WEBVTT 00:00:00.000 --> 00:00:00.500 align:middle line:90% [SQUEAKING] 00:00:00.500 --> 00:00:01.486 align:middle line:90% [CLICKING] 00:00:01.486 --> 00:00:04.937 align:middle line:90% [RUSTLING] 00:00:04.937 --> 00:00:09.374 align:middle line:90% 00:00:09.374 --> 00:00:12.480 align:middle line:84% JON GRUBER: Today, we're going to cover chapter 18,19, 00:00:12.480 --> 00:00:14.060 align:middle line:90% and maybe even chapter 20. 00:00:14.060 --> 00:00:16.677 align:middle line:90% 00:00:16.677 --> 00:00:18.260 align:middle line:84% This is the whole section on taxation. 00:00:18.260 --> 00:00:21.840 align:middle line:84% Now, we're the subsection on basic tax theory. 00:00:21.840 --> 00:00:26.103 align:middle line:84% So chapter 18 is covering how we think about the tax base. 00:00:26.103 --> 00:00:27.520 align:middle line:84% And we're talking about last time, 00:00:27.520 --> 00:00:30.960 align:middle line:84% we talked about the Haig-Simons comprehensive income definition, 00:00:30.960 --> 00:00:34.480 align:middle line:84% the idea of measuring ability to pay by all the resources you 00:00:34.480 --> 00:00:35.675 align:middle line:90% have available. 00:00:35.675 --> 00:00:37.800 align:middle line:84% And then we said, well, that's actually complicated 00:00:37.800 --> 00:00:41.860 align:middle line:84% because resource availability is hard to define. 00:00:41.860 --> 00:00:43.440 align:middle line:84% First of all, there are things that 00:00:43.440 --> 00:00:45.700 align:middle line:84% are out of control that change your resources. 00:00:45.700 --> 00:00:47.842 align:middle line:90% We want to let you deduct those. 00:00:47.842 --> 00:00:49.800 align:middle line:84% There are the facts you might have to pay money 00:00:49.800 --> 00:00:51.280 align:middle line:90% to earn your income. 00:00:51.280 --> 00:00:53.720 align:middle line:90% That's a legitimate deduction. 00:00:53.720 --> 00:00:55.360 align:middle line:84% And then finally, there's the facts 00:00:55.360 --> 00:00:59.590 align:middle line:84% that some type of activities generate positive externalities. 00:00:59.590 --> 00:01:02.430 align:middle line:84% And there's an argument for allowing a deviation 00:01:02.430 --> 00:01:06.630 align:middle line:84% from the Haig-Simons tax base if an activity generates 00:01:06.630 --> 00:01:08.550 align:middle line:90% a positive externality. 00:01:08.550 --> 00:01:12.750 align:middle line:84% Just like we want to tax, we have corrective taxes 00:01:12.750 --> 00:01:14.630 align:middle line:90% on negative externalities. 00:01:14.630 --> 00:01:19.190 align:middle line:84% We have corrective subsidies for positive externalities. 00:01:19.190 --> 00:01:22.790 align:middle line:84% Giving a tax break can provide a subsidy in the way 00:01:22.790 --> 00:01:24.670 align:middle line:90% I described last time, OK? 00:01:24.670 --> 00:01:30.750 align:middle line:84% So basically the question is, is that a sensible argument. 00:01:30.750 --> 00:01:33.110 align:middle line:84% And really, the extent to which the argument makes sense 00:01:33.110 --> 00:01:37.133 align:middle line:84% depends on comparing tax breaks to what else 00:01:37.133 --> 00:01:39.050 align:middle line:84% the government could have done with the money. 00:01:39.050 --> 00:01:40.050 align:middle line:90% I don't have any chalk. 00:01:40.050 --> 00:01:42.110 align:middle line:90% Oh, here it is. 00:01:42.110 --> 00:01:45.830 align:middle line:84% If you think about a government, they have a set of resources. 00:01:45.830 --> 00:01:50.750 align:middle line:84% And they can support activities in multiple ways. 00:01:50.750 --> 00:01:54.550 align:middle line:84% So whether it makes sense to use a tax break as a way 00:01:54.550 --> 00:01:58.710 align:middle line:84% to encourage a positive externality depends on how else 00:01:58.710 --> 00:02:00.910 align:middle line:84% the government could have encouraged that. 00:02:00.910 --> 00:02:03.850 align:middle line:84% So, for example, let's think about two ways. 00:02:03.850 --> 00:02:06.430 align:middle line:84% Let's say the government wants to help the homeless. 00:02:06.430 --> 00:02:08.130 align:middle line:84% And there's two ways it can do so. 00:02:08.130 --> 00:02:11.270 align:middle line:84% One is the government can build a homeless shelter. 00:02:11.270 --> 00:02:14.590 align:middle line:84% Two is the government can give a tax break for people to donate 00:02:14.590 --> 00:02:16.270 align:middle line:90% to a homeless shelter. 00:02:16.270 --> 00:02:19.390 align:middle line:84% And the question is, what is the better approach? 00:02:19.390 --> 00:02:22.950 align:middle line:84% Well, it turns out with both, there's complications. 00:02:22.950 --> 00:02:24.710 align:middle line:84% With the first one with the government 00:02:24.710 --> 00:02:27.210 align:middle line:84% just building the homeless shelter, 00:02:27.210 --> 00:02:29.550 align:middle line:84% the complication comes from chapter 7, which 00:02:29.550 --> 00:02:33.110 align:middle line:84% is crowd out, which is every dollar the government spends 00:02:33.110 --> 00:02:35.150 align:middle line:84% towards building a homeless shelter, 00:02:35.150 --> 00:02:37.170 align:middle line:84% some will contribute to homeless shelter. 00:02:37.170 --> 00:02:40.003 align:middle line:84% But some may just crowd out private donations 00:02:40.003 --> 00:02:42.170 align:middle line:84% that are already going toward that homeless shelter. 00:02:42.170 --> 00:02:46.030 align:middle line:84% The classic crowd out problem we had in chapter 7. 00:02:46.030 --> 00:02:47.750 align:middle line:84% So on the one side of the equation, 00:02:47.750 --> 00:02:53.870 align:middle line:84% for every dollar the government spends 00:02:53.870 --> 00:02:55.750 align:middle line:84% on building a homeless shelter, you're 00:02:55.750 --> 00:03:02.260 align:middle line:84% going to lose minus x cents in crowd out. 00:03:02.260 --> 00:03:03.220 align:middle line:90% OK? 00:03:03.220 --> 00:03:08.300 align:middle line:84% So the net you'll get will be 1 minus x. 00:03:08.300 --> 00:03:13.660 align:middle line:84% OK, that's the net you're going to get if you spend on that. 00:03:13.660 --> 00:03:18.820 align:middle line:84% On the other 2 if you give a tax break, what do you do? 00:03:18.820 --> 00:03:23.340 align:middle line:84% Well, the important thing is to now-- 00:03:23.340 --> 00:03:26.940 align:middle line:84% the single most important concept with tax breaks we'll 00:03:26.940 --> 00:03:32.660 align:middle line:84% cover is that whenever you give a tax break, you do two things. 00:03:32.660 --> 00:03:37.900 align:middle line:84% You have what's called a marginal effect 00:03:37.900 --> 00:03:40.160 align:middle line:90% and an inframarginal effect. 00:03:40.160 --> 00:03:43.580 align:middle line:90% 00:03:43.580 --> 00:03:46.220 align:middle line:84% The marginal effect is the effect 00:03:46.220 --> 00:03:50.420 align:middle line:84% you are trying to encourage with the tax break. 00:03:50.420 --> 00:03:53.980 align:middle line:84% The inframarginal effect is the revenues 00:03:53.980 --> 00:03:56.180 align:middle line:84% you spend on someone who is going 00:03:56.180 --> 00:03:59.060 align:middle line:90% to do that activity anyway. 00:03:59.060 --> 00:04:01.460 align:middle line:84% So let me give you a simple example. 00:04:01.460 --> 00:04:05.540 align:middle line:84% Imagine that the government wants to encourage charitable 00:04:05.540 --> 00:04:07.420 align:middle line:90% giving to homeless shelters. 00:04:07.420 --> 00:04:10.240 align:middle line:90% And imagine the tax rate is 50%. 00:04:10.240 --> 00:04:12.980 align:middle line:90% 00:04:12.980 --> 00:04:17.860 align:middle line:84% Moreover, imagine that today there is already $1 million 00:04:17.860 --> 00:04:20.220 align:middle line:84% in giving to charitable shelters. 00:04:20.220 --> 00:04:24.700 align:middle line:84% There's one million in giving today. 00:04:24.700 --> 00:04:26.340 align:middle line:84% Let's say the government announces 00:04:26.340 --> 00:04:31.180 align:middle line:84% it will make giving to homeless shelters tax deductible. 00:04:31.180 --> 00:04:32.540 align:middle line:90% What does that mean? 00:04:32.540 --> 00:04:36.440 align:middle line:84% That means that if you give a dollar to homeless-- 00:04:36.440 --> 00:04:39.940 align:middle line:84% if you earn a dollar and don't give it to homeless shelters, 00:04:39.940 --> 00:04:42.460 align:middle line:90% you will keep $0.50. 00:04:42.460 --> 00:04:45.000 align:middle line:84% But if you earn the dollar and give it to homeless shelters, 00:04:45.000 --> 00:04:49.080 align:middle line:84% the entire dollar goes to homeless shelters, OK? 00:04:49.080 --> 00:04:51.920 align:middle line:84% That's because we make it deductible from the tax code. 00:04:51.920 --> 00:04:58.210 align:middle line:84% So a deductible tax break is one where essentially you 00:04:58.210 --> 00:05:02.530 align:middle line:84% do not pay taxes on the dollars you contribute. 00:05:02.530 --> 00:05:04.010 align:middle line:90% So what that do? 00:05:04.010 --> 00:05:10.970 align:middle line:84% Well, let's assume, for example, imagine that because of this tax 00:05:10.970 --> 00:05:14.810 align:middle line:84% break, the amount contributed to homeless shelters 00:05:14.810 --> 00:05:17.830 align:middle line:84% goes from 1 million to 1.5 million. 00:05:17.830 --> 00:05:20.690 align:middle line:90% 00:05:20.690 --> 00:05:24.450 align:middle line:84% I'm just asserting that happens, OK? 00:05:24.450 --> 00:05:25.670 align:middle line:90% Well, what does that mean? 00:05:25.670 --> 00:05:35.090 align:middle line:84% That means there is a marginal 0.5 million increase in giving. 00:05:35.090 --> 00:05:38.330 align:middle line:84% But that also means that the people 00:05:38.330 --> 00:05:41.970 align:middle line:84% who are going to give $1 million no matter what also 00:05:41.970 --> 00:05:47.290 align:middle line:90% get a 0.5 million tax break. 00:05:47.290 --> 00:05:48.910 align:middle line:84% In other words, there's two effects. 00:05:48.910 --> 00:05:51.570 align:middle line:84% You're encouraging new giving, but you're just 00:05:51.570 --> 00:05:54.930 align:middle line:84% paying off people who are going to give anyway. 00:05:54.930 --> 00:05:57.650 align:middle line:84% The latter is not what you're trying to accomplish 00:05:57.650 --> 00:05:58.670 align:middle line:90% with the tax break. 00:05:58.670 --> 00:06:00.970 align:middle line:84% You're trying to encourage new giving. 00:06:00.970 --> 00:06:03.370 align:middle line:84% So in other words, another way to think about this 00:06:03.370 --> 00:06:08.730 align:middle line:84% is that basically, if we think about what we 00:06:08.730 --> 00:06:10.690 align:middle line:90% want to compare 1 minus x to. 00:06:10.690 --> 00:06:18.650 align:middle line:84% We want to compare 1 minus x versus the increase 00:06:18.650 --> 00:06:30.250 align:middle line:84% in giving over the dollar spent in for marginally. 00:06:30.250 --> 00:06:32.690 align:middle line:84% The dollar spent on those who would have given anyway. 00:06:32.690 --> 00:06:35.850 align:middle line:84% That's just thrown away money, OK? 00:06:35.850 --> 00:06:40.810 align:middle line:90% So, for example, in this case-- 00:06:40.810 --> 00:06:44.730 align:middle line:84% in this case, we are saving that for every dollar 00:06:44.730 --> 00:06:48.930 align:middle line:84% the government gives in tax breaks to rich guys, 00:06:48.930 --> 00:06:51.210 align:middle line:84% it's getting a new dollar of giving. 00:06:51.210 --> 00:06:56.720 align:middle line:84% So this number in our example equals 1. 00:06:56.720 --> 00:07:01.400 align:middle line:84% So that says that if there's any crowd at all, then 00:07:01.400 --> 00:07:05.200 align:middle line:84% it's better to give a tax break, because if the government spends 00:07:05.200 --> 00:07:08.640 align:middle line:84% the dollar on the homeless shelter, it only gets 1 minus x. 00:07:08.640 --> 00:07:13.840 align:middle line:84% But if it spends the dollar giving a tax break, it gets one. 00:07:13.840 --> 00:07:17.400 align:middle line:84% So what will determine whether it's better 00:07:17.400 --> 00:07:20.120 align:middle line:84% to do direct spending or tax break is 00:07:20.120 --> 00:07:26.010 align:middle line:84% the amount of crowd out and the elasticity of giving 00:07:26.010 --> 00:07:28.250 align:middle line:90% with respect to-- 00:07:28.250 --> 00:07:30.640 align:middle line:90% with respect to the tax rate. 00:07:30.640 --> 00:07:32.960 align:middle line:84% The elasticity of giving with respect to the tax rate. 00:07:32.960 --> 00:07:37.978 align:middle line:84% In my example, that elasticity of giving is one. 00:07:37.978 --> 00:07:40.020 align:middle line:84% So the elasticity of giving in my example is one. 00:07:40.020 --> 00:07:41.520 align:middle line:84% That's for every dollar in tax break 00:07:41.520 --> 00:07:44.200 align:middle line:84% we gave, we get one more dollar of giving, OK? 00:07:44.200 --> 00:07:45.980 align:middle line:90% That's the elasticity of one. 00:07:45.980 --> 00:07:49.360 align:middle line:84% Or in other words, we change the price by 50%. 00:07:49.360 --> 00:07:51.100 align:middle line:90% How do I know elasticity is one? 00:07:51.100 --> 00:07:53.800 align:middle line:84% Well, what happened to the price of giving? 00:07:53.800 --> 00:07:58.080 align:middle line:84% Every dollar of giving used to cost you a dollar. 00:07:58.080 --> 00:08:01.880 align:middle line:84% Now, every dollar of giving only costs you $0.50. 00:08:01.880 --> 00:08:08.280 align:middle line:84% So we've lowered the price by 50%, OK? 00:08:08.280 --> 00:08:10.840 align:middle line:84% Or in other words, so we have lowered 00:08:10.840 --> 00:08:12.660 align:middle line:90% the price of giving by 50%. 00:08:12.660 --> 00:08:14.100 align:middle line:90% How much more giving did we get? 00:08:14.100 --> 00:08:16.920 align:middle line:90% 50% more giving, OK? 00:08:16.920 --> 00:08:20.420 align:middle line:84% So in other words, by lowering the price 50%, 00:08:20.420 --> 00:08:22.020 align:middle line:90% we got 50% more giving. 00:08:22.020 --> 00:08:23.600 align:middle line:90% That's the elasticity of 1-- 00:08:23.600 --> 00:08:26.340 align:middle line:84% 1 or minus 1 depending how you want to define it. 00:08:26.340 --> 00:08:28.280 align:middle line:84% But the bottom line is, if you define it 00:08:28.280 --> 00:08:31.120 align:middle line:84% in terms of relative to a tax break, its elasticity of 1 00:08:31.120 --> 00:08:34.340 align:middle line:84% is find a relative to a taxation is minus 1. 00:08:34.340 --> 00:08:37.400 align:middle line:84% But the bottom line is the intuition, 00:08:37.400 --> 00:08:40.419 align:middle line:84% which is that for every dollar of tax break we gave, 00:08:40.419 --> 00:08:42.200 align:middle line:84% we got one more dollar of giving. 00:08:42.200 --> 00:08:44.250 align:middle line:84% Therefore, that was more efficient than providing 00:08:44.250 --> 00:08:45.500 align:middle line:90% the homeless shelter directly. 00:08:45.500 --> 00:08:47.260 align:middle line:90% We only got 1 minus x dollars. 00:08:47.260 --> 00:08:48.380 align:middle line:90% Now, what is x? 00:08:48.380 --> 00:08:50.510 align:middle line:84% Well, we talked about that in chapter 7. 00:08:50.510 --> 00:08:55.270 align:middle line:84% There's a wide range of x, but it's generally above 0, OK? 00:08:55.270 --> 00:08:59.710 align:middle line:84% So what that says is whether or not 00:08:59.710 --> 00:09:02.870 align:middle line:84% you want to give a tax break is going 00:09:02.870 --> 00:09:06.830 align:middle line:84% to depend on the elasticity of 2 behavior with respect 00:09:06.830 --> 00:09:08.950 align:middle line:90% to that tax break. 00:09:08.950 --> 00:09:12.150 align:middle line:84% If people are not going to respond at all the tax break, 00:09:12.150 --> 00:09:14.510 align:middle line:84% that all you do is just give away a bunch of money. 00:09:14.510 --> 00:09:17.150 align:middle line:84% Well, then you should just build a homeless shelter yourself. 00:09:17.150 --> 00:09:18.848 align:middle line:84% If people respond a lot, then you 00:09:18.848 --> 00:09:20.390 align:middle line:84% might have this effect where actually 00:09:20.390 --> 00:09:21.925 align:middle line:90% encourage a lot of giving. 00:09:21.925 --> 00:09:24.550 align:middle line:84% And that's better than doing it yourself because you're doing-- 00:09:24.550 --> 00:09:27.110 align:middle line:84% the government itself is going to lead to this crowd out. 00:09:27.110 --> 00:09:29.710 align:middle line:84% So that's how we think about that trade off, OK? 00:09:29.710 --> 00:09:35.190 align:middle line:84% So essentially, it's we ask whether the increase in giving 00:09:35.190 --> 00:09:38.510 align:middle line:84% per dollar spent for marginal is greater or less than 1 00:09:38.510 --> 00:09:42.390 align:middle line:84% minus x where x is the crowd out rate, OK? 00:09:42.390 --> 00:09:44.870 align:middle line:90% Question about that? 00:09:44.870 --> 00:09:46.510 align:middle line:84% OK, let me give you another example 00:09:46.510 --> 00:09:48.910 align:middle line:90% to drill this intuition home. 00:09:48.910 --> 00:09:51.310 align:middle line:84% So for charitable giving, the best evidence 00:09:51.310 --> 00:09:54.260 align:middle line:84% is that at this elasticity, it's actually pretty efficient 00:09:54.260 --> 00:09:56.010 align:middle line:84% to give a tax break for charitable giving. 00:09:56.010 --> 00:09:59.470 align:middle line:84% You encourage a lot of charitable giving. 00:09:59.470 --> 00:10:04.430 align:middle line:84% One of the biggest tax breaks we give in America is for housing. 00:10:04.430 --> 00:10:07.710 align:middle line:84% In particular, let's go back to Haig-Simons. 00:10:07.710 --> 00:10:13.550 align:middle line:84% And let's ask, how would Haig-Simons treat housing? 00:10:13.550 --> 00:10:20.110 align:middle line:84% Haig-Simons would say, for example, if you're a renter, 00:10:20.110 --> 00:10:24.990 align:middle line:84% you are paying rent and getting a service, which is 00:10:24.990 --> 00:10:26.910 align:middle line:90% the service of that apartment. 00:10:26.910 --> 00:10:31.030 align:middle line:84% If the market works well, then literally, that's 00:10:31.030 --> 00:10:34.550 align:middle line:90% a net zero operation, OK? 00:10:34.550 --> 00:10:36.770 align:middle line:90% Literally, you are paying rent. 00:10:36.770 --> 00:10:41.230 align:middle line:84% So your ability, your wealth is unaffected by renting. 00:10:41.230 --> 00:10:42.390 align:middle line:90% And you pay money in. 00:10:42.390 --> 00:10:44.230 align:middle line:90% You get housing services out. 00:10:44.230 --> 00:10:45.870 align:middle line:90% It's a net neutral. 00:10:45.870 --> 00:10:47.080 align:middle line:90% So what does that mean? 00:10:47.080 --> 00:10:52.460 align:middle line:84% That means that basically when we look at your ability to pay, 00:10:52.460 --> 00:10:58.960 align:middle line:84% we should in some sense add to your income, 00:10:58.960 --> 00:11:03.380 align:middle line:84% your imputed housing value and allow 00:11:03.380 --> 00:11:06.940 align:middle line:84% you to deduct from your income what you spend on housing. 00:11:06.940 --> 00:11:11.397 align:middle line:84% So your full resources in a Haig-Simons says, your full-- 00:11:11.397 --> 00:11:12.480 align:middle line:90% I want to leave this here. 00:11:12.480 --> 00:11:14.820 align:middle line:84% Your full resources in the Haig-Simons model 00:11:14.820 --> 00:11:18.760 align:middle line:84% is your income plus the value of housing. 00:11:18.760 --> 00:11:22.540 align:middle line:90% 00:11:22.540 --> 00:11:24.780 align:middle line:90% That's what you're getting. 00:11:24.780 --> 00:11:28.060 align:middle line:84% But to get that, you have to pay money. 00:11:28.060 --> 00:11:29.940 align:middle line:84% So it's your income plus the value of housing 00:11:29.940 --> 00:11:32.240 align:middle line:90% minus your payments for housing. 00:11:32.240 --> 00:11:38.180 align:middle line:90% 00:11:38.180 --> 00:11:41.570 align:middle line:84% That would be your full Haig-Simons income 00:11:41.570 --> 00:11:43.820 align:middle line:84% would be how much you're getting in housing minus what 00:11:43.820 --> 00:11:45.210 align:middle line:90% you're paying for that housing. 00:11:45.210 --> 00:11:48.210 align:middle line:84% So in other words, if the house is worth to you exactly rent, 00:11:48.210 --> 00:11:50.010 align:middle line:90% those cancel. 00:11:50.010 --> 00:11:52.970 align:middle line:84% So what we do in a Haig-Simons system is 00:11:52.970 --> 00:11:54.810 align:middle line:84% when you report your income tax, you 00:11:54.810 --> 00:11:58.170 align:middle line:84% report the value of the housing you're deriving. 00:11:58.170 --> 00:12:01.903 align:middle line:84% And you deduct how much you pay for that housing. 00:12:01.903 --> 00:12:04.070 align:middle line:84% Well, the problem, of course, is the latter is easy. 00:12:04.070 --> 00:12:06.130 align:middle line:90% The first is impossible. 00:12:06.130 --> 00:12:08.330 align:middle line:84% Now, actually, some Scandinavian countries 00:12:08.330 --> 00:12:11.970 align:middle line:84% do actually assign people an imputed value of their housing 00:12:11.970 --> 00:12:13.730 align:middle line:90% and tax them on it. 00:12:13.730 --> 00:12:16.610 align:middle line:84% They actually treat as taxable income, the imputed value 00:12:16.610 --> 00:12:19.350 align:middle line:90% of their housing. 00:12:19.350 --> 00:12:19.850 align:middle line:90% Yeah. 00:12:19.850 --> 00:12:21.022 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:12:21.022 --> 00:12:22.730 align:middle line:84% JON GRUBER: Oh, in other words, they say, 00:12:22.730 --> 00:12:25.490 align:middle line:84% based on what neighborhood your house is in, how many bedrooms 00:12:25.490 --> 00:12:27.030 align:middle line:90% is, we run a regression. 00:12:27.030 --> 00:12:28.530 align:middle line:90% We say, what is that worth? 00:12:28.530 --> 00:12:29.890 align:middle line:84% Now, it's not what it's worth to you, which 00:12:29.890 --> 00:12:31.057 align:middle line:90% is what it really should be. 00:12:31.057 --> 00:12:32.830 align:middle line:84% It's just what it's worth in the market. 00:12:32.830 --> 00:12:34.050 align:middle line:90% They impute a market. 00:12:34.050 --> 00:12:36.830 align:middle line:84% Now, in the US, we don't do that. 00:12:36.830 --> 00:12:38.930 align:middle line:90% That's pretty confusing. 00:12:38.930 --> 00:12:41.750 align:middle line:84% So we don't then allow people to deduct. 00:12:41.750 --> 00:12:44.090 align:middle line:90% We don't do this. 00:12:44.090 --> 00:12:47.770 align:middle line:84% So when you're a renter, we don't do this. 00:12:47.770 --> 00:12:51.890 align:middle line:84% But a light-line, because when you're an owner, we do. 00:12:51.890 --> 00:12:55.730 align:middle line:84% We allow individuals who itemize to deduct their mortgage 00:12:55.730 --> 00:12:58.970 align:middle line:90% payments from their taxes. 00:12:58.970 --> 00:13:01.970 align:middle line:84% Remember, going back to last lecture, when you pay tax, 00:13:01.970 --> 00:13:04.210 align:middle line:84% you can take the standard deduction. 00:13:04.210 --> 00:13:05.810 align:middle line:90% Or you can itemize. 00:13:05.810 --> 00:13:08.250 align:middle line:84% If you itemize, the biggest thing people itemize 00:13:08.250 --> 00:13:10.570 align:middle line:90% is their mortgage payments. 00:13:10.570 --> 00:13:15.163 align:middle line:84% So in the US, we actually don't obey the Haig-Simons rule. 00:13:15.163 --> 00:13:17.330 align:middle line:84% We don't add to your income the value of the housing 00:13:17.330 --> 00:13:18.530 align:middle line:90% you're consuming. 00:13:18.530 --> 00:13:21.850 align:middle line:84% But we do allow you to subtract the cost of that housing 00:13:21.850 --> 00:13:26.650 align:middle line:84% if you're an owner, not if you're a renter. 00:13:26.650 --> 00:13:28.250 align:middle line:90% Why do we do that? 00:13:28.250 --> 00:13:31.590 align:middle line:84% We do that because the argument goes, 00:13:31.590 --> 00:13:35.430 align:middle line:84% there is a positive externality to homeownership. 00:13:35.430 --> 00:13:35.930 align:middle line:90% Yeah. 00:13:35.930 --> 00:13:37.930 align:middle line:84% AUDIENCE: And it works with multiple units, 00:13:37.930 --> 00:13:39.263 align:middle line:90% deduct all of those [INAUDIBLE]? 00:13:39.263 --> 00:13:43.520 align:middle line:84% JON GRUBER: No, there's a limit Basically, you can deduct-- 00:13:43.520 --> 00:13:47.520 align:middle line:84% I think you can only-- you can deduct only your-- 00:13:47.520 --> 00:13:48.620 align:middle line:90% I forget the exact rule. 00:13:48.620 --> 00:13:50.140 align:middle line:84% But there's a limit on how many can deduct. 00:13:50.140 --> 00:13:52.040 align:middle line:84% It's either a total dollar limit or a number of properties limit. 00:13:52.040 --> 00:13:53.560 align:middle line:90% AUDIENCE: Understood. 00:13:53.560 --> 00:13:57.920 align:middle line:84% JON GRUBER: So basically, what we have here is 00:13:57.920 --> 00:14:00.880 align:middle line:84% a situation where we are essentially 00:14:00.880 --> 00:14:03.500 align:middle line:84% arguing that there's a positive externality to ownership. 00:14:03.500 --> 00:14:05.380 align:middle line:84% And that's why we're allowing this deduction. 00:14:05.380 --> 00:14:06.713 align:middle line:90% What's the positive externality? 00:14:06.713 --> 00:14:08.680 align:middle line:84% Well, the theory is actually quite simple. 00:14:08.680 --> 00:14:11.260 align:middle line:84% The theory is that when people own their house, 00:14:11.260 --> 00:14:13.320 align:middle line:84% they are invested in the community. 00:14:13.320 --> 00:14:16.600 align:middle line:84% And as a result, they will deliver positive benefits 00:14:16.600 --> 00:14:17.660 align:middle line:90% to that community. 00:14:17.660 --> 00:14:20.920 align:middle line:84% When you own a house, you participate in the schools. 00:14:20.920 --> 00:14:23.940 align:middle line:84% You participate in making the town a nicer place to live. 00:14:23.940 --> 00:14:25.440 align:middle line:84% You also make your house look nicer. 00:14:25.440 --> 00:14:27.760 align:middle line:84% When you rent, you let it go to shit because what do you care? 00:14:27.760 --> 00:14:29.500 align:middle line:84% When you own a house, you make the house look nice, 00:14:29.500 --> 00:14:32.062 align:middle line:84% which makes everybody's house around you more valuable. 00:14:32.062 --> 00:14:34.020 align:middle line:84% So there's positive externalities for ownership 00:14:34.020 --> 00:14:36.400 align:middle line:90% is the argument. 00:14:36.400 --> 00:14:41.000 align:middle line:84% Now, how do we evaluate that argument? 00:14:41.000 --> 00:14:44.200 align:middle line:84% Well, we need to know two things. 00:14:44.200 --> 00:14:50.480 align:middle line:84% First of all, we need to say, how big are those externalities? 00:14:50.480 --> 00:14:53.840 align:middle line:84% And second of all, we need to ask, 00:14:53.840 --> 00:14:59.880 align:middle line:84% how elastic is that-- is the home ownership decision 00:14:59.880 --> 00:15:03.480 align:middle line:90% with respect to the tax break? 00:15:03.480 --> 00:15:06.920 align:middle line:90% That's this concept. 00:15:06.920 --> 00:15:11.200 align:middle line:84% Well, in fact, the answer is that home ownership 00:15:11.200 --> 00:15:15.720 align:middle line:84% is completely inelastic with respect to the tax break. 00:15:15.720 --> 00:15:19.200 align:middle line:84% The home ownership rate has been constant at 65% forever. 00:15:19.200 --> 00:15:26.120 align:middle line:84% It went up during the housing bubble of the 2000 00:15:26.120 --> 00:15:29.967 align:middle line:84% when there was a change when in effort-- and quite frankly, 00:15:29.967 --> 00:15:31.800 align:middle line:84% I was there when this housing bubble started 00:15:31.800 --> 00:15:34.440 align:middle line:84% and quite frankly, a well-meaning effort 00:15:34.440 --> 00:15:36.190 align:middle line:84% to increase home ownership rates. 00:15:36.190 --> 00:15:38.440 align:middle line:84% We changed the rules to allow people to make it easier 00:15:38.440 --> 00:15:39.870 align:middle line:90% to qualify for a mortgage. 00:15:39.870 --> 00:15:41.710 align:middle line:84% And too many people bought homes. 00:15:41.710 --> 00:15:44.490 align:middle line:84% But now, it's back down close to its steady state level. 00:15:44.490 --> 00:15:46.110 align:middle line:90% It's pretty much a constant. 00:15:46.110 --> 00:15:47.550 align:middle line:84% And there's lots of studies which 00:15:47.550 --> 00:15:50.830 align:middle line:84% show that home ownership does not respond to taxes 00:15:50.830 --> 00:15:53.050 align:middle line:90% here and in other countries. 00:15:53.050 --> 00:15:53.550 align:middle line:90% Yeah. 00:15:53.550 --> 00:15:55.590 align:middle line:84% AUDIENCE: How much of that home ownership rate 00:15:55.590 --> 00:15:56.890 align:middle line:90% vary across countries? 00:15:56.890 --> 00:15:58.050 align:middle line:90% JON GRUBER: A lot. 00:15:58.050 --> 00:16:00.910 align:middle line:90% For lots of different reasons. 00:16:00.910 --> 00:16:03.270 align:middle line:84% So basically, we have a situation 00:16:03.270 --> 00:16:09.750 align:middle line:84% where, yes, home ownership may deliver positive attributes. 00:16:09.750 --> 00:16:11.990 align:middle line:84% But it doesn't matter because the tax break isn't 00:16:11.990 --> 00:16:13.590 align:middle line:90% encouraging home ownership. 00:16:13.590 --> 00:16:15.270 align:middle line:90% What is the tax break doing? 00:16:15.270 --> 00:16:18.670 align:middle line:84% Well, the tax break is a break on the size of your mortgage. 00:16:18.670 --> 00:16:20.990 align:middle line:84% The bigger your mortgage, the bigger tax break you get. 00:16:20.990 --> 00:16:24.670 align:middle line:84% So it just encourages people to buy more expensive houses. 00:16:24.670 --> 00:16:27.270 align:middle line:84% It's not clear what the positive externality is there. 00:16:27.270 --> 00:16:30.270 align:middle line:84% In fact, if anything, the x side could be negative. 00:16:30.270 --> 00:16:31.770 align:middle line:90% Why? 00:16:31.770 --> 00:16:33.330 align:middle line:90% Why could encouraging-- yeah. 00:16:33.330 --> 00:16:35.030 align:middle line:84% AUDIENCE: It encourages people to build 00:16:35.030 --> 00:16:37.610 align:middle line:84% more expensive houses instead of more affordable housing? 00:16:37.610 --> 00:16:38.770 align:middle line:90% JON GRUBER: There's that. 00:16:38.770 --> 00:16:39.790 align:middle line:90% What else? 00:16:39.790 --> 00:16:41.050 align:middle line:90% What else from chapter 17? 00:16:41.050 --> 00:16:44.070 align:middle line:84% Why might there be a negative effect on us 00:16:44.070 --> 00:16:46.210 align:middle line:90% if we encourage bigger houses? 00:16:46.210 --> 00:16:46.710 align:middle line:90% Yeah. 00:16:46.710 --> 00:16:47.668 align:middle line:90% AUDIENCE: Bigger house. 00:16:47.668 --> 00:16:48.512 align:middle line:90% Less dense areas. 00:16:48.512 --> 00:16:49.554 align:middle line:90% More [? colleges then. ?] 00:16:49.554 --> 00:16:50.830 align:middle line:84% JON GRUBER: You guys are all thinking 00:16:50.830 --> 00:16:51.830 align:middle line:90% about very good housing. 00:16:51.830 --> 00:16:55.090 align:middle line:84% I'm thinking about utility functions, which is, remember, 00:16:55.090 --> 00:16:59.797 align:middle line:84% if my neighbor builds a bigger house, that can make me sadder. 00:16:59.797 --> 00:17:01.630 align:middle line:84% A race where we all just build bigger houses 00:17:01.630 --> 00:17:04.470 align:middle line:84% can leave us all indifferent just with bigger houses, 00:17:04.470 --> 00:17:08.327 align:middle line:84% because if all I care about is a relative value of my house. 00:17:08.327 --> 00:17:09.910 align:middle line:84% And everyone just builds bigger houses 00:17:09.910 --> 00:17:13.869 align:middle line:84% where all equally happy at the end of the day, OK? 00:17:13.869 --> 00:17:15.773 align:middle line:84% It's not clear what the positive externality 00:17:15.773 --> 00:17:16.690 align:middle line:90% is for a bigger house. 00:17:16.690 --> 00:17:17.869 align:middle line:84% It might even be negative for reasons 00:17:17.869 --> 00:17:19.970 align:middle line:84% you've raised about the environment and zoning. 00:17:19.970 --> 00:17:22.730 align:middle line:84% But also, reasons are simple relative referent-- 00:17:22.730 --> 00:17:24.910 align:middle line:90% relative utility functions. 00:17:24.910 --> 00:17:28.310 align:middle line:84% The bottom line is there is really no good argument 00:17:28.310 --> 00:17:31.430 align:middle line:90% for this tax break. 00:17:31.430 --> 00:17:34.050 align:middle line:84% All it does is encourage people to buy bigger houses. 00:17:34.050 --> 00:17:35.970 align:middle line:84% It doesn't actually encourage home ownership. 00:17:35.970 --> 00:17:37.940 align:middle line:84% If you want to encourage home ownership, 00:17:37.940 --> 00:17:40.220 align:middle line:84% then something like a tax break for actually 00:17:40.220 --> 00:17:43.020 align:middle line:84% owning a home for first time tax buyers 00:17:43.020 --> 00:17:45.540 align:middle line:84% or something like that might make sense. 00:17:45.540 --> 00:17:48.760 align:middle line:84% But actually subsidizing mortgages doesn't really do-- 00:17:48.760 --> 00:17:50.860 align:middle line:90% doesn't really do anything. 00:17:50.860 --> 00:17:56.460 align:middle line:84% So the bottom line is that we have a situation here 00:17:56.460 --> 00:17:59.600 align:middle line:84% where on the one hand, when you subsidize charity, 00:17:59.600 --> 00:18:00.840 align:middle line:90% you get a lot more of it. 00:18:00.840 --> 00:18:03.060 align:middle line:84% So there's an argument for using that tax tool. 00:18:03.060 --> 00:18:05.260 align:middle line:84% Here, there's no arguing the tax tool. 00:18:05.260 --> 00:18:07.312 align:middle line:84% When you subsidize mortgages, you 00:18:07.312 --> 00:18:08.520 align:middle line:90% don't get more homeownership. 00:18:08.520 --> 00:18:12.180 align:middle line:84% You're not getting these positive externalities, OK? 00:18:12.180 --> 00:18:13.860 align:middle line:90% Questions about that? 00:18:13.860 --> 00:18:15.628 align:middle line:84% This is the intuition I want you to have 00:18:15.628 --> 00:18:16.920 align:middle line:90% when we think about tax breaks. 00:18:16.920 --> 00:18:20.160 align:middle line:84% Whenever you think about-- tax breaks sound great, right? 00:18:20.160 --> 00:18:22.003 align:middle line:84% It's a costless way to encourage behavior. 00:18:22.003 --> 00:18:23.920 align:middle line:84% We're just giving them a break in their taxes. 00:18:23.920 --> 00:18:24.880 align:middle line:90% What's the cost? 00:18:24.880 --> 00:18:28.060 align:middle line:84% The cost is that you're losing the money on the people who 00:18:28.060 --> 00:18:30.300 align:middle line:90% would have done that anyway. 00:18:30.300 --> 00:18:33.060 align:middle line:84% There is a revenue cost to tax breaks. 00:18:33.060 --> 00:18:35.100 align:middle line:84% And that is consequential because that money 00:18:35.100 --> 00:18:36.520 align:middle line:90% could have been used elsewhere. 00:18:36.520 --> 00:18:37.020 align:middle line:90% Yeah. 00:18:37.020 --> 00:18:40.385 align:middle line:84% AUDIENCE: I was wondering just the reason why they still exist. 00:18:40.385 --> 00:18:40.885 align:middle line:90% [? 00:18:40.885 --> 00:18:41.677 align:middle line:90% Or freely ?] input? 00:18:41.677 --> 00:18:45.540 align:middle line:84% JON GRUBER: Yeah, it's-- the last refuge of scoundrels is 00:18:45.540 --> 00:18:46.240 align:middle line:90% chapter 9. 00:18:46.240 --> 00:18:49.140 align:middle line:90% Basically it exists. 00:18:49.140 --> 00:18:50.780 align:middle line:84% This is the classic thing we've talked 00:18:50.780 --> 00:18:54.900 align:middle line:84% about in other context, which is once a bad policy's in place, 00:18:54.900 --> 00:18:57.140 align:middle line:84% it becomes incredibly hard to get rid of it. 00:18:57.140 --> 00:19:00.160 align:middle line:84% Here, it is absolutely true if we got rid of this. 00:19:00.160 --> 00:19:03.100 align:middle line:84% We'll talk about this more when we come to chapter 25. 00:19:03.100 --> 00:19:05.033 align:middle line:84% There's a very challenging issue. 00:19:05.033 --> 00:19:06.200 align:middle line:90% It's a legitimate challenge. 00:19:06.200 --> 00:19:08.100 align:middle line:84% It comes to the concept of horizontal equity. 00:19:08.100 --> 00:19:11.160 align:middle line:84% What do you do when there's a bad law in place, 00:19:11.160 --> 00:19:13.220 align:middle line:90% but markets have adjusted? 00:19:13.220 --> 00:19:15.080 align:middle line:84% And so people will get hurt when you change. 00:19:15.080 --> 00:19:17.260 align:middle line:84% If we got rid of this, house values 00:19:17.260 --> 00:19:20.020 align:middle line:84% would fall because house values embed 00:19:20.020 --> 00:19:22.460 align:middle line:90% the tax break that comes here. 00:19:22.460 --> 00:19:25.100 align:middle line:84% Houses are cheaper to have because you 00:19:25.100 --> 00:19:26.600 align:middle line:90% get to deduct your interest. 00:19:26.600 --> 00:19:29.380 align:middle line:84% If you didn't, housing would become a more expensive 00:19:29.380 --> 00:19:30.295 align:middle line:90% endeavor. 00:19:30.295 --> 00:19:31.920 align:middle line:84% And therefore, house prices would fall. 00:19:31.920 --> 00:19:33.700 align:middle line:90% People would want fewer houses. 00:19:33.700 --> 00:19:36.290 align:middle line:84% That would be bad for people who own homes. 00:19:36.290 --> 00:19:38.250 align:middle line:84% So there's what we call a transitional cost 00:19:38.250 --> 00:19:39.670 align:middle line:90% of getting to the right spot. 00:19:39.670 --> 00:19:42.870 align:middle line:84% And that transitional cost is very politically challenging. 00:19:42.870 --> 00:19:43.370 align:middle line:90% Yeah. 00:19:43.370 --> 00:19:47.010 align:middle line:84% AUDIENCE: So you're saying this mortgage subsidy only 00:19:47.010 --> 00:19:50.770 align:middle line:84% affects all the people that are already homeowners 00:19:50.770 --> 00:19:52.610 align:middle line:90% wanting to buy bigger homes? 00:19:52.610 --> 00:19:54.510 align:middle line:84% JON GRUBER: Or initially buy a bigger home. 00:19:54.510 --> 00:19:56.050 align:middle line:84% But it doesn't affect your decision to buy a home. 00:19:56.050 --> 00:19:56.770 align:middle line:90% AUDIENCE: Sure. 00:19:56.770 --> 00:20:01.330 align:middle line:84% So there's no marginal individual that is currently 00:20:01.330 --> 00:20:03.530 align:middle line:84% renting, but this mortgage subsidy 00:20:03.530 --> 00:20:04.770 align:middle line:90% would push them to want it? 00:20:04.770 --> 00:20:06.103 align:middle line:90% JON GRUBER: I'm not saying none. 00:20:06.103 --> 00:20:08.170 align:middle line:84% We deal in averages, not individuals. 00:20:08.170 --> 00:20:11.450 align:middle line:84% The elasticity is indistinguishable from zero. 00:20:11.450 --> 00:20:13.290 align:middle line:84% There may be a few people, but not 00:20:13.290 --> 00:20:16.130 align:middle line:84% a measurable clump of people who are literally moving 00:20:16.130 --> 00:20:17.750 align:middle line:90% because of this tax break. 00:20:17.750 --> 00:20:19.210 align:middle line:84% It's not literally making the difference between their-- 00:20:19.210 --> 00:20:20.350 align:middle line:90% between renting and owning. 00:20:20.350 --> 00:20:20.690 align:middle line:90% Yeah. 00:20:20.690 --> 00:20:22.610 align:middle line:84% AUDIENCE: I'm having a bit of a hard time parsing 00:20:22.610 --> 00:20:24.310 align:middle line:84% between [INAUDIBLE] assisting crowd out. 00:20:24.310 --> 00:20:26.102 align:middle line:84% What would that look like for this example? 00:20:26.102 --> 00:20:28.090 align:middle line:84% JON GRUBER: Well, here, the counter actual 00:20:28.090 --> 00:20:29.798 align:middle line:84% would be instead of giving the tax break, 00:20:29.798 --> 00:20:31.632 align:middle line:84% I could use public dollars to build housing. 00:20:31.632 --> 00:20:32.640 align:middle line:90% AUDIENCE: [INAUDIBLE]. 00:20:32.640 --> 00:20:34.380 align:middle line:84% JON GRUBER: Well, what would that do? 00:20:34.380 --> 00:20:36.580 align:middle line:84% Well, for every dollar, I'd used to build housing. 00:20:36.580 --> 00:20:38.180 align:middle line:84% Would I get a dollar more housing? 00:20:38.180 --> 00:20:39.790 align:middle line:84% No, some of that would just crowd out 00:20:39.790 --> 00:20:41.540 align:middle line:84% housing that would have been built anyway. 00:20:41.540 --> 00:20:42.920 align:middle line:84% Some of that will just say private individuals 00:20:42.920 --> 00:20:43.860 align:middle line:90% going to build that housing. 00:20:43.860 --> 00:20:44.980 align:middle line:84% They say great, the government is building. 00:20:44.980 --> 00:20:46.720 align:middle line:90% I'm not going to build it now. 00:20:46.720 --> 00:20:50.640 align:middle line:84% So it's like, each of these, the inframarginal effect 00:20:50.640 --> 00:20:52.880 align:middle line:84% and the credit effect operate similarly. 00:20:52.880 --> 00:20:55.440 align:middle line:84% They're both things that are offsetting the benefit 00:20:55.440 --> 00:20:57.160 align:middle line:90% of the government intervention. 00:20:57.160 --> 00:21:00.760 align:middle line:84% When I shoot fireworks in the sky, that's offset by the fact 00:21:00.760 --> 00:21:03.800 align:middle line:84% that Ben and Jerry cut back on their fireworks. 00:21:03.800 --> 00:21:05.820 align:middle line:84% When I give a tax break for charity, 00:21:05.820 --> 00:21:08.237 align:middle line:84% that's offset by the fact that I'm giving a bunch of money 00:21:08.237 --> 00:21:10.000 align:middle line:84% for free to people who are giving anyway. 00:21:10.000 --> 00:21:11.900 align:middle line:90% Those are both government costs. 00:21:11.900 --> 00:21:13.822 align:middle line:84% AUDIENCE: So the crowd out is particularly 00:21:13.822 --> 00:21:15.780 align:middle line:84% when we're talking about government provision-- 00:21:15.780 --> 00:21:16.955 align:middle line:90% JON GRUBER: Yes, exactly. 00:21:16.955 --> 00:21:18.080 align:middle line:90% AUDIENCE: --the elasticity. 00:21:18.080 --> 00:21:19.560 align:middle line:84% We talk about more when they were talking [? 00:21:19.560 --> 00:21:20.200 align:middle line:90% about some ?] [? taxes. ?] 00:21:20.200 --> 00:21:21.658 align:middle line:84% JON GRUBER: The elasticity is a way 00:21:21.658 --> 00:21:24.240 align:middle line:84% to try to distinguish is marginal-- inframarginal effect. 00:21:24.240 --> 00:21:27.400 align:middle line:84% The point is that an elasticity of 0 00:21:27.400 --> 00:21:31.760 align:middle line:84% says that all the effects in for marginal elasticity of infinity. 00:21:31.760 --> 00:21:34.895 align:middle line:84% Imagine there was nothing existing before. 00:21:34.895 --> 00:21:36.520 align:middle line:84% Well, then there couldn't be crowd out. 00:21:36.520 --> 00:21:38.380 align:middle line:84% And there couldn't be inframarginal effect. 00:21:38.380 --> 00:21:40.880 align:middle line:90% Both would be equally effective. 00:21:40.880 --> 00:21:41.920 align:middle line:90% Yeah. 00:21:41.920 --> 00:21:44.130 align:middle line:84% AUDIENCE: I think would be worth it to do one of [? 00:21:44.130 --> 00:21:47.600 align:middle line:84% United States ?] of [? like ?] different regions of income 00:21:47.600 --> 00:21:48.100 align:middle line:90% to see. 00:21:48.100 --> 00:21:50.400 align:middle line:84% For example, there is different elasticity that maybe-- 00:21:50.400 --> 00:21:51.317 align:middle line:90% JON GRUBER: Great, OK. 00:21:51.317 --> 00:21:52.760 align:middle line:90% Great segue to the next topic. 00:21:52.760 --> 00:21:55.240 align:middle line:84% Are there other questions about this first? 00:21:55.240 --> 00:21:57.520 align:middle line:84% OK, great segue to the next topic, 00:21:57.520 --> 00:21:59.820 align:middle line:84% which is, if you go back to our tax chart, 00:21:59.820 --> 00:22:02.700 align:middle line:84% we talked about two kinds of tax breaks. 00:22:02.700 --> 00:22:05.360 align:middle line:90% Tax deductions. 00:22:05.360 --> 00:22:06.058 align:middle line:90% Tax deduction. 00:22:06.058 --> 00:22:07.600 align:middle line:84% Hey, can I get a copy of the handout? 00:22:07.600 --> 00:22:08.300 align:middle line:90% Oh, is that it? 00:22:08.300 --> 00:22:09.000 align:middle line:90% Thanks. 00:22:09.000 --> 00:22:10.860 align:middle line:84% We talked about two types of tax break. 00:22:10.860 --> 00:22:14.600 align:middle line:90% Tax deductions and tax credits. 00:22:14.600 --> 00:22:17.880 align:middle line:84% A deduction is something where you get to deduct it 00:22:17.880 --> 00:22:19.480 align:middle line:90% from your taxable income. 00:22:19.480 --> 00:22:22.520 align:middle line:84% Therefore, a $1 deduction is worth to you 00:22:22.520 --> 00:22:26.800 align:middle line:84% 1 minus-- is worth to you ta sense where ta is the tax rate. 00:22:26.800 --> 00:22:29.440 align:middle line:84% So if your tax rate is 50% and allow you to deduct a dollar 00:22:29.440 --> 00:22:32.070 align:middle line:84% from your income, that's worth $0.50. 00:22:32.070 --> 00:22:35.550 align:middle line:84% A credit is literally subtracted from your tax bill at the end. 00:22:35.550 --> 00:22:38.270 align:middle line:84% So a dollar credit is worth a dollar. 00:22:38.270 --> 00:22:40.070 align:middle line:90% What is a better thing to use? 00:22:40.070 --> 00:22:41.995 align:middle line:84% Let's say I want to encourage behavior. 00:22:41.995 --> 00:22:43.370 align:middle line:84% Should I do it through deduction? 00:22:43.370 --> 00:22:44.870 align:middle line:90% We have both in our system. 00:22:44.870 --> 00:22:45.790 align:middle line:90% Why? 00:22:45.790 --> 00:22:48.830 align:middle line:84% Which is better-- a deduction or a credit? 00:22:48.830 --> 00:22:51.470 align:middle line:84% Well, the answer to that depends on exactly the question 00:22:51.470 --> 00:22:52.950 align:middle line:90% was asked here. 00:22:52.950 --> 00:22:55.150 align:middle line:90% It depends on two things. 00:22:55.150 --> 00:22:59.270 align:middle line:84% For efficiency, it depends on the nature of elasticities. 00:22:59.270 --> 00:23:05.370 align:middle line:84% So imagine that people are very elastic on the marginal dollar 00:23:05.370 --> 00:23:05.870 align:middle line:90% of giving. 00:23:05.870 --> 00:23:10.110 align:middle line:84% So imagine everyone's going to give $1,000 to charity no matter 00:23:10.110 --> 00:23:10.910 align:middle line:90% what. 00:23:10.910 --> 00:23:14.550 align:middle line:84% But then beyond that, they're encouraged by a tax break. 00:23:14.550 --> 00:23:18.630 align:middle line:84% Then $1,000 credit would be a very bad idea because all it 00:23:18.630 --> 00:23:19.760 align:middle line:90% would do would give $1,000. 00:23:19.760 --> 00:23:21.010 align:middle line:90% People need the $1,000 anyway. 00:23:21.010 --> 00:23:22.635 align:middle line:84% But it would encourage any more giving. 00:23:22.635 --> 00:23:24.210 align:middle line:84% There's no encouraging on the margin. 00:23:24.210 --> 00:23:26.850 align:middle line:84% It's like 100% subsidy to the top of the credit, 00:23:26.850 --> 00:23:28.270 align:middle line:90% but then it stops. 00:23:28.270 --> 00:23:31.670 align:middle line:84% A deduction would continue to encourage that. 00:23:31.670 --> 00:23:33.070 align:middle line:90% Let's see where the flip side. 00:23:33.070 --> 00:23:37.190 align:middle line:84% Imagine that only people who give a small amount to charity 00:23:37.190 --> 00:23:37.930 align:middle line:90% are elastic. 00:23:37.930 --> 00:23:39.350 align:middle line:90% And they're really elastic. 00:23:39.350 --> 00:23:40.290 align:middle line:90% And people give a lot. 00:23:40.290 --> 00:23:41.830 align:middle line:90% Just give it anyway. 00:23:41.830 --> 00:23:43.423 align:middle line:84% Then a credit would be a good idea. 00:23:43.423 --> 00:23:45.590 align:middle line:84% You'd be giving a really big encouragement to people 00:23:45.590 --> 00:23:47.047 align:middle line:90% to give some amount. 00:23:47.047 --> 00:23:48.630 align:middle line:84% But you wouldn't be encouraging people 00:23:48.630 --> 00:23:51.550 align:middle line:84% at the margin who are going to give it anyway. 00:23:51.550 --> 00:23:53.830 align:middle line:84% So whether a credit or a deduction is a good idea 00:23:53.830 --> 00:23:56.910 align:middle line:84% depends on the shape of the elasticities. 00:23:56.910 --> 00:23:59.310 align:middle line:84% If the people who aren't doing much of the activity 00:23:59.310 --> 00:24:01.275 align:middle line:84% are more elastic, you want to encourage it 00:24:01.275 --> 00:24:03.150 align:middle line:84% through a credit, which giving a lot of money 00:24:03.150 --> 00:24:05.070 align:middle line:84% to people who aren't doing anything. 00:24:05.070 --> 00:24:07.470 align:middle line:84% If the people on the-- who are doing 00:24:07.470 --> 00:24:09.770 align:middle line:84% a decent amount of the activity are the most elastic, 00:24:09.770 --> 00:24:11.390 align:middle line:84% you want deduction because that's 00:24:11.390 --> 00:24:13.910 align:middle line:90% encourage them to keep going. 00:24:13.910 --> 00:24:15.680 align:middle line:84% So efficiency perspective-- yeah, Steven. 00:24:15.680 --> 00:24:17.680 align:middle line:84% AUDIENCE: Would the credit not good at everyone? 00:24:17.680 --> 00:24:18.850 align:middle line:84% JON GRUBER: Credit would go to everyone. 00:24:18.850 --> 00:24:20.892 align:middle line:84% But the point is everyone's getting 1,000 anyway. 00:24:20.892 --> 00:24:22.590 align:middle line:90% There's no marginal effect. 00:24:22.590 --> 00:24:24.630 align:middle line:84% The marginal effects some encouraging behavior. 00:24:24.630 --> 00:24:28.080 align:middle line:84% If you give $1,000 credit to a population give $1,000 anyway, 00:24:28.080 --> 00:24:29.780 align:middle line:90% you haven't encouraged anything. 00:24:29.780 --> 00:24:31.060 align:middle line:84% Whereas if you have a deduction, then you 00:24:31.060 --> 00:24:32.320 align:middle line:90% encourage them to keep going. 00:24:32.320 --> 00:24:34.487 align:middle line:84% So the question is the big effect the initial giving 00:24:34.487 --> 00:24:35.660 align:middle line:90% or keep going? 00:24:35.660 --> 00:24:39.360 align:middle line:84% That's the question on efficiency. 00:24:39.360 --> 00:24:42.340 align:middle line:84% So on efficiency, it's not clear if a deduction or credit 00:24:42.340 --> 00:24:43.260 align:middle line:90% is better. 00:24:43.260 --> 00:24:45.780 align:middle line:84% But on equity grounds, it's clear. 00:24:45.780 --> 00:24:49.220 align:middle line:84% For vertical equity, which is a better thing to do-- 00:24:49.220 --> 00:24:50.522 align:middle line:90% a deduction or credit? 00:24:50.522 --> 00:24:51.980 align:middle line:84% If you think about vertical equity, 00:24:51.980 --> 00:24:53.440 align:middle line:84% redistributing from the rich to the poor. 00:24:53.440 --> 00:24:53.780 align:middle line:90% Yeah. 00:24:53.780 --> 00:24:54.793 align:middle line:84% AUDIENCE: Credits is [? corporate when you ?] take 00:24:54.793 --> 00:24:55.751 align:middle line:90% the standard deduction. 00:24:55.751 --> 00:24:56.562 align:middle line:90% JON GRUBER: Yeah. 00:24:56.562 --> 00:24:58.020 align:middle line:84% Well, A because standard deduction. 00:24:58.020 --> 00:24:59.820 align:middle line:90% But B because that's one reason. 00:24:59.820 --> 00:25:01.860 align:middle line:84% But more importantly, because it's 00:25:01.860 --> 00:25:04.220 align:middle line:84% the same amount to everybody, whereas a deduction is 00:25:04.220 --> 00:25:06.340 align:middle line:84% worth more the higher your tax rate is. 00:25:06.340 --> 00:25:08.540 align:middle line:90% Deductions are regressive. 00:25:08.540 --> 00:25:12.060 align:middle line:84% The higher your tax rate is, the more of a deduction you get. 00:25:12.060 --> 00:25:15.460 align:middle line:84% So by giving a deduction, we're giving the biggest tax 00:25:15.460 --> 00:25:17.340 align:middle line:90% break to the richest people. 00:25:17.340 --> 00:25:19.820 align:middle line:84% So the bottom line is if we care about both vertical equity 00:25:19.820 --> 00:25:22.300 align:middle line:90% and efficiency. 00:25:22.300 --> 00:25:24.900 align:middle line:84% We should be predisposed to want to use credits instead 00:25:24.900 --> 00:25:28.140 align:middle line:84% of deductions, unless you can argue that there's 00:25:28.140 --> 00:25:31.020 align:middle line:84% an elasticity shift that the shape of the elasticity 00:25:31.020 --> 00:25:34.840 align:middle line:84% is such that deductions make more sense, OK? 00:25:34.840 --> 00:25:38.100 align:middle line:84% So at equity grounds, the answer is clear. 00:25:38.100 --> 00:25:39.800 align:middle line:84% On efficiency grounds, it's unclear. 00:25:39.800 --> 00:25:41.000 align:middle line:84% I'm throwing some hard shit at you. 00:25:41.000 --> 00:25:42.980 align:middle line:84% So don't be afraid to ask questions about this stuff. 00:25:42.980 --> 00:25:44.120 align:middle line:90% This is hard stuff today. 00:25:44.120 --> 00:25:46.760 align:middle line:84% I'm trying to develop a lot of interesting but hard intuitions. 00:25:46.760 --> 00:25:47.362 align:middle line:90% Yeah. 00:25:47.362 --> 00:25:48.820 align:middle line:84% AUDIENCE: In the case of charitable 00:25:48.820 --> 00:25:52.165 align:middle line:84% giving where I think it's more likely that wealthier 00:25:52.165 --> 00:25:53.540 align:middle line:84% people would give more to charity 00:25:53.540 --> 00:25:56.578 align:middle line:84% simply because they can afford to give more, is that a case 00:25:56.578 --> 00:25:59.120 align:middle line:84% where deduction probably would make more sense than a credit? 00:25:59.120 --> 00:25:59.953 align:middle line:90% JON GRUBER: Exactly. 00:25:59.953 --> 00:26:01.540 align:middle line:84% If the wealthy comes to the question-- 00:26:01.540 --> 00:26:04.220 align:middle line:84% if the wealthiest people are the most elastic, 00:26:04.220 --> 00:26:07.700 align:middle line:84% then deduction would make the most sense. 00:26:07.700 --> 00:26:10.820 align:middle line:84% Indeed, what some are proposed for charitable giving 00:26:10.820 --> 00:26:13.460 align:middle line:84% on that very principle, most-- a lot of people 00:26:13.460 --> 00:26:16.048 align:middle line:84% said, look, most people give something to charity. 00:26:16.048 --> 00:26:18.340 align:middle line:84% But they just give it like they're not paying attention 00:26:18.340 --> 00:26:19.000 align:middle line:90% to tax rates. 00:26:19.000 --> 00:26:19.720 align:middle line:90% It's the rich. 00:26:19.720 --> 00:26:22.280 align:middle line:84% So maybe they'll propose actually having a deduction, 00:26:22.280 --> 00:26:26.010 align:middle line:84% but only on giving above 2% of your income. 00:26:26.010 --> 00:26:27.030 align:middle line:90% What's the idea of that? 00:26:27.030 --> 00:26:28.690 align:middle line:84% The idea of that is the first 2% people 00:26:28.690 --> 00:26:29.870 align:middle line:84% give out of the goodness of their heart, 00:26:29.870 --> 00:26:31.210 align:middle line:90% they're going to do it anyway. 00:26:31.210 --> 00:26:34.050 align:middle line:84% Above that, they only do it if there's a tax reason to do it. 00:26:34.050 --> 00:26:36.010 align:middle line:84% So that's actually an extreme form of reduction 00:26:36.010 --> 00:26:39.610 align:middle line:84% is you're not helping at all the people who are not giving a lot. 00:26:39.610 --> 00:26:41.890 align:middle line:84% But you make it a percent of income, so it still-- 00:26:41.890 --> 00:26:45.430 align:middle line:84% But so basically, you can set something any way you want. 00:26:45.430 --> 00:26:48.990 align:middle line:84% It depends on your theory of where the elasticity is. 00:26:48.990 --> 00:26:49.490 align:middle line:90% Yeah. 00:26:49.490 --> 00:26:55.470 align:middle line:84% Now, however, the credit runs into another issue, 00:26:55.470 --> 00:26:59.010 align:middle line:84% which is one of the most confounding-- 00:26:59.010 --> 00:27:00.510 align:middle line:84% not confounding, just frustrating, 00:27:00.510 --> 00:27:02.170 align:middle line:84% I would say, issues in tax policy, 00:27:02.170 --> 00:27:05.050 align:middle line:84% which is the issue of refundability. 00:27:05.050 --> 00:27:08.530 align:middle line:84% If you go back and remember Jack's tax calculation, 00:27:08.530 --> 00:27:10.490 align:middle line:90% he owed $500. 00:27:10.490 --> 00:27:11.910 align:middle line:84% But if he'd taken a bigger credit, 00:27:11.910 --> 00:27:15.850 align:middle line:84% he would have been owed money by the government. 00:27:15.850 --> 00:27:19.170 align:middle line:84% Many people have argued that if the government-- 00:27:19.170 --> 00:27:21.990 align:middle line:84% that if taxes go negative, that is welfare, 00:27:21.990 --> 00:27:23.810 align:middle line:90% and we shouldn't be doing that. 00:27:23.810 --> 00:27:26.610 align:middle line:84% That is, there's an argument largely in conservative circles 00:27:26.610 --> 00:27:29.410 align:middle line:84% that somehow zero is a magic number 00:27:29.410 --> 00:27:32.290 align:middle line:84% and that if people owe tax above zero, that's legit. 00:27:32.290 --> 00:27:35.270 align:middle line:84% But once someone actually owes taxes below zero, 00:27:35.270 --> 00:27:38.450 align:middle line:84% once their credits take their taxes below zero, 00:27:38.450 --> 00:27:39.310 align:middle line:90% then that's welfare. 00:27:39.310 --> 00:27:40.190 align:middle line:90% And we shouldn't be doing that. 00:27:40.190 --> 00:27:41.857 align:middle line:84% We're just sending money to poor people. 00:27:41.857 --> 00:27:44.040 align:middle line:90% And we shouldn't be doing that. 00:27:44.040 --> 00:27:45.790 align:middle line:84% If it seems confusing, it's because it is. 00:27:45.790 --> 00:27:46.540 align:middle line:90% It makes no sense. 00:27:46.540 --> 00:27:50.290 align:middle line:90% Zero is not a magic number. 00:27:50.290 --> 00:27:53.610 align:middle line:84% So in other words, they say if someone goes from paying-- 00:27:53.610 --> 00:27:57.910 align:middle line:84% if I give a credit that takes home from 1,000 or 100, great. 00:27:57.910 --> 00:28:01.070 align:middle line:84% But it takes them from 100 to negative 300, oh, terrible. 00:28:01.070 --> 00:28:02.550 align:middle line:90% We can't do that. 00:28:02.550 --> 00:28:03.050 align:middle line:90% Why? 00:28:03.050 --> 00:28:04.290 align:middle line:84% Because somehow there's something magic 00:28:04.290 --> 00:28:05.450 align:middle line:84% about the government sending you a check 00:28:05.450 --> 00:28:07.530 align:middle line:84% rather than you sending the government a check. 00:28:07.530 --> 00:28:09.890 align:middle line:84% Completely nonsensical, but very powerful 00:28:09.890 --> 00:28:11.970 align:middle line:90% in political debates, actually. 00:28:11.970 --> 00:28:15.250 align:middle line:84% And in fact, as a result, many tax credits 00:28:15.250 --> 00:28:18.890 align:middle line:90% are actually limited in-- 00:28:18.890 --> 00:28:21.130 align:middle line:84% you're limited to how you can use them to go negative 00:28:21.130 --> 00:28:22.800 align:middle line:90% on your tax-- 00:28:22.800 --> 00:28:24.220 align:middle line:90% on your tax burden. 00:28:24.220 --> 00:28:28.040 align:middle line:90% There's actually limitations-- 00:28:28.040 --> 00:28:29.140 align:middle line:90% I'm getting my term right. 00:28:29.140 --> 00:28:31.120 align:middle line:84% I'm forgetting my term for a second. 00:28:31.120 --> 00:28:33.120 align:middle line:90% One second. 00:28:33.120 --> 00:28:34.640 align:middle line:90% Terminology suck. 00:28:34.640 --> 00:28:36.480 align:middle line:90% Limitation on refundability. 00:28:36.480 --> 00:28:38.600 align:middle line:84% OK, there's a long example in the book. 00:28:38.600 --> 00:28:40.100 align:middle line:84% We don't have time to go through it. 00:28:40.100 --> 00:28:41.600 align:middle line:84% You can read through it in the book. 00:28:41.600 --> 00:28:44.680 align:middle line:84% But the bottom line is one of the most important tax 00:28:44.680 --> 00:28:48.245 align:middle line:84% credits in our system today is called the child tax credit. 00:28:48.245 --> 00:28:49.620 align:middle line:84% The child tax credit is a credit. 00:28:49.620 --> 00:28:52.040 align:middle line:90% You get $2,000 per kid. 00:28:52.040 --> 00:28:56.480 align:middle line:84% Well, you do not actually get that if you're poor. 00:28:56.480 --> 00:28:59.000 align:middle line:84% If you're poor, they limit how much of it-- how negative 00:28:59.000 --> 00:29:00.840 align:middle line:90% your tax can go. 00:29:00.840 --> 00:29:04.360 align:middle line:84% And they don't give you all the tax break, which is crazy. 00:29:04.360 --> 00:29:06.800 align:middle line:84% So if you're middle class, if you're richer, 00:29:06.800 --> 00:29:08.880 align:middle line:90% you get the full $2,000 per kid. 00:29:08.880 --> 00:29:11.000 align:middle line:84% But if you're really poor, you don't 00:29:11.000 --> 00:29:13.160 align:middle line:84% because it's arbitrarily cut off at zero, 00:29:13.160 --> 00:29:14.760 align:middle line:90% which makes no sense at all. 00:29:14.760 --> 00:29:21.218 align:middle line:84% And indeed, part of what the last tax bill-- 00:29:21.218 --> 00:29:22.760 align:middle line:84% part of what the American Rescue Plan 00:29:22.760 --> 00:29:27.160 align:middle line:84% did was actually make the child tax credit more refundable 00:29:27.160 --> 00:29:29.300 align:middle line:84% so that more people could benefit from it 00:29:29.300 --> 00:29:32.480 align:middle line:84% lead to a large reduction in child poverty. 00:29:32.480 --> 00:29:34.940 align:middle line:84% And that actually, unless action is taken, will expire. 00:29:34.940 --> 00:29:37.440 align:middle line:84% Unless the Trump administration takes action to extend that, 00:29:37.440 --> 00:29:38.378 align:middle line:90% that will expire. 00:29:38.378 --> 00:29:40.920 align:middle line:84% And many kids who would have benefited from refundable credit 00:29:40.920 --> 00:29:43.440 align:middle line:84% will now end up in poverty because this arbitrary notion 00:29:43.440 --> 00:29:45.840 align:middle line:90% of zero, OK? 00:29:45.840 --> 00:29:48.260 align:middle line:90% So that's just another feature. 00:29:48.260 --> 00:29:50.160 align:middle line:90% Let's put this all together. 00:29:50.160 --> 00:29:55.060 align:middle line:84% Table 18-2 lists what's called tax expenditures. 00:29:55.060 --> 00:29:56.500 align:middle line:90% What are tax expenditures? 00:29:56.500 --> 00:29:58.280 align:middle line:84% These are how much money the government 00:29:58.280 --> 00:30:01.520 align:middle line:84% would collect if we had a Haig-Simons tax base. 00:30:01.520 --> 00:30:04.840 align:middle line:84% If we actually didn't allow all these various tax breaks, 00:30:04.840 --> 00:30:05.940 align:middle line:90% how much money we collect? 00:30:05.940 --> 00:30:09.680 align:middle line:84% For example, the biggest with the federal income tax 00:30:09.680 --> 00:30:12.760 align:middle line:90% is lower by $215 billion. 00:30:12.760 --> 00:30:15.120 align:middle line:84% The federal income tax, it's another almost 100 billion 00:30:15.120 --> 00:30:19.340 align:middle line:84% on payroll tax because we don't tax health insurance premiums. 00:30:19.340 --> 00:30:20.070 align:middle line:90% We should. 00:30:20.070 --> 00:30:22.370 align:middle line:84% Haig-Simon say it's a form of compensation. 00:30:22.370 --> 00:30:23.370 align:middle line:90% Why aren't we taxing it? 00:30:23.370 --> 00:30:24.250 align:middle line:90% We don't do that. 00:30:24.250 --> 00:30:28.850 align:middle line:84% That's $214 billion of tax we're not collecting. 00:30:28.850 --> 00:30:31.590 align:middle line:84% We have special tax breaks on capital gains. 00:30:31.590 --> 00:30:33.350 align:middle line:90% I'll talk about that later. 00:30:33.350 --> 00:30:35.210 align:middle line:90% We have the child credit. 00:30:35.210 --> 00:30:37.370 align:middle line:84% You might like that on distributional grounds, 00:30:37.370 --> 00:30:38.850 align:middle line:90% but that's costing money. 00:30:38.850 --> 00:30:41.030 align:middle line:84% You have to realize that is not free. 00:30:41.030 --> 00:30:43.750 align:middle line:84% That is $75 billion we could have used some other way 00:30:43.750 --> 00:30:44.970 align:middle line:90% to help poor people. 00:30:44.970 --> 00:30:45.930 align:middle line:90% Is it worth it? 00:30:45.930 --> 00:30:48.830 align:middle line:90% 00:30:48.830 --> 00:30:51.910 align:middle line:84% There's various exclusions for home sales, cetera. 00:30:51.910 --> 00:30:56.090 align:middle line:84% The mortgage interest is 27 billion, cetera. 00:30:56.090 --> 00:30:58.590 align:middle line:84% The bottom line is when you put it together, 00:30:58.590 --> 00:31:04.670 align:middle line:84% you end up with more than $1 trillion in tax exclusions. 00:31:04.670 --> 00:31:05.790 align:middle line:90% What does that mean? 00:31:05.790 --> 00:31:09.350 align:middle line:84% When we collect in the US, something like, 00:31:09.350 --> 00:31:13.350 align:middle line:84% $3 and 1/2 to $4 trillion in taxes. 00:31:13.350 --> 00:31:18.380 align:middle line:84% That means that as much as a third, 00:31:18.380 --> 00:31:22.460 align:middle line:84% we could raise tax collections by 25% to 33% 00:31:22.460 --> 00:31:26.340 align:middle line:84% if we got-- if we used the Haig-Simons tax definition. 00:31:26.340 --> 00:31:28.540 align:middle line:90% That's a big deal. 00:31:28.540 --> 00:31:30.180 align:middle line:90% And as I will show-- 00:31:30.180 --> 00:31:31.740 align:middle line:90% and that's a big deal. 00:31:31.740 --> 00:31:33.910 align:middle line:90% And it matters for equity. 00:31:33.910 --> 00:31:35.160 align:middle line:90% And it matters for efficiency. 00:31:35.160 --> 00:31:39.260 align:middle line:84% And we'll talk about both of those next time, OK? 00:31:39.260 --> 00:31:39.760 align:middle line:90% Yeah. 00:31:39.760 --> 00:31:42.140 align:middle line:84% AUDIENCE: On terminology, at tax expenditure 00:31:42.140 --> 00:31:43.282 align:middle line:90% is any credit or deduction? 00:31:43.282 --> 00:31:44.740 align:middle line:84% JON GRUBER: Anything which deviates 00:31:44.740 --> 00:31:48.460 align:middle line:84% from the Haig-Simons definition, credit or a deduction. 00:31:48.460 --> 00:31:53.140 align:middle line:84% All right, now, last thing from chapter 18. 00:31:53.140 --> 00:31:54.980 align:middle line:84% There's just so many issues that get raised. 00:31:54.980 --> 00:31:56.320 align:middle line:84% I mean, we always think about tax rates. 00:31:56.320 --> 00:31:57.720 align:middle line:90% No one talks about tax base. 00:31:57.720 --> 00:31:59.160 align:middle line:84% But there's all these hard issues. 00:31:59.160 --> 00:32:00.540 align:middle line:90% Here's another one. 00:32:00.540 --> 00:32:03.460 align:middle line:90% How do we treat families? 00:32:03.460 --> 00:32:05.980 align:middle line:84% In most countries, married couples 00:32:05.980 --> 00:32:09.060 align:middle line:84% are taxed on their own individual income. 00:32:09.060 --> 00:32:12.680 align:middle line:84% In the US, they're taxed on-- were taxed on family income 00:32:12.680 --> 00:32:14.980 align:middle line:84% if you report as a married couple. 00:32:14.980 --> 00:32:16.700 align:middle line:90% What is the right thing to do? 00:32:16.700 --> 00:32:20.620 align:middle line:84% Well, it turns out that's actually really hard, OK? 00:32:20.620 --> 00:32:24.340 align:middle line:84% So let's say that you want to design a tax 00:32:24.340 --> 00:32:27.740 align:middle line:90% system with three goals. 00:32:27.740 --> 00:32:30.260 align:middle line:84% You want to design a tax system with three goals. 00:32:30.260 --> 00:32:34.440 align:middle line:90% Goal one is progressivity. 00:32:34.440 --> 00:32:39.540 align:middle line:90% 00:32:39.540 --> 00:32:46.100 align:middle line:84% That is you want average tax rates to rise with income. 00:32:46.100 --> 00:32:48.400 align:middle line:84% You want average tax rates to rise with income. 00:32:48.400 --> 00:32:51.540 align:middle line:90% You want progressivity. 00:32:51.540 --> 00:33:02.420 align:middle line:84% Two is you want across family, horizontal equity. 00:33:02.420 --> 00:33:05.020 align:middle line:84% What I mean by that is two families that 00:33:05.020 --> 00:33:09.340 align:middle line:84% have the same total income pay the same total tax. 00:33:09.340 --> 00:33:11.700 align:middle line:90% That's a second goal. 00:33:11.700 --> 00:33:18.630 align:middle line:84% And the third goal is across marriage, horizontal equity. 00:33:18.630 --> 00:33:27.650 align:middle line:90% 00:33:27.650 --> 00:33:28.790 align:middle line:90% What I mean by that? 00:33:28.790 --> 00:33:30.570 align:middle line:84% I mean that the amount of taxes you 00:33:30.570 --> 00:33:33.130 align:middle line:84% pay as a couple should not depend on whether you get 00:33:33.130 --> 00:33:35.033 align:middle line:90% married. 00:33:35.033 --> 00:33:36.950 align:middle line:84% I mean, if you're living together in marriage, 00:33:36.950 --> 00:33:37.970 align:middle line:90% it's a piece of paper. 00:33:37.970 --> 00:33:40.890 align:middle line:84% Why should determine how much taxes you pay? 00:33:40.890 --> 00:33:45.010 align:middle line:84% These are three goals one might have for a tax system. 00:33:45.010 --> 00:33:46.730 align:middle line:84% It turns out-- and you can guess where 00:33:46.730 --> 00:33:49.810 align:middle line:84% I'm going-- it is impossible to simultaneously satisfy all three 00:33:49.810 --> 00:33:51.273 align:middle line:90% goals. 00:33:51.273 --> 00:33:53.690 align:middle line:84% You cannot have a system that satisfies all three of these 00:33:53.690 --> 00:33:54.330 align:middle line:90% goals. 00:33:54.330 --> 00:33:58.250 align:middle line:84% And to see why, let's talk about two couples-- 00:33:58.250 --> 00:34:00.230 align:middle line:84% Yasmin and Doug and Jan and Elena. 00:34:00.230 --> 00:34:04.534 align:middle line:90% 00:34:04.534 --> 00:34:07.788 align:middle line:84% Imagine Yasmin and Doug are a couple 00:34:07.788 --> 00:34:09.330 align:middle line:84% where Yasmin earns most of the money, 00:34:09.330 --> 00:34:11.090 align:middle line:90% and Doug doesn't earn much. 00:34:11.090 --> 00:34:13.969 align:middle line:84% Jan and Elena each earn the same amount. 00:34:13.969 --> 00:34:16.730 align:middle line:84% Their total family income is the same, $150,000, 00:34:16.730 --> 00:34:20.130 align:middle line:90% just distributed differently. 00:34:20.130 --> 00:34:25.690 align:middle line:84% Imagine we have a tax system of the following form, OK? 00:34:25.690 --> 00:34:37.550 align:middle line:84% A 10% rate, the tax rate equals 0.1 on the first 20K and 0.2-- 00:34:37.550 --> 00:34:48.810 align:middle line:84% 0.2 up to 20 to 80K and 0.3 80K plus. 00:34:48.810 --> 00:34:51.090 align:middle line:84% So it's a progressive tax system. 00:34:51.090 --> 00:34:52.170 align:middle line:90% Rising rates. 00:34:52.170 --> 00:34:55.429 align:middle line:90% OK, progressive tax system. 00:34:55.429 --> 00:34:59.530 align:middle line:84% If you apply that system-- and you can trust my math here. 00:34:59.530 --> 00:35:00.270 align:middle line:90% Or maybe not. 00:35:00.270 --> 00:35:03.290 align:middle line:90% You can check it if you like. 00:35:03.290 --> 00:35:07.130 align:middle line:84% If you apply that system to each individual income, 00:35:07.130 --> 00:35:13.280 align:middle line:84% you get that Yasmin owns $32,000, and Doug owes $10,000. 00:35:13.280 --> 00:35:19.000 align:middle line:84% And Jan and Elena each owe $13,000, OK? 00:35:19.000 --> 00:35:22.800 align:middle line:84% Now, let's consider two different tax systems-- 00:35:22.800 --> 00:35:28.600 align:middle line:84% one where individuals file on their own. 00:35:28.600 --> 00:35:31.160 align:middle line:84% Then in that case, Yasmine and Doug 00:35:31.160 --> 00:35:34.600 align:middle line:84% would pay more in taxes than Jan and Elena. 00:35:34.600 --> 00:35:39.062 align:middle line:84% The other is one where you just tax total family income. 00:35:39.062 --> 00:35:41.020 align:middle line:84% In that case is their family income's the same. 00:35:41.020 --> 00:35:43.720 align:middle line:90% They pay the same. 00:35:43.720 --> 00:35:46.380 align:middle line:84% These two systems each violate one of these rules. 00:35:46.380 --> 00:35:48.600 align:middle line:90% They're both progressive. 00:35:48.600 --> 00:35:51.160 align:middle line:84% But if you look at this system, if you have an individual tax 00:35:51.160 --> 00:35:56.240 align:middle line:84% filing system, that violates rule number two, 00:35:56.240 --> 00:35:59.080 align:middle line:84% because we have two families with the same income paying 00:35:59.080 --> 00:36:01.440 align:middle line:90% different amounts of taxes. 00:36:01.440 --> 00:36:05.800 align:middle line:84% If a family tax system, that violates rule three. 00:36:05.800 --> 00:36:06.360 align:middle line:90% Why? 00:36:06.360 --> 00:36:07.818 align:middle line:84% Because by getting married, they've 00:36:07.818 --> 00:36:09.360 align:middle line:90% changed their tax burdens. 00:36:09.360 --> 00:36:12.900 align:middle line:84% In particular, both families, by getting married, 00:36:12.900 --> 00:36:14.340 align:middle line:90% have raised their tax burdens. 00:36:14.340 --> 00:36:17.040 align:middle line:90% 00:36:17.040 --> 00:36:21.000 align:middle line:84% So that violates across marriage horizontal equity imposes 00:36:21.000 --> 00:36:24.640 align:middle line:84% what is often called the marriage tax. 00:36:24.640 --> 00:36:26.880 align:middle line:90% Dun, da, da. 00:36:26.880 --> 00:36:30.200 align:middle line:84% It's said in those kind of harsh terms, the marriage tax. 00:36:30.200 --> 00:36:31.680 align:middle line:84% The notion that by getting married, 00:36:31.680 --> 00:36:35.000 align:middle line:84% you're going to pay more in taxes. 00:36:35.000 --> 00:36:37.960 align:middle line:84% Now, the important thing to understand about the marriage 00:36:37.960 --> 00:36:41.720 align:middle line:84% tax debate is that there's two different ways 00:36:41.720 --> 00:36:44.440 align:middle line:84% of thinking about what the term, marriage tax means. 00:36:44.440 --> 00:36:48.440 align:middle line:84% One way is to say, well, gee, a marriage tax 00:36:48.440 --> 00:36:53.240 align:middle line:84% exists whenever you pay more tax by getting married. 00:36:53.240 --> 00:36:55.040 align:middle line:90% That would be easy to fix. 00:36:55.040 --> 00:36:56.340 align:middle line:90% How could we fix that? 00:36:56.340 --> 00:36:58.940 align:middle line:84% How could we have a family system with no marriage tax? 00:36:58.940 --> 00:36:59.440 align:middle line:90% Yeah. 00:36:59.440 --> 00:36:59.940 align:middle line:90% AUDIENCE: [? 00:36:59.940 --> 00:37:03.080 align:middle line:84% A lot even ?] [? filed in ?] [? today's fault ?] issues. 00:37:03.080 --> 00:37:04.720 align:middle line:84% JON GRUBER: No, you'd still pay a tax 00:37:04.720 --> 00:37:07.800 align:middle line:84% if you got married if you-- you can file individually. 00:37:07.800 --> 00:37:09.442 align:middle line:84% But we're penalize you filing jointly. 00:37:09.442 --> 00:37:11.150 align:middle line:84% Married people almost always file jointly 00:37:11.150 --> 00:37:12.530 align:middle line:90% and are penalizing you for that. 00:37:12.530 --> 00:37:13.190 align:middle line:90% But is a simpler fix. 00:37:13.190 --> 00:37:13.690 align:middle line:90% Yeah. 00:37:13.690 --> 00:37:14.660 align:middle line:90% AUDIENCE: Divorce. 00:37:14.660 --> 00:37:15.850 align:middle line:90% JON GRUBER: No, come on. 00:37:15.850 --> 00:37:16.518 align:middle line:90% Simpler fix. 00:37:16.518 --> 00:37:17.810 align:middle line:90% I don't want to marry this guy. 00:37:17.810 --> 00:37:19.210 align:middle line:90% Simpler fix. 00:37:19.210 --> 00:37:19.710 align:middle line:90% Yeah. 00:37:19.710 --> 00:37:21.390 align:middle line:90% AUDIENCE: Have a lower tax rate. 00:37:21.390 --> 00:37:24.030 align:middle line:84% JON GRUBER: Yeah, just give more money back to married couples. 00:37:24.030 --> 00:37:28.390 align:middle line:84% Let's say in this example, I had a $5,000 marital tax credit. 00:37:28.390 --> 00:37:32.130 align:middle line:84% Then in both cases, there would be no marriage tax 00:37:32.130 --> 00:37:33.370 align:middle line:90% under that definition. 00:37:33.370 --> 00:37:35.870 align:middle line:84% You would save money by getting married. 00:37:35.870 --> 00:37:39.790 align:middle line:84% But that would not meet this definition. 00:37:39.790 --> 00:37:41.250 align:middle line:90% It still wouldn't be horizontal. 00:37:41.250 --> 00:37:43.667 align:middle line:84% It still wouldn't be equitable because now, married people 00:37:43.667 --> 00:37:46.390 align:middle line:90% pay less in taxes. 00:37:46.390 --> 00:37:48.930 align:middle line:84% Another way to think about 0.3 is, 00:37:48.930 --> 00:37:51.090 align:middle line:84% on average, is there a marriage tax? 00:37:51.090 --> 00:37:53.850 align:middle line:90% 00:37:53.850 --> 00:37:56.950 align:middle line:84% The quest is the marriage tax debate about is there 00:37:56.950 --> 00:37:58.830 align:middle line:90% any marriage tax? 00:37:58.830 --> 00:38:00.680 align:middle line:84% Or on average, there is a marriage tax. 00:38:00.680 --> 00:38:04.190 align:middle line:84% Right now in the US on average, we're pretty neutral. 00:38:04.190 --> 00:38:06.870 align:middle line:84% On average, because we give a bigger tax break 00:38:06.870 --> 00:38:10.590 align:middle line:84% to married couples through the tax system, 00:38:10.590 --> 00:38:12.627 align:middle line:90% we're actually pretty neutral. 00:38:12.627 --> 00:38:14.710 align:middle line:84% But that means about half the married couples have 00:38:14.710 --> 00:38:17.150 align:middle line:90% effectively a marriage tax. 00:38:17.150 --> 00:38:20.270 align:middle line:84% So how do you feel about this debate? 00:38:20.270 --> 00:38:22.395 align:middle line:84% Depends basically on how misleading you want to be. 00:38:22.395 --> 00:38:24.770 align:middle line:84% If you want to pound things that we should have no 8 tax, 00:38:24.770 --> 00:38:27.250 align:middle line:84% we could do that by collecting a lot less tax revenues, 00:38:27.250 --> 00:38:29.710 align:middle line:84% give a huge tax break to married couples. 00:38:29.710 --> 00:38:30.527 align:middle line:90% And we collect. 00:38:30.527 --> 00:38:31.610 align:middle line:90% We'd have no marriage tax. 00:38:31.610 --> 00:38:34.230 align:middle line:84% We just collect a lot less tax revenues. 00:38:34.230 --> 00:38:37.390 align:middle line:84% If by that, you mean neutrality, we're pretty close now, 00:38:37.390 --> 00:38:40.330 align:middle line:84% because basically married couples, yes, it's true. 00:38:40.330 --> 00:38:42.330 align:middle line:84% Their taxable income goes up by getting married. 00:38:42.330 --> 00:38:45.730 align:middle line:84% But we also give them a better tax schedule 00:38:45.730 --> 00:38:47.150 align:middle line:90% such that they pay less tax. 00:38:47.150 --> 00:38:48.250 align:middle line:90% And it offsets. 00:38:48.250 --> 00:38:48.750 align:middle line:90% Yeah. 00:38:48.750 --> 00:38:52.350 align:middle line:84% AUDIENCE: What kind of people tend to be facing marriage tax? 00:38:52.350 --> 00:38:53.850 align:middle line:84% Does it tend to be wealthier people? 00:38:53.850 --> 00:38:55.090 align:middle line:84% JON GRUBER: Well, if you can look at this example, 00:38:55.090 --> 00:38:56.330 align:middle line:90% it's a perfect example. 00:38:56.330 --> 00:39:00.170 align:middle line:84% The marriage tax will be bigger the more equal your income is. 00:39:00.170 --> 00:39:01.590 align:middle line:90% Why? 00:39:01.590 --> 00:39:03.550 align:middle line:84% This is actually an interesting intuition. 00:39:03.550 --> 00:39:06.130 align:middle line:84% Why the more equal your income is will your marriage track-- 00:39:06.130 --> 00:39:06.630 align:middle line:90% yeah. 00:39:06.630 --> 00:39:09.600 align:middle line:84% AUDIENCE: If the income's not super equal, 00:39:09.600 --> 00:39:11.660 align:middle line:84% whoever's making more is already paying more but 00:39:11.660 --> 00:39:12.627 align:middle line:90% on the higher rate. 00:39:12.627 --> 00:39:13.460 align:middle line:90% JON GRUBER: Exactly. 00:39:13.460 --> 00:39:16.220 align:middle line:84% So basically, the bottom line is, 00:39:16.220 --> 00:39:21.180 align:middle line:84% think about Doug's decision to earn more 00:39:21.180 --> 00:39:25.660 align:middle line:84% under the individual tax versus the marriage tax. 00:39:25.660 --> 00:39:28.700 align:middle line:84% Well, in the marriage tax, if Doug earns more, 00:39:28.700 --> 00:39:31.080 align:middle line:90% they are in a range-- 00:39:31.080 --> 00:39:33.300 align:middle line:84% their total family income is in a range 00:39:33.300 --> 00:39:37.120 align:middle line:90% where their tax rate is 0.3%. 00:39:37.120 --> 00:39:40.180 align:middle line:90% 00:39:40.180 --> 00:39:41.940 align:middle line:90% Let put it differently. 00:39:41.940 --> 00:39:46.720 align:middle line:84% The bottom line is, if one partner is already rich-- 00:39:46.720 --> 00:39:50.940 align:middle line:84% if one partner is already rich, then the second partner 00:39:50.940 --> 00:39:54.020 align:middle line:84% going to work is going to be effectively paying 00:39:54.020 --> 00:39:57.245 align:middle line:84% a very high rate on that additional income. 00:39:57.245 --> 00:39:58.620 align:middle line:84% OK, no, I'm actually explaining-- 00:39:58.620 --> 00:39:59.828 align:middle line:90% this is a different question. 00:39:59.828 --> 00:40:00.740 align:middle line:90% A different question. 00:40:00.740 --> 00:40:03.160 align:middle line:84% It's bigger just because-- it's because the progressivity. 00:40:03.160 --> 00:40:05.380 align:middle line:84% If it was a flat tax rate, it would be the same, 00:40:05.380 --> 00:40:08.190 align:middle line:84% because the progressivity, the more equal your income is, 00:40:08.190 --> 00:40:10.783 align:middle line:84% the more-- the bigger the marriage checks. 00:40:10.783 --> 00:40:11.950 align:middle line:90% I can't think the intuition. 00:40:11.950 --> 00:40:15.050 align:middle line:90% But that's the bottom line, OK? 00:40:15.050 --> 00:40:17.030 align:middle line:84% So that's how we think about marriage taxes. 00:40:17.030 --> 00:40:20.150 align:middle line:84% Now, let's go back to our definition discussed earlier. 00:40:20.150 --> 00:40:23.250 align:middle line:84% Does that mean we shouldn't give a tax break for marriage? 00:40:23.250 --> 00:40:25.170 align:middle line:84% Let's say right now, we're neutral. 00:40:25.170 --> 00:40:27.910 align:middle line:84% And some company proposes it is unfair. 00:40:27.910 --> 00:40:32.330 align:middle line:84% We should give an extra $5,000 deduction for married couples. 00:40:32.330 --> 00:40:34.050 align:middle line:90% Is that necessarily wrong? 00:40:34.050 --> 00:40:37.290 align:middle line:84% Under what conditions is it right? 00:40:37.290 --> 00:40:38.130 align:middle line:90% Yeah. 00:40:38.130 --> 00:40:40.070 align:middle line:84% AUDIENCE: On that, I guess [INAUDIBLE] you'd 00:40:40.070 --> 00:40:42.450 align:middle line:84% say like, oh, married couples that [? shoulders ?] on. 00:40:42.450 --> 00:40:44.350 align:middle line:84% JON GRUBER: If there's a positive externality 00:40:44.350 --> 00:40:46.600 align:middle line:84% in the marriage, it still might be a good thing to do. 00:40:46.600 --> 00:40:48.830 align:middle line:84% So the marriage tax debate has two components. 00:40:48.830 --> 00:40:50.790 align:middle line:84% There's a horizontal equity component. 00:40:50.790 --> 00:40:53.510 align:middle line:84% But there's also a positive externality component, 00:40:53.510 --> 00:40:57.010 align:middle line:84% which is maybe we don't want to penalize marriage 00:40:57.010 --> 00:40:59.690 align:middle line:90% because getting married is good. 00:40:59.690 --> 00:41:03.250 align:middle line:84% So in some sense, maybe we do want to subsidize marriage. 00:41:03.250 --> 00:41:03.770 align:middle line:90% Yeah. 00:41:03.770 --> 00:41:06.470 align:middle line:84% AUDIENCE: Do you know if there's any elasticity of marriage? 00:41:06.470 --> 00:41:09.210 align:middle line:84% JON GRUBER: Well, that's two questions we have to ask. 00:41:09.210 --> 00:41:13.250 align:middle line:84% First of all, is marriage elastic with respect to taxes? 00:41:13.250 --> 00:41:15.490 align:middle line:84% Second of all, are there positive externalities 00:41:15.490 --> 00:41:16.650 align:middle line:90% for marriage? 00:41:16.650 --> 00:41:18.460 align:middle line:84% OK, you have to answer both questions. 00:41:18.460 --> 00:41:19.710 align:middle line:90% I hope that I'm drilling this. 00:41:19.710 --> 00:41:21.490 align:middle line:84% I hope you guys are getting this concept. 00:41:21.490 --> 00:41:23.250 align:middle line:90% just like housing. 00:41:23.250 --> 00:41:25.770 align:middle line:84% Well, let's start with the second one. 00:41:25.770 --> 00:41:31.250 align:middle line:84% There's actually an enormous amount of non-causal evidence 00:41:31.250 --> 00:41:33.230 align:middle line:84% that getting married is good for the world, 00:41:33.230 --> 00:41:36.690 align:middle line:84% largely because guys are assholes till they get married. 00:41:36.690 --> 00:41:39.370 align:middle line:84% The bottom line is, I mean, guys, basically when 00:41:39.370 --> 00:41:41.610 align:middle line:90% they get married, calm down. 00:41:41.610 --> 00:41:42.630 align:middle line:90% They go to work. 00:41:42.630 --> 00:41:44.650 align:middle line:90% They become responsible people. 00:41:44.650 --> 00:41:46.750 align:middle line:84% And basically that's good for family income. 00:41:46.750 --> 00:41:49.090 align:middle line:84% That's good for the kids, cetera. 00:41:49.090 --> 00:41:52.450 align:middle line:84% Now, however, there's not been a great study 00:41:52.450 --> 00:41:54.810 align:middle line:84% of the kind we like to rely on in this course that's 00:41:54.810 --> 00:41:56.470 align:middle line:90% a lot of causal evidence. 00:41:56.470 --> 00:41:59.990 align:middle line:84% But it's a lot suggesting marriage is good for the kids 00:41:59.990 --> 00:42:02.358 align:middle line:90% and good for society. 00:42:02.358 --> 00:42:03.150 align:middle line:90% I'm willing to try. 00:42:03.150 --> 00:42:04.942 align:middle line:84% I think it's a big enough body of evidence. 00:42:04.942 --> 00:42:06.560 align:middle line:90% I'm willing to go with that. 00:42:06.560 --> 00:42:09.960 align:middle line:84% There's also a lot of evidence that divorce is bad for kids. 00:42:09.960 --> 00:42:13.660 align:middle line:84% So then we comes the question of how elastic is marriage? 00:42:13.660 --> 00:42:18.747 align:middle line:84% And the answer is zero, OK, except in timing. 00:42:18.747 --> 00:42:20.580 align:middle line:84% If you get a bigger break for your marriage, 00:42:20.580 --> 00:42:21.940 align:middle line:84% people get married before the end of the year 00:42:21.940 --> 00:42:23.900 align:middle line:84% so they can get an extra tax break for one year. 00:42:23.900 --> 00:42:24.858 align:middle line:90% It's a small tax break. 00:42:24.858 --> 00:42:26.700 align:middle line:84% They'll get married after in the new year. 00:42:26.700 --> 00:42:29.940 align:middle line:84% So except for timing, same thing happens with kids, by the way. 00:42:29.940 --> 00:42:32.960 align:middle line:90% 00:42:32.960 --> 00:42:34.535 align:middle line:90% You get a credit for each kid. 00:42:34.535 --> 00:42:36.660 align:middle line:84% So if you have your kid before the end of the year, 00:42:36.660 --> 00:42:38.202 align:middle line:84% you get a whole extra year of credit. 00:42:38.202 --> 00:42:40.620 align:middle line:84% So if your kid on December 31 verse January 1, 00:42:40.620 --> 00:42:41.840 align:middle line:90% you're getting 3,000 more-- 00:42:41.840 --> 00:42:45.800 align:middle line:84% 2,000 more dollars by having him on December 31. 00:42:45.800 --> 00:42:52.320 align:middle line:84% Now, I had a kid who was due on January 16. 00:42:52.320 --> 00:42:55.000 align:middle line:84% And the doctor said, look, your kid's lungs 00:42:55.000 --> 00:42:57.000 align:middle line:90% are not developing properly. 00:42:57.000 --> 00:42:59.300 align:middle line:84% We want to deliver the kid on January 2. 00:42:59.300 --> 00:43:04.640 align:middle line:84% I said, well, gee, because could you maybe do December 31? 00:43:04.640 --> 00:43:06.540 align:middle line:84% And the doctor said, well, we could, 00:43:06.540 --> 00:43:08.560 align:middle line:84% but that risked lung development. 00:43:08.560 --> 00:43:10.460 align:middle line:90% And I said, well, OK, fine. 00:43:10.460 --> 00:43:11.660 align:middle line:90% We'll do January 2. 00:43:11.660 --> 00:43:14.838 align:middle line:84% However, I made a rational decision with respect 00:43:14.838 --> 00:43:15.380 align:middle line:90% to the money. 00:43:15.380 --> 00:43:17.000 align:middle line:84% I did not make a rational decision with respect 00:43:17.000 --> 00:43:19.200 align:middle line:84% to the ridicule I would get from all my colleagues 00:43:19.200 --> 00:43:21.420 align:middle line:84% from a planned birth on January 2, 00:43:21.420 --> 00:43:23.680 align:middle line:84% thus, failing the basic tenets of economics. 00:43:23.680 --> 00:43:25.440 align:middle line:84% So if I countered that ridicule, I 00:43:25.440 --> 00:43:26.732 align:middle line:90% might have pushed it back more. 00:43:26.732 --> 00:43:27.440 align:middle line:90% Anyway, question. 00:43:27.440 --> 00:43:29.880 align:middle line:84% AUDIENCE: Is there a limit on the amount of kids, like, 00:43:29.880 --> 00:43:32.150 align:middle line:84% [INAUDIBLE] like [? over ?] benefits? 00:43:32.150 --> 00:43:34.680 align:middle line:90% JON GRUBER: No, go for it. 00:43:34.680 --> 00:43:36.900 align:middle line:84% So he's going to get divorced, have lots of kids. 00:43:36.900 --> 00:43:38.280 align:middle line:90% We've determined. 00:43:38.280 --> 00:43:42.420 align:middle line:84% OK, so basically, this is-- once again. 00:43:42.420 --> 00:43:43.820 align:middle line:90% So we're finishing chapter 18. 00:43:43.820 --> 00:43:47.080 align:middle line:84% But the bottom line is, as we think about tax breaks, 00:43:47.080 --> 00:43:50.040 align:middle line:84% we want to think about this basic question of how much 00:43:50.040 --> 00:43:52.160 align:middle line:90% behavior you're encouraging. 00:43:52.160 --> 00:43:55.120 align:middle line:84% And is it then how much is that versus the inframarginal revenue 00:43:55.120 --> 00:43:55.800 align:middle line:90% cost? 00:43:55.800 --> 00:43:59.640 align:middle line:90% So that's chapter 18. 00:43:59.640 --> 00:44:01.950 align:middle line:84% Now, we go to chapter 19, which we'll actually 00:44:01.950 --> 00:44:03.410 align:middle line:90% go through fairly quickly. 00:44:03.410 --> 00:44:05.190 align:middle line:90% I cover this in 14.01. 00:44:05.190 --> 00:44:08.230 align:middle line:90% It's pretty rudimentary stuff. 00:44:08.230 --> 00:44:10.430 align:middle line:84% So I'm going to go fairly quickly through it. 00:44:10.430 --> 00:44:12.270 align:middle line:84% But please, as always, I'm going too fast. 00:44:12.270 --> 00:44:15.720 align:middle line:90% Stop me and ask questions. 00:44:15.720 --> 00:44:17.630 align:middle line:84% When we think about taxes, we're going 00:44:17.630 --> 00:44:19.910 align:middle line:90% to think about two issues-- 00:44:19.910 --> 00:44:23.230 align:middle line:84% fairness or equity and efficiency. 00:44:23.230 --> 00:44:25.130 align:middle line:90% Chapter 19 is about equity. 00:44:25.130 --> 00:44:27.510 align:middle line:90% Chapter 20 is about efficiency. 00:44:27.510 --> 00:44:31.710 align:middle line:84% Equity, in turn, turns on who actually 00:44:31.710 --> 00:44:36.610 align:middle line:84% pays the taxes or the concept of tax incidence. 00:44:36.610 --> 00:44:40.590 align:middle line:90% 00:44:40.590 --> 00:44:47.110 align:middle line:84% And the motivation for this is FIGURE 19-1, 00:44:47.110 --> 00:44:51.470 align:middle line:84% which shows that from 1960 to 2020, 00:44:51.470 --> 00:44:55.950 align:middle line:84% we've seen a massive erosion in corporate taxes and a massive 00:44:55.950 --> 00:44:57.930 align:middle line:84% increase in social insurance contributions. 00:44:57.930 --> 00:45:02.390 align:middle line:84% Basically, we've shifted taxes from corporations to workers. 00:45:02.390 --> 00:45:05.470 align:middle line:84% Now, at first blush, you might say that is horrible. 00:45:05.470 --> 00:45:06.490 align:middle line:90% Corporations are rich. 00:45:06.490 --> 00:45:07.550 align:middle line:90% Workers aren't. 00:45:07.550 --> 00:45:09.350 align:middle line:90% That's terrible for equity. 00:45:09.350 --> 00:45:12.310 align:middle line:84% But in fact, you can't conclude that. 00:45:12.310 --> 00:45:14.270 align:middle line:84% You can't conclude that because when 00:45:14.270 --> 00:45:16.450 align:middle line:84% you think about who bears the tax, 00:45:16.450 --> 00:45:19.350 align:middle line:84% you have to remember that markets react to taxes. 00:45:19.350 --> 00:45:22.710 align:middle line:84% And that ultimately determines who bears the tax. 00:45:22.710 --> 00:45:26.410 align:middle line:84% So to see this, let's go to example. 00:45:26.410 --> 00:45:29.470 align:middle line:90% Let's go to FIGURE 19-2. 00:45:29.470 --> 00:45:32.710 align:middle line:84% Let's think about a tax on gasoline. 00:45:32.710 --> 00:45:35.430 align:middle line:84% So 19-2, Panel A is the market for gas. 00:45:35.430 --> 00:45:37.390 align:middle line:84% You've got the quantity of gas on the x-axis. 00:45:37.390 --> 00:45:38.990 align:middle line:90% Price on the y-axis. 00:45:38.990 --> 00:45:41.310 align:middle line:84% Imagine we're initially in equilibrium at 100 billion 00:45:41.310 --> 00:45:44.010 align:middle line:84% gallons of gas being sold at $1.50 a gallon. 00:45:44.010 --> 00:45:47.790 align:middle line:84% I really do have to update this example, $1.50 a gallon. 00:45:47.790 --> 00:45:51.290 align:middle line:84% Now, imagine the government rolls in and says, 00:45:51.290 --> 00:45:56.950 align:middle line:84% we are going to tax gas producers $0.50 a gallon. 00:45:56.950 --> 00:45:58.350 align:middle line:90% What does that do? 00:45:58.350 --> 00:46:01.540 align:middle line:84% What that does is that raises the marginal cost of producing 00:46:01.540 --> 00:46:04.260 align:middle line:90% gas every gallon by $0.50. 00:46:04.260 --> 00:46:07.500 align:middle line:84% If the marginal cost, remember, is the supply curve. 00:46:07.500 --> 00:46:12.420 align:middle line:84% So that shifts the supply curve upwards and inwards by $0.50. 00:46:12.420 --> 00:46:13.260 align:middle line:90% Why? 00:46:13.260 --> 00:46:17.820 align:middle line:84% Because supply curve is the marginal willingness to supply 00:46:17.820 --> 00:46:20.700 align:middle line:84% and which equals the marginal cost of production. 00:46:20.700 --> 00:46:23.128 align:middle line:84% If that marginal cost also includes another $0.50, 00:46:23.128 --> 00:46:25.420 align:middle line:84% you're going to have to get $0.50 more a gallon to sell 00:46:25.420 --> 00:46:26.020 align:middle line:90% that. 00:46:26.020 --> 00:46:28.580 align:middle line:84% You're no longer going to be willing to sell 100 billion 00:46:28.580 --> 00:46:30.860 align:middle line:90% gallons at $1.50. 00:46:30.860 --> 00:46:32.045 align:middle line:90% You'll lose money on that. 00:46:32.045 --> 00:46:33.920 align:middle line:84% Now, if you want to sell 100 billion gallons, 00:46:33.920 --> 00:46:36.540 align:middle line:90% you're going to need $2. 00:46:36.540 --> 00:46:39.500 align:middle line:84% So you move to the new supply curve. 00:46:39.500 --> 00:46:43.580 align:middle line:90% What does that do to the price? 00:46:43.580 --> 00:46:47.940 align:middle line:84% Well, at that higher supply curve, people want less gas. 00:46:47.940 --> 00:46:52.380 align:middle line:84% So you end up in equilibrium at point D with 90 billion gallons 00:46:52.380 --> 00:46:56.020 align:middle line:84% being bought at a price of $1.80. 00:46:56.020 --> 00:47:00.660 align:middle line:84% Now, we come to the question, who bears this tax? 00:47:00.660 --> 00:47:03.660 align:middle line:84% What is the incidence of this tax? 00:47:03.660 --> 00:47:05.820 align:middle line:84% Well, the quick answer would be, well, gee, 00:47:05.820 --> 00:47:07.800 align:middle line:84% the suppliers pay the $0.50 a gallon. 00:47:07.800 --> 00:47:09.260 align:middle line:90% So they bear the tax. 00:47:09.260 --> 00:47:10.680 align:middle line:90% But that would be wrong. 00:47:10.680 --> 00:47:12.500 align:middle line:90% Why? 00:47:12.500 --> 00:47:13.320 align:middle line:90% Yeah, Alec, 00:47:13.320 --> 00:47:15.153 align:middle line:84% AUDIENCE: Consumers are paying more. 00:47:15.153 --> 00:47:16.820 align:middle line:84% JON GRUBER: Because consumers are paying 00:47:16.820 --> 00:47:19.860 align:middle line:84% higher prices and suppliers are getting those higher prices. 00:47:19.860 --> 00:47:22.580 align:middle line:84% Yeah, suppliers are sending $0.50 checks to the government 00:47:22.580 --> 00:47:23.980 align:middle line:90% for every gallon they sell. 00:47:23.980 --> 00:47:27.460 align:middle line:84% But they're also getting $1.80 a gallon. 00:47:27.460 --> 00:47:30.060 align:middle line:84% They're getting $0.30 more per gallon. 00:47:30.060 --> 00:47:36.020 align:middle line:84% So in fact, the producer burden is only $0.20. 00:47:36.020 --> 00:47:40.320 align:middle line:84% There's a $0.50 check they send minus the $0.30 more a gallon 00:47:40.320 --> 00:47:42.380 align:middle line:90% they get in higher prices. 00:47:42.380 --> 00:47:44.180 align:middle line:90% Who pays that $0.30? 00:47:44.180 --> 00:47:45.940 align:middle line:90% Consumers. 00:47:45.940 --> 00:47:49.520 align:middle line:84% So even though consumers didn't send a check to the government, 00:47:49.520 --> 00:47:53.880 align:middle line:84% they are paying $0.30 a gallon in taxes. 00:47:53.880 --> 00:47:56.790 align:middle line:84% We have three fundamental rules of tax incidence. 00:47:56.790 --> 00:48:03.490 align:middle line:84% Rule one is that statutory burdens do not 00:48:03.490 --> 00:48:10.970 align:middle line:90% equal economic burdens, OK? 00:48:10.970 --> 00:48:13.150 align:middle line:84% Statutory burdens do not equal economic burdens. 00:48:13.150 --> 00:48:14.650 align:middle line:84% In other words, what people actually 00:48:14.650 --> 00:48:16.927 align:middle line:84% bear at the end of the day is related 00:48:16.927 --> 00:48:18.510 align:middle line:84% who sends the check to the government, 00:48:18.510 --> 00:48:22.650 align:middle line:84% but not determined by it, because the market adjust. 00:48:22.650 --> 00:48:24.730 align:middle line:84% And that market adjustment affects 00:48:24.730 --> 00:48:26.910 align:middle line:90% who effectively bears the tax. 00:48:26.910 --> 00:48:29.610 align:middle line:84% The economic burden is what people are paying 00:48:29.610 --> 00:48:32.650 align:middle line:90% after the market is adjusted. 00:48:32.650 --> 00:48:36.890 align:middle line:84% And this is the concept of tax incidence. 00:48:36.890 --> 00:48:41.050 align:middle line:84% That is the concept of tax incidence, OK? 00:48:41.050 --> 00:48:45.530 align:middle line:84% Now, that's the first rule of tax incidence. 00:48:45.530 --> 00:48:54.960 align:middle line:84% The second rule is that the side of the market is irrelevant. 00:48:54.960 --> 00:48:56.520 align:middle line:90% What do I mean by that rule? 00:48:56.520 --> 00:48:58.880 align:middle line:84% I mean that in a well-functioning-- 00:48:58.880 --> 00:49:01.000 align:middle line:84% in a perfectly competitive market, 00:49:01.000 --> 00:49:03.840 align:middle line:84% it doesn't matter who pays the tax, who sends 00:49:03.840 --> 00:49:05.560 align:middle line:90% the check to the government. 00:49:05.560 --> 00:49:11.240 align:middle line:84% To see that, let's go to FIGURE 19-3. 00:49:11.240 --> 00:49:14.440 align:middle line:84% Now, we're going to have $0.50 tax on gas, 00:49:14.440 --> 00:49:18.000 align:middle line:84% but it's going to be a tax on consumers, not producers. 00:49:18.000 --> 00:49:21.520 align:middle line:84% So every gallon of gas you buy, you pay $0.50. 00:49:21.520 --> 00:49:23.140 align:middle line:90% What does that do? 00:49:23.140 --> 00:49:26.360 align:middle line:84% That lowers my willingness to pay for gas. 00:49:26.360 --> 00:49:27.280 align:middle line:90% Why? 00:49:27.280 --> 00:49:29.760 align:middle line:84% 2 the old demand curve represented 00:49:29.760 --> 00:49:33.720 align:middle line:84% my marginal willingness to pay for a gallon of gas. 00:49:33.720 --> 00:49:36.760 align:middle line:84% Now, for every gallon of gas, I'm willing to pay $0.50 less 00:49:36.760 --> 00:49:39.200 align:middle line:84% because I'm going to send $0.50 to the government. 00:49:39.200 --> 00:49:44.160 align:middle line:84% So it shifts my demand curve downward and inward by $0.50. 00:49:44.160 --> 00:49:47.480 align:middle line:84% Before, I was willing to pay $1.50 for the 100th billion 00:49:47.480 --> 00:49:48.600 align:middle line:90% gallon. 00:49:48.600 --> 00:49:51.380 align:middle line:84% Now, I'm willing to pay a dollar for the 100 billion. 00:49:51.380 --> 00:49:55.023 align:middle line:84% Now, I'm only willing to pay $1.30 for the-- 00:49:55.023 --> 00:49:56.440 align:middle line:84% I'm sorry. for 100 billion gallon, 00:49:56.440 --> 00:50:00.240 align:middle line:84% only be willing to pay a dollar because I have to send $0.50 00:50:00.240 --> 00:50:01.187 align:middle line:90% to the government. 00:50:01.187 --> 00:50:02.020 align:middle line:90% What does that mean? 00:50:02.020 --> 00:50:03.280 align:middle line:90% That demand curve shifts down. 00:50:03.280 --> 00:50:08.360 align:middle line:84% We end up in a new equilibrium with a price of $1.30. 00:50:08.360 --> 00:50:12.040 align:middle line:90% What is the consumer burden now? 00:50:12.040 --> 00:50:17.800 align:middle line:84% Well, they send a $0.50 check to the government, OK? 00:50:17.800 --> 00:50:22.560 align:middle line:84% But they pay a price that's $0.20 lower. 00:50:22.560 --> 00:50:25.320 align:middle line:90% So their burden is $0.30. 00:50:25.320 --> 00:50:27.040 align:middle line:90% What is the producer burden? 00:50:27.040 --> 00:50:29.400 align:middle line:84% They get a price that's $0.20 lower. 00:50:29.400 --> 00:50:31.200 align:middle line:90% So their burden is $0.20. 00:50:31.200 --> 00:50:35.760 align:middle line:84% Exactly the same as the previous example. 00:50:35.760 --> 00:50:38.520 align:middle line:84% As long as you've got a perfectly competitive market 00:50:38.520 --> 00:50:40.120 align:middle line:84% and the tax is the same, it doesn't 00:50:40.120 --> 00:50:41.600 align:middle line:90% matter who you put it on. 00:50:41.600 --> 00:50:44.480 align:middle line:84% The market's going to react to deliver the same outcome. 00:50:44.480 --> 00:50:46.760 align:middle line:84% The side of the market is irrelevant. 00:50:46.760 --> 00:50:49.200 align:middle line:84% So basically what we have here is 00:50:49.200 --> 00:50:52.550 align:middle line:84% a situation where if you've got a given market with a given tax 00:50:52.550 --> 00:50:55.550 align:middle line:84% wedge, a given tax, it doesn't matter which side of the market 00:50:55.550 --> 00:50:56.250 align:middle line:90% you put it on. 00:50:56.250 --> 00:50:58.130 align:middle line:84% The market reacts to end up at the same spot. 00:50:58.130 --> 00:51:00.510 align:middle line:84% When it's up at the same spot, burdens end up the same. 00:51:00.510 --> 00:51:04.990 align:middle line:84% It's the market response that determines the burdens, OK? 00:51:04.990 --> 00:51:05.650 align:middle line:90% Yeah. 00:51:05.650 --> 00:51:08.238 align:middle line:84% AUDIENCE: If you wanted to draw the consumer producer 00:51:08.238 --> 00:51:10.196 align:middle line:84% surplus in both cases, then the deadweight loss 00:51:10.196 --> 00:51:11.455 align:middle line:90% on the [INAUDIBLE]. 00:51:11.455 --> 00:51:13.830 align:middle line:84% JON GRUBER: Right now, we're only talking about fairness, 00:51:13.830 --> 00:51:16.150 align:middle line:84% not-- we'll talk about that in chapter 20. 00:51:16.150 --> 00:51:18.950 align:middle line:84% We're not going to do any deadweight loss 00:51:18.950 --> 00:51:20.205 align:middle line:90% triangles in this chapter. 00:51:20.205 --> 00:51:21.330 align:middle line:90% We're not about efficiency. 00:51:21.330 --> 00:51:24.845 align:middle line:84% We're about fairness and who bears the burden, OK? 00:51:24.845 --> 00:51:25.970 align:middle line:90% Very important distinction. 00:51:25.970 --> 00:51:28.190 align:middle line:84% I'll discuss that a little more in a little bit. 00:51:28.190 --> 00:51:30.590 align:middle line:90% OK, third rule of tax incidence. 00:51:30.590 --> 00:51:35.990 align:middle line:90% 00:51:35.990 --> 00:51:40.210 align:middle line:84% Elasticities determine incidence. 00:51:40.210 --> 00:51:43.310 align:middle line:90% 00:51:43.310 --> 00:51:46.110 align:middle line:84% What drives tax incidences relative to elasticities? 00:51:46.110 --> 00:51:51.910 align:middle line:84% To see that, let's go to FIGURE 19-4. 00:51:51.910 --> 00:51:53.990 align:middle line:84% Now, let's go back to the tax being 00:51:53.990 --> 00:51:56.940 align:middle line:90% on the producer of gasoline-- 00:51:56.940 --> 00:51:58.650 align:middle line:90% tax producer gasoline. 00:51:58.650 --> 00:52:00.935 align:middle line:84% But let's imagine demand for gasoline is inelastic. 00:52:00.935 --> 00:52:03.310 align:middle line:84% People are always going to buy 100 billion gallons of gas 00:52:03.310 --> 00:52:05.550 align:middle line:90% no matter what. 00:52:05.550 --> 00:52:08.510 align:middle line:84% Well, in this case, what happens? 00:52:08.510 --> 00:52:12.630 align:middle line:84% The price adjusts by the full $0.50. 00:52:12.630 --> 00:52:16.128 align:middle line:84% And who bears the entire burden of the tax and why? 00:52:16.128 --> 00:52:16.670 align:middle line:90% Someone else. 00:52:16.670 --> 00:52:17.640 align:middle line:90% Get some other folks involved. 00:52:17.640 --> 00:52:17.890 align:middle line:90% Yeah. 00:52:17.890 --> 00:52:18.053 align:middle line:90% AUDIENCE: [? 00:52:18.053 --> 00:52:18.650 align:middle line:90% Make it ?] [? easier. ?] 00:52:18.650 --> 00:52:19.450 align:middle line:90% JON GRUBER: Why? 00:52:19.450 --> 00:52:22.050 align:middle line:84% AUDIENCE: Because they're fully inelastic. 00:52:22.050 --> 00:52:26.393 align:middle line:84% So their quantity demanded isn't going to change so that-- 00:52:26.393 --> 00:52:27.810 align:middle line:84% JON GRUBER: They're stuck with it. 00:52:27.810 --> 00:52:28.893 align:middle line:90% AUDIENCE: They can pay it. 00:52:28.893 --> 00:52:32.090 align:middle line:84% JON GRUBER: Yeah, well, and also, they don't have a choice. 00:52:32.090 --> 00:52:33.370 align:middle line:90% They're stuck with it. 00:52:33.370 --> 00:52:38.310 align:middle line:84% So basically, they are stuck paying that price, OK? 00:52:38.310 --> 00:52:43.030 align:middle line:84% However, if you flip it around, imagine, on the other hand, 00:52:43.030 --> 00:52:47.070 align:middle line:84% that consumers were perfectly elastic. 00:52:47.070 --> 00:52:54.540 align:middle line:84% Then when the supply curve shifts up, 00:52:54.540 --> 00:52:58.360 align:middle line:84% you end up with the price not changing. 00:52:58.360 --> 00:52:58.860 align:middle line:90% Why? 00:52:58.860 --> 00:53:00.400 align:middle line:84% Because you can't change the price. 00:53:00.400 --> 00:53:02.220 align:middle line:90% Consumers are perfectly elastic. 00:53:02.220 --> 00:53:04.860 align:middle line:84% So who bears the burden in this case? 00:53:04.860 --> 00:53:07.900 align:middle line:90% The producers bear all of it. 00:53:07.900 --> 00:53:10.460 align:middle line:84% The bottom line is, the fundamental rule 00:53:10.460 --> 00:53:14.020 align:middle line:84% of tax incidence, slippery factors avoid taxes, 00:53:14.020 --> 00:53:16.980 align:middle line:90% and stuck factors pay them. 00:53:16.980 --> 00:53:20.460 align:middle line:84% More elastic parties avoid taxes. 00:53:20.460 --> 00:53:23.140 align:middle line:84% Inelastic parties bear the taxes. 00:53:23.140 --> 00:53:26.100 align:middle line:84% It's true on the supply side as well. 00:53:26.100 --> 00:53:27.720 align:middle line:84% Here's how I like to think about it. 00:53:27.720 --> 00:53:29.632 align:middle line:84% It's not a clean intuition, but here's 00:53:29.632 --> 00:53:30.840 align:middle line:90% how I like to think about it. 00:53:30.840 --> 00:53:33.880 align:middle line:84% I think about it like, in some sense, the tax is laid down. 00:53:33.880 --> 00:53:36.203 align:middle line:84% You're negotiating over who's going to pay it. 00:53:36.203 --> 00:53:38.120 align:middle line:84% If the consumer's going to buy the gas anyway, 00:53:38.120 --> 00:53:38.880 align:middle line:90% you're like, well, fuck you. 00:53:38.880 --> 00:53:39.880 align:middle line:84% You're going to buy the gas anyway. 00:53:39.880 --> 00:53:40.760 align:middle line:90% You're paying it. 00:53:40.760 --> 00:53:42.260 align:middle line:84% If the consumer says, I'm just going 00:53:42.260 --> 00:53:44.093 align:middle line:84% to leave you the second you raise the price, 00:53:44.093 --> 00:53:46.260 align:middle line:84% then the producer has to bear it. 00:53:46.260 --> 00:53:48.940 align:middle line:84% So basically, the folks-- the party that's stuck 00:53:48.940 --> 00:53:49.640 align:middle line:90% is bearing it. 00:53:49.640 --> 00:53:52.540 align:middle line:84% The party that can leave is avoiding it. 00:53:52.540 --> 00:53:56.740 align:middle line:84% And likewise, on the supply side, OK? 00:53:56.740 --> 00:53:59.280 align:middle line:84% So now armed with that intuition, 00:53:59.280 --> 00:54:04.220 align:middle line:84% we can actually derive the formula for tax incidence. 00:54:04.220 --> 00:54:06.200 align:middle line:84% Let's derive the formula for tax incidence. 00:54:06.200 --> 00:54:11.980 align:middle line:90% 00:54:11.980 --> 00:54:13.800 align:middle line:90% Let's say that we have-- 00:54:13.800 --> 00:54:16.860 align:middle line:90% 00:54:16.860 --> 00:54:20.500 align:middle line:84% imagine a tax that's paid by consumers. 00:54:20.500 --> 00:54:21.840 align:middle line:90% A demand-side tax. 00:54:21.840 --> 00:54:23.980 align:middle line:84% Then the final price in the market 00:54:23.980 --> 00:54:26.910 align:middle line:84% is the change in price plus the tax. 00:54:26.910 --> 00:54:28.660 align:middle line:84% They send the tax to the government, plus, 00:54:28.660 --> 00:54:31.142 align:middle line:84% there's any adjustment in price they're going to pay. 00:54:31.142 --> 00:54:32.600 align:middle line:84% If price goes up, they'll pay more. 00:54:32.600 --> 00:54:35.540 align:middle line:84% If price goes down, they'll pay less. 00:54:35.540 --> 00:54:38.360 align:middle line:84% Now, let's start with some definitions. 00:54:38.360 --> 00:54:41.060 align:middle line:84% Remember, the definition is the elasticity of demand. 00:54:41.060 --> 00:54:45.760 align:middle line:84% The elasticity of demand is delta Q over delta P. 00:54:45.760 --> 00:54:48.570 align:middle line:90% But here is delta P plus tau. 00:54:48.570 --> 00:54:51.770 align:middle line:90% This is the change in price. 00:54:51.770 --> 00:54:54.290 align:middle line:84% Delta Q over delta P plus tau times P 00:54:54.290 --> 00:55:01.330 align:middle line:84% over Q. And the elasticity of supply is going to be-- 00:55:01.330 --> 00:55:04.810 align:middle line:84% the elasticity of supply is just delta Q 00:55:04.810 --> 00:55:10.210 align:middle line:84% over delta P times P over Q because it's not the producers 00:55:10.210 --> 00:55:12.410 align:middle line:90% not paying the tax. 00:55:12.410 --> 00:55:19.450 align:middle line:84% So we can basically say that we can put these together 00:55:19.450 --> 00:55:23.810 align:middle line:90% to say that delta Q over Q-- 00:55:23.810 --> 00:55:28.950 align:middle line:84% delta Q over Q equals the elasticity of demand. 00:55:28.950 --> 00:55:32.050 align:middle line:84% Just rearranging terms up here, delta Q over Q 00:55:32.050 --> 00:55:42.370 align:middle line:84% equals the elasticity of demand times delta P plus tau over P. 00:55:42.370 --> 00:55:46.490 align:middle line:84% That's delta Q over Q equals the elasticity of demand times 00:55:46.490 --> 00:55:49.722 align:middle line:90% delta T plus tau over P, OK? 00:55:49.722 --> 00:55:53.250 align:middle line:90% 00:55:53.250 --> 00:55:56.870 align:middle line:84% What this one, if you rearrange this equation, you get that. 00:55:56.870 --> 00:55:58.770 align:middle line:84% If you arrange this equation, you 00:55:58.770 --> 00:56:05.290 align:middle line:84% get that delta Q over Q is just A to delta Q over Q 00:56:05.290 --> 00:56:11.925 align:middle line:84% is just A to S times delta P over P, OK? 00:56:11.925 --> 00:56:14.050 align:middle line:84% If your range demand, you get this more complicated 00:56:14.050 --> 00:56:14.550 align:middle line:90% expression. 00:56:14.550 --> 00:56:16.970 align:middle line:84% Supply, you just get that simple expression. 00:56:16.970 --> 00:56:20.690 align:middle line:84% Now, delta Q over Q has to equal delta Q over Q. 00:56:20.690 --> 00:56:24.070 align:middle line:84% So if we set these expressions equal to each other-- 00:56:24.070 --> 00:56:26.690 align:middle line:84% so we can set these two expressions equal to each other. 00:56:26.690 --> 00:56:29.570 align:middle line:84% A to D times delta P plus tau over P 00:56:29.570 --> 00:56:32.410 align:middle line:84% equal to A to S times delta P over P. Set 00:56:32.410 --> 00:56:33.690 align:middle line:90% them equal to each other. 00:56:33.690 --> 00:56:34.890 align:middle line:90% What do you get? 00:56:34.890 --> 00:56:40.650 align:middle line:84% You get that delta P, the way the price adjusts 00:56:40.650 --> 00:56:49.040 align:middle line:84% in response to a tax, is A to D over A to S minus A 00:56:49.040 --> 00:56:55.680 align:middle line:90% to D times the tax. 00:56:55.680 --> 00:57:01.760 align:middle line:84% So the change in price depends on the size of the tax 00:57:01.760 --> 00:57:03.760 align:middle line:90% and the relative elasticities. 00:57:03.760 --> 00:57:07.440 align:middle line:84% In this case, it's a tax on consumers. 00:57:07.440 --> 00:57:10.920 align:middle line:84% So the bigger is the consumer elasticity, 00:57:10.920 --> 00:57:12.460 align:middle line:90% the more price will change. 00:57:12.460 --> 00:57:15.920 align:middle line:84% In other words, the more price will drop. 00:57:15.920 --> 00:57:21.360 align:middle line:84% The bigger supply elasticity, the more price won't drop. 00:57:21.360 --> 00:57:23.360 align:middle line:84% So who gets stuck depends on the battle 00:57:23.360 --> 00:57:24.740 align:middle line:90% between these elasticities. 00:57:24.740 --> 00:57:27.240 align:middle line:84% If this was a tax on suppliers, this 00:57:27.240 --> 00:57:30.680 align:middle line:84% would be A to S in the numerator. 00:57:30.680 --> 00:57:34.040 align:middle line:84% Tax supplies be A to S, the numerator but same math. 00:57:34.040 --> 00:57:36.440 align:middle line:84% The bottom line is the relative elasticities that 00:57:36.440 --> 00:57:38.460 align:middle line:90% determine who bears the tax. 00:57:38.460 --> 00:57:42.180 align:middle line:84% The change in price is the driver who bears the tax. 00:57:42.180 --> 00:57:44.400 align:middle line:84% And the change in price is a function 00:57:44.400 --> 00:57:49.180 align:middle line:90% of relative elasticities, OK? 00:57:49.180 --> 00:57:51.060 align:middle line:84% That math is shown in the appendix. 00:57:51.060 --> 00:57:53.800 align:middle line:90% 00:57:53.800 --> 00:57:56.080 align:middle line:84% Let me emphasize one important thing, 00:57:56.080 --> 00:57:58.080 align:middle line:84% which comes to the question about efficiency. 00:57:58.080 --> 00:58:00.860 align:middle line:84% When we're talking about fairness and tax equity, 00:58:00.860 --> 00:58:03.455 align:middle line:84% we are not paying attention to quantities, only prices. 00:58:03.455 --> 00:58:05.580 align:middle line:84% We're not talking about the fact that gas went down 00:58:05.580 --> 00:58:07.380 align:middle line:84% for 100 billion to 90 billion gallons. 00:58:07.380 --> 00:58:08.640 align:middle line:90% That's next chapter. 00:58:08.640 --> 00:58:10.900 align:middle line:84% This chapter is just about what happened to prices 00:58:10.900 --> 00:58:14.840 align:middle line:84% because that's what drives the fairness. 00:58:14.840 --> 00:58:19.780 align:middle line:84% One other point that I want to make is to remember, 00:58:19.780 --> 00:58:22.720 align:middle line:84% we're also ignoring what's done with the money. 00:58:22.720 --> 00:58:24.277 align:middle line:84% We're just doing what the tax does. 00:58:24.277 --> 00:58:26.360 align:middle line:84% Of course, if you take the money and then spend it 00:58:26.360 --> 00:58:29.387 align:middle line:84% on certain people, that could affect winners and losers too. 00:58:29.387 --> 00:58:30.220 align:middle line:90% We're ignoring that. 00:58:30.220 --> 00:58:32.720 align:middle line:84% We're assuming the money just gets thrown back. 00:58:32.720 --> 00:58:33.817 align:middle line:90% So we're ignoring that. 00:58:33.817 --> 00:58:35.400 align:middle line:84% Just important to remember, we're just 00:58:35.400 --> 00:58:40.880 align:middle line:84% focusing on what happens when you raise the tax here, OK? 00:58:40.880 --> 00:58:45.270 align:middle line:84% Let's do an example to try to illustrate 00:58:45.270 --> 00:58:48.150 align:middle line:90% this a more real world example. 00:58:48.150 --> 00:58:53.190 align:middle line:84% Let's talk about the incidence of taxes in the labor market. 00:58:53.190 --> 00:59:01.710 align:middle line:90% So now go to FIGURE 19-7. 00:59:01.710 --> 00:59:05.590 align:middle line:84% Just going to drill this through again with a different example. 00:59:05.590 --> 00:59:07.290 align:middle line:90% Now, we have the labor market. 00:59:07.290 --> 00:59:09.390 align:middle line:84% We've got hours of work on the x-axis. 00:59:09.390 --> 00:59:11.430 align:middle line:90% Wages on the y-axis. 00:59:11.430 --> 00:59:13.350 align:middle line:90% We're going to impose a tax. 00:59:13.350 --> 00:59:17.710 align:middle line:84% First, we're going to impose a dollar an hour tax on firms. 00:59:17.710 --> 00:59:20.310 align:middle line:84% For every hour of labor you employ, 00:59:20.310 --> 00:59:22.670 align:middle line:84% we're going to charge you a dollar of tax. 00:59:22.670 --> 00:59:25.390 align:middle line:90% What does that do? 00:59:25.390 --> 00:59:26.550 align:middle line:90% I'm sorry. 00:59:26.550 --> 00:59:27.050 align:middle line:90% I'm sorry. 00:59:27.050 --> 00:59:28.270 align:middle line:84% First, we're doing a tax on workers 00:59:28.270 --> 00:59:29.870 align:middle line:84% because workers are suppliers here. 00:59:29.870 --> 00:59:30.610 align:middle line:90% I caught myself. 00:59:30.610 --> 00:59:33.190 align:middle line:84% Remember, in the labor market, workers, suppliers. 00:59:33.190 --> 00:59:35.750 align:middle line:84% So first, a dollar an hour tax on the workers. 00:59:35.750 --> 00:59:39.030 align:middle line:84% For every hour you work, you pay a dollar in tax. 00:59:39.030 --> 00:59:42.740 align:middle line:84% That means that you are going to want to supply less labor. 00:59:42.740 --> 00:59:45.060 align:middle line:84% They're going to pay you more to get you to work. 00:59:45.060 --> 00:59:47.900 align:middle line:84% You used to be willing to deliver 00:59:47.900 --> 00:59:53.200 align:middle line:90% H1 hours at a wage of $7.25. 00:59:53.200 --> 00:59:57.100 align:middle line:84% Now, since you're paying tax, you're going to supply-- 00:59:57.100 --> 00:59:59.220 align:middle line:84% you're going to need to pay at a higher wage 00:59:59.220 --> 01:00:01.700 align:middle line:84% to supply that number of hours, OK? 01:00:01.700 --> 01:00:06.180 align:middle line:84% As a result, we get to a new equilibrium at point B 01:00:06.180 --> 01:00:09.220 align:middle line:90% where the wage is 7.75. 01:00:09.220 --> 01:00:11.240 align:middle line:84% And the firms and the workers split the burden. 01:00:11.240 --> 01:00:12.460 align:middle line:90% How do we see that? 01:00:12.460 --> 01:00:15.380 align:middle line:84% Well, remember, the worker's setting a dollar check 01:00:15.380 --> 01:00:17.140 align:middle line:90% to the government. 01:00:17.140 --> 01:00:19.580 align:middle line:90% The wage has gone up $0.50. 01:00:19.580 --> 01:00:22.380 align:middle line:84% So what's the burden on the worker? 01:00:22.380 --> 01:00:23.342 align:middle line:90% $0.50. 01:00:23.342 --> 01:00:24.800 align:middle line:84% They send dollar to the government, 01:00:24.800 --> 01:00:26.175 align:middle line:84% but they have $0.50 more an hour. 01:00:26.175 --> 01:00:28.660 align:middle line:84% What's the burden on the firm? $0.50. 01:00:28.660 --> 01:00:31.260 align:middle line:84% They're paying $0.50 more an hour. 01:00:31.260 --> 01:00:34.052 align:middle line:84% So that dollar tax is split equally. 01:00:34.052 --> 01:00:35.760 align:middle line:84% Now, why before was it not split equally? 01:00:35.760 --> 01:00:38.820 align:middle line:84% In this case it is because of elasticities. 01:00:38.820 --> 01:00:41.860 align:middle line:84% That's why last time was 30-20, and this time it's 50-50. 01:00:41.860 --> 01:00:45.760 align:middle line:84% Different elasticities in these two examples, OK? 01:00:45.760 --> 01:00:46.720 align:middle line:90% Let's flip it. 01:00:46.720 --> 01:00:48.000 align:middle line:90% Let's put the tax on firms. 01:00:48.000 --> 01:00:50.460 align:middle line:90% Firms are the demanders here. 01:00:50.460 --> 01:00:53.220 align:middle line:84% But the tax on firms who are the demanders. 01:00:53.220 --> 01:00:54.300 align:middle line:90% What do you get? 01:00:54.300 --> 01:00:57.380 align:middle line:84% Well, now, you lower the demand for labor. 01:00:57.380 --> 01:00:59.193 align:middle line:84% For every hour of worker you employ, you 01:00:59.193 --> 01:01:00.360 align:middle line:90% have to pay a dollar in tax. 01:01:00.360 --> 01:01:01.560 align:middle line:90% You want fewer workers. 01:01:01.560 --> 01:01:03.180 align:middle line:90% Your marginal cost has gone up. 01:01:03.180 --> 01:01:05.940 align:middle line:90% You lower demand for labor. 01:01:05.940 --> 01:01:08.380 align:middle line:84% That shifts to a new demand curve, the red curve, 01:01:08.380 --> 01:01:12.700 align:middle line:84% and new equilibrium point C with a wage of 6.75 an hour. 01:01:12.700 --> 01:01:14.580 align:middle line:90% Now, what are the burdens? 01:01:14.580 --> 01:01:17.580 align:middle line:84% Well, the employer sends a dollar check to the government 01:01:17.580 --> 01:01:20.180 align:middle line:90% but pays $0.50 less an hour. 01:01:20.180 --> 01:01:22.300 align:middle line:90% So the burden is $0.50. 01:01:22.300 --> 01:01:24.520 align:middle line:84% The worker gets $0.50 less an hour. 01:01:24.520 --> 01:01:26.700 align:middle line:90% The burden is $0.50. 01:01:26.700 --> 01:01:31.660 align:middle line:90% So the second rule is held, OK? 01:01:31.660 --> 01:01:34.300 align:middle line:90% Question about that example? 01:01:34.300 --> 01:01:35.400 align:middle line:90% Now, I'm blow your minds. 01:01:35.400 --> 01:01:36.500 align:middle line:90% You ready for this? 01:01:36.500 --> 01:01:38.850 align:middle line:90% What if there's a minimum wage? 01:01:38.850 --> 01:01:40.730 align:middle line:90% Let's go to the next figure. 01:01:40.730 --> 01:01:42.830 align:middle line:84% What if there's a minimum wage at 7.25, 01:01:42.830 --> 01:01:45.650 align:middle line:90% the federal minimum wage? 01:01:45.650 --> 01:01:49.970 align:middle line:84% Well, in the first case, it doesn't matter. 01:01:49.970 --> 01:01:51.270 align:middle line:90% The same thing happens. 01:01:51.270 --> 01:01:53.010 align:middle line:90% You put the tax on workers. 01:01:53.010 --> 01:01:55.770 align:middle line:90% They supply less labor. 01:01:55.770 --> 01:01:57.390 align:middle line:90% The supply curve shifts up. 01:01:57.390 --> 01:02:02.050 align:middle line:84% Wages rise to 7.75 an hour is $0.50 burden on each. 01:02:02.050 --> 01:02:03.810 align:middle line:90% But what about the second case? 01:02:03.810 --> 01:02:05.030 align:middle line:90% What's changed? 01:02:05.030 --> 01:02:09.330 align:middle line:84% What's changed is the employer can no longer lower the wage 01:02:09.330 --> 01:02:11.130 align:middle line:90% to avoid the burden. 01:02:11.130 --> 01:02:12.630 align:middle line:84% Because the minimum wage is there, 01:02:12.630 --> 01:02:15.090 align:middle line:84% the employer has to pay at least 7.25. 01:02:15.090 --> 01:02:19.890 align:middle line:84% So what you see is the wage remains at 7.25. 01:02:19.890 --> 01:02:24.970 align:middle line:84% The employer bears the whole burden. 01:02:24.970 --> 01:02:26.230 align:middle line:90% You get a lot fewer workers. 01:02:26.230 --> 01:02:27.230 align:middle line:90% We'll come back to efficiency. 01:02:27.230 --> 01:02:29.105 align:middle line:84% We're not talking about efficiency right now. 01:02:29.105 --> 01:02:31.050 align:middle line:84% We're just talking about fairness. 01:02:31.050 --> 01:02:33.530 align:middle line:84% So the side of the market being irrelevant 01:02:33.530 --> 01:02:35.370 align:middle line:84% is only in a perfectly competitive market 01:02:35.370 --> 01:02:37.250 align:middle line:90% with no impediments. 01:02:37.250 --> 01:02:39.230 align:middle line:84% What is impediments in the market? 01:02:39.230 --> 01:02:42.050 align:middle line:84% The side of the market is no longer relevant 01:02:42.050 --> 01:02:44.890 align:middle line:84% and the application of how we think about this, OK? 01:02:44.890 --> 01:02:47.170 align:middle line:84% But once again, the main thing is 01:02:47.170 --> 01:02:50.210 align:middle line:84% to realize that essentially, the main thing is 01:02:50.210 --> 01:02:53.690 align:middle line:84% to realize that basically what's going on 01:02:53.690 --> 01:02:56.750 align:middle line:84% is that you really care about how price adjusts. 01:02:56.750 --> 01:03:00.050 align:middle line:84% That's what's going to drive the economic burden is 01:03:00.050 --> 01:03:03.750 align:middle line:90% how price adjust, OK? 01:03:03.750 --> 01:03:04.250 align:middle line:90% Yeah. 01:03:04.250 --> 01:03:04.750 align:middle line:90% AUDIENCE: [? 01:03:04.750 --> 01:03:08.270 align:middle line:84% You said ?] [? blank ?] [? by a ?] [? reduction ?] 8.25 again? 01:03:08.270 --> 01:03:10.710 align:middle line:84% JON GRUBER: Oh, why this goes up to 8.25? 01:03:10.710 --> 01:03:13.830 align:middle line:84% Because no, the wages go up to 8.25. 01:03:13.830 --> 01:03:16.530 align:middle line:84% The firm has to pay 25 because they have to pay 7.25 an hour 01:03:16.530 --> 01:03:18.530 align:middle line:90% plus a dollar in taxes. 01:03:18.530 --> 01:03:21.930 align:middle line:84% The equilibrium wage stays at 7.25. 01:03:21.930 --> 01:03:23.690 align:middle line:90% The firm just has to pay. 01:03:23.690 --> 01:03:25.190 align:middle line:90% It shouldn't say W2, actually. 01:03:25.190 --> 01:03:28.210 align:middle line:90% Yeah, that's a typo. 01:03:28.210 --> 01:03:29.430 align:middle line:90% That's not really a wage. 01:03:29.430 --> 01:03:31.050 align:middle line:90% That's a good point. 01:03:31.050 --> 01:03:31.950 align:middle line:90% We should fix that. 01:03:31.950 --> 01:03:32.790 align:middle line:90% No, that's a good catch. 01:03:32.790 --> 01:03:33.590 align:middle line:90% It shouldn't say W2. 01:03:33.590 --> 01:03:34.400 align:middle line:90% It should say 8.25. 01:03:34.400 --> 01:03:36.080 align:middle line:84% 8.25 is what the firm ends up paying 01:03:36.080 --> 01:03:38.120 align:middle line:84% because they pay 7.25 an hour for workers 01:03:38.120 --> 01:03:39.600 align:middle line:90% plus a dollar in tax. 01:03:39.600 --> 01:03:42.440 align:middle line:90% But that shouldn't say wage. 01:03:42.440 --> 01:03:43.160 align:middle line:90% OK? 01:03:43.160 --> 01:03:44.000 align:middle line:90% Good catch. 01:03:44.000 --> 01:03:45.440 align:middle line:90% Other questions? 01:03:45.440 --> 01:03:48.680 align:middle line:84% OK, now, let's make things harder. 01:03:48.680 --> 01:03:54.840 align:middle line:84% Let's recognize that taxes on a given good 01:03:54.840 --> 01:03:58.240 align:middle line:84% are not levied in a vacuum that there's 01:03:58.240 --> 01:04:00.160 align:middle line:90% economic systems at work. 01:04:00.160 --> 01:04:02.760 align:middle line:84% And we need to consider the concept of what 01:04:02.760 --> 01:04:07.840 align:middle line:84% we call general equilibrium tax incidence, which accounts 01:04:07.840 --> 01:04:13.360 align:middle line:84% for the fact that a tax in one market may affect other markets. 01:04:13.360 --> 01:04:16.780 align:middle line:84% And to see this, let's go to specific example. 01:04:16.780 --> 01:04:22.080 align:middle line:90% 01:04:22.080 --> 01:04:23.520 align:middle line:90% Imagine that Bozeman, Montana-- 01:04:23.520 --> 01:04:26.360 align:middle line:84% Bozeman, Montana is a big, touristy, beautiful town. 01:04:26.360 --> 01:04:29.440 align:middle line:84% Imagine town of Bozeman, Montana decides 01:04:29.440 --> 01:04:33.600 align:middle line:84% they're going to put a tax on restaurants in their town. 01:04:33.600 --> 01:04:36.280 align:middle line:84% Therefore, every restaurant meal sold, 01:04:36.280 --> 01:04:38.880 align:middle line:84% the restaurant's going to have to pay a dollar tax, 01:04:38.880 --> 01:04:40.380 align:middle line:84% because they figure it's a good way to raise money. 01:04:40.380 --> 01:04:41.922 align:middle line:84% There's a lot of tourists in Bozeman. 01:04:41.922 --> 01:04:43.440 align:middle line:90% They'll raise money this way. 01:04:43.440 --> 01:04:45.200 align:middle line:90% What is the incidence of that? 01:04:45.200 --> 01:04:48.720 align:middle line:84% Well, let's assume that the demand 01:04:48.720 --> 01:04:52.280 align:middle line:84% for restaurant meals in Bozeman is perfectly elastic. 01:04:52.280 --> 01:04:54.020 align:middle line:84% Why is that not a bad assumption? 01:04:54.020 --> 01:04:56.480 align:middle line:84% Why do we think it'll at least be very highly elastic? 01:04:56.480 --> 01:04:56.980 align:middle line:90% Yeah. 01:04:56.980 --> 01:04:59.200 align:middle line:84% AUDIENCE: It's pretty easy to substitute a restaurant 01:04:59.200 --> 01:05:00.283 align:middle line:90% meal for a non-restaurant. 01:05:00.283 --> 01:05:02.920 align:middle line:84% JON GRUBER: Yeah, or to go to the next town over. 01:05:02.920 --> 01:05:05.180 align:middle line:84% You can go to the next town over to Bozeman. 01:05:05.180 --> 01:05:08.443 align:middle line:90% You can eat at home. 01:05:08.443 --> 01:05:10.360 align:middle line:84% Nothing's perfectly elastic, but it's probably 01:05:10.360 --> 01:05:11.560 align:middle line:90% pretty darn elastic. 01:05:11.560 --> 01:05:14.200 align:middle line:84% So to make life easy, let's assume it's perfectly elastic. 01:05:14.200 --> 01:05:19.560 align:middle line:84% In that case, who bears the burden of the tax? 01:05:19.560 --> 01:05:20.420 align:middle line:90% Someone else. 01:05:20.420 --> 01:05:20.920 align:middle line:90% Yeah. 01:05:20.920 --> 01:05:21.420 align:middle line:90% AUDIENCE: Tourist. 01:05:21.420 --> 01:05:22.300 align:middle line:90% JON GRUBER: The what? 01:05:22.300 --> 01:05:23.092 align:middle line:90% AUDIENCE: Tourists. 01:05:23.092 --> 01:05:24.065 align:middle line:90% JON GRUBER: Nope. 01:05:24.065 --> 01:05:24.940 align:middle line:90% Who bears the burden? 01:05:24.940 --> 01:05:28.960 align:middle line:84% Because they don't bear the-- because why-- how can they 01:05:28.960 --> 01:05:29.890 align:middle line:90% avoid the tax? 01:05:29.890 --> 01:05:32.390 align:middle line:84% They can avoid it because they can go to the next town over. 01:05:32.390 --> 01:05:33.750 align:middle line:90% The firm bears it all. 01:05:33.750 --> 01:05:35.670 align:middle line:84% The restaurant bears it all because he can't 01:05:35.670 --> 01:05:37.010 align:middle line:90% charge the tourists anymore. 01:05:37.010 --> 01:05:39.390 align:middle line:84% He has to charge them the same $20. 01:05:39.390 --> 01:05:42.950 align:middle line:84% So therefore, he has to pay the whole tax, OK? 01:05:42.950 --> 01:05:45.830 align:middle line:84% So the firm has to pay the whole tax. 01:05:45.830 --> 01:05:48.790 align:middle line:84% So we're done, except we're not done. 01:05:48.790 --> 01:05:51.630 align:middle line:84% What does it mean for a firm to pay a tax? 01:05:51.630 --> 01:05:53.750 align:middle line:90% A firm is not a thing. 01:05:53.750 --> 01:05:56.007 align:middle line:84% A firm's like, basically we know 14.01. 01:05:56.007 --> 01:05:56.590 align:middle line:90% What's a firm? 01:05:56.590 --> 01:05:59.550 align:middle line:90% It's agglomeration of factors. 01:05:59.550 --> 01:06:01.850 align:middle line:90% So we say a firm pays a tax. 01:06:01.850 --> 01:06:05.563 align:middle line:84% That means the factors that underlie that firm pay the tax. 01:06:05.563 --> 01:06:07.230 align:middle line:84% So we have to actually take another step 01:06:07.230 --> 01:06:08.650 align:middle line:90% and ask, well, wait a second. 01:06:08.650 --> 01:06:12.370 align:middle line:84% What does this do to the factors that make up the restaurant? 01:06:12.370 --> 01:06:13.950 align:middle line:90% They're in markets too. 01:06:13.950 --> 01:06:16.910 align:middle line:84% For example, what does this do to restaurant workers 01:06:16.910 --> 01:06:18.548 align:middle line:90% in Bozeman? 01:06:18.548 --> 01:06:20.090 align:middle line:84% Well, before we go to the next graph, 01:06:20.090 --> 01:06:21.350 align:middle line:90% think about it for a second. 01:06:21.350 --> 01:06:24.190 align:middle line:84% Think about a labor market graph for restaurant workers 01:06:24.190 --> 01:06:24.750 align:middle line:90% in Bozeman-- 01:06:24.750 --> 01:06:26.270 align:middle line:90% demand and supply curves. 01:06:26.270 --> 01:06:28.705 align:middle line:84% How would those curves going to shift? 01:06:28.705 --> 01:06:30.330 align:middle line:84% Only one that's going to shift and why. 01:06:30.330 --> 01:06:31.490 align:middle line:90% What's going to shift? 01:06:31.490 --> 01:06:33.570 align:middle line:84% Think about a market for labor in Bozeman. 01:06:33.570 --> 01:06:34.080 align:middle line:90% What's going to happen? 01:06:34.080 --> 01:06:34.250 align:middle line:90% Yeah. 01:06:34.250 --> 01:06:35.930 align:middle line:84% AUDIENCE: Demand's going to shift down. 01:06:35.930 --> 01:06:36.970 align:middle line:90% JON GRUBER: Down. 01:06:36.970 --> 01:06:37.470 align:middle line:90% Why? 01:06:37.470 --> 01:06:39.410 align:middle line:90% Because people don't want it. 01:06:39.410 --> 01:06:44.350 align:middle line:84% Because basically, restaurants can't serve as many meals, OK. 01:06:44.350 --> 01:06:45.970 align:middle line:84% So demand is going to shift down. 01:06:45.970 --> 01:06:47.710 align:middle line:90% Indeed you see that. 01:06:47.710 --> 01:06:55.570 align:middle line:84% Let's now go to FIGURE 19-10, panel (a). 01:06:55.570 --> 01:07:00.190 align:middle line:84% This is the market for labor and restaurants in Bozeman. 01:07:00.190 --> 01:07:04.870 align:middle line:84% The demand curve, the downward sloping demand curve shifts 01:07:04.870 --> 01:07:06.830 align:middle line:90% inward. 01:07:06.830 --> 01:07:09.750 align:middle line:84% But what is supply curve for workers 01:07:09.750 --> 01:07:11.630 align:middle line:90% at restaurants in Bozeman? 01:07:11.630 --> 01:07:13.790 align:middle line:84% Well, it's probably pretty darn elastic, right? 01:07:13.790 --> 01:07:15.623 align:middle line:84% They can work at the hardware store instead. 01:07:15.623 --> 01:07:17.310 align:middle line:84% They can work at the next town over. 01:07:17.310 --> 01:07:20.270 align:middle line:84% So they're going to have a pretty elastic supply curve. 01:07:20.270 --> 01:07:23.142 align:middle line:90% So who's going to bear this tax? 01:07:23.142 --> 01:07:24.350 align:middle line:90% Who's going to bear this tax. 01:07:24.350 --> 01:07:24.750 align:middle line:90% Yeah. 01:07:24.750 --> 01:07:25.650 align:middle line:90% AUDIENCE: The owner? 01:07:25.650 --> 01:07:26.990 align:middle line:90% JON GRUBER: The restaurants. 01:07:26.990 --> 01:07:28.290 align:middle line:84% The workers are not going to bear it. 01:07:28.290 --> 01:07:29.880 align:middle line:84% We know that because they can avoid it 01:07:29.880 --> 01:07:30.922 align:middle line:90% because they're slippery. 01:07:30.922 --> 01:07:32.620 align:middle line:90% They're elastic. 01:07:32.620 --> 01:07:34.380 align:middle line:84% Well, if they don't bear it, who does? 01:07:34.380 --> 01:07:35.940 align:middle line:90% Well, what's left? 01:07:35.940 --> 01:07:38.620 align:middle line:90% Firms are labor and capital. 01:07:38.620 --> 01:07:41.140 align:middle line:84% So let's ask, what about the market for capital 01:07:41.140 --> 01:07:44.140 align:middle line:84% to restaurants in Bozeman, Montana? 01:07:44.140 --> 01:07:45.303 align:middle line:90% What does that mean? 01:07:45.303 --> 01:07:47.720 align:middle line:84% Think of it as like, think of all restaurants as pizzeria, 01:07:47.720 --> 01:07:49.980 align:middle line:84% and the capital is the brick ovens. 01:07:49.980 --> 01:07:53.860 align:middle line:84% Basically, what is going to happen 01:07:53.860 --> 01:07:57.460 align:middle line:84% is the demand for brick oven are going to fall. 01:07:57.460 --> 01:07:59.740 align:middle line:84% But the brick ovens are already there. 01:07:59.740 --> 01:08:01.300 align:middle line:90% They're already made. 01:08:01.300 --> 01:08:05.900 align:middle line:84% They're inelastic, so they are stuck. 01:08:05.900 --> 01:08:10.140 align:middle line:84% So who bears the incidence of this tax 01:08:10.140 --> 01:08:13.340 align:middle line:84% is the owners, the capitalists, the guys who 01:08:13.340 --> 01:08:14.400 align:middle line:90% build the brick ovens. 01:08:14.400 --> 01:08:15.100 align:middle line:90% Yeah. 01:08:15.100 --> 01:08:18.600 align:middle line:84% AUDIENCE: What about the food and the actual variable cost 01:08:18.600 --> 01:08:19.100 align:middle line:90% factor? 01:08:19.100 --> 01:08:20.240 align:middle line:84% JON GRUBER: We don't have that in our model, right? 01:08:20.240 --> 01:08:21.760 align:middle line:90% We just have labor and capital. 01:08:21.760 --> 01:08:25.100 align:middle line:84% If there was food, you'd have to ask how elastic that is. 01:08:25.100 --> 01:08:30.420 align:middle line:84% So basically, the bottom line is in this simple example, 01:08:30.420 --> 01:08:33.140 align:middle line:84% we basically said, look, this is what's 01:08:33.140 --> 01:08:35.040 align:middle line:84% fascinating with general tax instances. 01:08:35.040 --> 01:08:40.180 align:middle line:84% A tax on restaurants ends up hurting the restaurant owners. 01:08:40.180 --> 01:08:43.859 align:middle line:90% Well, that makes sense. 01:08:43.859 --> 01:08:47.399 align:middle line:90% But that doesn't have to be. 01:08:47.399 --> 01:08:49.740 align:middle line:84% For example, imagine a world with these elasticities 01:08:49.740 --> 01:08:51.020 align:middle line:90% were changed. 01:08:51.020 --> 01:08:54.219 align:middle line:84% You can end up with very different burden sharing 01:08:54.219 --> 01:08:55.640 align:middle line:90% if these elasticities change. 01:08:55.640 --> 01:08:59.740 align:middle line:84% So for example, let's change this. 01:08:59.740 --> 01:09:07.020 align:middle line:84% Let's make it so that the tax is on restaurants in Montana. 01:09:07.020 --> 01:09:09.620 align:middle line:84% Imagine a dollar tax on restaurants in Montana. 01:09:09.620 --> 01:09:11.700 align:middle line:84% Well, how would that change the analysis? 01:09:11.700 --> 01:09:20.899 align:middle line:90% Let's go back to FIGURE 19-9. 01:09:20.899 --> 01:09:23.140 align:middle line:84% The demand will not be as elastic for restaurants 01:09:23.140 --> 01:09:25.399 align:middle line:84% on Montana as it is for restaurants in Bozeman, 01:09:25.399 --> 01:09:27.312 align:middle line:84% because you have to go far to a substitute. 01:09:27.312 --> 01:09:29.770 align:middle line:84% It's still elastic somewhat because you can eat it at home. 01:09:29.770 --> 01:09:31.045 align:middle line:90% But it's less elastic. 01:09:31.045 --> 01:09:33.670 align:middle line:84% What does that mean in terms of who's going to bear the burden? 01:09:33.670 --> 01:09:35.942 align:middle line:90% 01:09:35.942 --> 01:09:38.609 align:middle line:84% How is this going to change the analysis if restaurant demand is 01:09:38.609 --> 01:09:40.822 align:middle line:90% less elastic? 01:09:40.822 --> 01:09:42.250 align:middle line:90% Yeah. 01:09:42.250 --> 01:09:46.130 align:middle line:84% AUDIENCE: It will be shared by the restaurant 01:09:46.130 --> 01:09:46.982 align:middle line:90% and by the people. 01:09:46.982 --> 01:09:48.649 align:middle line:84% JON GRUBER: Yeah, the consumers will now 01:09:48.649 --> 01:09:50.090 align:middle line:90% bear some of the burden. 01:09:50.090 --> 01:09:52.970 align:middle line:90% So it'll be less to shift. 01:09:52.970 --> 01:09:54.757 align:middle line:84% So first of all, the burden, instead 01:09:54.757 --> 01:09:57.090 align:middle line:84% of being entirely shift to labor and capital, some of it 01:09:57.090 --> 01:09:58.530 align:middle line:84% will drop off on the-- some, it's 01:09:58.530 --> 01:10:00.230 align:middle line:84% going to drop off on the consumers. 01:10:00.230 --> 01:10:02.290 align:middle line:84% Now, it's going to labor supply side. 01:10:02.290 --> 01:10:05.550 align:middle line:84% Let's go to FIGURE 19-11, the first panel. 01:10:05.550 --> 01:10:08.530 align:middle line:84% How is that going to change with the tax on restaurants 01:10:08.530 --> 01:10:11.330 align:middle line:90% in Montana? 01:10:11.330 --> 01:10:13.730 align:middle line:84% How's this graph going to change? 01:10:13.730 --> 01:10:16.650 align:middle line:84% What's it mean in particular for the supply of labor, the labor 01:10:16.650 --> 01:10:18.950 align:middle line:90% supply curve? 01:10:18.950 --> 01:10:19.450 align:middle line:90% Yeah. 01:10:19.450 --> 01:10:22.290 align:middle line:84% AUDIENCE: The supply will be less elastic because workers 01:10:22.290 --> 01:10:23.677 align:middle line:90% won't be able to move to-- 01:10:23.677 --> 01:10:24.510 align:middle line:90% JON GRUBER: Exactly. 01:10:24.510 --> 01:10:26.360 align:middle line:84% The supply will be less elastic because it's harder 01:10:26.360 --> 01:10:28.193 align:middle line:84% to leave Montana to go work in a restaurant. 01:10:28.193 --> 01:10:29.620 align:middle line:90% This will be the next one over. 01:10:29.620 --> 01:10:30.980 align:middle line:90% Well, supply is less elastic. 01:10:30.980 --> 01:10:33.800 align:middle line:84% That means the workers are going to bear some of the burden. 01:10:33.800 --> 01:10:37.320 align:middle line:84% And then what's left over is born by the capitalists. 01:10:37.320 --> 01:10:40.040 align:middle line:84% So the bottom line is ta-- general equilibrium tax 01:10:40.040 --> 01:10:42.720 align:middle line:84% incidence is a game of follow the burden. 01:10:42.720 --> 01:10:44.720 align:middle line:84% Basically, you want to follow who is 01:10:44.720 --> 01:10:46.660 align:middle line:90% getting stuck at every level. 01:10:46.660 --> 01:10:49.160 align:middle line:84% Basically at every level, you want to look at who's elastic? 01:10:49.160 --> 01:10:50.298 align:middle line:90% Who's not elastic? 01:10:50.298 --> 01:10:52.090 align:middle line:84% And how's that burden shared along the way. 01:10:52.090 --> 01:10:52.300 align:middle line:90% Yeah. 01:10:52.300 --> 01:10:54.480 align:middle line:84% AUDIENCE: How did you work elastic capital supply 01:10:54.480 --> 01:10:55.395 align:middle line:90% into this? 01:10:55.395 --> 01:10:56.520 align:middle line:90% JON GRUBER: One second, OK? 01:10:56.520 --> 01:10:58.395 align:middle line:84% So you're going to look at how that burden is 01:10:58.395 --> 01:11:00.680 align:middle line:90% shared along the way, OK? 01:11:00.680 --> 01:11:04.280 align:middle line:84% Now, let's do a different example. 01:11:04.280 --> 01:11:06.080 align:middle line:90% Tax in Bozeman. 01:11:06.080 --> 01:11:08.040 align:middle line:84% But we're not thinking about the incidence now. 01:11:08.040 --> 01:11:10.248 align:middle line:84% We're thinking about the incidence over the next five 01:11:10.248 --> 01:11:11.760 align:middle line:90% years. 01:11:11.760 --> 01:11:14.180 align:middle line:90% So it's just in Bozeman. 01:11:14.180 --> 01:11:17.920 align:middle line:90% So FIGURE 19-10 doesn't change. 01:11:17.920 --> 01:11:19.580 align:middle line:90% Demand's perfectly elastic. 01:11:19.580 --> 01:11:22.200 align:middle line:90% FIGURE 19-11A doesn't change. 01:11:22.200 --> 01:11:24.680 align:middle line:90% But FIGURE 19-11B changes. 01:11:24.680 --> 01:11:25.400 align:middle line:90% Why? 01:11:25.400 --> 01:11:28.840 align:middle line:84% Because over time, capital becomes elastic. 01:11:28.840 --> 01:11:31.200 align:middle line:84% Think about what capital is in a restaurant. 01:11:31.200 --> 01:11:32.220 align:middle line:90% Its upkeep. 01:11:32.220 --> 01:11:34.000 align:middle line:90% Its continued investment. 01:11:34.000 --> 01:11:36.400 align:middle line:84% People stop investing in restaurants over time. 01:11:36.400 --> 01:11:39.062 align:middle line:84% So in the short run, your money is stuck in the brick oven. 01:11:39.062 --> 01:11:40.520 align:middle line:84% But in the long run, all that money 01:11:40.520 --> 01:11:42.603 align:middle line:84% you would have put into improving your brick oven, 01:11:42.603 --> 01:11:43.520 align:middle line:90% you take elsewhere. 01:11:43.520 --> 01:11:47.440 align:middle line:84% So capital is also elastic in the long run. 01:11:47.440 --> 01:11:49.020 align:middle line:90% So capitalism gets stuck. 01:11:49.020 --> 01:11:51.520 align:middle line:90% What the hell happens now? 01:11:51.520 --> 01:11:53.920 align:middle line:84% Consumers aren't getting stuck with it. 01:11:53.920 --> 01:11:55.900 align:middle line:84% Workers aren't getting stuck with it. 01:11:55.900 --> 01:11:57.900 align:middle line:84% Capital is not getting stuck with it. 01:11:57.900 --> 01:11:59.520 align:middle line:90% What's left? 01:11:59.520 --> 01:12:03.400 align:middle line:84% What's the ultimate inelastic factor? 01:12:03.400 --> 01:12:05.940 align:middle line:84% What's the thing that literally you cannot change? 01:12:05.940 --> 01:12:10.200 align:middle line:90% 01:12:10.200 --> 01:12:11.540 align:middle line:90% It's in a fixed supply. 01:12:11.540 --> 01:12:14.620 align:middle line:90% 01:12:14.620 --> 01:12:15.120 align:middle line:90% Yeah. 01:12:15.120 --> 01:12:16.140 align:middle line:90% AUDIENCE: The land. 01:12:16.140 --> 01:12:18.480 align:middle line:90% JON GRUBER: The land. 01:12:18.480 --> 01:12:22.950 align:middle line:84% The landowners are the ultimate stuck factor. 01:12:22.950 --> 01:12:26.750 align:middle line:84% Restaurants rent from landowners. 01:12:26.750 --> 01:12:28.970 align:middle line:84% In the long run, the restaurants just say, 01:12:28.970 --> 01:12:30.670 align:middle line:84% I don't want to be in Bozeman anymore. 01:12:30.670 --> 01:12:32.430 align:middle line:90% That will lower rents. 01:12:32.430 --> 01:12:34.450 align:middle line:84% And the landowners are the ones that get stuck. 01:12:34.450 --> 01:12:36.325 align:middle line:84% So I cheated a bit on your intermediate goods 01:12:36.325 --> 01:12:38.790 align:middle line:84% because I did add an extra factor-- added land. 01:12:38.790 --> 01:12:41.095 align:middle line:84% The point is, land is the ultimate stuck factor. 01:12:41.095 --> 01:12:43.470 align:middle line:84% So in the long run, [? land bears the ?] [? incidence. ?] 01:12:43.470 --> 01:12:44.790 align:middle line:90% So here's fascinating. 01:12:44.790 --> 01:12:47.270 align:middle line:90% We put a tax on pizza meals. 01:12:47.270 --> 01:12:50.630 align:middle line:84% And the landlords of Bozeman end up bearing it. 01:12:50.630 --> 01:12:54.030 align:middle line:84% That's what's fun about general income tax incidence. 01:12:54.030 --> 01:12:54.570 align:middle line:90% It's fun. 01:12:54.570 --> 01:12:55.180 align:middle line:90% Come on. 01:12:55.180 --> 01:12:55.930 align:middle line:90% It's a fun puzzle. 01:12:55.930 --> 01:12:58.222 align:middle line:84% Where at MIT, it wouldn't be fun if we were at Harvard. 01:12:58.222 --> 01:13:00.910 align:middle line:84% But it's fun at MIT, which is basically 01:13:00.910 --> 01:13:04.190 align:middle line:84% it's a fun puzzle to follow the burden on where it ultimately 01:13:04.190 --> 01:13:05.150 align:middle line:90% lands, OK? 01:13:05.150 --> 01:13:09.390 align:middle line:84% And once again, you can consider all sorts of different factors. 01:13:09.390 --> 01:13:14.190 align:middle line:84% For example, there's also product market spillovers. 01:13:14.190 --> 01:13:18.950 align:middle line:84% If we tax restaurant meals, what other effect will it have? 01:13:18.950 --> 01:13:24.830 align:middle line:84% What effect will that have, for example, in the market for-- 01:13:24.830 --> 01:13:27.930 align:middle line:84% what will that happen in the market for groceries? 01:13:27.930 --> 01:13:32.230 align:middle line:90% 01:13:32.230 --> 01:13:33.970 align:middle line:84% If we tax restaurant meals, what happens? 01:13:33.970 --> 01:13:34.330 align:middle line:90% Yeah. 01:13:34.330 --> 01:13:35.288 align:middle line:90% AUDIENCE: Demand curve. 01:13:35.288 --> 01:13:36.910 align:middle line:84% JON GRUBER: Demand will increase. 01:13:36.910 --> 01:13:38.710 align:middle line:90% Prices will go up. 01:13:38.710 --> 01:13:41.630 align:middle line:84% And people eat at home will bear some of the tax. 01:13:41.630 --> 01:13:42.690 align:middle line:90% Think about that. 01:13:42.690 --> 01:13:44.830 align:middle line:84% If I tax restaurant meals, people 01:13:44.830 --> 01:13:47.190 align:middle line:84% who buy at the supermarket bear some of it 01:13:47.190 --> 01:13:48.930 align:middle line:84% because demand for groceries go up. 01:13:48.930 --> 01:13:50.990 align:middle line:90% So prices go up. 01:13:50.990 --> 01:13:53.850 align:middle line:90% What about babysitters? 01:13:53.850 --> 01:13:56.630 align:middle line:90% 01:13:56.630 --> 01:13:57.570 align:middle line:90% How are they affected? 01:13:57.570 --> 01:13:58.380 align:middle line:90% How's that market affected? 01:13:58.380 --> 01:13:58.650 align:middle line:90% Yeah. 01:13:58.650 --> 01:14:00.130 align:middle line:84% AUDIENCE: Demand probably goes down. 01:14:00.130 --> 01:14:01.422 align:middle line:90% JON GRUBER: People go out less. 01:14:01.422 --> 01:14:02.410 align:middle line:90% Demand goes down. 01:14:02.410 --> 01:14:05.630 align:middle line:84% Babysitters bear some of the tax. 01:14:05.630 --> 01:14:08.370 align:middle line:84% The point is, if you want to be picky, 01:14:08.370 --> 01:14:12.310 align:middle line:84% every tax is born by everyone, OK? 01:14:12.310 --> 01:14:14.270 align:middle line:84% This is where general taxes gets tough is 01:14:14.270 --> 01:14:16.030 align:middle line:90% you have to stop at some point. 01:14:16.030 --> 01:14:17.850 align:middle line:84% And we will not leave it up to you as to where to stop. 01:14:17.850 --> 01:14:19.870 align:middle line:84% I don't want you spending eight pages in your exam writing out 01:14:19.870 --> 01:14:21.495 align:middle line:84% every possible market that's affected. 01:14:21.495 --> 01:14:23.120 align:middle line:84% We'll give you more guidance than that. 01:14:23.120 --> 01:14:25.540 align:middle line:84% But the bottom line is we come back 01:14:25.540 --> 01:14:28.080 align:middle line:84% to the introduction of this chapter, which was, gee, 01:14:28.080 --> 01:14:31.180 align:middle line:84% isn't it terrible that corporations are paying less tax 01:14:31.180 --> 01:14:32.400 align:middle line:90% and people are paying more? 01:14:32.400 --> 01:14:33.980 align:middle line:90% Not necessarily. 01:14:33.980 --> 01:14:37.180 align:middle line:84% It depends on how the market adjusts. 01:14:37.180 --> 01:14:39.740 align:middle line:84% Indeed, we'll talk about the Trump 01:14:39.740 --> 01:14:42.300 align:middle line:84% corporate tax cuts in chapter 24. 01:14:42.300 --> 01:14:44.760 align:middle line:84% But the theory behind the corporate tax cuts, 01:14:44.760 --> 01:14:47.940 align:middle line:84% the massive corporate tax cuts that we saw in 2018 01:14:47.940 --> 01:14:49.620 align:middle line:90% was that it would raise wages. 01:14:49.620 --> 01:14:51.120 align:middle line:84% They might say, well, that's stupid. 01:14:51.120 --> 01:14:52.953 align:middle line:84% How could cutting corporate tax raise wages? 01:14:52.953 --> 01:14:54.900 align:middle line:90% Not stupid at all. 01:14:54.900 --> 01:14:57.180 align:middle line:84% If you think capital is perfectly 01:14:57.180 --> 01:15:01.280 align:middle line:84% elastic in the long run, then cutting corporate wages 01:15:01.280 --> 01:15:03.140 align:middle line:90% benefits workers. 01:15:03.140 --> 01:15:04.960 align:middle line:90% It doesn't affect capitalists. 01:15:04.960 --> 01:15:07.340 align:middle line:84% They move to get the same rate of return no matter what. 01:15:07.340 --> 01:15:09.280 align:middle line:84% But workers are going to get higher wages. 01:15:09.280 --> 01:15:11.980 align:middle line:84% So it's not a crazy concept at all. 01:15:11.980 --> 01:15:16.780 align:middle line:84% So ultimately, tax incidence is about how the market responds. 01:15:16.780 --> 01:15:18.380 align:middle line:90% Where does that leave us? 01:15:18.380 --> 01:15:21.325 align:middle line:84% Well, there's actually fundamental analysis. 01:15:21.325 --> 01:15:22.700 align:middle line:84% I just want to pound through this 01:15:22.700 --> 01:15:23.950 align:middle line:90% in the last couple of minutes. 01:15:23.950 --> 01:15:28.900 align:middle line:84% There's really interesting analysis of who bears taxes 01:15:28.900 --> 01:15:30.340 align:middle line:90% and what it means. 01:15:30.340 --> 01:15:34.740 align:middle line:84% Basically, the common assumption is, taxes on workers 01:15:34.740 --> 01:15:38.100 align:middle line:84% are born by workers because labor supply is 01:15:38.100 --> 01:15:40.700 align:middle line:90% largely inelastic. 01:15:40.700 --> 01:15:45.180 align:middle line:84% Taxes on capitalists are shared between capitalists and workers 01:15:45.180 --> 01:15:49.300 align:middle line:84% because capital is more elastic, so they avoid some of the taxes. 01:15:49.300 --> 01:15:53.023 align:middle line:84% That's the summary, rough way that we do tax incidence. 01:15:53.023 --> 01:15:53.940 align:middle line:90% That's the assumption. 01:15:53.940 --> 01:15:58.060 align:middle line:84% We'll come back to whether those assumptions are reasonable. 01:15:58.060 --> 01:16:00.860 align:middle line:84% But that's basically the way that tax incidence is done 01:16:00.860 --> 01:16:03.320 align:middle line:84% is they say taxes on workers are born by workers. 01:16:03.320 --> 01:16:05.060 align:middle line:90% Tax on firms are shared. 01:16:05.060 --> 01:16:06.940 align:middle line:84% Put that together, what does that 01:16:06.940 --> 01:16:08.520 align:middle line:84% mean for the distribution of taxes? 01:16:08.520 --> 01:16:11.640 align:middle line:90% Well, let's go to TABLE 19-1. 01:16:11.640 --> 01:16:14.180 align:middle line:90% 01:16:14.180 --> 01:16:21.250 align:middle line:84% TABLE 19-1 shows effective tax rates-- 01:16:21.250 --> 01:16:27.570 align:middle line:84% effective tax rates, which means taxes paid over income. 01:16:27.570 --> 01:16:30.250 align:middle line:90% These are average tax rates. 01:16:30.250 --> 01:16:33.430 align:middle line:84% What you see is that on all household, 01:16:33.430 --> 01:16:36.730 align:middle line:84% the average tax rate has fallen over time. 01:16:36.730 --> 01:16:38.130 align:middle line:90% Tax rates have fallen in the US. 01:16:38.130 --> 01:16:40.890 align:middle line:84% But it's fallen a lot more at the bottom 01:16:40.890 --> 01:16:43.330 align:middle line:90% than it has at the top. 01:16:43.330 --> 01:16:45.450 align:middle line:84% So basically, total effective tax rates 01:16:45.450 --> 01:16:47.570 align:middle line:84% are actually pretty constant at the top 01:16:47.570 --> 01:16:51.690 align:middle line:84% and have fallen a lot at the bottom, which is interesting. 01:16:51.690 --> 01:16:56.250 align:middle line:84% So that says if you look at it that way, 01:16:56.250 --> 01:16:59.513 align:middle line:84% you say, gee, that seems pretty fair. 01:16:59.513 --> 01:17:00.930 align:middle line:84% We basically cut tax at the bottom 01:17:00.930 --> 01:17:03.270 align:middle line:90% and not raised them at the top. 01:17:03.270 --> 01:17:05.770 align:middle line:84% What that doesn't account for is the fact that income itself 01:17:05.770 --> 01:17:06.970 align:middle line:90% has changed. 01:17:06.970 --> 01:17:10.210 align:middle line:84% So if you go to the next table, this 01:17:10.210 --> 01:17:12.490 align:middle line:84% shows what happens to the share of income 01:17:12.490 --> 01:17:15.210 align:middle line:84% and the share of tax liabilities. 01:17:15.210 --> 01:17:23.170 align:middle line:84% The top quintile over time has seen their share of income rise 01:17:23.170 --> 01:17:25.890 align:middle line:90% from 46% to 55%. 01:17:25.890 --> 01:17:31.142 align:middle line:84% Their share of taxes rise 55%, 69%. 01:17:31.142 --> 01:17:32.350 align:middle line:90% That seems pretty comparable. 01:17:32.350 --> 01:17:35.770 align:middle line:84% Indeed, the top 1% has seen their share of income double 01:17:35.770 --> 01:17:38.850 align:middle line:90% and the share of taxes double. 01:17:38.850 --> 01:17:42.230 align:middle line:84% The poor have actually seen their share of income fall a bit 01:17:42.230 --> 01:17:44.770 align:middle line:84% and the share of taxes fall a lot. 01:17:44.770 --> 01:17:47.130 align:middle line:84% So the bottom line is, when you look at these numbers, 01:17:47.130 --> 01:17:51.050 align:middle line:84% it looks like the tax system, overall, 01:17:51.050 --> 01:17:55.170 align:middle line:84% has stayed roughly equal, neutral distributionally 01:17:55.170 --> 01:17:58.730 align:middle line:84% or if anything gotten a little more progressive overall. 01:17:58.730 --> 01:18:01.750 align:middle line:84% But different tax cuts have different kinds of effects. 01:18:01.750 --> 01:18:04.770 align:middle line:84% And we'll come back to that as we talk about specific tax cuts, 01:18:04.770 --> 01:18:05.610 align:middle line:90% OK? 01:18:05.610 --> 01:18:07.368 align:middle line:84% There's a lot to process in one lecture. 01:18:07.368 --> 01:18:08.910 align:middle line:84% Get back to me if you have questions. 01:18:08.910 --> 01:18:11.680 align:middle line:84% We'll cover more of this in section on Friday. 01:18:11.680 --> 01:18:16.000 align:middle line:90%