --> 00:37:22.440 align:middle line:90% That's at the state level. 00:37:22.440 --> 00:37:24.565 align:middle line:84% Lotteries are a very significant source of revenue. 00:37:24.565 --> 00:37:27.040 align:middle line:84% I don't know how big they are compared to these others. 00:37:27.040 --> 00:37:28.500 align:middle line:84% They are not represented as graphs. 00:37:28.500 --> 00:37:30.020 align:middle line:84% Tariffs, lotteries, spectrum auction, 00:37:30.020 --> 00:37:31.312 align:middle line:90% that wouldn't be in this graph. 00:37:31.312 --> 00:37:34.920 align:middle line:90% This is just source of taxation. 00:37:34.920 --> 00:37:36.140 align:middle line:90% OK. 00:37:36.140 --> 00:37:37.320 align:middle line:90% Other questions? 00:37:37.320 --> 00:37:38.400 align:middle line:84% Now you put all those together, they're 00:37:38.400 --> 00:37:40.317 align:middle line:84% still trivial relative to stuff in this graph. 00:37:40.317 --> 00:37:42.760 align:middle line:90% But they're not zero. 00:37:42.760 --> 00:37:43.480 align:middle line:90% Yeah. 00:37:43.480 --> 00:37:45.800 align:middle line:84% STUDENT: What about something like USPS 00:37:45.800 --> 00:37:48.120 align:middle line:84% that technically has its own revenue? 00:37:48.120 --> 00:37:49.800 align:middle line:84% JONATHAN GRUBER: The Patent office? 00:37:49.800 --> 00:37:50.380 align:middle line:90% STUDENT: Postal Service. 00:37:50.380 --> 00:37:51.760 align:middle line:90% JONATHAN GRUBER: Postal Service. 00:37:51.760 --> 00:37:52.260 align:middle line:90% Yeah. 00:37:52.260 --> 00:37:54.380 align:middle line:84% I mean, basically, that's interesting. 00:37:54.380 --> 00:37:58.880 align:middle line:84% That almost goes back to chapter 10 and thinking about Tiebout 00:37:58.880 --> 00:38:04.320 align:middle line:84% and thinking about benefit taxation. 00:38:04.320 --> 00:38:07.360 align:middle line:84% That's really almost a price that's charged for a service. 00:38:07.360 --> 00:38:10.720 align:middle line:84% So it's a revenue source, but it's a dedicated revenue 00:38:10.720 --> 00:38:14.080 align:middle line:90% source to a particular service. 00:38:14.080 --> 00:38:14.940 align:middle line:90% Good question. 00:38:14.940 --> 00:38:16.560 align:middle line:90% Those are great questions. 00:38:16.560 --> 00:38:17.260 align:middle line:90% Other thoughts? 00:38:17.260 --> 00:38:19.040 align:middle line:90% Comments? 00:38:19.040 --> 00:38:19.920 align:middle line:90% OK. 00:38:19.920 --> 00:38:21.920 align:middle line:90% So that's the kind of taxes. 00:38:21.920 --> 00:38:26.213 align:middle line:84% We're going to focus primarily for the next-- 00:38:26.213 --> 00:38:27.880 align:middle line:84% primarily for this lecture and certainly 00:38:27.880 --> 00:38:30.840 align:middle line:84% for lectures chapters 21 through 23, 00:38:30.840 --> 00:38:32.923 align:middle line:84% we're going to focus on the individual income tax. 00:38:32.923 --> 00:38:35.298 align:middle line:84% That's the most significant source of government revenue. 00:38:35.298 --> 00:38:37.780 align:middle line:84% So what I want to do now is tell you how income taxes work. 00:38:37.780 --> 00:38:40.760 align:middle line:84% How many of you have filed your own income tax? 00:38:40.760 --> 00:38:41.260 align:middle line:90% Wow. 00:38:41.260 --> 00:38:42.200 align:middle line:90% Impressive. 00:38:42.200 --> 00:38:42.720 align:middle line:90% OK. 00:38:42.720 --> 00:38:45.500 align:middle line:84% How many of you did it without using software, 00:38:45.500 --> 00:38:47.220 align:middle line:90% like just did it by hand? 00:38:47.220 --> 00:38:47.720 align:middle line:90% OK. 00:38:47.720 --> 00:38:48.540 align:middle line:90% That's all right. 00:38:48.540 --> 00:38:49.582 align:middle line:90% Nobody does that anymore. 00:38:49.582 --> 00:38:51.480 align:middle line:90% Just checking. 00:38:51.480 --> 00:38:53.680 align:middle line:84% I made enough mistakes on mine that my wife finally 00:38:53.680 --> 00:38:55.640 align:middle line:84% made me give up and get an accountant. 00:38:55.640 --> 00:38:56.280 align:middle line:90% OK. 00:38:56.280 --> 00:38:58.980 align:middle line:84% So how does the individual income tax work? 00:38:58.980 --> 00:39:03.040 align:middle line:84% Well, we'll do this by going through an example. 00:39:03.040 --> 00:39:04.560 align:middle line:90% let's take Jack. 00:39:04.560 --> 00:39:06.320 align:middle line:90% OK. 00:39:06.320 --> 00:39:09.560 align:middle line:84% We're going to basically walk through Jack's income tax 00:39:09.560 --> 00:39:10.160 align:middle line:90% calculation. 00:39:10.160 --> 00:39:13.120 align:middle line:90% That is shown in table 18.1. 00:39:13.120 --> 00:39:15.880 align:middle line:84% We're going to walk through Jack's income tax calculation. 00:39:15.880 --> 00:39:17.720 align:middle line:90% OK. 00:39:17.720 --> 00:39:19.260 align:middle line:84% Jack starts by earning some income. 00:39:19.260 --> 00:39:22.840 align:middle line:84% Imagine Jack makes $85,000 a year. 00:39:22.840 --> 00:39:26.320 align:middle line:84% That is what's called his gross income, the total income 00:39:26.320 --> 00:39:28.320 align:middle line:90% that Jack earns. 00:39:28.320 --> 00:39:29.080 align:middle line:90% OK. 00:39:29.080 --> 00:39:32.880 align:middle line:84% This includes wages and salaries, capital income 00:39:32.880 --> 00:39:36.960 align:middle line:84% like interest and dividends, rental income, other business 00:39:36.960 --> 00:39:40.480 align:middle line:84% income, et cetera because all the income Jack makes 00:39:40.480 --> 00:39:42.800 align:middle line:90% is included. 00:39:42.800 --> 00:39:47.800 align:middle line:84% Now, the first step is the set of initial deductions 00:39:47.800 --> 00:39:49.680 align:middle line:90% Jack can take off that income. 00:39:49.680 --> 00:39:53.120 align:middle line:84% They're called above the line deductions. 00:39:53.120 --> 00:39:56.360 align:middle line:84% This includes things, most importantly, like contributions 00:39:56.360 --> 00:39:58.790 align:middle line:84% to an IRA, an individual retirement account, 00:39:58.790 --> 00:39:59.540 align:middle line:90% a savings account. 00:39:59.540 --> 00:40:01.800 align:middle line:84% We'll talk about that in chapter 22. 00:40:01.800 --> 00:40:04.660 align:middle line:84% Alimony gets deducted above the line. 00:40:04.660 --> 00:40:07.200 align:middle line:90% 00:40:07.200 --> 00:40:10.020 align:middle line:84% Expenses from being a teacher you conduct above the line. 00:40:10.020 --> 00:40:12.400 align:middle line:84% There's a few things you deduct above the line. 00:40:12.400 --> 00:40:14.920 align:middle line:84% After you deduct those, let's say Jack contributed 2,000 00:40:14.920 --> 00:40:17.280 align:middle line:84% to an individual retirement account. 00:40:17.280 --> 00:40:19.440 align:middle line:84% He gets to what's called his adjusted gross income 00:40:19.440 --> 00:40:22.360 align:middle line:90% of $83,000. 00:40:22.360 --> 00:40:23.680 align:middle line:90% OK. 00:40:23.680 --> 00:40:26.960 align:middle line:84% At that point, all hell breaks loose. 00:40:26.960 --> 00:40:30.240 align:middle line:84% At that point, he then has a choice. 00:40:30.240 --> 00:40:31.200 align:middle line:90% OK. 00:40:31.200 --> 00:40:35.077 align:middle line:84% He then-- so these initial deductions are irrelevant. 00:40:35.077 --> 00:40:36.660 align:middle line:84% They're a very small piece of the pie. 00:40:36.660 --> 00:40:38.760 align:middle line:84% The next stage is a big one, which 00:40:38.760 --> 00:40:43.560 align:middle line:84% is the government gives Jack a choice of itemizing 00:40:43.560 --> 00:40:47.400 align:middle line:84% his deductions or taking a standard deduction. 00:40:47.400 --> 00:40:49.400 align:middle line:90% Let me explain what that means. 00:40:49.400 --> 00:40:54.320 align:middle line:84% Jack has a choice of saying, I'm going to deduct from my taxes 00:40:54.320 --> 00:40:59.200 align:middle line:84% $12,500 if I'm a single taxpayer or $25,000 if I'm a married 00:40:59.200 --> 00:41:00.200 align:middle line:90% couple. 00:41:00.200 --> 00:41:01.900 align:middle line:84% I can just take that off the top. 00:41:01.900 --> 00:41:03.180 align:middle line:90% That's another deduction. 00:41:03.180 --> 00:41:03.980 align:middle line:90% I had my $2,000. 00:41:03.980 --> 00:41:06.030 align:middle line:84% I'm going to take another deduction production. 00:41:06.030 --> 00:41:09.030 align:middle line:84% Alternatively, Jack can forgo that, 00:41:09.030 --> 00:41:10.990 align:middle line:84% and there's a list of additional things 00:41:10.990 --> 00:41:13.030 align:middle line:84% Jack can deduct from his taxes that 00:41:13.030 --> 00:41:15.910 align:middle line:90% are called itemized deductions. 00:41:15.910 --> 00:41:19.670 align:middle line:84% These are things like medical expenses 00:41:19.670 --> 00:41:24.510 align:middle line:84% that exceed 10% of your income, other taxes 00:41:24.510 --> 00:41:27.590 align:middle line:84% paid like if you pay state and local income taxes, that 00:41:27.590 --> 00:41:29.590 align:middle line:90% is an itemized deduction. 00:41:29.590 --> 00:41:34.470 align:middle line:84% Your mortgage payment is an itemizable deduction. 00:41:34.470 --> 00:41:38.848 align:middle line:84% Your charitable contributions, losses-- 00:41:38.848 --> 00:41:41.390 align:middle line:84% if your house burns down or if somebody steals stuff from you 00:41:41.390 --> 00:41:45.550 align:middle line:84% and you have to replace it, you can deduct those, et cetera. 00:41:45.550 --> 00:41:48.710 align:middle line:84% So basically, there's this list of things. 00:41:48.710 --> 00:41:51.090 align:middle line:84% And essentially, what Jack has to do is ask, 00:41:51.090 --> 00:41:54.230 align:middle line:84% do those things add up to more than the standard deduction? 00:41:54.230 --> 00:41:55.750 align:middle line:90% If so, I take that. 00:41:55.750 --> 00:41:57.830 align:middle line:84% If not, I take the standard deduction. 00:41:57.830 --> 00:41:59.670 align:middle line:84% So you have a choice at that point. 00:41:59.670 --> 00:42:02.950 align:middle line:84% Roughly speaking, homeowners always itemize. 00:42:02.950 --> 00:42:06.350 align:middle line:84% Non-homeowners, only very rich do not itemize. 00:42:06.350 --> 00:42:08.870 align:middle line:84% So essentially, homeowners with a mortgage-- 00:42:08.870 --> 00:42:12.030 align:middle line:84% the homeowners with a mortgage generally itemize 00:42:12.030 --> 00:42:13.630 align:middle line:90% and very rich people. 00:42:13.630 --> 00:42:17.750 align:middle line:84% Non-homeowners who aren't very rich typically don't itemize. 00:42:17.750 --> 00:42:19.850 align:middle line:84% That's the way to think about it. 00:42:19.850 --> 00:42:21.670 align:middle line:84% The reason is the major deductible expense 00:42:21.670 --> 00:42:23.545 align:middle line:84% is mortgages and state and local taxes, which 00:42:23.545 --> 00:42:25.510 align:middle line:90% come from owning a home. 00:42:25.510 --> 00:42:27.810 align:middle line:90% Now you take out that deduction. 00:42:27.810 --> 00:42:30.630 align:middle line:84% In our case Jack's going to take the standard deduction. 00:42:30.630 --> 00:42:34.350 align:middle line:84% And you end up with what's called your taxable income. 00:42:34.350 --> 00:42:36.370 align:middle line:84% That is the amount you get taxed on. 00:42:36.370 --> 00:42:36.870 align:middle line:90% Yeah. 00:42:36.870 --> 00:42:39.483 align:middle line:84% STUDENT: [INAUDIBLE] the standardized. 00:42:39.483 --> 00:42:41.150 align:middle line:84% JONATHAN GRUBER: Oh it's just the amount 00:42:41.150 --> 00:42:42.690 align:middle line:90% specified by Congress. 00:42:42.690 --> 00:42:45.683 align:middle line:84% STUDENT: Is it determined by the [INAUDIBLE]? 00:42:45.683 --> 00:42:46.850 align:middle line:90% JONATHAN GRUBER: It's a law. 00:42:46.850 --> 00:42:47.710 align:middle line:90% STUDENT: Oh. 00:42:47.710 --> 00:42:48.110 align:middle line:90% JONATHAN GRUBER: Yeah. 00:42:48.110 --> 00:42:48.370 align:middle line:90% Yeah. 00:42:48.370 --> 00:42:49.810 align:middle line:90% It's just like it's a parameter. 00:42:49.810 --> 00:42:50.770 align:middle line:90% It's like the tax rate. 00:42:50.770 --> 00:42:53.870 align:middle line:90% They have a standard deduction. 00:42:53.870 --> 00:42:55.230 align:middle line:90% Does that-- yeah. 00:42:55.230 --> 00:42:58.630 align:middle line:84% So basically, we end up with Jack's taxable income 00:42:58.630 --> 00:43:00.510 align:middle line:90% of $58,200. 00:43:00.510 --> 00:43:02.010 align:middle line:84% So this is the first thing to note. 00:43:02.010 --> 00:43:03.470 align:middle line:84% When we talk about people's income, 00:43:03.470 --> 00:43:06.910 align:middle line:84% they're often taxed on a much lower number than their income. 00:43:06.910 --> 00:43:09.510 align:middle line:84% Indeed, as we'll discuss in a little bit, 00:43:09.510 --> 00:43:11.730 align:middle line:84% most Americans don't pay income tax. 00:43:11.730 --> 00:43:14.510 align:middle line:84% Don't pay more than-- don't pay positive income tax. 00:43:14.510 --> 00:43:16.950 align:middle line:84% And we'll come back to that in a little bit. 00:43:16.950 --> 00:43:19.030 align:middle line:90% So in this case, Jack does. 00:43:19.030 --> 00:43:22.630 align:middle line:84% From that, he figures out how much he owes in taxes. 00:43:22.630 --> 00:43:27.410 align:middle line:84% And to do that, he applies a tax rate schedule. 00:43:27.410 --> 00:43:30.550 align:middle line:84% That tax rate schedule is shown in figure 18.3. 00:43:30.550 --> 00:43:36.270 align:middle line:84% Now here's a critical point to note about tax rate schedules. 00:43:36.270 --> 00:43:40.010 align:middle line:84% We are graphing what is called the marginal tax rate. 00:43:40.010 --> 00:43:40.510 align:middle line:90% OK. 00:43:40.510 --> 00:43:41.635 align:middle line:90% Very important distinction. 00:43:41.635 --> 00:43:44.680 align:middle line:84% We're graphing the marginal tax rate. 00:43:44.680 --> 00:43:45.930 align:middle line:90% What is the marginal tax rate? 00:43:45.930 --> 00:43:48.230 align:middle line:84% That is the rate you pay on the next dollar. 00:43:48.230 --> 00:43:50.410 align:middle line:90% So let's look at how this works. 00:43:50.410 --> 00:43:50.910 align:middle line:90% OK. 00:43:50.910 --> 00:43:53.510 align:middle line:90% 00:43:53.510 --> 00:43:58.950 align:middle line:84% For any dollar of taxable income that's below $19,750, 00:43:58.950 --> 00:44:01.710 align:middle line:90% you pay $0.10 per dollar. 00:44:01.710 --> 00:44:09.390 align:middle line:84% But for the 19,751st dollar, you now pay $0.12 per dollar. 00:44:09.390 --> 00:44:10.310 align:middle line:90% OK. 00:44:10.310 --> 00:44:14.870 align:middle line:90% So let's say you earn $20,000. 00:44:14.870 --> 00:44:17.590 align:middle line:84% On that $20,000th dollar, you pay $0.12. 00:44:17.590 --> 00:44:21.190 align:middle line:84% But on the first $19,750, you only pay $0.10. 00:44:21.190 --> 00:44:24.230 align:middle line:84% So the marginal tax rate is different than the average tax 00:44:24.230 --> 00:44:25.510 align:middle line:90% rate. 00:44:25.510 --> 00:44:32.928 align:middle line:84% The average tax rate is your total taxes over your income. 00:44:32.928 --> 00:44:34.470 align:middle line:84% The marginal tax rate is what you pay 00:44:34.470 --> 00:44:35.970 align:middle line:90% on your next dollar of income. 00:44:35.970 --> 00:44:38.830 align:middle line:84% And those are very different if you have a progressive-- 00:44:38.830 --> 00:44:41.030 align:middle line:84% if you have a schedule like this. 00:44:41.030 --> 00:44:43.190 align:middle line:90% So this schedule wanders up. 00:44:43.190 --> 00:44:46.150 align:middle line:84% And basically, it's ever-rising marginal tax rates 00:44:46.150 --> 00:44:50.550 align:middle line:90% hitting a top tax rate of 37% 00:44:50.550 --> 00:44:54.870 align:middle line:84% So if you apply this tax rate to Jack's schedule, 00:44:54.870 --> 00:45:02.070 align:middle line:84% he owes 10% of his first 19,750, which is $1,975. 00:45:02.070 --> 00:45:03.810 align:middle line:90% So Jack owes $1,975. 00:45:03.810 --> 00:45:06.550 align:middle line:84% But he earns more than that on the remaining-- 00:45:06.550 --> 00:45:10.850 align:middle line:84% he also has $38,450 of taxable income left, 00:45:10.850 --> 00:45:14.510 align:middle line:90% so it pays another $4,614. 00:45:14.510 --> 00:45:18.230 align:middle line:84% So he pays all on the first bracket and then he's halfway 00:45:18.230 --> 00:45:20.590 align:middle line:84% in the second bracket when he stops. 00:45:20.590 --> 00:45:24.190 align:middle line:84% So at the end of the day, if you flip back to table 18.1, 00:45:24.190 --> 00:45:27.550 align:middle line:90% Jack owes $6,589 in taxes. 00:45:27.550 --> 00:45:28.990 align:middle line:90% Question about how that worked? 00:45:28.990 --> 00:45:31.190 align:middle line:84% Understanding marginal versus average tax rates 00:45:31.190 --> 00:45:33.950 align:middle line:84% is essential for the next third of the course. 00:45:33.950 --> 00:45:34.510 align:middle line:90% Yeah. 00:45:34.510 --> 00:45:36.710 align:middle line:84% STUDENT: What you said before that most Americans don't pay. 00:45:36.710 --> 00:45:37.450 align:middle line:84% JONATHAN GRUBER: Let me come back to that. 00:45:37.450 --> 00:45:38.975 align:middle line:90% I shouldn't have previewed that. 00:45:38.975 --> 00:45:39.850 align:middle line:90% I'll come back to it. 00:45:39.850 --> 00:45:40.773 align:middle line:90% STUDENT: Oh. 00:45:40.773 --> 00:45:41.690 align:middle line:90% JONATHAN GRUBER: Yeah. 00:45:41.690 --> 00:45:46.190 align:middle line:84% STUDENT: So for the first 19,750, you pay 10%. 00:45:46.190 --> 00:45:49.328 align:middle line:84% Anywhere between the 19 and 80, it'd be 12? 00:45:49.328 --> 00:45:50.370 align:middle line:90% JONATHAN GRUBER: Exactly. 00:45:50.370 --> 00:45:50.870 align:middle line:90% Exactly. 00:45:50.870 --> 00:45:53.610 align:middle line:84% So if Jack earned-- if his taxable income was $100,000, 00:45:53.610 --> 00:45:56.270 align:middle line:84% he'd pay the whole 12% up to 80, and then he'd pay 15 00:45:56.270 --> 00:45:57.110 align:middle line:90% on the rest. 00:45:57.110 --> 00:46:01.300 align:middle line:84% So you think of yourself as walking up that tax schedule. 00:46:01.300 --> 00:46:02.900 align:middle line:90% Other questions? 00:46:02.900 --> 00:46:03.740 align:middle line:90% OK. 00:46:03.740 --> 00:46:09.540 align:middle line:84% So basically, Jack then owes $6,589 but we're not done yet 00:46:09.540 --> 00:46:12.580 align:middle line:84% because there's another feature of the tax code because it 00:46:12.580 --> 00:46:16.100 align:middle line:84% wasn't complicated enough called tax credits. 00:46:16.100 --> 00:46:18.380 align:middle line:84% These are distinct from deductions. 00:46:18.380 --> 00:46:21.100 align:middle line:84% Tax credits are various sources that you can 00:46:21.100 --> 00:46:23.860 align:middle line:90% subtract from your tax bill. 00:46:23.860 --> 00:46:25.160 align:middle line:90% Very important difference. 00:46:25.160 --> 00:46:27.460 align:middle line:84% Taxable deductions are things you 00:46:27.460 --> 00:46:28.860 align:middle line:84% subtract from your taxable income 00:46:28.860 --> 00:46:30.900 align:middle line:90% before computing your taxes. 00:46:30.900 --> 00:46:33.060 align:middle line:84% Tax credits are literally dollars you 00:46:33.060 --> 00:46:35.820 align:middle line:90% can take off the taxes you owe. 00:46:35.820 --> 00:46:38.820 align:middle line:84% The most significant tax credits are the Earned Income Tax 00:46:38.820 --> 00:46:42.160 align:middle line:84% Credit, which I talked about last time 00:46:42.160 --> 00:46:44.590 align:middle line:84% and I'll talk about more in chapter 21, a credit you get 00:46:44.590 --> 00:46:45.840 align:middle line:90% back if your earnings are low. 00:46:45.840 --> 00:46:48.100 align:middle line:90% It's a wage subsidy. 00:46:48.100 --> 00:46:51.700 align:middle line:90% And the child and-- 00:46:51.700 --> 00:47:01.780 align:middle line:84% the CDC, basically, the child tax credit, which basically-- 00:47:01.780 --> 00:47:02.600 align:middle line:90% no, that's not. 00:47:02.600 --> 00:47:03.100 align:middle line:90% No. 00:47:03.100 --> 00:47:03.600 align:middle line:90% I'm sorry. 00:47:03.600 --> 00:47:05.140 align:middle line:90% Yeah. 00:47:05.140 --> 00:47:07.120 align:middle line:90% CTC is the Child Tax Credit. 00:47:07.120 --> 00:47:10.020 align:middle line:84% That's literally just a credit you get for having kids. 00:47:10.020 --> 00:47:11.520 align:middle line:90% They give you money for taxes. 00:47:11.520 --> 00:47:16.600 align:middle line:84% There's also a CDC, which is the Child and Dependent Care Credit, 00:47:16.600 --> 00:47:18.060 align:middle line:84% which is the tax rate you can get 00:47:18.060 --> 00:47:22.340 align:middle line:84% against the cost of providing child care or elder care. 00:47:22.340 --> 00:47:24.260 align:middle line:84% So there's lots of these credits that 00:47:24.260 --> 00:47:26.780 align:middle line:90% are floating around at the end. 00:47:26.780 --> 00:47:30.580 align:middle line:84% So let's say, for example, Jack had three kids. 00:47:30.580 --> 00:47:32.940 align:middle line:90% Well the CTC is $2,000 each. 00:47:32.940 --> 00:47:35.280 align:middle line:84% So he gets another $6,000 off his taxes. 00:47:35.280 --> 00:47:38.300 align:middle line:84% STUDENT: Can I ask ask what the difference between the last-- 00:47:38.300 --> 00:47:39.800 align:middle line:84% JONATHAN GRUBER: Oh, this one is just for having a kid. 00:47:39.800 --> 00:47:41.200 align:middle line:84% This is for having a kid in child care. 00:47:41.200 --> 00:47:42.742 align:middle line:84% This, everyone who has a kid gets it. 00:47:42.742 --> 00:47:43.900 align:middle line:90% Here, you can deduct-- 00:47:43.900 --> 00:47:45.000 align:middle line:84% I'll come back to the details of this. 00:47:45.000 --> 00:47:46.600 align:middle line:84% You can deduct your child care expenses. 00:47:46.600 --> 00:47:48.240 align:middle line:84% You can get a credit for childcare expenses. 00:47:48.240 --> 00:47:49.420 align:middle line:90% STUDENT: Childcare being-- 00:47:49.420 --> 00:47:50.600 align:middle line:84% JONATHAN GRUBER: Formal child care. 00:47:50.600 --> 00:47:50.940 align:middle line:90% STUDENT: Formal child care. 00:47:50.940 --> 00:47:51.857 align:middle line:90% JONATHAN GRUBER: Yeah. 00:47:51.857 --> 00:47:52.540 align:middle line:90% OK. 00:47:52.540 --> 00:47:54.360 align:middle line:84% But once again, the details aren't important to these. 00:47:54.360 --> 00:47:56.100 align:middle line:84% The important thing is that these credits exist 00:47:56.100 --> 00:47:57.520 align:middle line:84% and they come off the bottom line. 00:47:57.520 --> 00:47:58.020 align:middle line:90% Yeah. 00:47:58.020 --> 00:47:58.980 align:middle line:90% STUDENT: So sorry. 00:47:58.980 --> 00:48:02.300 align:middle line:84% Tax credits and taxable-- what was the first point? 00:48:02.300 --> 00:48:03.900 align:middle line:84% JONATHAN GRUBER: First is deductions. 00:48:03.900 --> 00:48:07.140 align:middle line:84% Deductions come off your taxable income 00:48:07.140 --> 00:48:09.080 align:middle line:84% before you compute your taxes owed. 00:48:09.080 --> 00:48:12.900 align:middle line:84% Credits come at the end after you've computed taxes owed. 00:48:12.900 --> 00:48:14.720 align:middle line:90% So Jack has three kids. 00:48:14.720 --> 00:48:16.800 align:middle line:90% So let's say he gets three CTCs. 00:48:16.800 --> 00:48:19.780 align:middle line:90% That's $6,000. 00:48:19.780 --> 00:48:23.900 align:middle line:84% So he ends up owing $589 in taxes. 00:48:23.900 --> 00:48:24.960 align:middle line:90% Think about this. 00:48:24.960 --> 00:48:26.280 align:middle line:90% This is pretty interesting. 00:48:26.280 --> 00:48:32.700 align:middle line:84% Jack earned $85,000 and he only ends up owing $589 in taxes. 00:48:32.700 --> 00:48:33.740 align:middle line:90% OK. 00:48:33.740 --> 00:48:38.420 align:middle line:84% Now we're not quite done because the government doesn't just 00:48:38.420 --> 00:48:42.840 align:middle line:84% send Jack a bill every April 15 for $580. 00:48:42.840 --> 00:48:48.020 align:middle line:84% Doesn't send Jack a bill on November 15 for $589. 00:48:48.020 --> 00:48:50.420 align:middle line:84% The government instead practices what's 00:48:50.420 --> 00:48:53.720 align:middle line:84% called withholding, which is the government takes-- 00:48:53.720 --> 00:48:55.540 align:middle line:84% and you've seen this on your paychecks. 00:48:55.540 --> 00:48:58.260 align:middle line:84% The government takes out from your paycheck every week 00:48:58.260 --> 00:49:00.452 align:middle line:84% an estimate of what you will owe in taxes. 00:49:00.452 --> 00:49:02.660 align:middle line:84% So the government doesn't want you holding the money, 00:49:02.660 --> 00:49:04.040 align:middle line:84% and you earn the interest, and paying them in April. 00:49:04.040 --> 00:49:05.700 align:middle line:84% The government wants the interest. 00:49:05.700 --> 00:49:08.500 align:middle line:84% So the government withholds your taxes along the way 00:49:08.500 --> 00:49:11.220 align:middle line:90% as you earn money. 00:49:11.220 --> 00:49:13.740 align:middle line:84% Now, Jack here has set up a schedule such 00:49:13.740 --> 00:49:18.300 align:middle line:84% that his witholding is actually bigger than what he owes. 00:49:18.300 --> 00:49:21.940 align:middle line:84% He's actually had $2,000 withheld during the year. 00:49:21.940 --> 00:49:25.140 align:middle line:84% So that on net, he actually gets a check on April 15. 00:49:25.140 --> 00:49:27.780 align:middle line:84% It turns out that's true for most Americans who 00:49:27.780 --> 00:49:31.460 align:middle line:84% pay income taxes actually overwithhold. 00:49:31.460 --> 00:49:32.692 align:middle line:90% It's not quite clear why. 00:49:32.692 --> 00:49:34.400 align:middle line:84% It could go back to behavioral economics. 00:49:34.400 --> 00:49:36.567 align:middle line:84% People just don't trust themselves to have the money 00:49:36.567 --> 00:49:38.200 align:middle line:90% on April 15 to pay their taxes. 00:49:38.200 --> 00:49:40.060 align:middle line:90% Could be they don't understand. 00:49:40.060 --> 00:49:41.940 align:middle line:84% But the bottom line is overwithholding. 00:49:41.940 --> 00:49:43.940 align:middle line:84% Most people-- so the average American actually 00:49:43.940 --> 00:49:44.995 align:middle line:90% gets a check on April 15. 00:49:44.995 --> 00:49:45.620 align:middle line:90% They don't pay. 00:49:45.620 --> 00:49:47.700 align:middle line:90% They don't pay money. 00:49:47.700 --> 00:49:49.340 align:middle line:84% Instead of people hating Tax Day, 00:49:49.340 --> 00:49:51.180 align:middle line:84% it's actually a day you get a check. 00:49:51.180 --> 00:49:52.520 align:middle line:90% Yeah. 00:49:52.520 --> 00:49:54.020 align:middle line:84% STUDENT: Do you personally determine 00:49:54.020 --> 00:49:55.900 align:middle line:84% how much you withhold out of each month or is that-- 00:49:55.900 --> 00:49:56.540 align:middle line:90% JONATHAN GRUBER: There's a form. 00:49:56.540 --> 00:49:58.040 align:middle line:84% When you sign up for your job, there'll be a form. 00:49:58.040 --> 00:50:00.207 align:middle line:84% You list your number of dependents, stuff like that. 00:50:00.207 --> 00:50:02.060 align:middle line:84% But the reason people mostly overwithhold 00:50:02.060 --> 00:50:03.740 align:middle line:84% is because there's other lines like, do 00:50:03.740 --> 00:50:05.160 align:middle line:84% you think you'll take this deduction, that deduction? 00:50:05.160 --> 00:50:07.118 align:middle line:84% People just ignore them, whereas, in fact, they 00:50:07.118 --> 00:50:09.660 align:middle line:84% end up taking them and they end up overwithholding. 00:50:09.660 --> 00:50:11.060 align:middle line:90% Yeah. 00:50:11.060 --> 00:50:13.420 align:middle line:84% STUDENT: Where along the list does tax penalty go on? 00:50:13.420 --> 00:50:16.020 align:middle line:84% For example, for the individual mandate. 00:50:16.020 --> 00:50:17.720 align:middle line:90% JONATHAN GRUBER: That would be-- 00:50:17.720 --> 00:50:21.280 align:middle line:84% the tax on individual mandate, which is added to your taxes. 00:50:21.280 --> 00:50:23.473 align:middle line:84% So when I compute-- when I compute your taxes owed, 00:50:23.473 --> 00:50:25.140 align:middle line:84% there'd be other pieces in that that are 00:50:25.140 --> 00:50:26.860 align:middle line:90% small that I'm not including. 00:50:26.860 --> 00:50:28.020 align:middle line:90% Yeah. 00:50:28.020 --> 00:50:31.027 align:middle line:84% STUDENT: How is the child tax credit set? 00:50:31.027 --> 00:50:32.360 align:middle line:90% JONATHAN GRUBER: How is it what? 00:50:32.360 --> 00:50:35.380 align:middle line:84% STUDENT: How is it the child tax credit set, 00:50:35.380 --> 00:50:37.820 align:middle line:90% like the amount of money. 00:50:37.820 --> 00:50:39.780 align:middle line:84% JONATHAN GRUBER: Like the $2,000? 00:50:39.780 --> 00:50:40.400 align:middle line:90% Same answer. 00:50:40.400 --> 00:50:41.660 align:middle line:90% Congress determines it. 00:50:41.660 --> 00:50:43.400 align:middle line:90% It's just a law. 00:50:43.400 --> 00:50:43.900 align:middle line:90% Yeah. 00:50:43.900 --> 00:50:46.620 align:middle line:90% 00:50:46.620 --> 00:50:47.160 align:middle line:90% Yeah. 00:50:47.160 --> 00:50:47.993 align:middle line:90% So basically-- yeah. 00:50:47.993 --> 00:50:48.850 align:middle line:90% Go ahead. 00:50:48.850 --> 00:50:51.100 align:middle line:84% STUDENT: So does that mean when you say more than half 00:50:51.100 --> 00:50:52.370 align:middle line:84% of Americans aren't paying income tax, 00:50:52.370 --> 00:50:53.970 align:middle line:84% is that more than half of Americans 00:50:53.970 --> 00:50:56.370 align:middle line:84% aren't sending a check on Tax Day or is it that-- 00:50:56.370 --> 00:50:56.570 align:middle line:90% JONATHAN GRUBER: No. 00:50:56.570 --> 00:50:59.153 align:middle line:84% More than half of the Americans, when you do this calculation, 00:50:59.153 --> 00:50:59.870 align:middle line:90% end up negative. 00:50:59.870 --> 00:51:00.912 align:middle line:90% STUDENT: End up negative. 00:51:00.912 --> 00:51:03.352 align:middle line:84% JONATHAN GRUBER: Now a lot of them still have withholding. 00:51:03.352 --> 00:51:04.810 align:middle line:84% A lot of them don't realize they're 00:51:04.810 --> 00:51:07.060 align:middle line:84% going to have negative so they still have withholding. 00:51:07.060 --> 00:51:08.730 align:middle line:90% So they end up getting a check. 00:51:08.730 --> 00:51:11.570 align:middle line:84% But actually, if they knew they were going to be negative, 00:51:11.570 --> 00:51:13.153 align:middle line:84% they could have not withheld anything. 00:51:13.153 --> 00:51:15.330 align:middle line:84% They could have just paid no money all year. 00:51:15.330 --> 00:51:17.672 align:middle line:84% STUDENT: And with even without excessive withholding? 00:51:17.672 --> 00:51:19.630 align:middle line:84% JONATHAN GRUBER: Without excessive withholding, 00:51:19.630 --> 00:51:20.850 align:middle line:90% most of the average-- 00:51:20.850 --> 00:51:22.830 align:middle line:84% I think it's about 50% of Americans, 00:51:22.830 --> 00:51:25.810 align:middle line:84% once you take all deductions and credits, end up owing 00:51:25.810 --> 00:51:28.010 align:middle line:90% nothing on the income tax. 00:51:28.010 --> 00:51:28.530 align:middle line:90% STUDENT: OK. 00:51:28.530 --> 00:51:29.447 align:middle line:90% JONATHAN GRUBER: Yeah. 00:51:29.447 --> 00:51:32.092 align:middle line:84% STUDENT: [INAUDIBLE] commit tax fraud? 00:51:32.092 --> 00:51:34.550 align:middle line:84% JONATHAN GRUBER: We'll talk a lot about that in chapter 25. 00:51:34.550 --> 00:51:36.610 align:middle line:84% The answer is we don't have nearly enough tax 00:51:36.610 --> 00:51:38.810 align:middle line:90% fraud in America. 00:51:38.810 --> 00:51:41.930 align:middle line:84% And I'll explain why in chapter 25. 00:51:41.930 --> 00:51:42.830 align:middle line:90% Yeah. 00:51:42.830 --> 00:51:44.950 align:middle line:84% STUDENT: Do you just create a number 00:51:44.950 --> 00:51:49.010 align:middle line:84% for withholding to make it easier for [INAUDIBLE] people 00:51:49.010 --> 00:51:52.280 align:middle line:84% to do whatever they want with their cash? 00:51:52.280 --> 00:51:53.530 align:middle line:90% JONATHAN GRUBER: Say it again. 00:51:53.530 --> 00:51:54.918 align:middle line:90% Aren't you what? 00:51:54.918 --> 00:51:57.210 align:middle line:84% STUDENT: If you make it easy to hold [INAUDIBLE] people 00:51:57.210 --> 00:51:58.173 align:middle line:90% will have less cash. 00:51:58.173 --> 00:51:59.090 align:middle line:90% JONATHAN GRUBER: Yeah. 00:51:59.090 --> 00:52:04.030 align:middle line:84% I mean, basically, look, we're not making it easy to withhold. 00:52:04.030 --> 00:52:07.010 align:middle line:84% We're just making it hard to properly withhold. 00:52:07.010 --> 00:52:09.650 align:middle line:84% And basically, it's a good question 00:52:09.650 --> 00:52:12.810 align:middle line:84% about whether we should do more to fight overwithholding. 00:52:12.810 --> 00:52:15.690 align:middle line:84% I think people really don't want to owe money April 15th. 00:52:15.690 --> 00:52:17.850 align:middle line:84% It's the behavioral thing that people just 00:52:17.850 --> 00:52:20.450 align:middle line:90% don't want that bill coming. 00:52:20.450 --> 00:52:24.105 align:middle line:84% And so I don't think people mind it actually. 00:52:24.105 --> 00:52:25.230 align:middle line:90% But that's a good question. 00:52:25.230 --> 00:52:26.230 align:middle line:84% There's not enough research on that. 00:52:26.230 --> 00:52:26.370 align:middle line:90% Yeah. 00:52:26.370 --> 00:52:26.870 align:middle line:90% Enoch. 00:52:26.870 --> 00:52:28.578 align:middle line:84% STUDENT: The government does not give you 00:52:28.578 --> 00:52:31.210 align:middle line:84% money back off the interest that they gained 00:52:31.210 --> 00:52:34.570 align:middle line:90% if you overpaid or they do? 00:52:34.570 --> 00:52:36.090 align:middle line:84% JONATHAN GRUBER: No, they do not. 00:52:36.090 --> 00:52:36.835 align:middle line:90% They do not. 00:52:36.835 --> 00:52:38.710 align:middle line:84% Now there's another feature not covered here, 00:52:38.710 --> 00:52:40.490 align:middle line:84% which is if you're wealthy enough, if you 00:52:40.490 --> 00:52:43.010 align:middle line:84% have unearned income, you also pay 00:52:43.010 --> 00:52:44.630 align:middle line:90% what's called estimated taxes. 00:52:44.630 --> 00:52:47.130 align:middle line:84% So if you are going to have-- let's say you're going to earn 00:52:47.130 --> 00:52:49.170 align:middle line:84% $100,000 in dividends every year. 00:52:49.170 --> 00:52:51.000 align:middle line:84% You have to pay tax on that every quarter. 00:52:51.000 --> 00:52:52.250 align:middle line:90% You have to send them a check. 00:52:52.250 --> 00:52:53.747 align:middle line:90% You have to prepay that as well. 00:52:53.747 --> 00:52:55.330 align:middle line:84% Now if it turns out that's a surprise, 00:52:55.330 --> 00:52:56.510 align:middle line:90% they don't hit you for it. 00:52:56.510 --> 00:52:58.810 align:middle line:84% But if you have income and you haven't prepaid it, 00:52:58.810 --> 00:53:01.045 align:middle line:84% then they will actually penalize you at the end. 00:53:01.045 --> 00:53:02.670 align:middle line:84% So you not only withhold your earnings. 00:53:02.670 --> 00:53:05.253 align:middle line:84% You have to send them a check in advance about unearned income 00:53:05.253 --> 00:53:07.470 align:middle line:84% to offset the taxes you're going to pay on that. 00:53:07.470 --> 00:53:09.210 align:middle line:90% They don't want you owing taxes. 00:53:09.210 --> 00:53:10.570 align:middle line:90% STUDENT: Unrealized income. 00:53:10.570 --> 00:53:12.570 align:middle line:84% JONATHAN GRUBER: Unrealized income is not taxed. 00:53:12.570 --> 00:53:13.570 align:middle line:90% We'll talk about that. 00:53:13.570 --> 00:53:16.610 align:middle line:84% STUDENT: I was going to ask if that is dependent upon something 00:53:16.610 --> 00:53:17.610 align:middle line:84% happening in the market that you don't 00:53:17.610 --> 00:53:18.450 align:middle line:90% have full control over it-- 00:53:18.450 --> 00:53:19.950 align:middle line:84% JONATHAN GRUBER: It doesn't matter. 00:53:19.950 --> 00:53:21.325 align:middle line:84% I mean, basically, when it comes, 00:53:21.325 --> 00:53:24.430 align:middle line:84% you then pay tax on it if you realize it. 00:53:24.430 --> 00:53:25.710 align:middle line:90% Then we'll come back to that. 00:53:25.710 --> 00:53:26.210 align:middle line:90% OK. 00:53:26.210 --> 00:53:27.750 align:middle line:90% Those are good questions. 00:53:27.750 --> 00:53:31.210 align:middle line:84% Other questions about how taxes work? 00:53:31.210 --> 00:53:31.910 align:middle line:90% All right. 00:53:31.910 --> 00:53:33.430 align:middle line:90% So that's how taxes work. 00:53:33.430 --> 00:53:37.650 align:middle line:84% Now here's the big question on every American's mind. 00:53:37.650 --> 00:53:39.770 align:middle line:90% Are taxes fair? 00:53:39.770 --> 00:53:40.850 align:middle line:90% The fairness. 00:53:40.850 --> 00:53:41.562 align:middle line:90% Fair, fair, fair. 00:53:41.562 --> 00:53:43.270 align:middle line:84% It's all you ever hear about tax systems. 00:53:43.270 --> 00:53:47.330 align:middle line:84% Well, fair is not really a term of art in economics. 00:53:47.330 --> 00:53:49.875 align:middle line:84% So how do we think about, in economics, 00:53:49.875 --> 00:53:51.250 align:middle line:84% how do we think about translating 00:53:51.250 --> 00:53:53.890 align:middle line:84% the concept of fairness to concepts 00:53:53.890 --> 00:53:56.050 align:middle line:90% we can measure and define? 00:53:56.050 --> 00:54:00.090 align:middle line:84% And basically, the way we do that 00:54:00.090 --> 00:54:02.490 align:middle line:84% is by, first of all, distinguishing average 00:54:02.490 --> 00:54:04.030 align:middle line:90% and marginal tax rates. 00:54:04.030 --> 00:54:07.490 align:middle line:84% First of all, recognizing that fairness-- 00:54:07.490 --> 00:54:10.970 align:middle line:84% really people think in terms of not 00:54:10.970 --> 00:54:13.970 align:middle line:84% what you pay in the next dollar but how much you pay. 00:54:13.970 --> 00:54:16.320 align:middle line:84% So if I say my taxes are unfair, I 00:54:16.320 --> 00:54:18.070 align:middle line:84% don't mean that on the incremental dollar. 00:54:18.070 --> 00:54:20.610 align:middle line:84% I mean, I'm paying too much in taxes. 00:54:20.610 --> 00:54:23.490 align:middle line:84% So fairness is really about average tax rates. 00:54:23.490 --> 00:54:25.210 align:middle line:84% That's the concept people have in mind 00:54:25.210 --> 00:54:26.610 align:middle line:84% when they think about fairness, which 00:54:26.610 --> 00:54:27.970 align:middle line:84% is what's the amount they're paying 00:54:27.970 --> 00:54:29.470 align:middle line:84% in taxes relative to their income. 00:54:29.470 --> 00:54:31.610 align:middle line:84% Are they paying too much of their income in taxes 00:54:31.610 --> 00:54:34.930 align:middle line:84% or not enough of their income in taxes? 00:54:34.930 --> 00:54:39.770 align:middle line:84% And fairness is judged against two different standards. 00:54:39.770 --> 00:54:42.390 align:middle line:84% The standard economists talk about 00:54:42.390 --> 00:54:44.530 align:middle line:84% and typically worry the most about 00:54:44.530 --> 00:54:46.990 align:middle line:84% is what's called vertical equity. 00:54:46.990 --> 00:54:50.970 align:middle line:90% 00:54:50.970 --> 00:54:51.870 align:middle line:90% Vertical equity. 00:54:51.870 --> 00:54:54.450 align:middle line:84% Vertical equity-- the notion of fairness, which is it 00:54:54.450 --> 00:54:58.250 align:middle line:84% is fair if the rich pay more than the poor. 00:54:58.250 --> 00:55:01.730 align:middle line:84% So vertical means your spot in the income distribution. 00:55:01.730 --> 00:55:06.397 align:middle line:84% Vertical equity is what the rich pay relative to the poor. 00:55:06.397 --> 00:55:08.230 align:middle line:84% When you say equity, it's what you think of. 00:55:08.230 --> 00:55:09.147 align:middle line:90% I say the word equity. 00:55:09.147 --> 00:55:10.530 align:middle line:90% It's what you think of. 00:55:10.530 --> 00:55:16.210 align:middle line:84% But there's another concept that actually doesn't really 00:55:16.210 --> 00:55:17.830 align:middle line:84% have a lot of spot in economic models 00:55:17.830 --> 00:55:19.850 align:middle line:84% but is critically important politically, 00:55:19.850 --> 00:55:23.450 align:middle line:84% which is the notion of horizontal equity. 00:55:23.450 --> 00:55:25.830 align:middle line:90% This is an odd concept. 00:55:25.830 --> 00:55:28.450 align:middle line:84% It's hard to define and measure, but the basic idea behind it 00:55:28.450 --> 00:55:32.930 align:middle line:84% is simple, which is that two people who are similar 00:55:32.930 --> 00:55:35.210 align:middle line:90% should pay similar taxes. 00:55:35.210 --> 00:55:36.650 align:middle line:84% It's unfair if two similar people 00:55:36.650 --> 00:55:37.950 align:middle line:90% pay very different amounts. 00:55:37.950 --> 00:55:40.510 align:middle line:84% Here's the only true example of horizontal inequity. 00:55:40.510 --> 00:55:42.170 align:middle line:90% Everything else is convoluted. 00:55:42.170 --> 00:55:45.980 align:middle line:84% Imagine the way it worked was that sales tax, 00:55:45.980 --> 00:55:50.700 align:middle line:84% instead of being 6 and 1/4% were either 13.5% or 0, 00:55:50.700 --> 00:55:52.415 align:middle line:90% depending on a coin flip. 00:55:52.415 --> 00:55:53.540 align:middle line:90% So you walk into the store. 00:55:53.540 --> 00:55:54.332 align:middle line:90% They flip the coin. 00:55:54.332 --> 00:55:56.240 align:middle line:90% Heads, you pay 13.5% sales tax. 00:55:56.240 --> 00:55:57.920 align:middle line:90% Tails, you pay zero. 00:55:57.920 --> 00:56:01.540 align:middle line:84% Well, if Enoch and I walk into the store and I pay 13.5%, 00:56:01.540 --> 00:56:04.360 align:middle line:84% he pays zero, that is horizontally inequitable. 00:56:04.360 --> 00:56:05.840 align:middle line:90% We are identical. 00:56:05.840 --> 00:56:09.000 align:middle line:84% We go in and I pay a different amount. 00:56:09.000 --> 00:56:11.600 align:middle line:84% The problem is, that's not how taxes work. 00:56:11.600 --> 00:56:13.920 align:middle line:84% And every other definition of horizontal inequity 00:56:13.920 --> 00:56:15.080 align:middle line:90% is problematic. 00:56:15.080 --> 00:56:17.600 align:middle line:90% So let me give you an example. 00:56:17.600 --> 00:56:23.140 align:middle line:84% Imagine that my friend and I are identical in every respect-- 00:56:23.140 --> 00:56:28.060 align:middle line:84% in ability, in skill, in all sorts of things, 00:56:28.060 --> 00:56:30.440 align:middle line:84% with one fundamental difference, which 00:56:30.440 --> 00:56:34.380 align:middle line:84% is that I choose to spend more time with my kids 00:56:34.380 --> 00:56:38.160 align:middle line:84% and he chooses to spend more time at work. 00:56:38.160 --> 00:56:41.480 align:middle line:84% Well, he gets taxed more than I do. 00:56:41.480 --> 00:56:45.040 align:middle line:84% He could claim that as horizontally inequitable. 00:56:45.040 --> 00:56:46.488 align:middle line:90% We're identical. 00:56:46.488 --> 00:56:48.780 align:middle line:84% Just because he chose to work and I chose stay at home, 00:56:48.780 --> 00:56:51.200 align:middle line:84% why should I get to pay less taxes? 00:56:51.200 --> 00:56:53.180 align:middle line:84% Now you might say, well, duh, of course you do. 00:56:53.180 --> 00:56:54.520 align:middle line:90% You have less money. 00:56:54.520 --> 00:56:56.228 align:middle line:84% But he might say, well, I have less money 00:56:56.228 --> 00:56:57.960 align:middle line:90% through a choice I made. 00:56:57.960 --> 00:57:00.420 align:middle line:84% And why should I pay less taxes because of a choice? 00:57:00.420 --> 00:57:03.222 align:middle line:84% Why should because I chose to stay at home? 00:57:03.222 --> 00:57:04.180 align:middle line:90% Maybe it's not my kids. 00:57:04.180 --> 00:57:06.000 align:middle line:84% Maybe I'm just home watching reruns. 00:57:06.000 --> 00:57:08.280 align:middle line:90% Why should I pay less taxes? 00:57:08.280 --> 00:57:10.480 align:middle line:84% And that's the notion of horizontal equity, which 00:57:10.480 --> 00:57:13.360 align:middle line:84% is very, very hard because, basically, it 00:57:13.360 --> 00:57:14.300 align:middle line:90% gets really tricky. 00:57:14.300 --> 00:57:17.140 align:middle line:84% Imagine two couples, one where the wife works, 00:57:17.140 --> 00:57:18.960 align:middle line:90% one where the wife doesn't. 00:57:18.960 --> 00:57:21.920 align:middle line:84% Should the couple where the wife works have to pay more taxes? 00:57:21.920 --> 00:57:22.840 align:middle line:90% They do now. 00:57:22.840 --> 00:57:24.840 align:middle line:90% Is that fair? 00:57:24.840 --> 00:57:27.680 align:middle line:84% I think many people would argue, yes, their income is higher. 00:57:27.680 --> 00:57:30.960 align:middle line:84% But there's at least you could see the issue that raises. 00:57:30.960 --> 00:57:34.600 align:middle line:84% And horizontal equity, while hard to define and grasp hold of 00:57:34.600 --> 00:57:37.180 align:middle line:84% is actually a big motivator of tax debates. 00:57:37.180 --> 00:57:39.040 align:middle line:90% And we'll come back to that. 00:57:39.040 --> 00:57:41.420 align:middle line:84% Typically, when I slip into a term like equity, 00:57:41.420 --> 00:57:42.760 align:middle line:90% I mean vertical equity. 00:57:42.760 --> 00:57:44.960 align:middle line:84% Unless I say horizontal equity, equity 00:57:44.960 --> 00:57:47.280 align:middle line:84% is a shorthand for vertical equity 00:57:47.280 --> 00:57:49.880 align:middle line:84% because horizontal equity is almost more of a political issue 00:57:49.880 --> 00:57:51.180 align:middle line:90% than an economic issue. 00:57:51.180 --> 00:57:52.080 align:middle line:90% OK. 00:57:52.080 --> 00:57:57.240 align:middle line:84% Now, if we think about vertical equity, how do we measure it? 00:57:57.240 --> 00:58:01.260 align:middle line:84% Well, the way we measure it is essentially by asking, 00:58:01.260 --> 00:58:04.320 align:middle line:84% does the average tax rate-- how does the average tax 00:58:04.320 --> 00:58:08.760 align:middle line:90% rate vary with income? 00:58:08.760 --> 00:58:13.280 align:middle line:84% If the average tax rate rises with income, 00:58:13.280 --> 00:58:16.560 align:middle line:84% that is higher income people pay higher average tax rates, 00:58:16.560 --> 00:58:22.160 align:middle line:84% we call this a progressive tax system. 00:58:22.160 --> 00:58:23.680 align:middle line:84% The richer you are, the more tax you 00:58:23.680 --> 00:58:25.720 align:middle line:84% pay as a percentage of your income, 00:58:25.720 --> 00:58:27.700 align:middle line:84% not that just you pay more taxes. 00:58:27.700 --> 00:58:30.320 align:middle line:84% Pay more tax as a percentage of your income. 00:58:30.320 --> 00:58:33.800 align:middle line:84% If it's flat, that is, everybody pays 00:58:33.800 --> 00:58:37.400 align:middle line:84% 10% of their income, that's called a proportional tax 00:58:37.400 --> 00:58:38.020 align:middle line:90% system. 00:58:38.020 --> 00:58:41.560 align:middle line:90% 00:58:41.560 --> 00:58:44.560 align:middle line:84% And if it falls with income, that's 00:58:44.560 --> 00:58:50.640 align:middle line:90% called a regressive tax system. 00:58:50.640 --> 00:58:55.640 align:middle line:84% So for example, if you go to figure 18.3, 00:58:55.640 --> 00:58:58.680 align:middle line:84% we have a progressive tax system. 00:58:58.680 --> 00:59:01.658 align:middle line:84% The higher income is, subject to these steps, 00:59:01.658 --> 00:59:03.200 align:middle line:84% the higher your average tax rate will 00:59:03.200 --> 00:59:06.360 align:middle line:84% be because these rising marginal rates lead 00:59:06.360 --> 00:59:08.280 align:middle line:90% to rising average rates. 00:59:08.280 --> 00:59:11.580 align:middle line:84% Just like a rising marginal cost leads to a rising average cost, 00:59:11.580 --> 00:59:13.820 align:middle line:84% rising marginal rates lead to rising average rates. 00:59:13.820 --> 00:59:16.280 align:middle line:90% We have a progressive system. 00:59:16.280 --> 00:59:19.280 align:middle line:84% Now consider Social Security payroll taxes, 00:59:19.280 --> 00:59:25.600 align:middle line:84% which are a flat 6.2% on the employee. 00:59:25.600 --> 00:59:28.540 align:middle line:84% That's proportional except it's not. 00:59:28.540 --> 00:59:29.480 align:middle line:90% Why? 00:59:29.480 --> 00:59:31.120 align:middle line:90% STUDENT: There's a cap. 00:59:31.120 --> 00:59:32.720 align:middle line:90% JONATHAN GRUBER: There's a cap. 00:59:32.720 --> 00:59:37.560 align:middle line:84% So actually, the richer you are, the less your average tax rate 00:59:37.560 --> 00:59:41.710 align:middle line:84% is because once you're above whatever it is, $190,000, 00:59:41.710 --> 00:59:43.170 align:middle line:84% your Social Security tax goes to 0. 00:59:43.170 --> 00:59:44.830 align:middle line:84% Your marginal rate actually goes down. 00:59:44.830 --> 00:59:49.510 align:middle line:84% So actually, payroll taxes are regressive. 00:59:49.510 --> 00:59:52.230 align:middle line:84% So you can see how different taxes can 00:59:52.230 --> 00:59:55.390 align:middle line:90% fit these terms differently. 00:59:55.390 --> 00:59:59.950 align:middle line:84% The problem is whether taxes are fair or not is often 00:59:59.950 --> 01:00:01.270 align:middle line:90% in the eye of the beholder. 01:00:01.270 --> 01:00:03.750 align:middle line:84% So let's run through a fun example of that. 01:00:03.750 --> 01:00:04.550 align:middle line:90% OK. 01:00:04.550 --> 01:00:07.070 align:middle line:84% George W. Bush signed a set of tax cuts 01:00:07.070 --> 01:00:13.990 align:middle line:84% into law in 2003 which were they reduced income tax rates 01:00:13.990 --> 01:00:15.890 align:middle line:84% and increased tax rates for corporations. 01:00:15.890 --> 01:00:18.750 align:middle line:84% Those were the major features of it. 01:00:18.750 --> 01:00:22.630 align:middle line:84% Critics said that this was unfair. 01:00:22.630 --> 01:00:25.990 align:middle line:84% They said, look, 44% of these tax cuts 01:00:25.990 --> 01:00:28.130 align:middle line:90% go to the top 1% of Americans. 01:00:28.130 --> 01:00:31.330 align:middle line:84% 44% go to the top 1% of Americans. 01:00:31.330 --> 01:00:32.990 align:middle line:90% That's unfair. 01:00:32.990 --> 01:00:34.990 align:middle line:84% The Bush administration said, wait a second. 01:00:34.990 --> 01:00:39.363 align:middle line:84% The top 1% of Americans pay 40% of the taxes. 01:00:39.363 --> 01:00:41.530 align:middle line:84% They're pretty much just getting back what they pay. 01:00:41.530 --> 01:00:42.710 align:middle line:90% That's not unfair. 01:00:42.710 --> 01:00:44.570 align:middle line:90% They pay 40% of the taxes. 01:00:44.570 --> 01:00:46.090 align:middle line:84% They're getting 44% of the Tax Cut. 01:00:46.090 --> 01:00:48.110 align:middle line:90% How is that unfair? 01:00:48.110 --> 01:00:51.050 align:middle line:84% To which critics responded, well, that's fine. 01:00:51.050 --> 01:00:55.710 align:middle line:84% They pay 40% of the income tax, but they pay 30% of all taxes 01:00:55.710 --> 01:00:58.110 align:middle line:84% because payroll taxes are regressive. 01:00:58.110 --> 01:01:00.770 align:middle line:84% So the rich may pay 40% of the income tax. 01:01:00.770 --> 01:01:02.490 align:middle line:90% They pay 30% of all taxes. 01:01:02.490 --> 01:01:06.190 align:middle line:84% So giving them 45% of the tax break is still unfair. 01:01:06.190 --> 01:01:06.830 align:middle line:90% OK. 01:01:06.830 --> 01:01:09.450 align:middle line:84% To which the Bush administration responded, well, 01:01:09.450 --> 01:01:14.070 align:middle line:84% that's ridiculous because we are giving 34 million families a tax 01:01:14.070 --> 01:01:17.750 align:middle line:90% cut of $1,500 each. 01:01:17.750 --> 01:01:18.250 align:middle line:90% OK. 01:01:18.250 --> 01:01:19.417 align:middle line:90% That's a pretty good number. 01:01:19.417 --> 01:01:21.950 align:middle line:84% To which critics responded, well, wait a second. 01:01:21.950 --> 01:01:23.430 align:middle line:90% That is true. 01:01:23.430 --> 01:01:28.150 align:middle line:84% But actually, that consists of 10 million families that get 01:01:28.150 --> 01:01:32.830 align:middle line:84% a tax cut of $100 and 200,000 families that get a tax cut 01:01:32.830 --> 01:01:34.750 align:middle line:90% of $100,000. 01:01:34.750 --> 01:01:38.570 align:middle line:84% So, as Paul Krugman wrote, when Bill Gates walks into a bar, 01:01:38.570 --> 01:01:41.150 align:middle line:84% the average person becomes a millionaire. 01:01:41.150 --> 01:01:41.977 align:middle line:90% OK. 01:01:41.977 --> 01:01:43.810 align:middle line:84% So on average, they were giving a tax break, 01:01:43.810 --> 01:01:46.910 align:middle line:84% but it mostly was a ginormous tax break to a few families 01:01:46.910 --> 01:01:49.710 align:middle line:84% and a small tax break to many families. 01:01:49.710 --> 01:01:52.118 align:middle line:84% So basically, this went back and forth. 01:01:52.118 --> 01:01:53.410 align:middle line:90% The tax cuts eventually passed. 01:01:53.410 --> 01:01:55.150 align:middle line:84% It turned out each side just talked past each other 01:01:55.150 --> 01:01:56.110 align:middle line:90% and they passed. 01:01:56.110 --> 01:01:59.570 align:middle line:84% But this highlights the famous Mark Twain [INAUDIBLE]. 01:01:59.570 --> 01:02:02.190 align:middle line:84% There are lies, damn lies, in statistics. 01:02:02.190 --> 01:02:04.310 align:middle line:84% That, in fact, there are many ways 01:02:04.310 --> 01:02:07.150 align:middle line:84% to use statistics to make your case when you're arguing policy. 01:02:07.150 --> 01:02:09.490 align:middle line:84% And ultimately, we have to ultimately, at the end, 01:02:09.490 --> 01:02:11.550 align:middle line:84% think about a principled definition. 01:02:11.550 --> 01:02:14.790 align:middle line:84% And the principal definition is this one, 01:02:14.790 --> 01:02:17.190 align:middle line:84% which is you have to ask, did the tax cut 01:02:17.190 --> 01:02:19.950 align:middle line:84% make the system more progressive or more regressive? 01:02:19.950 --> 01:02:22.510 align:middle line:84% And the answer is it made it more progressive-- more 01:02:22.510 --> 01:02:23.330 align:middle line:90% regressive. 01:02:23.330 --> 01:02:24.177 align:middle line:90% I'm sorry. 01:02:24.177 --> 01:02:26.010 align:middle line:84% The tax cut made the system more regressive. 01:02:26.010 --> 01:02:29.790 align:middle line:84% It was unfair in the sense of vertical equity. 01:02:29.790 --> 01:02:36.270 align:middle line:84% Does that help explain how these debates go? 01:02:36.270 --> 01:02:37.770 align:middle line:90% OK. 01:02:37.770 --> 01:02:41.830 align:middle line:90% 01:02:41.830 --> 01:02:42.330 align:middle line:90% OK. 01:02:42.330 --> 01:02:44.163 align:middle line:84% So that's what I want to say about fairness. 01:02:44.163 --> 01:02:45.710 align:middle line:90% Any other questions about that? 01:02:45.710 --> 01:02:48.350 align:middle line:84% Now the other major topic I want to cover this lecture, which 01:02:48.350 --> 01:02:50.830 align:middle line:84% will go into next time, but it's a critical one, 01:02:50.830 --> 01:02:53.470 align:middle line:84% is we've just talked about tax rates. 01:02:53.470 --> 01:02:56.710 align:middle line:84% And the next two chapters, actually 01:02:56.710 --> 01:02:59.070 align:middle line:84% the whole rest of the tax chapters, 01:02:59.070 --> 01:03:02.630 align:middle line:84% will focus primarily on the effect of tax rates. 01:03:02.630 --> 01:03:04.750 align:middle line:84% What happens if you raise the tax rate? 01:03:04.750 --> 01:03:08.550 align:middle line:84% But taxes of, course, are the rate times the base. 01:03:08.550 --> 01:03:09.827 align:middle line:90% Well, what defines the base? 01:03:09.827 --> 01:03:10.410 align:middle line:90% Good question. 01:03:10.410 --> 01:03:12.210 align:middle line:84% Or why is the child tax credit $2,000? 01:03:12.210 --> 01:03:13.770 align:middle line:84% Why is standard deduction $12,000? 01:03:13.770 --> 01:03:14.630 align:middle line:90% How about this. 01:03:14.630 --> 01:03:16.770 align:middle line:84% Why do we tax some things and not others? 01:03:16.770 --> 01:03:19.630 align:middle line:90% Why do we tax the things we do. 01:03:19.630 --> 01:03:21.990 align:middle line:84% And in fact, that is a deep and important question 01:03:21.990 --> 01:03:24.230 align:middle line:84% for dealing with tax policy design. 01:03:24.230 --> 01:03:26.790 align:middle line:84% And that leads to an important concept 01:03:26.790 --> 01:03:31.470 align:middle line:84% in economics, which is how do we think about the right definition 01:03:31.470 --> 01:03:33.030 align:middle line:90% of income. 01:03:33.030 --> 01:03:35.790 align:middle line:84% And a typical standard used by economists 01:03:35.790 --> 01:03:41.950 align:middle line:84% is what's called the Haig-Simons comprehensive income definition. 01:03:41.950 --> 01:03:47.350 align:middle line:84% The Haig-Simons comprehensive income definition basically 01:03:47.350 --> 01:03:50.790 align:middle line:84% says we're going to define people's resources based 01:03:50.790 --> 01:03:54.150 align:middle line:90% on their ability to pay taxes. 01:03:54.150 --> 01:03:56.630 align:middle line:84% And what is your ability to pay taxes? 01:03:56.630 --> 01:03:59.470 align:middle line:84% It is your potential annual consumption. 01:03:59.470 --> 01:04:01.350 align:middle line:84% It's your consumption during the year 01:04:01.350 --> 01:04:05.870 align:middle line:90% plus any change in your wealth. 01:04:05.870 --> 01:04:07.290 align:middle line:84% That is your ability to pay taxes. 01:04:07.290 --> 01:04:08.950 align:middle line:84% That's your total resources, how much 01:04:08.950 --> 01:04:12.765 align:middle line:84% you consumed plus any assets you added or subtracted. 01:04:12.765 --> 01:04:14.890 align:middle line:84% If you lost money, you have less than you consumed. 01:04:14.890 --> 01:04:17.710 align:middle line:84% If you made money, you have more than you consumed. 01:04:17.710 --> 01:04:21.630 align:middle line:84% Now, for many, many people, that's equal to their income. 01:04:21.630 --> 01:04:25.010 align:middle line:84% For most Americans, that's equal to a measure of income. 01:04:25.010 --> 01:04:28.270 align:middle line:84% But for others, it's not for important reasons. 01:04:28.270 --> 01:04:29.822 align:middle line:84% But the Haig-Simons tax base is what 01:04:29.822 --> 01:04:32.030 align:middle line:84% economists-- when we think about fairness, economists 01:04:32.030 --> 01:04:33.900 align:middle line:84% say this is the right way to think about fairness, which 01:04:33.900 --> 01:04:35.192 align:middle line:90% you think about ability to pay. 01:04:35.192 --> 01:04:37.442 align:middle line:84% And why is that the right way to think about fairness? 01:04:37.442 --> 01:04:40.140 align:middle line:84% Well, whether you think about vertical equity or horizontal 01:04:40.140 --> 01:04:41.640 align:middle line:84% equity, it's the right way to think. 01:04:41.640 --> 01:04:43.620 align:middle line:90% Think about vertical equity. 01:04:43.620 --> 01:04:48.740 align:middle line:84% Vertical equity says-- so let's say, for example-- 01:04:48.740 --> 01:04:50.240 align:middle line:90% let's say, for example-- 01:04:50.240 --> 01:04:55.740 align:middle line:90% 01:04:55.740 --> 01:04:57.240 align:middle line:90% one second. 01:04:57.240 --> 01:04:57.740 align:middle line:90% Yeah. 01:04:57.740 --> 01:04:58.240 align:middle line:90% OK. 01:04:58.240 --> 01:05:00.540 align:middle line:84% So let's take the example of the tax 01:05:00.540 --> 01:05:03.780 align:middle line:84% subsidy of employer-provided health insurance, the fact 01:05:03.780 --> 01:05:06.060 align:middle line:84% you're not taxed on what your employer spends 01:05:06.060 --> 01:05:07.620 align:middle line:90% on health insurance. 01:05:07.620 --> 01:05:08.820 align:middle line:90% OK. 01:05:08.820 --> 01:05:11.420 align:middle line:84% Haig-Simons would say that deviates 01:05:11.420 --> 01:05:13.340 align:middle line:84% from a comprehensive income definition 01:05:13.340 --> 01:05:16.460 align:middle line:84% because you are wealthier by the fact you get health 01:05:16.460 --> 01:05:19.620 align:middle line:90% insurance from your employer. 01:05:19.620 --> 01:05:24.400 align:middle line:84% Well, by excluding that, we lower vertical equity. 01:05:24.400 --> 01:05:25.840 align:middle line:90% Why do we lower vertical equity? 01:05:25.840 --> 01:05:27.215 align:middle line:84% Because a rich person with health 01:05:27.215 --> 01:05:30.180 align:middle line:84% insurance is treated as poorer than they are. 01:05:30.180 --> 01:05:32.020 align:middle line:90% So we lower vertical equity. 01:05:32.020 --> 01:05:35.020 align:middle line:84% But we also lower horizontal equity 01:05:35.020 --> 01:05:36.720 align:middle line:84% because if Ahmed and I are the same, 01:05:36.720 --> 01:05:39.740 align:middle line:84% but I choose to have health insurance, I pay less taxes. 01:05:39.740 --> 01:05:42.147 align:middle line:84% So whether you're a fan of vertical or horizontal equity, 01:05:42.147 --> 01:05:43.980 align:middle line:84% they're both better off with a broader, more 01:05:43.980 --> 01:05:46.380 align:middle line:84% comprehensive definition of income. 01:05:46.380 --> 01:05:49.740 align:middle line:84% Bottom line is you want someone's full ability to pay 01:05:49.740 --> 01:05:52.900 align:middle line:84% is a measure of how much they should pay in taxes. 01:05:52.900 --> 01:05:55.820 align:middle line:84% That's the economist's starting point. 01:05:55.820 --> 01:06:00.820 align:middle line:84% The problem is that that's a theoretical concept. 01:06:00.820 --> 01:06:03.420 align:middle line:84% And in practice, it is very challenging 01:06:03.420 --> 01:06:07.540 align:middle line:84% to actually define what ability to pay is. 01:06:07.540 --> 01:06:10.340 align:middle line:84% And indeed, if you think about the US tax code, 01:06:10.340 --> 01:06:13.860 align:middle line:84% we deviate from Haig-Simons for two reasons. 01:06:13.860 --> 01:06:16.900 align:middle line:84% In both cases, the reasons are theoretically legitimate 01:06:16.900 --> 01:06:19.260 align:middle line:90% but practically illegitimate. 01:06:19.260 --> 01:06:21.100 align:middle line:90% The first reason we deviate-- 01:06:21.100 --> 01:06:24.940 align:middle line:84% so what are the deviations from Haig-Simons? 01:06:24.940 --> 01:06:29.180 align:middle line:84% The first reason we deviate is because of ability 01:06:29.180 --> 01:06:30.660 align:middle line:90% to pay considerations. 01:06:30.660 --> 01:06:34.020 align:middle line:90% 01:06:34.020 --> 01:06:35.820 align:middle line:90% So here's the best example. 01:06:35.820 --> 01:06:40.260 align:middle line:84% Imagine your house burns down, through no fault of your own, 01:06:40.260 --> 01:06:42.820 align:middle line:84% and you get no enjoyment from that. 01:06:42.820 --> 01:06:43.780 align:middle line:90% OK. 01:06:43.780 --> 01:06:47.457 align:middle line:84% Well, you have lowered your ability to pay taxes. 01:06:47.457 --> 01:06:49.540 align:middle line:84% To live, you have to buy a new house or something. 01:06:49.540 --> 01:06:50.540 align:middle line:90% Assume it's not insured. 01:06:50.540 --> 01:06:51.740 align:middle line:90% You lose all the money. 01:06:51.740 --> 01:06:54.380 align:middle line:84% You have lowered your ability to pay taxes. 01:06:54.380 --> 01:06:57.440 align:middle line:84% So even a Haig-Simons definition would say we define your income. 01:06:57.440 --> 01:06:59.740 align:middle line:84% We should allow you to deduct losses 01:06:59.740 --> 01:07:02.260 align:middle line:90% that are outside your control. 01:07:02.260 --> 01:07:03.540 align:middle line:90% Seems pretty reasonable. 01:07:03.540 --> 01:07:04.640 align:middle line:90% No argue with that. 01:07:04.640 --> 01:07:05.460 align:middle line:90% OK. 01:07:05.460 --> 01:07:09.940 align:middle line:84% What if I end up having to spend 20% of my income on medical care 01:07:09.940 --> 01:07:12.260 align:middle line:90% because I have an accident? 01:07:12.260 --> 01:07:14.660 align:middle line:84% Well, if that was out of my control, 01:07:14.660 --> 01:07:17.020 align:middle line:84% then probably should deduct it as well. 01:07:17.020 --> 01:07:19.020 align:middle line:84% But it's hard to say it's out of my control. 01:07:19.020 --> 01:07:23.900 align:middle line:84% Maybe I spent 20% of my income on plastic surgery 01:07:23.900 --> 01:07:26.340 align:middle line:84% that I just chose because I wanted to look weird. 01:07:26.340 --> 01:07:27.260 align:middle line:90% OK. 01:07:27.260 --> 01:07:29.020 align:middle line:84% So basically, the bottom line is, 01:07:29.020 --> 01:07:31.780 align:middle line:84% yeah, in theory, if we could define 01:07:31.780 --> 01:07:34.520 align:middle line:84% as non-controllable health care expenditures, 01:07:34.520 --> 01:07:36.020 align:middle line:84% we would want to let you deduct that 01:07:36.020 --> 01:07:37.940 align:middle line:90% from your Haig-Simons income. 01:07:37.940 --> 01:07:39.060 align:middle line:90% It's just hard to define. 01:07:39.060 --> 01:07:40.200 align:middle line:90% What do we do in the US? 01:07:40.200 --> 01:07:42.740 align:middle line:84% We compromise and say you can deduct any health expenditures 01:07:42.740 --> 01:07:46.180 align:middle line:84% above 10% of income, the idea being major health expenditures 01:07:46.180 --> 01:07:47.860 align:middle line:90% are not something you choose. 01:07:47.860 --> 01:07:51.740 align:middle line:84% So that's one way we compromise on that. 01:07:51.740 --> 01:07:54.100 align:middle line:90% OK. 01:07:54.100 --> 01:07:57.540 align:middle line:84% Here's another fascinating case, state and local tax payments. 01:07:57.540 --> 01:08:00.060 align:middle line:90% 01:08:00.060 --> 01:08:02.780 align:middle line:84% As I said, if you itemize your deductions, 01:08:02.780 --> 01:08:06.420 align:middle line:84% you can deduct state and local tax payments. 01:08:06.420 --> 01:08:07.940 align:middle line:84% So in other words, I pay every year 01:08:07.940 --> 01:08:10.060 align:middle line:84% to my town of Lexington tax payments 01:08:10.060 --> 01:08:12.260 align:middle line:84% and to the state of Massachusetts tax payments. 01:08:12.260 --> 01:08:15.720 align:middle line:84% I get to deduct those, or I used to-- 01:08:15.720 --> 01:08:18.580 align:middle line:84% I'll tell you why not anymore-- get to deduct those 01:08:18.580 --> 01:08:20.060 align:middle line:90% from my income tax. 01:08:20.060 --> 01:08:23.859 align:middle line:84% And the idea was, well, I have less ability to pay income tax 01:08:23.859 --> 01:08:26.399 align:middle line:84% because I'm paying these taxes to other governments. 01:08:26.399 --> 01:08:29.420 align:middle line:84% So I have less ability to pay federal income tax. 01:08:29.420 --> 01:08:31.080 align:middle line:90% What economist is that ignoring? 01:08:31.080 --> 01:08:32.700 align:middle line:90% What concept does that ignore? 01:08:32.700 --> 01:08:33.600 align:middle line:90% Why is it wrong? 01:08:33.600 --> 01:08:34.660 align:middle line:90% Yeah. 01:08:34.660 --> 01:08:36.359 align:middle line:90% It ignores the Tiebout concept. 01:08:36.359 --> 01:08:38.908 align:middle line:84% Because if those taxes are buying me something, 01:08:38.908 --> 01:08:40.200 align:middle line:90% they buy me local public goods. 01:08:40.200 --> 01:08:44.100 align:middle line:84% In fact, in a perfect Tiebout equilibrium, the tax I pay 01:08:44.100 --> 01:08:45.439 align:middle line:90% is the benefit I get. 01:08:45.439 --> 01:08:48.240 align:middle line:84% So in fact, I'm not poor at all from paying taxes. 01:08:48.240 --> 01:08:50.220 align:middle line:84% It doesn't lower my ability to pay at all. 01:08:50.220 --> 01:08:53.060 align:middle line:84% It's literally just the price I'm paying for my public goods. 01:08:53.060 --> 01:08:56.340 align:middle line:84% So I should only be able to deduct state and local taxes 01:08:56.340 --> 01:08:58.899 align:middle line:84% to the extent I'm deviating from the Tiebout equilibrium. 01:08:58.899 --> 01:08:59.580 align:middle line:90% Yeah. 01:08:59.580 --> 01:09:02.740 align:middle line:84% STUDENT: Does that mean that a policy of reimbursing state 01:09:02.740 --> 01:09:07.020 align:middle line:84% taxes is, in effect, a transfer by the federal government 01:09:07.020 --> 01:09:09.380 align:middle line:84% or a transfer executed by the federal government 01:09:09.380 --> 01:09:11.640 align:middle line:84% from people in low tax states to high tax? 01:09:11.640 --> 01:09:13.020 align:middle line:90% JONATHAN GRUBER: Yes, exactly. 01:09:13.020 --> 01:09:13.740 align:middle line:90% Exactly. 01:09:13.740 --> 01:09:15.990 align:middle line:84% It's basically a subsidy to state and local government 01:09:15.990 --> 01:09:16.939 align:middle line:90% spending. 01:09:16.939 --> 01:09:20.060 align:middle line:84% So that would say-- so economists for decades 01:09:20.060 --> 01:09:23.020 align:middle line:84% have argued that we probably shouldn't 01:09:23.020 --> 01:09:24.479 align:middle line:90% allow the full deduction. 01:09:24.479 --> 01:09:27.000 align:middle line:84% And indeed, as part of the 2018 tax reform, 01:09:27.000 --> 01:09:30.609 align:middle line:84% the Trump tax reform we'll talk a lot about throughout the next 01:09:30.609 --> 01:09:35.250 align:middle line:84% eight lectures, we actually limited the extent to which 01:09:35.250 --> 01:09:38.649 align:middle line:84% people could deduct their state and local income taxes 01:09:38.649 --> 01:09:47.890 align:middle line:84% to $10,000, which was a limit which basically hit the blue 01:09:47.890 --> 01:09:48.590 align:middle line:90% states. 01:09:48.590 --> 01:09:51.210 align:middle line:84% Trump didn't put it in because he'd taken my class. 01:09:51.210 --> 01:09:53.649 align:middle line:84% Trump put it in because he wanted to hit the blue states. 01:09:53.649 --> 01:09:56.410 align:middle line:84% But it's still a pretty good policy, one of the better things 01:09:56.410 --> 01:09:58.530 align:middle line:84% to come out of the Trump tax reform. 01:09:58.530 --> 01:09:59.770 align:middle line:90% OK. 01:09:59.770 --> 01:10:03.630 align:middle line:84% So that's another example of where it makes sense 01:10:03.630 --> 01:10:05.850 align:middle line:84% but it's hard to do it in practice. 01:10:05.850 --> 01:10:06.830 align:middle line:90% Here's another example. 01:10:06.830 --> 01:10:13.970 align:middle line:84% The second deviate is the cost of earning 01:10:13.970 --> 01:10:17.170 align:middle line:84% which is, let's say that to get to work, 01:10:17.170 --> 01:10:20.450 align:middle line:84% I have to drive a certain distance and spend money on gas. 01:10:20.450 --> 01:10:23.250 align:middle line:84% Well, that lowers my ability to pay. 01:10:23.250 --> 01:10:25.650 align:middle line:84% My earnings are not a measure of my resources. 01:10:25.650 --> 01:10:29.970 align:middle line:84% I should be able to deduct what I spent earning that money. 01:10:29.970 --> 01:10:31.850 align:middle line:84% So that says that there would be-- 01:10:31.850 --> 01:10:34.730 align:middle line:84% you should be able to deduct legitimate business 01:10:34.730 --> 01:10:37.770 align:middle line:90% costs from your income. 01:10:37.770 --> 01:10:40.850 align:middle line:84% The problem with that is what is a legitimate business cost? 01:10:40.850 --> 01:10:42.590 align:middle line:84% And the best example of that, of course, 01:10:42.590 --> 01:10:44.770 align:middle line:90% is any people here see Mad Men? 01:10:44.770 --> 01:10:46.530 align:middle line:90% Any Mad Men viewers here? 01:10:46.530 --> 01:10:49.490 align:middle line:84% The best thing, of course, is business lunches. 01:10:49.490 --> 01:10:50.010 align:middle line:90% OK. 01:10:50.010 --> 01:10:51.530 align:middle line:90% Business lunches. 01:10:51.530 --> 01:10:54.992 align:middle line:84% You should be able to deduct if I take my client to lunch, 01:10:54.992 --> 01:10:56.450 align:middle line:84% I should be able to deduct the cost 01:10:56.450 --> 01:10:59.170 align:middle line:84% of that lunch minus my enjoyment of it, 01:10:59.170 --> 01:11:01.625 align:middle line:84% because that doesn't reduce my ability to pay. 01:11:01.625 --> 01:11:03.750 align:middle line:84% We used to just allow those lunches to be deducted. 01:11:03.750 --> 01:11:06.250 align:middle line:84% That's why Mad Men have these outstanding lunches every day 01:11:06.250 --> 01:11:09.290 align:middle line:84% because tax rates are very high and they were tax deductible. 01:11:09.290 --> 01:11:11.710 align:middle line:84% Over time, we've shrunk the ability. 01:11:11.710 --> 01:11:15.418 align:middle line:84% Now it's 50%, which probably makes sense, the idea that you 01:11:15.418 --> 01:11:16.710 align:middle line:90% don't get to deduct your lunch. 01:11:16.710 --> 01:11:18.890 align:middle line:84% You deduct the other person's lunch. 01:11:18.890 --> 01:11:21.603 align:middle line:90% So it's 50% deductible. 01:11:21.603 --> 01:11:23.270 align:middle line:84% But this is just the tip of the iceberg. 01:11:23.270 --> 01:11:25.812 align:middle line:84% There's some fun examples in the Book of Business Deductions. 01:11:25.812 --> 01:11:27.690 align:middle line:84% STUDENT: Is that for all business expenses? 01:11:27.690 --> 01:11:31.310 align:middle line:84% JONATHAN GRUBER: No, just for lunches, or for meals. 01:11:31.310 --> 01:11:32.270 align:middle line:90% Other fun examples. 01:11:32.270 --> 01:11:35.730 align:middle line:84% So here's a guy who claimed $30,000 worth of business 01:11:35.730 --> 01:11:38.850 align:middle line:84% expenses for the cost of goods he was selling. 01:11:38.850 --> 01:11:40.590 align:middle line:90% And what were the goods? 01:11:40.590 --> 01:11:43.330 align:middle line:84% Amphetamines, cocaine, and marijuana. 01:11:43.330 --> 01:11:47.130 align:middle line:84% The government allowed the deduction and put him in jail. 01:11:47.130 --> 01:11:50.530 align:middle line:84% ABBA reported that they should be 01:11:50.530 --> 01:11:53.610 align:middle line:84% able to deduct the clothes they wore on stage because they 01:11:53.610 --> 01:11:56.490 align:middle line:84% argued that the clothes were so uncomfortable, 01:11:56.490 --> 01:11:59.372 align:middle line:84% they couldn't wear-- they only wore them to make money. 01:11:59.372 --> 01:12:01.830 align:middle line:84% They actually didn't get any enjoyment out of wearing them. 01:12:01.830 --> 01:12:06.130 align:middle line:84% There was a cost of earning money was wearing those outfits. 01:12:06.130 --> 01:12:10.313 align:middle line:90% And it turns out that the US-- 01:12:10.313 --> 01:12:12.730 align:middle line:84% and so Sweden passed a law which says business clothes are 01:12:12.730 --> 01:12:15.450 align:middle line:84% deductible only if they're so outrageous that they couldn't 01:12:15.450 --> 01:12:16.930 align:middle line:90% be worn on the street. 01:12:16.930 --> 01:12:18.850 align:middle line:84% I don't know how you define that. 01:12:18.850 --> 01:12:21.890 align:middle line:84% The US has a similar law, which says work clothes deductible 01:12:21.890 --> 01:12:24.130 align:middle line:84% if they're not suitable for everyday wear. 01:12:24.130 --> 01:12:27.330 align:middle line:84% Of course, the best example would be Lady Gaga's meat dress. 01:12:27.330 --> 01:12:29.290 align:middle line:84% It was deductible because that's really not 01:12:29.290 --> 01:12:30.510 align:middle line:90% suitable for everyday wear. 01:12:30.510 --> 01:12:31.450 align:middle line:90% I don't know. 01:12:31.450 --> 01:12:33.930 align:middle line:90% I don't think so. 01:12:33.930 --> 01:12:37.810 align:middle line:84% So that's examples of how it's tricky to think 01:12:37.810 --> 01:12:41.490 align:middle line:84% about what is a deductible business expense and what's not. 01:12:41.490 --> 01:12:47.370 align:middle line:84% So those are two deviations from Haig-Simons. 01:12:47.370 --> 01:12:51.270 align:middle line:84% The third deviation is the most interesting, 01:12:51.270 --> 01:13:04.210 align:middle line:84% which is externalities, which is if my activity causes 01:13:04.210 --> 01:13:09.090 align:middle line:84% a positive externality, you may want to encourage it. 01:13:09.090 --> 01:13:13.570 align:middle line:84% And one way to encourage it is to lower 01:13:13.570 --> 01:13:16.250 align:middle line:90% the rate at which it's taxed. 01:13:16.250 --> 01:13:19.610 align:middle line:84% The classic example here would be charitable deductions, 01:13:19.610 --> 01:13:22.130 align:middle line:84% which, as I noted, are deductible if you're 01:13:22.130 --> 01:13:24.410 align:middle line:90% an itemizer. 01:13:24.410 --> 01:13:28.290 align:middle line:84% The argument is, look, when I donate to charity, 01:13:28.290 --> 01:13:31.350 align:middle line:84% I am creating a public good, a positive externality. 01:13:31.350 --> 01:13:32.850 align:middle line:84% I'm giving money to other people. 01:13:32.850 --> 01:13:36.410 align:middle line:84% Therefore, that lowers my ability to pay. 01:13:36.410 --> 01:13:41.570 align:middle line:84% So in other words, unless there's a warm glow, 01:13:41.570 --> 01:13:43.450 align:middle line:84% I'm literally just giving the money away, 01:13:43.450 --> 01:13:44.933 align:middle line:90% that lowers my ability to pay. 01:13:44.933 --> 01:13:46.350 align:middle line:84% Well, actually, let me go further. 01:13:46.350 --> 01:13:47.150 align:middle line:90% Let me step back. 01:13:47.150 --> 01:13:50.330 align:middle line:84% In a standard model with no other concerns, 01:13:50.330 --> 01:13:53.810 align:middle line:84% the money I give to charity lowers my ability to pay. 01:13:53.810 --> 01:13:56.130 align:middle line:84% Now, of course, if I'm altruistic, 01:13:56.130 --> 01:13:57.990 align:middle line:90% it still raises my utility. 01:13:57.990 --> 01:14:00.148 align:middle line:84% If I have a warm glow, it still raises my utility. 01:14:00.148 --> 01:14:01.690 align:middle line:84% So that would say you really wouldn't 01:14:01.690 --> 01:14:04.348 align:middle line:84% want people to-- to allow people to deduct all of it. 01:14:04.348 --> 01:14:06.890 align:middle line:84% You only want them to deduct the amount above which it raises 01:14:06.890 --> 01:14:09.090 align:middle line:84% their utility, which is impossible to measure, 01:14:09.090 --> 01:14:11.370 align:middle line:84% so we just allowed them to deduct all of it. 01:14:11.370 --> 01:14:13.010 align:middle line:84% So we say basically you can deduct 01:14:13.010 --> 01:14:15.130 align:middle line:90% your charitable contributions. 01:14:15.130 --> 01:14:19.130 align:middle line:84% By doing so, we make charitable contributions cheap 01:14:19.130 --> 01:14:21.760 align:middle line:84% because you make them with pre-tax dollars 01:14:21.760 --> 01:14:22.860 align:middle line:90% on after tax dollars. 01:14:22.860 --> 01:14:25.120 align:middle line:84% In other words, if you're thinking 01:14:25.120 --> 01:14:28.680 align:middle line:84% about deducting $100 to charity versus not, 01:14:28.680 --> 01:14:31.020 align:middle line:84% if you don't deduct it, you pay taxes on it. 01:14:31.020 --> 01:14:33.440 align:middle line:84% If you deduct it, you don't pay taxes on it. 01:14:33.440 --> 01:14:37.080 align:middle line:84% So it's essentially that's equivalent to a subsidy of 1 01:14:37.080 --> 01:14:38.560 align:middle line:90% minus the tax rate. 01:14:38.560 --> 01:14:41.320 align:middle line:90% So the tax rate is 25%. 01:14:41.320 --> 01:14:44.880 align:middle line:84% If I spend that money on apples, I only 01:14:44.880 --> 01:14:47.240 align:middle line:90% get $75 worth of spending. 01:14:47.240 --> 01:14:51.160 align:middle line:84% If I give it to charity, I get $100 worth of spending, say 25% 01:14:51.160 --> 01:14:54.168 align:middle line:90% subsidy to charitable giving. 01:14:54.168 --> 01:14:55.960 align:middle line:84% So subsidy charitable giving is essentially 01:14:55.960 --> 01:14:58.680 align:middle line:90% 1 minus your tax rate. 01:14:58.680 --> 01:15:00.960 align:middle line:84% And we put that in the system through 01:15:00.960 --> 01:15:02.300 align:middle line:90% an externality rationale. 01:15:02.300 --> 01:15:05.720 align:middle line:84% The idea is that you're creating a positive good for others. 01:15:05.720 --> 01:15:10.920 align:middle line:84% So you should get to deduct that. 01:15:10.920 --> 01:15:16.360 align:middle line:90% So that is the next rationale. 01:15:16.360 --> 01:15:21.320 align:middle line:84% The problem is the government actually 01:15:21.320 --> 01:15:26.280 align:middle line:84% has two very different tools to encourage public goods. 01:15:26.280 --> 01:15:29.260 align:middle line:84% It can give these tax breaks, which as I said, 01:15:29.260 --> 01:15:32.800 align:middle line:84% you could justify under Haig-Simons, although measuring 01:15:32.800 --> 01:15:35.360 align:middle line:84% how much is ability to pay is tricky, 01:15:35.360 --> 01:15:39.040 align:middle line:84% or it can also just spend the money. 01:15:39.040 --> 01:15:42.433 align:middle line:84% And a fascinating question is, what's the right thing to do? 01:15:42.433 --> 01:15:44.100 align:middle line:84% So here's the problem I'm going to pose, 01:15:44.100 --> 01:15:46.160 align:middle line:84% and we'll come back to it next time to start. 01:15:46.160 --> 01:15:47.660 align:middle line:84% But I'm going to pose the following. 01:15:47.660 --> 01:15:51.080 align:middle line:84% The government wants to encourage more spending 01:15:51.080 --> 01:15:53.040 align:middle line:90% on a homeless shelter. 01:15:53.040 --> 01:15:55.240 align:middle line:84% And the government has two choices. 01:15:55.240 --> 01:15:57.760 align:middle line:84% It can give a tax break to individuals 01:15:57.760 --> 01:16:00.360 align:middle line:84% who give to that homeless shelter 01:16:00.360 --> 01:16:03.160 align:middle line:84% or the government can just spend its own money 01:16:03.160 --> 01:16:04.217 align:middle line:90% on the homeless shelter. 01:16:04.217 --> 01:16:05.800 align:middle line:84% We're going to talk about next on what 01:16:05.800 --> 01:16:08.400 align:middle line:84% you think about is what's the trade-off 01:16:08.400 --> 01:16:11.200 align:middle line:84% and then we think about the optimal way for the government 01:16:11.200 --> 01:16:12.640 align:middle line:90% to undertake that activity. 01:16:12.640 --> 01:16:15.230 align:middle line:84% And we'll talk about that next time. 01:16:15.230 --> 01:16:19.000 align:middle line:90%