WEBVTT 00:00:00.000 --> 00:00:00.982 align:middle line:90% 00:00:00.982 --> 00:00:02.910 align:middle line:90% [SQUEAKING] 00:00:02.910 --> 00:00:04.356 align:middle line:90% [RUSTLING] 00:00:04.356 --> 00:00:10.640 align:middle line:90% [CLICKING] 00:00:10.640 --> 00:00:13.600 align:middle line:84% JON GRUBER: Today we're going to continue our tax discussion 00:00:13.600 --> 00:00:17.080 align:middle line:90% talking about chapter 20. 00:00:17.080 --> 00:00:19.680 align:middle line:84% Remember, the first three chapters of tax 00:00:19.680 --> 00:00:20.940 align:middle line:90% are really about tax theory. 00:00:20.940 --> 00:00:22.760 align:middle line:84% Chapter 18 was about thinking about how 00:00:22.760 --> 00:00:24.840 align:middle line:90% we define the tax base. 00:00:24.840 --> 00:00:26.980 align:middle line:84% Chapter 19, which we went through rather quickly, 00:00:26.980 --> 00:00:29.400 align:middle line:84% was about tax fairness and the topic of what 00:00:29.400 --> 00:00:31.960 align:middle line:90% economists call tax incidence. 00:00:31.960 --> 00:00:35.400 align:middle line:84% Now, we turn to the topic of tax efficiency. 00:00:35.400 --> 00:00:38.040 align:middle line:84% Tax efficiency is in some sense, the more fun topic 00:00:38.040 --> 00:00:40.280 align:middle line:84% because it really is the ultimate place 00:00:40.280 --> 00:00:44.320 align:middle line:84% we see the difference between intended and unintended effects 00:00:44.320 --> 00:00:46.080 align:middle line:90% that we discussed in chapter 1. 00:00:46.080 --> 00:00:50.160 align:middle line:84% And to see that, there's no better place to start than about 00:00:50.160 --> 00:00:54.480 align:middle line:84% halfway through your packet, figure 20-3. 00:00:54.480 --> 00:00:56.420 align:middle line:90% Let's talk about the window tax. 00:00:56.420 --> 00:00:57.880 align:middle line:90% What is the window tax? 00:00:57.880 --> 00:01:01.960 align:middle line:84% So in 1696, English King William III 00:01:01.960 --> 00:01:04.280 align:middle line:84% needed to finance a war with France. 00:01:04.280 --> 00:01:07.920 align:middle line:84% He wanted to tax people who had the ability to pay taxes 00:01:07.920 --> 00:01:10.240 align:middle line:90% in order to raise money. 00:01:10.240 --> 00:01:12.100 align:middle line:84% So how do you measure that in 1696? 00:01:12.100 --> 00:01:15.160 align:middle line:90% We don't have W-2 forms in 1696. 00:01:15.160 --> 00:01:18.440 align:middle line:84% Well, King William decided that a good sign of who was wealthy 00:01:18.440 --> 00:01:20.780 align:middle line:84% was how many windows they had in their house. 00:01:20.780 --> 00:01:22.622 align:middle line:84% That the more windows you had in your house, 00:01:22.622 --> 00:01:23.580 align:middle line:90% the wealthier you were. 00:01:23.580 --> 00:01:25.497 align:middle line:84% Glass was actually really expensive back then. 00:01:25.497 --> 00:01:27.040 align:middle line:84% If you go tour ancient Europe, you'll 00:01:27.040 --> 00:01:30.720 align:middle line:84% see windows were often made at the bottom of wine bottles 00:01:30.720 --> 00:01:32.860 align:middle line:84% because it was so hard to make glass, to get glass. 00:01:32.860 --> 00:01:35.400 align:middle line:84% So if you windows, that meant you're wealthy. 00:01:35.400 --> 00:01:39.080 align:middle line:84% So basically he said, we're going to tax people 00:01:39.080 --> 00:01:41.520 align:middle line:84% based on how many windows they have in their house. 00:01:41.520 --> 00:01:44.560 align:middle line:84% The problem that is an easy tax to avoid 00:01:44.560 --> 00:01:46.840 align:middle line:84% by either boarding up your windows 00:01:46.840 --> 00:01:49.280 align:middle line:84% or building houses with no windows. 00:01:49.280 --> 00:01:51.480 align:middle line:84% So it was an easy-- when you tax people 00:01:51.480 --> 00:01:53.780 align:middle line:84% based on how many windows they had, 00:01:53.780 --> 00:01:56.720 align:middle line:84% he set up a tax that was rather easy to avoid. 00:01:56.720 --> 00:01:59.360 align:middle line:84% Moreover, the problem is when you avoid that tax by boarding 00:01:59.360 --> 00:02:03.480 align:middle line:84% up your windows, in 1696, it's incredibly unhealthy 00:02:03.480 --> 00:02:07.200 align:middle line:84% because basically you don't have fresh air coming 00:02:07.200 --> 00:02:08.139 align:middle line:90% into your house. 00:02:08.139 --> 00:02:11.440 align:middle line:84% Indeed, Charles Dickens wrote about this. 00:02:11.440 --> 00:02:15.500 align:middle line:84% There was a typhus epidemic in 1781, 00:02:15.500 --> 00:02:18.480 align:middle line:84% in Carlisle, which was traced to a house inhabited 00:02:18.480 --> 00:02:20.080 align:middle line:90% by six poor families. 00:02:20.080 --> 00:02:23.240 align:middle line:84% In order to reduce the window tax, every window was built up 00:02:23.240 --> 00:02:25.840 align:middle line:84% and the source of ventilation was thus removed. 00:02:25.840 --> 00:02:28.920 align:middle line:84% The smell in this house was overwhelming and offensive 00:02:28.920 --> 00:02:30.480 align:middle line:90% to an unbearable extent. 00:02:30.480 --> 00:02:34.160 align:middle line:84% And 52 people died from typhus starting in this house. 00:02:34.160 --> 00:02:36.280 align:middle line:84% So we have here is an example of what 00:02:36.280 --> 00:02:41.920 align:middle line:84% we call the inefficiency of tax avoidance of people trying 00:02:41.920 --> 00:02:47.480 align:middle line:84% to avoid taxes based by undertaking other activities 00:02:47.480 --> 00:02:49.240 align:middle line:90% that could be inefficient. 00:02:49.240 --> 00:02:51.827 align:middle line:84% Now, how do we know people responded? 00:02:51.827 --> 00:02:53.660 align:middle line:84% Well, this is a very clever empirical study. 00:02:53.660 --> 00:02:56.990 align:middle line:84% There's a study where these economists actually collected 00:02:56.990 --> 00:03:01.110 align:middle line:84% data on the number of windows in every house in a large section 00:03:01.110 --> 00:03:03.950 align:middle line:90% of England in the 1700s. 00:03:03.950 --> 00:03:07.770 align:middle line:84% And they looked at the data on how many windows houses had. 00:03:07.770 --> 00:03:10.870 align:middle line:84% And they noticed that the way the window tax worked 00:03:10.870 --> 00:03:14.550 align:middle line:84% was if there was fewer than 10 windows in the house, 00:03:14.550 --> 00:03:17.470 align:middle line:84% there was a tax of 6 pence per window. 00:03:17.470 --> 00:03:19.990 align:middle line:84% But once you got to the 10th window, 00:03:19.990 --> 00:03:22.290 align:middle line:84% the tax went to 9 pence per window, 00:03:22.290 --> 00:03:24.390 align:middle line:90% including the first nine. 00:03:24.390 --> 00:03:28.490 align:middle line:84% So the ninth window was taxed at 6 pence. 00:03:28.490 --> 00:03:33.150 align:middle line:84% The 10th window was taxed at 100 pence, because you paid-- 00:03:33.150 --> 00:03:38.790 align:middle line:84% or no, 46 pence, because you paid an extra $0.04 on all 00:03:38.790 --> 00:03:42.390 align:middle line:84% the previous nine windows, plus the $0.10 for the 10th window. 00:03:42.390 --> 00:03:47.510 align:middle line:84% And if you look at the data in figure 20-3, what do you see? 00:03:47.510 --> 00:03:49.510 align:middle line:84% A huge spike in the number of windows and houses 00:03:49.510 --> 00:03:51.750 align:middle line:90% at nine windows. 00:03:51.750 --> 00:03:57.410 align:middle line:84% Indeed, there was another notch at the 15th window. 00:03:57.410 --> 00:03:58.370 align:middle line:90% The tax went up higher. 00:03:58.370 --> 00:03:59.170 align:middle line:90% What do you see? 00:03:59.170 --> 00:04:02.110 align:middle line:84% Another spike in the number of windows at 14 windows. 00:04:02.110 --> 00:04:05.510 align:middle line:84% So basically, this is evidence of people avoiding the tax. 00:04:05.510 --> 00:04:09.750 align:middle line:84% Indeed, what's really cool is they then changed the tax where 00:04:09.750 --> 00:04:13.630 align:middle line:84% later, the big jump in tax start at the eighth window. 00:04:13.630 --> 00:04:17.070 align:middle line:84% And so flip to figure 20-4, there became a huge spike 00:04:17.070 --> 00:04:19.070 align:middle line:90% at seven windows. 00:04:19.070 --> 00:04:20.410 align:middle line:90% This is not unusual. 00:04:20.410 --> 00:04:24.870 align:middle line:84% There is a history of people doing things to avoid taxes. 00:04:24.870 --> 00:04:27.510 align:middle line:84% Any have you ever heard of Tuscan bread? 00:04:27.510 --> 00:04:29.470 align:middle line:90% Tuscan bread is saltless bread. 00:04:29.470 --> 00:04:30.890 align:middle line:90% It's a term for saltless bread. 00:04:30.890 --> 00:04:32.870 align:middle line:90% Why is that called Tuscan bread? 00:04:32.870 --> 00:04:36.510 align:middle line:84% It's called Tuscan bread because in-- 00:04:36.510 --> 00:04:40.450 align:middle line:84% I got to get the year right --in the papal state of Tuscany, 00:04:40.450 --> 00:04:44.670 align:middle line:84% I don't have the year, the pope imposed a tax on salt. 00:04:44.670 --> 00:04:47.310 align:middle line:84% So they started making bread without salt. 00:04:47.310 --> 00:04:50.710 align:middle line:84% If you visit many developing countries, 00:04:50.710 --> 00:04:52.910 align:middle line:84% you will see what looks like an unreasonable 00:04:52.910 --> 00:04:54.393 align:middle line:90% number of unfinished buildings. 00:04:54.393 --> 00:04:55.810 align:middle line:84% If you've been to other countries, 00:04:55.810 --> 00:04:57.310 align:middle line:84% you'll notice buildings often look like the top floor is 00:04:57.310 --> 00:04:58.213 align:middle line:90% unfinished. 00:04:58.213 --> 00:04:59.630 align:middle line:84% That's because many countries have 00:04:59.630 --> 00:05:01.483 align:middle line:90% taxes on finished buildings. 00:05:01.483 --> 00:05:02.150 align:middle line:90% So they do this. 00:05:02.150 --> 00:05:04.775 align:middle line:84% They just build buildings with an extra floor that's unfinished 00:05:04.775 --> 00:05:09.190 align:middle line:84% and avoid the tax on finished buildings. 00:05:09.190 --> 00:05:11.590 align:middle line:84% And one of my favorite examples is 00:05:11.590 --> 00:05:16.350 align:middle line:84% there's a tax on shoes in the US that's 40%. 00:05:16.350 --> 00:05:19.590 align:middle line:90% The tax on slippers is 3%. 00:05:19.590 --> 00:05:21.830 align:middle line:84% What is interesting, shoes and slippers, 00:05:21.830 --> 00:05:26.190 align:middle line:84% it's basically how the bottom, what the bottom looks like. 00:05:26.190 --> 00:05:29.430 align:middle line:84% So actually, Chuck Taylor Sneakers by Converse 00:05:29.430 --> 00:05:32.750 align:middle line:84% have a thin layer of felt on the bottom that wear away 00:05:32.750 --> 00:05:34.930 align:middle line:84% after you use them a few times, but because of that, 00:05:34.930 --> 00:05:37.250 align:middle line:84% they can be classified as slippers, not sneakers, 00:05:37.250 --> 00:05:39.150 align:middle line:90% and pay lower tax. 00:05:39.150 --> 00:05:41.190 align:middle line:84% The point of these fun examples is 00:05:41.190 --> 00:05:43.870 align:middle line:84% that basically, people can do lots of things 00:05:43.870 --> 00:05:45.430 align:middle line:90% to avoid taxation. 00:05:45.430 --> 00:05:47.270 align:middle line:84% And the fundamental point of this chapter 00:05:47.270 --> 00:05:50.230 align:middle line:84% is that those efforts they take to avoid taxation 00:05:50.230 --> 00:05:52.870 align:middle line:84% impose efficiency costs on society. 00:05:52.870 --> 00:05:56.870 align:middle line:84% So to see this, let's go back in figure 20-1 about halfway 00:05:56.870 --> 00:05:57.870 align:middle line:90% through your packet. 00:05:57.870 --> 00:06:02.710 align:middle line:84% Let's go back to Figure 20-1 to our tax on gasoline we had last 00:06:02.710 --> 00:06:04.630 align:middle line:84% time we talked about tax fairness. 00:06:04.630 --> 00:06:08.670 align:middle line:84% Remember, we were in initial equilibrium with 100 billion 00:06:08.670 --> 00:06:13.390 align:middle line:84% gallons of gas being sold at $1.50 a gallon. 00:06:13.390 --> 00:06:17.710 align:middle line:84% The government comes in and taxes the suppliers of gas $0.50 00:06:17.710 --> 00:06:19.270 align:middle line:90% a gallon. 00:06:19.270 --> 00:06:20.510 align:middle line:90% What did that do? 00:06:20.510 --> 00:06:24.030 align:middle line:84% That shifted the supply curve up by $0.50, 00:06:24.030 --> 00:06:27.750 align:middle line:84% moving our new equilibrium from point A to point B, 00:06:27.750 --> 00:06:31.670 align:middle line:84% with a new price of $1.80, which meant that producers avoided 00:06:31.670 --> 00:06:33.910 align:middle line:84% much of the incidence of the tax. 00:06:33.910 --> 00:06:36.030 align:middle line:84% And that's what we focused on last time, but also 00:06:36.030 --> 00:06:38.090 align:middle line:90% new quantity of $90 billion. 00:06:38.090 --> 00:06:40.110 align:middle line:84% Now, we're going to turn our focus to quantity. 00:06:40.110 --> 00:06:42.710 align:middle line:90% Tax fairness is about prices. 00:06:42.710 --> 00:06:45.870 align:middle line:84% Tax efficiency is about quantities. 00:06:45.870 --> 00:06:48.420 align:middle line:84% What we see here is what we learned about in 14-01, 00:06:48.420 --> 00:06:51.660 align:middle line:84% that this tax causes a deadweight loss. 00:06:51.660 --> 00:06:55.220 align:middle line:84% The deadweight loss is the units that 00:06:55.220 --> 00:06:58.140 align:middle line:84% were efficiently traded before the tax that 00:06:58.140 --> 00:06:59.900 align:middle line:90% are no longer traded. 00:06:59.900 --> 00:07:05.300 align:middle line:84% So before the tax, the 99 billionth gallon of gas 00:07:05.300 --> 00:07:08.420 align:middle line:84% was something where the consumer surplus from consuming 00:07:08.420 --> 00:07:16.820 align:middle line:84% that gallon exceeded the consumer value of consuming 00:07:16.820 --> 00:07:21.300 align:middle line:84% that unit, exceeded the marginal cost of producing that unit. 00:07:21.300 --> 00:07:25.100 align:middle line:84% As a result, producing that unit delivered both consumer surplus 00:07:25.100 --> 00:07:27.100 align:middle line:90% and producer surplus. 00:07:27.100 --> 00:07:29.540 align:middle line:84% When we tax, and therefore reduce 00:07:29.540 --> 00:07:32.420 align:middle line:84% the number of gallons sold to $90 billion, 00:07:32.420 --> 00:07:34.320 align:middle line:90% we cause deadweight loss. 00:07:34.320 --> 00:07:37.340 align:middle line:90% We destroy productive trades. 00:07:37.340 --> 00:07:39.780 align:middle line:84% Trades that are being made that were delivering surplus 00:07:39.780 --> 00:07:41.820 align:middle line:90% to society are now destroyed. 00:07:41.820 --> 00:07:44.500 align:middle line:84% That creates our classic deadweight loss triangle. 00:07:44.500 --> 00:07:46.220 align:middle line:84% Remember, the deadweight loss triangle, 00:07:46.220 --> 00:07:48.020 align:middle line:84% we talked about this in chapter 6, 00:07:48.020 --> 00:07:52.140 align:middle line:84% it points to the efficient outcome. 00:07:52.140 --> 00:07:54.660 align:middle line:84% So the efficient outcome is point A, the deadweight loss 00:07:54.660 --> 00:07:57.580 align:middle line:84% triangle points there and then spreads out from there. 00:07:57.580 --> 00:07:59.748 align:middle line:84% So the further you get from the efficient outcome, 00:07:59.748 --> 00:08:01.040 align:middle line:90% the bigger the deadweight loss. 00:08:01.040 --> 00:08:01.540 align:middle line:90% Yeah, Alec. 00:08:01.540 --> 00:08:03.373 align:middle line:84% AUDIENCE: If the demand curve was completely 00:08:03.373 --> 00:08:04.600 align:middle line:90% vertical, would there be-- 00:08:04.600 --> 00:08:04.920 align:middle line:90% JON GRUBER: Hold on. 00:08:04.920 --> 00:08:06.628 align:middle line:84% Let me-- hold on, hold on, hold on there. 00:08:06.628 --> 00:08:07.495 align:middle line:90% We'll get there. 00:08:07.495 --> 00:08:09.620 align:middle line:84% Come on, you got to leave me a little mystery here. 00:08:09.620 --> 00:08:10.300 align:middle line:90% OK. 00:08:10.300 --> 00:08:14.340 align:middle line:84% So basically, this is our fundamental inefficiency 00:08:14.340 --> 00:08:16.360 align:middle line:90% caused by taxation. 00:08:16.360 --> 00:08:16.860 align:middle line:90% OK. 00:08:16.860 --> 00:08:18.748 align:middle line:84% Question about the basic analysis? 00:08:18.748 --> 00:08:20.040 align:middle line:90% This should be pretty familiar. 00:08:20.040 --> 00:08:21.060 align:middle line:90% You saw this in 14-01. 00:08:21.060 --> 00:08:23.060 align:middle line:84% We know about deadweight loss, but the key thing 00:08:23.060 --> 00:08:25.220 align:middle line:84% is to remember the intuition of deadweight loss. 00:08:25.220 --> 00:08:28.540 align:middle line:84% It is trades that deliver social surplus that are destroyed 00:08:28.540 --> 00:08:30.120 align:middle line:90% by these new taxation. 00:08:30.120 --> 00:08:33.997 align:middle line:84% And this is our first hint about why we can't just spend all that 00:08:33.997 --> 00:08:36.539 align:middle line:84% money in the first 2/3 of the book without thinking about how 00:08:36.539 --> 00:08:37.461 align:middle line:90% you raise the money. 00:08:37.461 --> 00:08:39.919 align:middle line:84% Because when you raise the money, you create an efficiency, 00:08:39.919 --> 00:08:41.044 align:middle line:90% and that's going to matter. 00:08:41.044 --> 00:08:43.539 align:middle line:84% This is the other leak in Okun's bucket. 00:08:43.539 --> 00:08:45.620 align:middle line:84% Remember, we talked about Okun's leaky bucket, 00:08:45.620 --> 00:08:48.222 align:middle line:84% and we talked about three sources of leakage. 00:08:48.222 --> 00:08:50.180 align:middle line:84% One was the person who has to carry the bucket. 00:08:50.180 --> 00:08:52.472 align:middle line:84% One was distorted labor supply among the people getting 00:08:52.472 --> 00:08:53.520 align:middle line:90% the transfers. 00:08:53.520 --> 00:08:55.160 align:middle line:84% This is the third source of leakage, 00:08:55.160 --> 00:08:58.700 align:middle line:84% a distortion in economic activity by raising the money. 00:08:58.700 --> 00:09:01.000 align:middle line:84% Now, as Alec's question pointed out, 00:09:01.000 --> 00:09:02.540 align:middle line:90% let's go to the next figure. 00:09:02.540 --> 00:09:04.860 align:middle line:84% You can see that deadweight loss is fundamentally 00:09:04.860 --> 00:09:06.920 align:middle line:90% determined by elasticities. 00:09:06.920 --> 00:09:10.100 align:middle line:84% Remember, incidence was determined by elasticities. 00:09:10.100 --> 00:09:12.580 align:middle line:90% So is deadweight loss. 00:09:12.580 --> 00:09:14.860 align:middle line:84% When demand is very inelastic, as Alec pointed out, 00:09:14.860 --> 00:09:16.640 align:middle line:84% there's a very small deadweight loss. 00:09:16.640 --> 00:09:17.140 align:middle line:90% Why? 00:09:17.140 --> 00:09:17.680 align:middle line:90% Alec, why? 00:09:17.680 --> 00:09:19.180 align:middle line:84% Why is deadweight loss so small when 00:09:19.180 --> 00:09:20.887 align:middle line:90% the demand is very inelastic? 00:09:20.887 --> 00:09:22.720 align:middle line:84% AUDIENCE: Because less trades get destroyed. 00:09:22.720 --> 00:09:24.980 align:middle line:84% JON GRUBER: Yeah, basically it's perfectly inelastic. 00:09:24.980 --> 00:09:27.063 align:middle line:84% There's no inefficiency because nothings happened. 00:09:27.063 --> 00:09:29.400 align:middle line:84% When you tax insulin, there's no inefficiency. 00:09:29.400 --> 00:09:31.260 align:middle line:84% Everybody just keeps buying insulin. 00:09:31.260 --> 00:09:34.817 align:middle line:84% But when you tax McDonald's but not Burger King, 00:09:34.817 --> 00:09:36.900 align:middle line:84% there's massive inefficiency because everyone just 00:09:36.900 --> 00:09:37.522 align:middle line:90% switches over. 00:09:37.522 --> 00:09:38.480 align:middle line:90% It's perfectly elastic. 00:09:38.480 --> 00:09:39.438 align:middle line:90% Everyone switches over. 00:09:39.438 --> 00:09:39.975 align:middle line:90% Yeah. 00:09:39.975 --> 00:09:42.100 align:middle line:84% AUDIENCE: Isn't consumer surplus still lost though, 00:09:42.100 --> 00:09:45.415 align:middle line:90% due to the higher prices? 00:09:45.415 --> 00:09:48.040 align:middle line:84% JON GRUBER: Consumer surplus is lost through the higher prices, 00:09:48.040 --> 00:09:48.780 align:middle line:90% absolutely. 00:09:48.780 --> 00:09:50.260 align:middle line:84% Well, the thing is what's tricky about that 00:09:50.260 --> 00:09:51.718 align:middle line:84% is with perfectly inelastic demand, 00:09:51.718 --> 00:09:53.820 align:middle line:84% consumer surplus is infinite technically. 00:09:53.820 --> 00:09:56.000 align:middle line:84% So infinity minus x is still infinity. 00:09:56.000 --> 00:09:58.780 align:middle line:84% So yes, it's small-- it's not really smaller 00:09:58.780 --> 00:10:00.740 align:middle line:84% because in its completely made up 00:10:00.740 --> 00:10:02.440 align:middle line:84% world of perfectly inelastic demand, 00:10:02.440 --> 00:10:04.500 align:middle line:84% there's infinite consumer surplus. 00:10:04.500 --> 00:10:07.585 align:middle line:84% But it is true in general, if demand is very, very inelastic, 00:10:07.585 --> 00:10:08.960 align:middle line:84% you won't get a lot of distortion 00:10:08.960 --> 00:10:11.242 align:middle line:84% but you'll get a big loss in consumer surplus. 00:10:11.242 --> 00:10:12.700 align:middle line:84% AUDIENCE: Does the consumer surplus 00:10:12.700 --> 00:10:14.237 align:middle line:90% count as deadweight loss? 00:10:14.237 --> 00:10:15.320 align:middle line:90% JON GRUBER: You will get-- 00:10:15.320 --> 00:10:17.980 align:middle line:90% 00:10:17.980 --> 00:10:20.478 align:middle line:90% let me back up a second. 00:10:20.478 --> 00:10:21.520 align:middle line:90% No, I'm sorry, you won't. 00:10:21.520 --> 00:10:21.800 align:middle line:90% You're right. 00:10:21.800 --> 00:10:22.480 align:middle line:90% You're absolutely right. 00:10:22.480 --> 00:10:23.188 align:middle line:90% No, you're right. 00:10:23.188 --> 00:10:24.320 align:middle line:90% Let me retract that. 00:10:24.320 --> 00:10:26.340 align:middle line:84% You will not get a change in consumer surplus 00:10:26.340 --> 00:10:30.820 align:middle line:84% because consumer surplus, remember, is the area, 00:10:30.820 --> 00:10:33.403 align:middle line:84% basically, if the demand curve is vertical, 00:10:33.403 --> 00:10:35.320 align:middle line:84% then there's always infinite consumer surplus. 00:10:35.320 --> 00:10:36.360 align:middle line:90% It's a weird case. 00:10:36.360 --> 00:10:38.500 align:middle line:90% So it can't fall. 00:10:38.500 --> 00:10:43.740 align:middle line:84% So basically, at the end of the day, you get some-- 00:10:43.740 --> 00:10:49.140 align:middle line:84% so I guess the point is that if you look at figure 20-2 00:10:49.140 --> 00:10:52.120 align:middle line:84% a, to come to Alec's question, there's a tiny deadweight loss. 00:10:52.120 --> 00:10:54.000 align:middle line:84% Most of it is lost consumer surplus. 00:10:54.000 --> 00:10:56.458 align:middle line:84% This is, I guess, the better answer to your question, Alec. 00:10:56.458 --> 00:10:59.160 align:middle line:84% With varying elastic but not perfectly inelastic demand, 00:10:59.160 --> 00:11:01.980 align:middle line:84% most of the loss and surplus is consumer surplus. 00:11:01.980 --> 00:11:04.278 align:middle line:84% But it's not perfectly consumer surplus 00:11:04.278 --> 00:11:05.820 align:middle line:84% and it's not a lot because you didn't 00:11:05.820 --> 00:11:07.340 align:middle line:90% change your behavior that much. 00:11:07.340 --> 00:11:10.480 align:middle line:84% When demand is very inelastic, very elastic, 00:11:10.480 --> 00:11:15.580 align:middle line:84% you see a much larger loss in surplus. 00:11:15.580 --> 00:11:20.220 align:middle line:84% And once again, if demand is perfectly elastic, 00:11:20.220 --> 00:11:24.487 align:middle line:84% you would see a loss in surplus, but it'll all be on producers. 00:11:24.487 --> 00:11:26.320 align:middle line:84% So it would be a measurable loss of surplus. 00:11:26.320 --> 00:11:29.460 align:middle line:84% You'd see a loss in producer surplus. 00:11:29.460 --> 00:11:30.117 align:middle line:90% Yeah. 00:11:30.117 --> 00:11:32.700 align:middle line:84% AUDIENCE: I think what I meant was like, if the consumers were 00:11:32.700 --> 00:11:35.620 align:middle line:84% consuming past point B, or consuming either way, 00:11:35.620 --> 00:11:38.570 align:middle line:84% they lose surplus due to the higher prices though. 00:11:38.570 --> 00:11:40.570 align:middle line:84% JON GRUBER: No, but they would-- no, no, no. 00:11:40.570 --> 00:11:44.330 align:middle line:84% No, because the point is that technically, consumer surplus 00:11:44.330 --> 00:11:46.190 align:middle line:84% is the area above the demand curve. 00:11:46.190 --> 00:11:48.528 align:middle line:84% Above the price, but below the demand curve. 00:11:48.528 --> 00:11:50.070 align:middle line:84% But there's no below the demand curve 00:11:50.070 --> 00:11:52.807 align:middle line:84% if it's perfectly elastic-- if perfectly inelastic. 00:11:52.807 --> 00:11:54.890 align:middle line:84% AUDIENCE: I mean, when it's not perfectly elastic. 00:11:54.890 --> 00:11:56.150 align:middle line:84% JON GRUBER: When it's not perfectly elastic, yes, 00:11:56.150 --> 00:11:56.790 align:middle line:90% they lose some. 00:11:56.790 --> 00:11:58.650 align:middle line:90% That's the top gray part. 00:11:58.650 --> 00:12:01.210 align:middle line:84% AUDIENCE: Right, but what about past the-- 00:12:01.210 --> 00:12:05.010 align:middle line:84% for the people like from past point B. ? 00:12:05.010 --> 00:12:06.810 align:middle line:90% JON GRUBER: Past which way? 00:12:06.810 --> 00:12:08.610 align:middle line:90% AUDIENCE: To the left. 00:12:08.610 --> 00:12:12.150 align:middle line:90% Down to the original price. 00:12:12.150 --> 00:12:14.890 align:middle line:84% JON GRUBER: Right, that's that upper gray triangle. 00:12:14.890 --> 00:12:19.713 align:middle line:84% AUDIENCE: But now, isn't it only down to the second price? 00:12:19.713 --> 00:12:20.630 align:middle line:90% JON GRUBER: I'm sorry. 00:12:20.630 --> 00:12:22.903 align:middle line:84% So basically, the price has gone up from P1 to P2. 00:12:22.903 --> 00:12:23.570 align:middle line:90% AUDIENCE: Right. 00:12:23.570 --> 00:12:25.730 align:middle line:84% JON GRUBER: Consumer surplus that has been lost 00:12:25.730 --> 00:12:28.310 align:middle line:84% is the area below the demand curve above the price. 00:12:28.310 --> 00:12:32.490 align:middle line:84% So it's the gray triangle above the P1 line. 00:12:32.490 --> 00:12:34.730 align:middle line:90% We can talk about it afterwards. 00:12:34.730 --> 00:12:39.110 align:middle line:84% So basically, essentially, elasticity is determinant. 00:12:39.110 --> 00:12:43.057 align:middle line:84% In fact, more generally, we can write the formula 00:12:43.057 --> 00:12:43.890 align:middle line:90% for deadweight loss. 00:12:43.890 --> 00:12:45.410 align:middle line:84% This is derived-- let me try this. 00:12:45.410 --> 00:12:47.890 align:middle line:90% Try to just wander over here. 00:12:47.890 --> 00:12:51.630 align:middle line:90% This is derived in the appendix. 00:12:51.630 --> 00:12:53.570 align:middle line:84% We can write the formula for deadweight loss 00:12:53.570 --> 00:12:55.225 align:middle line:90% as deadweight loss-- 00:12:55.225 --> 00:12:57.350 align:middle line:84% at least we know my handwriting can't get any worse 00:12:57.350 --> 00:13:08.370 align:middle line:84% --is minus eta s eta d, over 2 times eta s minus eta 00:13:08.370 --> 00:13:18.970 align:middle line:84% d, times tau squared times Q over P. A very, very important 00:13:18.970 --> 00:13:20.267 align:middle line:90% formula you need to know cold. 00:13:20.267 --> 00:13:22.350 align:middle line:84% And let me explain why you need to know this cold. 00:13:22.350 --> 00:13:24.683 align:middle line:84% Because this formula is not only mathematically relevant 00:13:24.683 --> 00:13:26.290 align:middle line:90% but intuitively relevant. 00:13:26.290 --> 00:13:28.490 align:middle line:90% OK. 00:13:28.490 --> 00:13:34.730 align:middle line:84% This formula shows that the deadweight loss of taxation 00:13:34.730 --> 00:13:36.750 align:middle line:90% depends on two things. 00:13:36.750 --> 00:13:38.738 align:middle line:84% Incidence, remember, depend on elasticities. 00:13:38.738 --> 00:13:40.030 align:middle line:90% They also depend on two things. 00:13:40.030 --> 00:13:41.690 align:middle line:84% First of all, depends on elasticities. 00:13:41.690 --> 00:13:45.250 align:middle line:84% Because this is multiplicative and this is additive, 00:13:45.250 --> 00:13:47.250 align:middle line:84% if either elasticity gets bigger, 00:13:47.250 --> 00:13:49.330 align:middle line:90% deadweight loss gets bigger. 00:13:49.330 --> 00:13:52.550 align:middle line:84% So basically, deadweight loss is larger, 00:13:52.550 --> 00:13:55.210 align:middle line:84% the larger either supply or demand elasticities. 00:13:55.210 --> 00:13:58.130 align:middle line:84% And that's intuitive from the graph. 00:13:58.130 --> 00:14:00.510 align:middle line:84% But there's a second feature of this formula, 00:14:00.510 --> 00:14:05.285 align:middle line:84% which is very, very important, which is the tau squared term. 00:14:05.285 --> 00:14:06.910 align:middle line:84% Here's another way to think about this. 00:14:06.910 --> 00:14:08.285 align:middle line:84% Here's another way we could write 00:14:08.285 --> 00:14:10.170 align:middle line:90% this that might be helpful. 00:14:10.170 --> 00:14:13.530 align:middle line:84% Differentiate this with respect to tax. 00:14:13.530 --> 00:14:15.610 align:middle line:84% We get that the marginal deadweight 00:14:15.610 --> 00:14:19.130 align:middle line:84% loss from an increase in tax is minus eta 00:14:19.130 --> 00:14:24.950 align:middle line:84% s eta d over 2 times eta s minus eta d-- 00:14:24.950 --> 00:14:27.730 align:middle line:90% 00:14:27.730 --> 00:14:34.070 align:middle line:84% actually, this goes away --times tau times q over p. 00:14:34.070 --> 00:14:36.690 align:middle line:90% 00:14:36.690 --> 00:14:40.850 align:middle line:84% The marginal deadweight loss depends on the tax. 00:14:40.850 --> 00:14:43.890 align:middle line:84% The higher is the initial level of tax, 00:14:43.890 --> 00:14:47.370 align:middle line:84% the more is the deadweight loss from additionally increasing 00:14:47.370 --> 00:14:48.890 align:middle line:90% tax. 00:14:48.890 --> 00:14:52.250 align:middle line:84% And that's why we call this the tau squared rule. 00:14:52.250 --> 00:14:56.470 align:middle line:84% The tau squared rule is taxes cause more inefficiency, A, 00:14:56.470 --> 00:15:01.130 align:middle line:84% if things are more elastic, or B, the further they take you 00:15:01.130 --> 00:15:02.770 align:middle line:90% from the efficient outcome. 00:15:02.770 --> 00:15:06.230 align:middle line:84% To see this, go to figure 20-5, and this will show you 00:15:06.230 --> 00:15:06.730 align:middle line:90% graphically. 00:15:06.730 --> 00:15:08.850 align:middle line:84% That's after the window tax figures. 00:15:08.850 --> 00:15:11.650 align:middle line:84% This will show you graphically why this-- this will give you 00:15:11.650 --> 00:15:12.630 align:middle line:90% the intuition. 00:15:12.630 --> 00:15:15.630 align:middle line:84% We start at point A with P1 and Q1. 00:15:15.630 --> 00:15:17.950 align:middle line:84% We then impose imagine a first tax. 00:15:17.950 --> 00:15:20.490 align:middle line:90% Let's say we tax $0.10. 00:15:20.490 --> 00:15:21.810 align:middle line:90% OK. 00:15:21.810 --> 00:15:25.350 align:middle line:90% That causes deadweight loss ABC. 00:15:25.350 --> 00:15:27.130 align:middle line:90% Questions about that? 00:15:27.130 --> 00:15:31.360 align:middle line:84% Now, let's say I want to tax a second $0.10. 00:15:31.360 --> 00:15:37.520 align:middle line:84% That raises the deadweight loss from ABC to ADE. 00:15:37.520 --> 00:15:43.240 align:middle line:84% You add the trapezoid BCDE to your deadweight loss. 00:15:43.240 --> 00:15:45.000 align:middle line:90% You see that? 00:15:45.000 --> 00:15:51.120 align:middle line:84% Notice BCDE is much larger than ABC even though both taxes are 00:15:51.120 --> 00:15:52.140 align:middle line:90% $0.10. 00:15:52.140 --> 00:15:54.546 align:middle line:90% Why? 00:15:54.546 --> 00:15:56.920 align:middle line:84% Why do you get this much larger trapezoid 00:15:56.920 --> 00:16:01.280 align:middle line:84% even though both taxes are the same size? 00:16:01.280 --> 00:16:02.340 align:middle line:90% What's the intuition? 00:16:02.340 --> 00:16:05.128 align:middle line:90% 00:16:05.128 --> 00:16:06.920 align:middle line:84% Come on, you guys know by now I won't bite. 00:16:06.920 --> 00:16:09.153 align:middle line:90% Let's go, Steven. 00:16:09.153 --> 00:16:11.820 align:middle line:84% AUDIENCE: Not all trades produce the same amount of the surplus. 00:16:11.820 --> 00:16:14.403 align:middle line:84% JON GRUBER: Yeah, in particular, which trades produce the most 00:16:14.403 --> 00:16:15.560 align:middle line:90% loss surplus? 00:16:15.560 --> 00:16:18.703 align:middle line:84% AUDIENCE: The ones that are further left. 00:16:18.703 --> 00:16:20.120 align:middle line:84% JON GRUBER: Yeah, the further away 00:16:20.120 --> 00:16:22.160 align:middle line:90% you get, the more loss surplus. 00:16:22.160 --> 00:16:22.980 align:middle line:90% Think about it. 00:16:22.980 --> 00:16:26.440 align:middle line:84% Think about the trade at point A. Literally, the trade right 00:16:26.440 --> 00:16:29.680 align:middle line:84% at point A, the 100 billionth gallon of gas. 00:16:29.680 --> 00:16:33.677 align:middle line:84% People are indifferent between the 99.99999 billionth. 00:16:33.677 --> 00:16:35.760 align:middle line:84% However around you have billionth of gallon of gas 00:16:35.760 --> 00:16:37.200 align:middle line:84% and the 100 billionth gallon of gas. 00:16:37.200 --> 00:16:38.940 align:middle line:84% At that price, they're roughly indifferent. 00:16:38.940 --> 00:16:41.560 align:middle line:84% So there's not a great sadness if that one last gallon doesn't 00:16:41.560 --> 00:16:44.280 align:middle line:84% get sold because that gallon was, one, delivered effectively 00:16:44.280 --> 00:16:46.560 align:middle line:90% only epsilon surplus. 00:16:46.560 --> 00:16:50.040 align:middle line:84% But if you think about the 81st billion gallon of gas 00:16:50.040 --> 00:16:52.880 align:middle line:84% or whatever, if you think about one that's slightly to the right 00:16:52.880 --> 00:16:57.593 align:middle line:84% of Q3, that's delivering a lot of surplus. 00:16:57.593 --> 00:16:59.260 align:middle line:84% That's a gallon that people really want, 00:16:59.260 --> 00:17:02.320 align:middle line:84% and they're happy to pay way more than it cost to produce, 00:17:02.320 --> 00:17:04.960 align:middle line:84% or destroying it through this tax. 00:17:04.960 --> 00:17:07.119 align:middle line:84% So the basic intuition, the tau squared rule, 00:17:07.119 --> 00:17:09.599 align:middle line:84% is you're getting further from the equilibrium. 00:17:09.599 --> 00:17:12.800 align:middle line:84% So you're destroying more and more valuable trades. 00:17:12.800 --> 00:17:17.640 align:middle line:84% And that's why tax, that's why you get 00:17:17.640 --> 00:17:20.540 align:middle line:90% this second effect of taxes. 00:17:20.540 --> 00:17:23.880 align:middle line:84% Not only do elasticities matter, but you 00:17:23.880 --> 00:17:27.880 align:middle line:84% have this tau squared effect, the base of taxation matters. 00:17:27.880 --> 00:17:29.440 align:middle line:90% OK. 00:17:29.440 --> 00:17:32.160 align:middle line:90% Questions about that? 00:17:32.160 --> 00:17:32.720 align:middle line:90% OK. 00:17:32.720 --> 00:17:36.040 align:middle line:84% This rule is going to become second nature for you 00:17:36.040 --> 00:17:37.640 align:middle line:84% because we're going to use it a lot. 00:17:37.640 --> 00:17:43.240 align:middle line:84% Let's start with three interesting implications 00:17:43.240 --> 00:17:44.880 align:middle line:90% of this rule. 00:17:44.880 --> 00:17:49.680 align:middle line:84% The first implication is that, remember 00:17:49.680 --> 00:17:52.160 align:middle line:84% how we talked about how the incidence of taxes 00:17:52.160 --> 00:17:56.120 align:middle line:84% was affected by whether there was a minimum wage? 00:17:56.120 --> 00:18:00.280 align:middle line:84% The efficiency of taxes is also affected by how 00:18:00.280 --> 00:18:02.200 align:middle line:90% competitive the market is. 00:18:02.200 --> 00:18:07.080 align:middle line:84% Let's look at figure 20-6, and let's consider a tax in two 00:18:07.080 --> 00:18:08.920 align:middle line:90% markets. 00:18:08.920 --> 00:18:12.160 align:middle line:84% On the left hand side is a tax in a perfectly competitive 00:18:12.160 --> 00:18:13.960 align:middle line:90% market. 00:18:13.960 --> 00:18:16.040 align:middle line:84% In this perfectly competitive market 00:18:16.040 --> 00:18:20.160 align:middle line:84% we tax and we lower the quantity from Q1 to Q2, 00:18:20.160 --> 00:18:22.820 align:middle line:84% and we create a deadweight loss triangle ABC. 00:18:22.820 --> 00:18:26.240 align:middle line:90% 00:18:26.240 --> 00:18:29.920 align:middle line:84% Now, imagine the market with a positive production externality. 00:18:29.920 --> 00:18:31.520 align:middle line:84% A market, or alternatively, could have 00:18:31.520 --> 00:18:33.240 align:middle line:90% been market power, either way. 00:18:33.240 --> 00:18:37.040 align:middle line:84% But imagine a market with a positive production externality. 00:18:37.040 --> 00:18:40.240 align:middle line:84% The implication of positive production externality is what? 00:18:40.240 --> 00:18:43.040 align:middle line:84% That we were already under producing. 00:18:43.040 --> 00:18:44.540 align:middle line:90% The optimum was Q1. 00:18:44.540 --> 00:18:46.040 align:middle line:84% That's where social marginal benefit 00:18:46.040 --> 00:18:47.207 align:middle line:90% equals social marginal cost. 00:18:47.207 --> 00:18:48.667 align:middle line:84% Remember, this is a hint here, this 00:18:48.667 --> 00:18:50.500 align:middle line:84% is a example of how when we write the final, 00:18:50.500 --> 00:18:53.080 align:middle line:84% we're going to use all sorts of chapters at the same time. 00:18:53.080 --> 00:18:55.800 align:middle line:84% Here, I'm bringing back stuff back from chapter 5 and 6 00:18:55.800 --> 00:18:57.100 align:middle line:90% into the tax chapter. 00:18:57.100 --> 00:19:00.080 align:middle line:84% So remember, if it's intuition, if you 00:19:00.080 --> 00:19:02.598 align:middle line:84% remind yourself the intuition about externalities. 00:19:02.598 --> 00:19:04.140 align:middle line:84% Remind yourself how this all relates. 00:19:04.140 --> 00:19:07.000 align:middle line:90% 00:19:07.000 --> 00:19:10.420 align:middle line:84% Remember, in a market with a positive production externality, 00:19:10.420 --> 00:19:12.560 align:middle line:90% we are already under producing. 00:19:12.560 --> 00:19:15.080 align:middle line:84% We're producing Q2 instead of Q1. 00:19:15.080 --> 00:19:20.080 align:middle line:84% So when we add a tax to that market, it's extra inefficient. 00:19:20.080 --> 00:19:21.760 align:middle line:84% Because instead of adding a triangle, 00:19:21.760 --> 00:19:24.680 align:middle line:84% it's adding a trapezoid because they've already 00:19:24.680 --> 00:19:27.080 align:middle line:84% given up the triangle because we're already not producing 00:19:27.080 --> 00:19:28.360 align:middle line:90% enough. 00:19:28.360 --> 00:19:29.300 align:middle line:90% This is the flip side. 00:19:29.300 --> 00:19:32.160 align:middle line:90% Remember in chapter 6. 00:19:32.160 --> 00:19:34.360 align:middle line:84% In chapter 5, we talked about corrective taxes. 00:19:34.360 --> 00:19:36.400 align:middle line:84% When there were negative externalities, 00:19:36.400 --> 00:19:38.630 align:middle line:84% a tax should get you to efficiency. 00:19:38.630 --> 00:19:40.380 align:middle line:84% Well, when there's positive externalities, 00:19:40.380 --> 00:19:42.880 align:middle line:84% the tax will get you farther from efficiency. 00:19:42.880 --> 00:19:45.520 align:middle line:84% So that's one kind of implication 00:19:45.520 --> 00:19:48.760 align:middle line:90% of the tau squared rule. 00:19:48.760 --> 00:19:50.440 align:middle line:90% What's another implication? 00:19:50.440 --> 00:19:53.940 align:middle line:84% Well, here is the implication, which 00:19:53.940 --> 00:19:56.560 align:middle line:84% this is a hard one, hard one for we lefties. 00:19:56.560 --> 00:20:01.160 align:middle line:84% But another implication is that progressive taxes are more 00:20:01.160 --> 00:20:04.200 align:middle line:90% inefficient than flat taxes. 00:20:04.200 --> 00:20:06.560 align:middle line:84% Taxes where the marginal rate rises 00:20:06.560 --> 00:20:08.500 align:middle line:84% are more inefficient than flat taxes. 00:20:08.500 --> 00:20:10.375 align:middle line:84% I'm going to work through an example with you 00:20:10.375 --> 00:20:11.720 align:middle line:90% to show you why this is. 00:20:11.720 --> 00:20:13.080 align:middle line:90% OK. 00:20:13.080 --> 00:20:17.040 align:middle line:84% So let's imagine that basically, there's 00:20:17.040 --> 00:20:19.563 align:middle line:90% a society with two individuals. 00:20:19.563 --> 00:20:21.230 align:middle line:84% I'm not going to write this on the board 00:20:21.230 --> 00:20:22.930 align:middle line:84% because it's too hard for me, but you just write this down. 00:20:22.930 --> 00:20:24.470 align:middle line:90% There's two individuals. 00:20:24.470 --> 00:20:27.710 align:middle line:90% One has a wage of $10 an hour. 00:20:27.710 --> 00:20:29.990 align:middle line:90% One has a wage of $20 an hour. 00:20:29.990 --> 00:20:33.790 align:middle line:84% So there's a high skill and a low skill individual. 00:20:33.790 --> 00:20:38.390 align:middle line:84% They both have an elasticity of labor supply of 1. 00:20:38.390 --> 00:20:41.190 align:middle line:84% For each of them, a 10% rise in the wage 00:20:41.190 --> 00:20:44.110 align:middle line:90% leads to 10% more labor. 00:20:44.110 --> 00:20:47.710 align:middle line:84% And moreover, we're going to assume 00:20:47.710 --> 00:20:53.470 align:middle line:84% that they both face a elasticity of demand for labor of minus 1. 00:20:53.470 --> 00:20:56.910 align:middle line:84% They both work for employers where a 10% rise in wages 00:20:56.910 --> 00:20:59.390 align:middle line:84% leads to 10% drop in demand for labor. 00:20:59.390 --> 00:21:02.590 align:middle line:84% So both supply and demand of elasticities are one. 00:21:02.590 --> 00:21:10.310 align:middle line:84% In figure 20-7, we show the initial equilibrium in this 00:21:10.310 --> 00:21:10.990 align:middle line:90% market. 00:21:10.990 --> 00:21:14.790 align:middle line:84% On the left is the figure for the low wage worker. 00:21:14.790 --> 00:21:18.150 align:middle line:84% On the right is the figure for the high wage worker. 00:21:18.150 --> 00:21:21.710 align:middle line:84% So the low wage worker and the high wage worker we're going 00:21:21.710 --> 00:21:23.590 align:middle line:84% to say are initially in equilibrium, 00:21:23.590 --> 00:21:26.710 align:middle line:90% working 1,000 hours a year. 00:21:26.710 --> 00:21:29.910 align:middle line:84% So the low wage worker's at point A, working 1,000 hours 00:21:29.910 --> 00:21:32.350 align:middle line:90% a year at a wage of $10. 00:21:32.350 --> 00:21:35.470 align:middle line:84% The high wage worker's at point D, on the right hand side, 00:21:35.470 --> 00:21:37.770 align:middle line:84% working 1,000 hours a year, $20 an hour. 00:21:37.770 --> 00:21:39.250 align:middle line:90% This is a complicated example. 00:21:39.250 --> 00:21:43.030 align:middle line:84% Please stop me at any point if it's not clear. 00:21:43.030 --> 00:21:48.150 align:middle line:84% Now, we're going to roll in and levy a tax. 00:21:48.150 --> 00:21:54.670 align:middle line:84% We're going to levy a tax of 20% on all labor earnings. 00:21:54.670 --> 00:21:56.690 align:middle line:90% 20% tax, what does that do? 00:21:56.690 --> 00:22:01.870 align:middle line:84% Well, we know that lowers labor supply by 20%. 00:22:01.870 --> 00:22:04.590 align:middle line:84% We know the elasticity of labor supply is 1. 00:22:04.590 --> 00:22:09.190 align:middle line:84% So that's going to be a shift from S1 to S2. 00:22:09.190 --> 00:22:11.190 align:middle line:84% That is going to-- and the underlying math here, 00:22:11.190 --> 00:22:12.530 align:middle line:90% you can do basic elasticity. 00:22:12.530 --> 00:22:14.670 align:middle line:84% You'd be able to do this underlying math. 00:22:14.670 --> 00:22:19.050 align:middle line:84% You can find that that lowers the hours worked from 1,000 00:22:19.050 --> 00:22:23.590 align:middle line:90% hours to 894 hours. 00:22:23.590 --> 00:22:28.390 align:middle line:84% And that raises the equilibrium wage 00:22:28.390 --> 00:22:31.710 align:middle line:84% because there's fewer people working to $11.18. 00:22:31.710 --> 00:22:34.830 align:middle line:84% It creates a deadweight loss of ABC. 00:22:34.830 --> 00:22:38.470 align:middle line:84% So the 20% tax on low skilled workers 00:22:38.470 --> 00:22:40.797 align:middle line:90% has created a deadweight loss. 00:22:40.797 --> 00:22:42.630 align:middle line:84% Workers who are productively willing to work 00:22:42.630 --> 00:22:46.150 align:middle line:90% are no longer able to. 00:22:46.150 --> 00:22:47.830 align:middle line:84% The same tax on high skilled workers 00:22:47.830 --> 00:22:50.510 align:middle line:90% does exactly the same thing. 00:22:50.510 --> 00:22:53.310 align:middle line:90% It creates a triangle, DEF. 00:22:53.310 --> 00:22:55.870 align:middle line:90% Why is DEF? 00:22:55.870 --> 00:22:57.838 align:middle line:90% The x-axis is the same. 00:22:57.838 --> 00:22:58.630 align:middle line:90% Change is the same. 00:22:58.630 --> 00:23:01.882 align:middle line:90% Why is DEF bigger than ABC? 00:23:01.882 --> 00:23:04.590 align:middle line:84% They both lower the labor supply by the same amount, 1,000 hours, 00:23:04.590 --> 00:23:05.910 align:middle line:90% 894. 00:23:05.910 --> 00:23:08.630 align:middle line:84% Why does that create a bigger deadweight loss 00:23:08.630 --> 00:23:12.310 align:middle line:90% for the $20 an hour worker? 00:23:12.310 --> 00:23:15.830 align:middle line:84% Why is the triangle DEF bigger than ABC? 00:23:15.830 --> 00:23:18.090 align:middle line:84% I mean, graphically, you can see it, but intuitively. 00:23:18.090 --> 00:23:20.830 align:middle line:90% 00:23:20.830 --> 00:23:21.830 align:middle line:90% Yeah. 00:23:21.830 --> 00:23:23.830 align:middle line:84% AUDIENCE: They have a higher wage [INAUDIBLE]. 00:23:23.830 --> 00:23:25.455 align:middle line:84% JON GRUBER: Wage in a competitive labor 00:23:25.455 --> 00:23:27.250 align:middle line:84% market, your wages are marginal product. 00:23:27.250 --> 00:23:28.830 align:middle line:84% They're producing more valuable shit. 00:23:28.830 --> 00:23:30.630 align:middle line:84% That's why they're getting paid more. 00:23:30.630 --> 00:23:33.195 align:middle line:84% Your wage is a value marginal product. 00:23:33.195 --> 00:23:34.570 align:middle line:84% Therefore, you're being paid $20, 00:23:34.570 --> 00:23:36.030 align:middle line:84% you're producing something that's worth twice as much 00:23:36.030 --> 00:23:37.650 align:middle line:84% as someone being paid $10 an hour, 00:23:37.650 --> 00:23:39.570 align:middle line:84% or your labor is worth twice as much. 00:23:39.570 --> 00:23:43.270 align:middle line:84% Therefore, distorting it is twice as costly. 00:23:43.270 --> 00:23:44.610 align:middle line:90% So that's why. 00:23:44.610 --> 00:23:45.270 align:middle line:90% Yeah. 00:23:45.270 --> 00:23:48.090 align:middle line:84% AUDIENCE: So this is saying, with same elasticity, 00:23:48.090 --> 00:23:51.330 align:middle line:84% the reduction on the labor you get, I will be the same, 00:23:51.330 --> 00:23:52.190 align:middle line:90% but the value of-- 00:23:52.190 --> 00:23:53.630 align:middle line:84% JON GRUBER: Exactly, the reduction in hours 00:23:53.630 --> 00:23:55.713 align:middle line:84% will be the same, but the hours are more valuable. 00:23:55.713 --> 00:24:01.630 align:middle line:84% Once again, really, I talked earlier today with someone 00:24:01.630 --> 00:24:04.963 align:middle line:84% about the bad economics of the dismal science. 00:24:04.963 --> 00:24:07.130 align:middle line:84% Sometimes we have to draw conclusions we don't like. 00:24:07.130 --> 00:24:09.110 align:middle line:84% One conclusion is if we're in a perfectly competitive labor 00:24:09.110 --> 00:24:10.870 align:middle line:84% market, the rich guy is producing stuff that's more-- 00:24:10.870 --> 00:24:12.703 align:middle line:84% the higher paid guy's producing stuff that's 00:24:12.703 --> 00:24:14.800 align:middle line:84% more valuable than the lower paid guy. 00:24:14.800 --> 00:24:16.300 align:middle line:84% You may not believe that, and that's 00:24:16.300 --> 00:24:18.425 align:middle line:84% because labor markets aren't perfectly competitive. 00:24:18.425 --> 00:24:20.220 align:middle line:84% But if they are, that's the implication. 00:24:20.220 --> 00:24:28.220 align:middle line:84% Now, so if you look at the table below, if you look at the table, 00:24:28.220 --> 00:24:31.660 align:middle line:90% unfortunately, the table's-- 00:24:31.660 --> 00:24:32.480 align:middle line:90% yeah, I'm sorry. 00:24:32.480 --> 00:24:34.080 align:middle line:90% So if you look at-- 00:24:34.080 --> 00:24:35.400 align:middle line:90% so I'm now on figure 27. 00:24:35.400 --> 00:24:39.020 align:middle line:84% So look at the table on the next page, the top table. 00:24:39.020 --> 00:24:43.460 align:middle line:84% With no tax, so what we have is the tax rate, 00:24:43.460 --> 00:24:45.592 align:middle line:84% the low wage worker's hours and deadweight loss 00:24:45.592 --> 00:24:47.800 align:middle line:84% and the high wage worker's hours and deadweight loss. 00:24:47.800 --> 00:24:52.380 align:middle line:84% You see that when you go from a zero tax rate to 20% tax rate, 00:24:52.380 --> 00:24:55.740 align:middle line:90% they each go to 894 hours. 00:24:55.740 --> 00:24:57.775 align:middle line:84% You get a deadweight loss for the rich, which 00:24:57.775 --> 00:24:59.900 align:middle line:84% is twice as big as the poor, and a total deadweight 00:24:59.900 --> 00:25:02.860 align:middle line:90% loss of $347.13. 00:25:02.860 --> 00:25:06.860 align:middle line:90% OK, questions about that? 00:25:06.860 --> 00:25:10.980 align:middle line:84% Now, let's say I replace that with a system that 00:25:10.980 --> 00:25:14.060 align:middle line:84% in equilibrium, will be revenue neutral. 00:25:14.060 --> 00:25:16.740 align:middle line:84% But I want a progressive tax system. 00:25:16.740 --> 00:25:21.100 align:middle line:84% In other words, I want to not tax you below $10,000 a year, 00:25:21.100 --> 00:25:23.760 align:middle line:84% but tax people who earn more than $10,000 a year. 00:25:23.760 --> 00:25:25.900 align:middle line:90% I want it to be progressive. 00:25:25.900 --> 00:25:29.500 align:middle line:84% Well, in equilibrium, to raise the same amount of money, 00:25:29.500 --> 00:25:35.060 align:middle line:84% that implies a tax rate of 0, below 10,000, and 60, 00:25:35.060 --> 00:25:36.280 align:middle line:90% above 10,000. 00:25:36.280 --> 00:25:38.820 align:middle line:84% The reason it's not just 40 is you could only tax the amount 00:25:38.820 --> 00:25:40.080 align:middle line:90% above 10,000. 00:25:40.080 --> 00:25:44.023 align:middle line:84% Even for the rich guy, you exclude the first 10,000. 00:25:44.023 --> 00:25:45.940 align:middle line:84% So it's not like the poor guy gets taxed fewer 00:25:45.940 --> 00:25:47.900 align:middle line:90% and the rich guy gets taxed 60. 00:25:47.900 --> 00:25:51.660 align:middle line:84% The poor guy gets taxed zero and the rich guy gets taxed 60 above 00:25:51.660 --> 00:25:52.640 align:middle line:90% the first 10,000. 00:25:52.640 --> 00:25:54.040 align:middle line:90% 0 on the first 10,000. 00:25:54.040 --> 00:25:57.900 align:middle line:90% It's a marginal tax rate. 00:25:57.900 --> 00:26:00.260 align:middle line:90% That's a progressive tax system. 00:26:00.260 --> 00:26:01.120 align:middle line:90% What does that do? 00:26:01.120 --> 00:26:03.660 align:middle line:84% Well, let's go back to figure 20-7. 00:26:03.660 --> 00:26:05.992 align:middle line:84% For the poor guy, deadweight loss is 0. 00:26:05.992 --> 00:26:07.200 align:middle line:90% You've gotten rid of the tax. 00:26:07.200 --> 00:26:11.020 align:middle line:84% They're back to point A. For the rich guy, 00:26:11.020 --> 00:26:14.460 align:middle line:84% they lower their labor supply in response 00:26:14.460 --> 00:26:18.300 align:middle line:84% to this tax all the way to 837 hours 00:26:18.300 --> 00:26:22.860 align:middle line:84% of labor, creating a much bigger deadweight loss 00:26:22.860 --> 00:26:26.580 align:middle line:90% by adding the trapezoid EFIG. 00:26:26.580 --> 00:26:29.860 align:middle line:90% 00:26:29.860 --> 00:26:35.180 align:middle line:84% So if you go back to the table, it's a 0 deadweight loss. 00:26:35.180 --> 00:26:37.440 align:middle line:84% The last row is 0 deadweight is the low wage worker, 00:26:37.440 --> 00:26:41.140 align:middle line:84% but now a $566 deadweight loss on the high wage 00:26:41.140 --> 00:26:45.120 align:middle line:84% worker, meaning the total social deadweight loss is higher. 00:26:45.120 --> 00:26:47.940 align:middle line:90% 00:26:47.940 --> 00:26:50.460 align:middle line:84% Total social deadweight loss is higher 00:26:50.460 --> 00:26:52.740 align:middle line:90% for two important reasons. 00:26:52.740 --> 00:26:55.220 align:middle line:84% First, the first is what we said before, it's mechanical. 00:26:55.220 --> 00:26:57.512 align:middle line:84% If you distort labor supply among a higher earning guy, 00:26:57.512 --> 00:27:00.220 align:middle line:84% you're costing society more because they're producing more. 00:27:00.220 --> 00:27:03.740 align:middle line:84% But the second is because of this tau squared effect, 00:27:03.740 --> 00:27:07.700 align:middle line:84% that basically there's a trade off. 00:27:07.700 --> 00:27:11.820 align:middle line:84% The more you shrink the tax base while raising 00:27:11.820 --> 00:27:13.740 align:middle line:84% the same amount of revenues, the more 00:27:13.740 --> 00:27:16.900 align:middle line:84% you have to tax another group even more. 00:27:16.900 --> 00:27:19.900 align:middle line:84% And that's a bad deal, that the extra revenues 00:27:19.900 --> 00:27:22.620 align:middle line:84% by taxing the rich high are much more efficient. 00:27:22.620 --> 00:27:23.120 align:middle line:90% Why? 00:27:23.120 --> 00:27:25.662 align:middle line:84% Because you're already farther from that initial equilibrium. 00:27:25.662 --> 00:27:26.700 align:middle line:90% Question. 00:27:26.700 --> 00:27:30.860 align:middle line:84% AUDIENCE: [INAUDIBLE] why do we have progressive-- 00:27:30.860 --> 00:27:32.900 align:middle line:84% JON GRUBER: Why do we have progressive taxes? 00:27:32.900 --> 00:27:35.460 align:middle line:84% Because we talked about in chap-- because progressive taxes 00:27:35.460 --> 00:27:36.900 align:middle line:90% are fair. 00:27:36.900 --> 00:27:38.980 align:middle line:84% So basically, if you think, essentially, 00:27:38.980 --> 00:27:41.580 align:middle line:84% remember, if you go back to our utilitarian social welfare 00:27:41.580 --> 00:27:43.398 align:middle line:84% function, what are we trading off? 00:27:43.398 --> 00:27:44.940 align:middle line:84% We're trading off the size of the pie 00:27:44.940 --> 00:27:46.322 align:middle line:90% and the distribution of the pie. 00:27:46.322 --> 00:27:48.280 align:middle line:84% If all you cared about was the size of the pie, 00:27:48.280 --> 00:27:50.700 align:middle line:84% you would only want proportional tax. 00:27:50.700 --> 00:27:51.640 align:middle line:90% But we don't. 00:27:51.640 --> 00:27:53.200 align:middle line:84% We care about the distribution of the pie as well. 00:27:53.200 --> 00:27:54.620 align:middle line:84% And we trade those things off, and that depends 00:27:54.620 --> 00:27:56.340 align:middle line:90% on our social welfare function. 00:27:56.340 --> 00:27:56.940 align:middle line:90% Yeah. 00:27:56.940 --> 00:27:59.140 align:middle line:84% AUDIENCE: Would we create an efficiency gain 00:27:59.140 --> 00:28:02.220 align:middle line:84% to tax proportionally and just increase the overall level, 00:28:02.220 --> 00:28:05.220 align:middle line:84% and then redistribute from the taxes 00:28:05.220 --> 00:28:07.660 align:middle line:84% to the people who otherwise would have just 00:28:07.660 --> 00:28:09.980 align:middle line:84% had a lower tax rate and progression [INAUDIBLE]? 00:28:09.980 --> 00:28:12.000 align:middle line:84% JON GRUBER: That is absolutely right. 00:28:12.000 --> 00:28:13.240 align:middle line:90% And we will come to that. 00:28:13.240 --> 00:28:15.448 align:middle line:84% We will come to the only time The Wall Street Journal 00:28:15.448 --> 00:28:16.540 align:middle line:90% has ever praised me. 00:28:16.540 --> 00:28:17.340 align:middle line:90% AUDIENCE: [LAUGHS] 00:28:17.340 --> 00:28:17.960 align:middle line:90% JON GRUBER: Keep that in mind. 00:28:17.960 --> 00:28:19.180 align:middle line:90% We'll come back to that. 00:28:19.180 --> 00:28:23.820 align:middle line:84% But basically, that's absolutely right. 00:28:23.820 --> 00:28:26.440 align:middle line:84% Basically, proportional taxes is going to be much fairer. 00:28:26.440 --> 00:28:28.300 align:middle line:84% Redistribution to progressive taxation 00:28:28.300 --> 00:28:30.240 align:middle line:90% imposes extra deadweight loss. 00:28:30.240 --> 00:28:32.100 align:middle line:84% And that imposes the trade off that we 00:28:32.100 --> 00:28:34.280 align:middle line:84% can evaluate with our social welfare function, 00:28:34.280 --> 00:28:36.260 align:middle line:84% which is we do more for the poor, 00:28:36.260 --> 00:28:38.020 align:middle line:90% but we create more inefficiency. 00:28:38.020 --> 00:28:40.020 align:middle line:84% And that's why Steven implied it may be better 00:28:40.020 --> 00:28:44.100 align:middle line:84% to not do redistribution through taxes, but through spending. 00:28:44.100 --> 00:28:47.300 align:middle line:84% OK, so that's the second implication. 00:28:47.300 --> 00:28:50.220 align:middle line:84% There's a third implication, which is quite interesting, 00:28:50.220 --> 00:28:54.060 align:middle line:84% which is, governments should actually 00:28:54.060 --> 00:28:57.140 align:middle line:84% consider the time path of tax rates, 00:28:57.140 --> 00:28:59.500 align:middle line:84% not just the tax rate at a point in time, when 00:28:59.500 --> 00:29:03.450 align:middle line:84% deciding on how to finance spending, and do what we often 00:29:03.450 --> 00:29:05.330 align:middle line:90% call tax smoothing. 00:29:05.330 --> 00:29:07.850 align:middle line:84% So here's an example to make the point. 00:29:07.850 --> 00:29:13.930 align:middle line:84% Imagine that a nation has to raise 20% of GDP in taxes 00:29:13.930 --> 00:29:17.170 align:middle line:84% to finance its everyday operations. 00:29:17.170 --> 00:29:21.090 align:middle line:84% And then there's a one year war, and that one year war 00:29:21.090 --> 00:29:26.370 align:middle line:84% will at one time cost 20% of GDP to fight. 00:29:26.370 --> 00:29:29.890 align:middle line:84% Should the government raise taxes to 40% of GDP 00:29:29.890 --> 00:29:32.930 align:middle line:84% for one year, then drop them back down to 20? 00:29:32.930 --> 00:29:37.170 align:middle line:84% Or should it raise taxes by, say, 1% for the next 20 years, 00:29:37.170 --> 00:29:41.610 align:middle line:84% or half a percent for 40 years, or by epsilon for infinity? 00:29:41.610 --> 00:29:46.660 align:middle line:84% And basically, do you guys ever call your parents 00:29:46.660 --> 00:29:47.910 align:middle line:90% except when you're in the car? 00:29:47.910 --> 00:29:49.660 align:middle line:84% My kid only calls me when he's in the car. 00:29:49.660 --> 00:29:50.450 align:middle line:90% AUDIENCE: [LAUGHS] 00:29:50.450 --> 00:29:51.850 align:middle line:90% JON GRUBER: I swear to God. 00:29:51.850 --> 00:29:59.650 align:middle line:84% Anyway, so basically, essentially, tax smoothing 00:29:59.650 --> 00:30:02.890 align:middle line:84% is saying the trade off between financing things right away 00:30:02.890 --> 00:30:05.870 align:middle line:84% and smoothing it over time, and we want to smooth it over time. 00:30:05.870 --> 00:30:06.992 align:middle line:90% Why? 00:30:06.992 --> 00:30:08.450 align:middle line:84% Because the deadweight loss goes up 00:30:08.450 --> 00:30:09.510 align:middle line:90% with the square of the tax rate. 00:30:09.510 --> 00:30:12.170 align:middle line:84% If I go up to 40 in one year, I'm causing huge deadweight loss 00:30:12.170 --> 00:30:12.910 align:middle line:90% that year. 00:30:12.910 --> 00:30:14.910 align:middle line:84% Whereas if I just have an epsilon up every year, 00:30:14.910 --> 00:30:16.930 align:middle line:84% I'm a small deadweight loss in every year 00:30:16.930 --> 00:30:19.330 align:middle line:90% and it will add up to less. 00:30:19.330 --> 00:30:22.370 align:middle line:84% So you want to smooth taxes over time. 00:30:22.370 --> 00:30:24.890 align:middle line:84% Now, this actually is something which is quite interesting 00:30:24.890 --> 00:30:27.090 align:middle line:84% because many policies we'll talk about 00:30:27.090 --> 00:30:30.370 align:middle line:84% affect both tau squared and elasticities. 00:30:30.370 --> 00:30:32.250 align:middle line:84% There's a second reason why you wouldn't 00:30:32.250 --> 00:30:37.650 align:middle line:84% want to jack taxes up and take them down, 00:30:37.650 --> 00:30:40.330 align:middle line:84% which is that people might be more elastic to that. 00:30:40.330 --> 00:30:42.708 align:middle line:84% If you raise a tax rate half a percent forever, 00:30:42.708 --> 00:30:43.750 align:middle line:90% people might not respond. 00:30:43.750 --> 00:30:45.670 align:middle line:84% If you go to 40% before, you're back 20, 00:30:45.670 --> 00:30:47.450 align:middle line:84% people may then quit their jobs for a year 00:30:47.450 --> 00:30:49.970 align:middle line:90% or do something that's dramatic. 00:30:49.970 --> 00:30:53.170 align:middle line:84% So oftentimes, policies can affect both the elasticity 00:30:53.170 --> 00:30:54.382 align:middle line:90% or could go the other way. 00:30:54.382 --> 00:30:56.590 align:middle line:84% It could go if you did for one year, nobody can quit. 00:30:56.590 --> 00:30:58.470 align:middle line:84% But forever, they'll take a lower paying job. 00:30:58.470 --> 00:31:00.022 align:middle line:84% It's not clear which way it goes. 00:31:00.022 --> 00:31:02.730 align:middle line:84% But the point is, often policies will affect both the tax squared 00:31:02.730 --> 00:31:04.890 align:middle line:90% and the elasticity terms. 00:31:04.890 --> 00:31:05.850 align:middle line:90% OK. 00:31:05.850 --> 00:31:09.690 align:middle line:84% So I find this an incredibly exciting and important intuition 00:31:09.690 --> 00:31:12.410 align:middle line:84% about how you think about elasticities 00:31:12.410 --> 00:31:16.730 align:middle line:84% and tax base sizes, and thinking about optimal 00:31:16.730 --> 00:31:19.890 align:middle line:84% and thinking about tax efficiency. 00:31:19.890 --> 00:31:25.250 align:middle line:84% Now, in fact, just one side note all this presumes people 00:31:25.250 --> 00:31:27.150 align:middle line:90% understand the tax code. 00:31:27.150 --> 00:31:29.530 align:middle line:84% In fact, there's a really interesting literature 00:31:29.530 --> 00:31:31.650 align:middle line:84% showing how badly people understand the tax code. 00:31:31.650 --> 00:31:34.210 align:middle line:84% That in fact, most people make two common mistakes. 00:31:34.210 --> 00:31:37.850 align:middle line:84% First of all, first of all, people 00:31:37.850 --> 00:31:42.190 align:middle line:84% assume that the tax schedule is flatter than it is. 00:31:42.190 --> 00:31:44.050 align:middle line:84% Most people assume that rich people 00:31:44.050 --> 00:31:47.025 align:middle line:84% don't pay nearly as much more than poor people as they do. 00:31:47.025 --> 00:31:49.650 align:middle line:84% Second of all, most people tend to assume their average rate is 00:31:49.650 --> 00:31:51.410 align:middle line:90% their marginal rate. 00:31:51.410 --> 00:31:53.690 align:middle line:84% They tend to just conflate the two. 00:31:53.690 --> 00:31:57.810 align:middle line:84% It turns out, in that world with those mistakes, that 00:31:57.810 --> 00:31:59.828 align:middle line:84% delivers lower deadweight loss from taxation. 00:31:59.828 --> 00:32:01.370 align:middle line:84% Basically, people are making mistakes 00:32:01.370 --> 00:32:04.135 align:middle line:84% since they think rates are lower than they really are. 00:32:04.135 --> 00:32:06.010 align:middle line:84% Deadweight loss of taxation is actually lower 00:32:06.010 --> 00:32:07.088 align:middle line:90% than it really is. 00:32:07.088 --> 00:32:09.130 align:middle line:84% So mistakes can maybe help government efficiency, 00:32:09.130 --> 00:32:11.730 align:middle line:84% is an interesting implication of that. 00:32:11.730 --> 00:32:13.970 align:middle line:90% Just sort of a side note. 00:32:13.970 --> 00:32:16.428 align:middle line:84% But with that in mind, now let's go to policy. 00:32:16.428 --> 00:32:18.470 align:middle line:84% With this background in mind, let's go to policy. 00:32:18.470 --> 00:32:21.890 align:middle line:84% And let's talk about how many of you guys know who James Dean is? 00:32:21.890 --> 00:32:23.050 align:middle line:90% James Dean. 00:32:23.050 --> 00:32:24.190 align:middle line:90% Going once, going twice. 00:32:24.190 --> 00:32:24.850 align:middle line:90% Jesus, you're young. 00:32:24.850 --> 00:32:25.350 align:middle line:90% OK. 00:32:25.350 --> 00:32:26.470 align:middle line:90% James Dean-- we got one. 00:32:26.470 --> 00:32:30.490 align:middle line:84% James Dean was a very famous movie actor from the 50s, 00:32:30.490 --> 00:32:32.430 align:middle line:84% who was like the young Brad Pitt. 00:32:32.430 --> 00:32:34.230 align:middle line:90% Think Brad Pitt. 00:32:34.230 --> 00:32:37.530 align:middle line:84% Made two unbelievably important movies 00:32:37.530 --> 00:32:39.810 align:middle line:90% and then died in a car crash. 00:32:39.810 --> 00:32:43.690 align:middle line:84% The James Dean of economists was a guy named Frank Ramsey. 00:32:43.690 --> 00:32:47.370 align:middle line:84% Frank Ramsey was an economist in England in the 1920s who wrote 00:32:47.370 --> 00:32:49.810 align:middle line:84% two of the most important articles in economic history 00:32:49.810 --> 00:32:52.030 align:middle line:84% and then died in a car crash at a very young age. 00:32:52.030 --> 00:32:54.820 align:middle line:90% 00:32:54.820 --> 00:32:56.320 align:middle line:84% And basically, one of those articles 00:32:56.320 --> 00:32:59.200 align:middle line:84% was the foundation of economic growth, the canonical growth 00:32:59.200 --> 00:33:03.000 align:middle line:84% model we use was based on Frank Ramsey's initial insights. 00:33:03.000 --> 00:33:08.800 align:middle line:84% The other is the model of how we think about optimal taxation. 00:33:08.800 --> 00:33:12.920 align:middle line:84% And what Ramsey said was, he said, look, 00:33:12.920 --> 00:33:15.200 align:middle line:84% he asked the question very simply. 00:33:15.200 --> 00:33:19.040 align:middle line:84% He said, imagine a world where we raise taxes 00:33:19.040 --> 00:33:20.260 align:middle line:90% by taxing commodities. 00:33:20.260 --> 00:33:21.260 align:middle line:90% Let's forget income tax. 00:33:21.260 --> 00:33:22.340 align:middle line:90% This is 1920s. 00:33:22.340 --> 00:33:24.640 align:middle line:84% We didn't really have very good income taxes back then. 00:33:24.640 --> 00:33:28.440 align:middle line:84% Most taxes were raised by taxing commodities, tariffs, 00:33:28.440 --> 00:33:30.720 align:middle line:90% excise taxes, sales taxes. 00:33:30.720 --> 00:33:32.540 align:middle line:84% They were raised by taxing different goods, 00:33:32.540 --> 00:33:35.042 align:middle line:84% and often those goods were taxed at different rates. 00:33:35.042 --> 00:33:37.500 align:middle line:84% Some goods would be taxed at higher rates than other goods. 00:33:37.500 --> 00:33:40.000 align:middle line:84% And Ramsey asked, well, what is the right way 00:33:40.000 --> 00:33:42.400 align:middle line:90% to set taxes across goods? 00:33:42.400 --> 00:33:44.760 align:middle line:84% Imagine if a commodity tax system, 00:33:44.760 --> 00:33:49.058 align:middle line:84% what is the optimal set of commodity tax rates? 00:33:49.058 --> 00:33:51.100 align:middle line:84% And the way he posed the question was quite good. 00:33:51.100 --> 00:33:56.840 align:middle line:84% He said, look, what is the way to minimize the inefficiency 00:33:56.840 --> 00:34:00.600 align:middle line:84% of taxation while raising the required number of required 00:34:00.600 --> 00:34:01.880 align:middle line:90% amount of revenues? 00:34:01.880 --> 00:34:04.700 align:middle line:84% And this is formalized in the appendix to the chapter. 00:34:04.700 --> 00:34:06.480 align:middle line:84% But Ramsey's question he posed as let's 00:34:06.480 --> 00:34:11.080 align:middle line:84% minimize the deadweight loss across all the goods 00:34:11.080 --> 00:34:17.199 align:middle line:84% we tax, subject to raising a given amount of revenues. 00:34:17.199 --> 00:34:18.540 align:middle line:90% And he solved that problem. 00:34:18.540 --> 00:34:21.040 align:middle line:84% And what he got was Ramsey's, was 00:34:21.040 --> 00:34:24.639 align:middle line:84% what we call the Ramsey rule, which is that-- 00:34:24.639 --> 00:34:26.280 align:middle line:90% actually, I'll leave this here. 00:34:26.280 --> 00:34:31.520 align:middle line:84% He got the Ramsey rule, which is that we should set commodity 00:34:31.520 --> 00:34:35.600 align:middle line:84% taxes across goods i, to the point 00:34:35.600 --> 00:34:39.960 align:middle line:84% where the marginal deadweight loss of taxing good 00:34:39.960 --> 00:34:43.600 align:middle line:84% i of the next increment to taxation. 00:34:43.600 --> 00:34:45.520 align:middle line:84% So the deadweight loss of increasing tax 00:34:45.520 --> 00:34:50.679 align:middle line:84% by epsilon on good i over the marginal revenue raised 00:34:50.679 --> 00:34:52.520 align:middle line:90% by an epsilon tax in good i. 00:34:52.520 --> 00:34:54.520 align:middle line:84% So if I increase tax in i, I raise some money, 00:34:54.520 --> 00:34:56.679 align:middle line:90% I cause some deadweight loss. 00:34:56.679 --> 00:35:01.760 align:middle line:84% That should be equal to a constant across all i 00:35:01.760 --> 00:35:04.960 align:middle line:84% that you should set tax across all goods 00:35:04.960 --> 00:35:06.940 align:middle line:84% such that this ratio is a constant. 00:35:06.940 --> 00:35:11.200 align:middle line:84% Not such that their tax are equal, but rather such 00:35:11.200 --> 00:35:13.440 align:middle line:90% that this relationship holds. 00:35:13.440 --> 00:35:15.380 align:middle line:90% Let's think about the intuition. 00:35:15.380 --> 00:35:18.440 align:middle line:90% First of all, what is lambda? 00:35:18.440 --> 00:35:21.120 align:middle line:84% Lambda is a constant that represents 00:35:21.120 --> 00:35:24.720 align:middle line:84% the value of additional government revenues. 00:35:24.720 --> 00:35:27.020 align:middle line:84% Think about lambda being how much the government needs, 00:35:27.020 --> 00:35:28.052 align:middle line:90% the next dollar. 00:35:28.052 --> 00:35:30.260 align:middle line:84% If the government really needs the next dollar a lot, 00:35:30.260 --> 00:35:30.860 align:middle line:90% lambda is high. 00:35:30.860 --> 00:35:33.152 align:middle line:84% If it doesn't need the next dollar much, lambda is low. 00:35:33.152 --> 00:35:34.920 align:middle line:84% So it's just a level shifter that 00:35:34.920 --> 00:35:39.000 align:middle line:84% represents the marginal value of the next dollar of taxes 00:35:39.000 --> 00:35:40.800 align:middle line:90% to the government. 00:35:40.800 --> 00:35:42.050 align:middle line:90% That's what lambda is. 00:35:42.050 --> 00:35:44.300 align:middle line:84% But the important thing is not what lambda represents, 00:35:44.300 --> 00:35:47.320 align:middle line:84% it's that this ratio equals a constant. 00:35:47.320 --> 00:35:48.880 align:middle line:90% What does that mean? 00:35:48.880 --> 00:35:57.520 align:middle line:84% So basically, let's recall that marginal deadweight loss 00:35:57.520 --> 00:35:59.403 align:middle line:84% is a positive function of the tax rate. 00:35:59.403 --> 00:36:01.320 align:middle line:84% Remember, marginal loss is a positive function 00:36:01.320 --> 00:36:02.600 align:middle line:90% of the tax rate. 00:36:02.600 --> 00:36:05.120 align:middle line:84% So the more you tax a good the higher 00:36:05.120 --> 00:36:06.620 align:middle line:90% the marginal deadweight loss is. 00:36:06.620 --> 00:36:10.526 align:middle line:90% 00:36:10.526 --> 00:36:12.640 align:middle line:84% So basically, and marginal revenue, 00:36:12.640 --> 00:36:14.700 align:middle line:84% let's just assume marginal revenue is linear. 00:36:14.700 --> 00:36:17.280 align:middle line:84% Let's ignore the marginal revenue term for a second. 00:36:17.280 --> 00:36:23.280 align:middle line:84% So what this says is the more you tax a good, 00:36:23.280 --> 00:36:26.840 align:middle line:90% the higher this ratio becomes. 00:36:26.840 --> 00:36:29.860 align:middle line:90% So think about one intuition. 00:36:29.860 --> 00:36:31.960 align:middle line:84% If a good is already taxed very highly, 00:36:31.960 --> 00:36:35.800 align:middle line:84% another one's good tax is not taxed at all. 00:36:35.800 --> 00:36:36.925 align:middle line:90% Then, what does this imply? 00:36:36.925 --> 00:36:38.217 align:middle line:90% Let's say you've got two goods. 00:36:38.217 --> 00:36:40.420 align:middle line:84% One has no tax on it, one has a very high tax on it. 00:36:40.420 --> 00:36:43.640 align:middle line:84% What does this imply about where you should put the next tax? 00:36:43.640 --> 00:36:45.780 align:middle line:84% Well, you want to set both these ratios. 00:36:45.780 --> 00:36:47.960 align:middle line:84% And let's say in both cases, you raise $1. 00:36:47.960 --> 00:36:50.140 align:middle line:84% You want to raise the next dollar of taxation. 00:36:50.140 --> 00:36:50.900 align:middle line:90% Yeah. 00:36:50.900 --> 00:36:54.277 align:middle line:84% AUDIENCE: Is this tax taxing the gains on the commodity or sale? 00:36:54.277 --> 00:36:55.860 align:middle line:84% JON GRUBER: The sale of the commodity. 00:36:55.860 --> 00:36:58.180 align:middle line:84% Not a commodity like, we're not doing commodity exchanges. 00:36:58.180 --> 00:36:59.180 align:middle line:90% You're in finance world. 00:36:59.180 --> 00:37:00.700 align:middle line:90% I mean, like an apple. 00:37:00.700 --> 00:37:01.240 align:middle line:90% An Apple. 00:37:01.240 --> 00:37:04.020 align:middle line:84% Buying an apple, buying a banana, buying a loaf of bread, 00:37:04.020 --> 00:37:06.180 align:middle line:84% buying a cigarette, buying a gallon of gas. 00:37:06.180 --> 00:37:06.680 align:middle line:90% Yeah. 00:37:06.680 --> 00:37:09.200 align:middle line:90% AUDIENCE: [INAUDIBLE] 00:37:09.200 --> 00:37:10.380 align:middle line:90% JON GRUBER: Because-- 00:37:10.380 --> 00:37:12.713 align:middle line:84% AUDIENCE: Because the marginal deadweight loss from that 00:37:12.713 --> 00:37:14.546 align:middle line:84% is lower than the commodity already taxed. 00:37:14.546 --> 00:37:15.588 align:middle line:90% JON GRUBER: Right, right. 00:37:15.588 --> 00:37:19.240 align:middle line:84% So you want to put, on the one hand, there's that. 00:37:19.240 --> 00:37:23.000 align:middle line:84% You want to put the good on the tax 00:37:23.000 --> 00:37:24.340 align:middle line:90% on the good that's taxed less. 00:37:24.340 --> 00:37:26.360 align:middle line:84% You want to basically, that would 00:37:26.360 --> 00:37:29.580 align:middle line:84% say if that was all that existed, 00:37:29.580 --> 00:37:31.840 align:middle line:84% if that was the only issue, you'd 00:37:31.840 --> 00:37:35.000 align:middle line:84% want to basically do what with taxes? 00:37:35.000 --> 00:37:36.140 align:middle line:90% You want to set them equal. 00:37:36.140 --> 00:37:38.500 align:middle line:84% You'd want any tax that goes above, 00:37:38.500 --> 00:37:41.080 align:middle line:84% it's like the consumption smoothing argument. 00:37:41.080 --> 00:37:42.840 align:middle line:84% Once one tax is higher-- remember 00:37:42.840 --> 00:37:46.363 align:middle line:84% with consumption smoothing, if you give $1 to a rich guy 00:37:46.363 --> 00:37:48.030 align:middle line:84% and take it away from a poor guy, that's 00:37:48.030 --> 00:37:49.925 align:middle line:84% a bad deal because the rich guy is a lower 00:37:49.925 --> 00:37:51.050 align:middle line:90% marginal utility of income. 00:37:51.050 --> 00:37:52.390 align:middle line:90% It's a similar thing here. 00:37:52.390 --> 00:37:55.490 align:middle line:84% Adding any dollar of taxes to which takes one above, 00:37:55.490 --> 00:37:58.110 align:middle line:90% it'll take one below. 00:37:58.110 --> 00:38:00.470 align:middle line:84% But going above causes more inefficiency 00:38:00.470 --> 00:38:02.950 align:middle line:90% because this tau term. 00:38:02.950 --> 00:38:03.908 align:middle line:90% So that's one argument. 00:38:03.908 --> 00:38:06.492 align:middle line:84% But there's another thing, which is why taxes shouldn't always 00:38:06.492 --> 00:38:09.030 align:middle line:84% be equal, which is what else goes into marginal deadweight 00:38:09.030 --> 00:38:09.730 align:middle line:90% loss? 00:38:09.730 --> 00:38:10.230 align:middle line:90% Yeah. 00:38:10.230 --> 00:38:11.188 align:middle line:90% AUDIENCE: Elasticities. 00:38:11.188 --> 00:38:13.550 align:middle line:90% JON GRUBER: Elasticities. 00:38:13.550 --> 00:38:16.450 align:middle line:84% And elasticities also turn optimal commodity taxes. 00:38:16.450 --> 00:38:20.770 align:middle line:84% So for example, what does the Ramsay tax imply? 00:38:20.770 --> 00:38:25.030 align:middle line:84% What does the Ramsay model imply about taxing luxuries 00:38:25.030 --> 00:38:28.470 align:middle line:90% versus taxing necessities? 00:38:28.470 --> 00:38:29.370 align:middle line:90% Yeah. 00:38:29.370 --> 00:38:30.430 align:middle line:90% AUDIENCE: Tax them less. 00:38:30.430 --> 00:38:32.590 align:middle line:84% JON GRUBER: Tax luxuries less than necessities, 00:38:32.590 --> 00:38:35.510 align:middle line:84% because necessities are more inelastic than luxuries. 00:38:35.510 --> 00:38:38.950 align:middle line:84% The Ramsay tax had some pretty nasty equity implications. 00:38:38.950 --> 00:38:41.950 align:middle line:84% It says basically things that are more elastic 00:38:41.950 --> 00:38:43.350 align:middle line:90% should get taxed less. 00:38:43.350 --> 00:38:46.070 align:middle line:84% So essentially, when you put these two things together, 00:38:46.070 --> 00:38:49.070 align:middle line:84% that's the tension that creates the optimal tax. 00:38:49.070 --> 00:38:52.070 align:middle line:84% You want to put taxes on inelastic goods, 00:38:52.070 --> 00:38:56.327 align:middle line:84% but not so much that the tau squared term comes to dominate. 00:38:56.327 --> 00:38:57.910 align:middle line:84% Essentially, what the Ramsey rule does 00:38:57.910 --> 00:39:00.270 align:middle line:84% is trading off these two pieces, trading off 00:39:00.270 --> 00:39:02.310 align:middle line:90% this piece versus this piece. 00:39:02.310 --> 00:39:05.010 align:middle line:84% It's saying put tax on more elastic goods. 00:39:05.010 --> 00:39:06.962 align:middle line:84% But remember, the more tax you put on one 00:39:06.962 --> 00:39:09.170 align:middle line:84% good the higher the marginal deadweight loss will be. 00:39:09.170 --> 00:39:10.790 align:middle line:84% And at some point, it'd be efficient to take it off and put 00:39:10.790 --> 00:39:12.610 align:middle line:90% it on a less elastic good. 00:39:12.610 --> 00:39:15.010 align:middle line:84% If you put tax on the least elastic goods, 00:39:15.010 --> 00:39:18.070 align:middle line:84% I'm sorry, at some point, put it on more elastic good. 00:39:18.070 --> 00:39:20.510 align:middle line:84% So Ramsey would say, if you've got a bunch of commodities 00:39:20.510 --> 00:39:25.550 align:middle line:84% lined up, let's say the world consists of apples and watches. 00:39:25.550 --> 00:39:27.230 align:middle line:84% Ramsey says, the first dollar of tax 00:39:27.230 --> 00:39:29.990 align:middle line:84% ought to go on apples because it's 00:39:29.990 --> 00:39:31.915 align:middle line:90% a lower elasticity of demand. 00:39:31.915 --> 00:39:33.790 align:middle line:84% Let's assume the elasticity applies the same. 00:39:33.790 --> 00:39:35.750 align:middle line:90% Lower elasticity of demand. 00:39:35.750 --> 00:39:40.190 align:middle line:84% You're therefore going to, essentially, 00:39:40.190 --> 00:39:42.110 align:middle line:90% create less deadweight loss. 00:39:42.110 --> 00:39:44.193 align:middle line:84% But should the 100th dollar of taxes go on apples? 00:39:44.193 --> 00:39:46.485 align:middle line:84% Or maybe at that point, you want to keep apples on an i 00:39:46.485 --> 00:39:47.590 align:middle line:90% and do $1 on watches. 00:39:47.590 --> 00:39:49.942 align:middle line:84% Well, that, you might want to because once you have $199 00:39:49.942 --> 00:39:52.150 align:middle line:84% of taxes, there's a big deadweight loss of that 100th 00:39:52.150 --> 00:39:54.270 align:middle line:84% tax, whereas the first incremental tax on watches 00:39:54.270 --> 00:39:56.630 align:middle line:84% doesn't cause much deadweight loss. 00:39:56.630 --> 00:40:00.710 align:middle line:84% Another way to see this is to make a set of assumptions, 00:40:00.710 --> 00:40:04.190 align:middle line:84% and with a set of assumptions we lay out in the appendix. 00:40:04.190 --> 00:40:07.670 align:middle line:84% We generally summarize the Ramsay rule 00:40:07.670 --> 00:40:13.550 align:middle line:84% as saying that the optimal commodity tax is minus 1 00:40:13.550 --> 00:40:17.190 align:middle line:90% over eta i times lambda. 00:40:17.190 --> 00:40:21.390 align:middle line:84% That that is the formula for the optimal commodity tax on good i. 00:40:21.390 --> 00:40:23.490 align:middle line:84% We call this the inverse elasticity rule. 00:40:23.490 --> 00:40:25.910 align:middle line:84% This is basically making some assumptions, 00:40:25.910 --> 00:40:30.908 align:middle line:84% like a perfectly elastic supply side, stuff like that. 00:40:30.908 --> 00:40:32.450 align:middle line:84% And they're laid out in the appendix. 00:40:32.450 --> 00:40:33.867 align:middle line:84% But you really need to know those. 00:40:33.867 --> 00:40:36.868 align:middle line:84% This is just sort of a shorthand that you can generally use. 00:40:36.868 --> 00:40:38.410 align:middle line:84% Basically, it's a way of summarizing. 00:40:38.410 --> 00:40:41.950 align:middle line:84% It's saying, look, we want more taxes on inelastic goods, 00:40:41.950 --> 00:40:44.630 align:middle line:84% but don't put all the taxes on inelastic goods. 00:40:44.630 --> 00:40:46.330 align:middle line:84% You want to basically share the burden. 00:40:46.330 --> 00:40:49.870 align:middle line:84% So tax on inelastic goods should be higher than elastic goods, 00:40:49.870 --> 00:40:53.250 align:middle line:84% but shouldn't have all the tax on inelastic goods 00:40:53.250 --> 00:40:54.870 align:middle line:90% because the tau squared rule. 00:40:54.870 --> 00:40:57.407 align:middle line:84% So it's basically the elasticity rule against-- 00:40:57.407 --> 00:40:58.990 align:middle line:84% another way to think about tau squared 00:40:58.990 --> 00:41:00.710 align:middle line:90% rule is the broad-based rule. 00:41:00.710 --> 00:41:05.110 align:middle line:84% That broad base of taxation reduce 00:41:05.110 --> 00:41:09.070 align:middle line:84% inefficiency because of the tau squared rule. 00:41:09.070 --> 00:41:11.630 align:middle line:84% And this goes back to Haig-Simons. 00:41:11.630 --> 00:41:13.782 align:middle line:84% This is why economists like Haig-Simons. 00:41:13.782 --> 00:41:15.490 align:middle line:84% Haig-Simons isn't just good for fairness, 00:41:15.490 --> 00:41:16.610 align:middle line:90% it's good for efficiency. 00:41:16.610 --> 00:41:20.510 align:middle line:84% When you tax everything, the rate can be lower. 00:41:20.510 --> 00:41:22.750 align:middle line:84% So the idea of optimal tax theory 00:41:22.750 --> 00:41:25.870 align:middle line:84% is the broader the base, the lower the rate can be. 00:41:25.870 --> 00:41:28.870 align:middle line:84% And the lower the rate, the less damage from taxation 00:41:28.870 --> 00:41:31.230 align:middle line:90% because the tau squared rule. 00:41:31.230 --> 00:41:33.590 align:middle line:84% On the other hand, if the broad base 00:41:33.590 --> 00:41:35.690 align:middle line:84% means taxing a bunch of really elastic shit, 00:41:35.690 --> 00:41:37.380 align:middle line:90% you don't want to do that. 00:41:37.380 --> 00:41:39.060 align:middle line:90% And that's the trade off. 00:41:39.060 --> 00:41:42.780 align:middle line:84% Inherent in, optimal commodity taxation. 00:41:42.780 --> 00:41:43.490 align:middle line:90% Yeah. 00:41:43.490 --> 00:41:45.740 align:middle line:84% AUDIENCE: Does the [INAUDIBLE] rule takes into account 00:41:45.740 --> 00:41:47.118 align:middle line:90% like externalities [INAUDIBLE]? 00:41:47.118 --> 00:41:49.160 align:middle line:84% JON GRUBER: No, this is all perfect market stuff. 00:41:49.160 --> 00:41:50.380 align:middle line:90% AUDIENCE: OK. 00:41:50.380 --> 00:41:51.218 align:middle line:90% JON GRUBER: Yeah. 00:41:51.218 --> 00:41:52.760 align:middle line:84% AUDIENCE: So you would, in this case, 00:41:52.760 --> 00:41:55.060 align:middle line:84% keep on increasing the tax on something 00:41:55.060 --> 00:41:56.803 align:middle line:84% until it reached the lambda level, 00:41:56.803 --> 00:41:58.220 align:middle line:84% and then you would go [INAUDIBLE]. 00:41:58.220 --> 00:41:59.762 align:middle line:84% JON GRUBER: You go to the next thing. 00:41:59.762 --> 00:42:02.395 align:middle line:84% I mean, you do it all simultaneously because, yeah. 00:42:02.395 --> 00:42:03.020 align:middle line:90% AUDIENCE: Sure. 00:42:03.020 --> 00:42:07.180 align:middle line:84% In this case then, so in the economy where this is happening, 00:42:07.180 --> 00:42:09.480 align:middle line:84% your insulin, for example, super high tax. 00:42:09.480 --> 00:42:11.260 align:middle line:84% If you wanted to try and address that, 00:42:11.260 --> 00:42:12.385 align:middle line:90% then you would [INAUDIBLE]? 00:42:12.385 --> 00:42:14.180 align:middle line:84% JON GRUBER: So then, basically, this 00:42:14.180 --> 00:42:16.700 align:middle line:84% leads to the equity question, which is as always, there's 00:42:16.700 --> 00:42:17.580 align:middle line:90% a trade off. 00:42:17.580 --> 00:42:18.880 align:middle line:90% How do economists model that? 00:42:18.880 --> 00:42:20.940 align:middle line:90% Well, they model a simple way. 00:42:20.940 --> 00:42:23.980 align:middle line:84% To every good they add an equity weight. 00:42:23.980 --> 00:42:27.420 align:middle line:84% So they say, look, yes, the Ramsay rule 00:42:27.420 --> 00:42:29.960 align:middle line:84% implies taxing inelastic things more, 00:42:29.960 --> 00:42:31.880 align:middle line:84% but poor people consume inelastic things. 00:42:31.880 --> 00:42:33.980 align:middle line:84% So let's let goods have literally a welfare 00:42:33.980 --> 00:42:37.500 align:middle line:84% weight, where the goods consumed by the poor 00:42:37.500 --> 00:42:39.860 align:middle line:90% are worth more to society. 00:42:39.860 --> 00:42:42.900 align:middle line:84% Then, in that case, that would offset this. 00:42:42.900 --> 00:42:43.448 align:middle line:90% Not fully. 00:42:43.448 --> 00:42:45.240 align:middle line:84% Depends what welfare weights you put on it. 00:42:45.240 --> 00:42:47.455 align:middle line:84% But for example, if you said like, insulin, 00:42:47.455 --> 00:42:49.580 align:middle line:84% you could put an infinite welfare weight in insulin 00:42:49.580 --> 00:42:51.340 align:middle line:84% and then insulin would never be taxed 00:42:51.340 --> 00:42:53.548 align:middle line:84% because it'd be infinite inefficiency from taxing it. 00:42:53.548 --> 00:42:55.423 align:middle line:84% So you can always fuck around with this model 00:42:55.423 --> 00:42:57.540 align:middle line:84% by just changing the weights on the goods. 00:42:57.540 --> 00:42:58.080 align:middle line:90% Yeah. 00:42:58.080 --> 00:42:59.300 align:middle line:84% AUDIENCE: Wouldn't that defeat the purpose? 00:42:59.300 --> 00:43:00.400 align:middle line:84% JON GRUBER: Well, it wouldn't defeat the purpose. 00:43:00.400 --> 00:43:01.733 align:middle line:90% It depends what your purpose is. 00:43:01.733 --> 00:43:03.460 align:middle line:90% It's social welfare function. 00:43:03.460 --> 00:43:06.260 align:middle line:84% If putting an infinite weight in insulin 00:43:06.260 --> 00:43:08.720 align:middle line:84% means watches have to be taxed epsilon more, who cares? 00:43:08.720 --> 00:43:09.720 align:middle line:90% That would defeat the purpose. 00:43:09.720 --> 00:43:11.320 align:middle line:84% Yeah, it'd be a little more inefficiency, 00:43:11.320 --> 00:43:12.320 align:middle line:90% but guys wouldn't die. 00:43:12.320 --> 00:43:14.460 align:middle line:84% So maybe you're willing to make that trade off. 00:43:14.460 --> 00:43:15.400 align:middle line:90% Yeah. 00:43:15.400 --> 00:43:18.860 align:middle line:84% AUDIENCE: Wouldn't the output [INAUDIBLE] you 00:43:18.860 --> 00:43:20.570 align:middle line:84% want to actually optimize lambda. 00:43:20.570 --> 00:43:22.820 align:middle line:84% JON GRUBER: No, you want to reduce the deadweight loss 00:43:22.820 --> 00:43:24.340 align:middle line:90% in collecting that revenue. 00:43:24.340 --> 00:43:27.660 align:middle line:84% Or as they say, you want to pluck the goose while inducing 00:43:27.660 --> 00:43:29.900 align:middle line:90% the least squawking. 00:43:29.900 --> 00:43:32.940 align:middle line:84% So basically, the optimization function 00:43:32.940 --> 00:43:36.600 align:middle line:84% is minimized deadweight loss to raise revenue. 00:43:36.600 --> 00:43:38.940 align:middle line:84% Lambda is literally actually a Lagrange multiplier 00:43:38.940 --> 00:43:40.480 align:middle line:90% on the revenue constraint. 00:43:40.480 --> 00:43:43.400 align:middle line:84% If you do the formal math lambda is the Lagrange multiplier. 00:43:43.400 --> 00:43:46.022 align:middle line:90% That's why we use lambda. 00:43:46.022 --> 00:43:47.480 align:middle line:84% But you don't need the formal math, 00:43:47.480 --> 00:43:49.060 align:middle line:84% you just need the intuition, which 00:43:49.060 --> 00:43:51.940 align:middle line:84% is that basically, lambda is the shifter, which tells you 00:43:51.940 --> 00:43:54.140 align:middle line:90% how you want your levels. 00:43:54.140 --> 00:43:55.947 align:middle line:90% But Ramsay isn't about that. 00:43:55.947 --> 00:43:57.280 align:middle line:90% Ramsay couldn't care about this. 00:43:57.280 --> 00:43:58.500 align:middle line:90% He's about this. 00:43:58.500 --> 00:44:01.040 align:middle line:84% Ramsay is about at a given level, 00:44:01.040 --> 00:44:04.180 align:middle line:84% how do I want to set the tax across goods? 00:44:04.180 --> 00:44:08.020 align:middle line:84% Let me do an example of this, a very famous example, which 00:44:08.020 --> 00:44:11.860 align:middle line:84% comes to work by the Nobel Prize winning economist Angus Deaton. 00:44:11.860 --> 00:44:14.140 align:middle line:84% Angus Deaton was hired as a consultant 00:44:14.140 --> 00:44:17.140 align:middle line:84% by the country of Pakistan to help them figure out how 00:44:17.140 --> 00:44:21.140 align:middle line:90% to set their commodity taxes. 00:44:21.140 --> 00:44:24.420 align:middle line:84% In 1984, the Pakistani government 00:44:24.420 --> 00:44:28.260 align:middle line:84% had three goods it was focused on. 00:44:28.260 --> 00:44:35.800 align:middle line:84% It was focused on wheat, rice and oils and fats. 00:44:35.800 --> 00:44:37.712 align:middle line:90% So let's go to figure 20-8. 00:44:37.712 --> 00:44:39.420 align:middle line:84% This is a complicated example, so I won't 00:44:39.420 --> 00:44:41.900 align:middle line:90% try to go through this slowly. 00:44:41.900 --> 00:44:47.220 align:middle line:84% Three markets, wheat, rice and oils and fats. 00:44:47.220 --> 00:44:53.700 align:middle line:84% The existing system was system which taxed oils and fats 00:44:53.700 --> 00:44:57.260 align:middle line:90% to subsidize wheat and rice. 00:44:57.260 --> 00:44:59.580 align:middle line:90% So look at table 20-1. 00:44:59.580 --> 00:45:01.635 align:middle line:84% You see that we have the three goods 00:45:01.635 --> 00:45:03.260 align:middle line:84% and what the existing government policy 00:45:03.260 --> 00:45:05.960 align:middle line:84% was, a 40% subsidy to wheat and rice 00:45:05.960 --> 00:45:08.940 align:middle line:90% and a 5% tax on oil and fat. 00:45:08.940 --> 00:45:11.100 align:middle line:84% Deaton went in and estimated the elasticity 00:45:11.100 --> 00:45:12.483 align:middle line:90% of demands for these goods. 00:45:12.483 --> 00:45:13.400 align:middle line:90% And what did he found? 00:45:13.400 --> 00:45:16.420 align:middle line:84% He found that wheat was inelastic, 00:45:16.420 --> 00:45:19.420 align:middle line:84% but that rice and oil and fat were both fairly elastically 00:45:19.420 --> 00:45:20.160 align:middle line:90% demanded. 00:45:20.160 --> 00:45:24.740 align:middle line:84% So now, if you go back to your figure, figure 20-8, 00:45:24.740 --> 00:45:29.740 align:middle line:84% you can see that you have fairly inelastic demand curve 00:45:29.740 --> 00:45:34.500 align:middle line:84% for wheat, but a more elastic demand curve for rice 00:45:34.500 --> 00:45:36.180 align:middle line:90% and for oils and fats. 00:45:36.180 --> 00:45:36.680 align:middle line:90% OK. 00:45:36.680 --> 00:45:39.140 align:middle line:90% Questions so far? 00:45:39.140 --> 00:45:42.540 align:middle line:84% Now, the initial government equilibrium, the government 00:45:42.540 --> 00:45:44.620 align:middle line:84% had put in policies such that we were 00:45:44.620 --> 00:45:46.580 align:middle line:84% at point C in the market for wheat, 00:45:46.580 --> 00:45:49.100 align:middle line:90% because of the 40% subsidy. 00:45:49.100 --> 00:45:53.540 align:middle line:84% We're at point C in the market for rice, 00:45:53.540 --> 00:45:55.460 align:middle line:90% because there was a 40% subsidy. 00:45:55.460 --> 00:45:58.640 align:middle line:84% And at point B, in the market for oils and fats, 00:45:58.640 --> 00:46:01.260 align:middle line:90% because there was a 5% tax. 00:46:01.260 --> 00:46:03.260 align:middle line:84% Therefore, we were getting-- remember, subsidies 00:46:03.260 --> 00:46:04.855 align:middle line:90% create deadweight loss too. 00:46:04.855 --> 00:46:06.980 align:middle line:84% Anything which deviates from the market equilibrium 00:46:06.980 --> 00:46:07.840 align:middle line:90% creates deadweight loss. 00:46:07.840 --> 00:46:09.798 align:middle line:84% Let's ignore all the pre-existing externalities 00:46:09.798 --> 00:46:11.540 align:middle line:90% in these markets. 00:46:11.540 --> 00:46:15.460 align:middle line:84% So this is creating these three deadweight losses. 00:46:15.460 --> 00:46:19.562 align:middle line:84% And they asked Deaton, how should we change our tax system? 00:46:19.562 --> 00:46:21.020 align:middle line:84% One nice thing about that question, 00:46:21.020 --> 00:46:24.540 align:middle line:84% it is way easier to figure out how to change a system than how 00:46:24.540 --> 00:46:26.090 align:middle line:90% to design a system. 00:46:26.090 --> 00:46:28.090 align:middle line:84% Changing a system means I can just look at this, 00:46:28.090 --> 00:46:30.450 align:middle line:84% and Deaton looked at this and said, well, wait a second, 00:46:30.450 --> 00:46:32.490 align:middle line:90% you've got a situation. 00:46:32.490 --> 00:46:38.050 align:middle line:84% The subsidy that basically you are taxing oil and fat 00:46:38.050 --> 00:46:39.450 align:middle line:90% to pay for these subsidies. 00:46:39.450 --> 00:46:43.770 align:middle line:84% Well, imagine if you reduce the subsidy on wheat some. 00:46:43.770 --> 00:46:46.090 align:middle line:84% That's not going to cause that much since wheat 00:46:46.090 --> 00:46:50.030 align:middle line:84% is fairly inelastically demanded, 00:46:50.030 --> 00:46:52.330 align:middle line:84% if you reduce the subsidy on wheat. 00:46:52.330 --> 00:46:53.210 align:middle line:90% OK. 00:46:53.210 --> 00:46:55.950 align:middle line:84% If you reduce the subsidy of wheat, 00:46:55.950 --> 00:46:58.970 align:middle line:84% you don't get much social benefit. 00:46:58.970 --> 00:47:01.430 align:middle line:84% But if you reduce the subsidy on rice, 00:47:01.430 --> 00:47:04.070 align:middle line:84% you get a lot, because that's elastically demanded. 00:47:04.070 --> 00:47:07.050 align:middle line:90% 00:47:07.050 --> 00:47:09.917 align:middle line:84% And at the same time, if you reduce the tax on oil and fats, 00:47:09.917 --> 00:47:12.250 align:middle line:84% you also get a lot of benefit because that's elastically 00:47:12.250 --> 00:47:13.850 align:middle line:90% demanded. 00:47:13.850 --> 00:47:15.530 align:middle line:84% So he said, basically what you ought 00:47:15.530 --> 00:47:20.050 align:middle line:84% to do is you ought to really reduce the tax on rice 00:47:20.050 --> 00:47:23.210 align:middle line:90% and reduce the subsidies-- 00:47:23.210 --> 00:47:25.890 align:middle line:84% reduce the tax on fat and reduce the subsidies to rice and also 00:47:25.890 --> 00:47:26.390 align:middle line:90% to wheat. 00:47:26.390 --> 00:47:27.598 align:middle line:90% But that isn't as big a deal. 00:47:27.598 --> 00:47:28.970 align:middle line:90% The welfare gain is not as big. 00:47:28.970 --> 00:47:32.610 align:middle line:84% The real action is, why are we taxing this very elastic thing 00:47:32.610 --> 00:47:35.450 align:middle line:84% to subsidize this other very elastic thing? 00:47:35.450 --> 00:47:38.050 align:middle line:84% And he recommended that on the margin, 00:47:38.050 --> 00:47:42.430 align:middle line:84% they could reduce the tax on oil and reduce the subsidy to rice. 00:47:42.430 --> 00:47:46.210 align:middle line:84% And that overall, Pakistan will be better off. 00:47:46.210 --> 00:47:49.270 align:middle line:84% The Pakistani government said that's great, economist. 00:47:49.270 --> 00:47:51.932 align:middle line:84% But here's the problem, we also care about equity. 00:47:51.932 --> 00:47:53.390 align:middle line:84% What if people consume these goods? 00:47:53.390 --> 00:47:57.250 align:middle line:84% Well, Deaton said, fine, I will go and measure 00:47:57.250 --> 00:48:02.210 align:middle line:84% the income distribution of people who consume these things. 00:48:02.210 --> 00:48:07.090 align:middle line:84% And what he found was that the people who consumed the wheat 00:48:07.090 --> 00:48:11.850 align:middle line:84% were the poorest, whereas the people who consume rice 00:48:11.850 --> 00:48:14.850 align:middle line:90% were higher income. 00:48:14.850 --> 00:48:18.730 align:middle line:84% Yeah, so basically, the bottom line is, wheat and oil and fat 00:48:18.730 --> 00:48:21.130 align:middle line:84% were consumed the most by lower income people, 00:48:21.130 --> 00:48:23.987 align:middle line:84% and rice more by middle income people. 00:48:23.987 --> 00:48:26.570 align:middle line:84% So what he said is, well, when you put distributional concerns 00:48:26.570 --> 00:48:28.010 align:middle line:84% in, what that says is that further 00:48:28.010 --> 00:48:30.552 align:middle line:84% says we shouldn't reduce the subsidy to wheat, because that's 00:48:30.552 --> 00:48:32.170 align:middle line:84% poor people, but we should reduce even 00:48:32.170 --> 00:48:33.930 align:middle line:90% further the subsidy to rice. 00:48:33.930 --> 00:48:35.810 align:middle line:90% That's not the poorest people. 00:48:35.810 --> 00:48:39.230 align:middle line:84% And we should reduce the tax further on oil and fat, 00:48:39.230 --> 00:48:41.090 align:middle line:90% because that's poor people. 00:48:41.090 --> 00:48:45.010 align:middle line:84% So that's how you put equity considerations into the model. 00:48:45.010 --> 00:48:47.470 align:middle line:84% This is not-- I don't need you to remember this example. 00:48:47.470 --> 00:48:49.890 align:middle line:84% I want you to use this as an illustration of how 00:48:49.890 --> 00:48:53.070 align:middle line:84% these abstract theory can be put in place in the real world. 00:48:53.070 --> 00:48:55.410 align:middle line:84% He can literally help the people of Pakistan 00:48:55.410 --> 00:48:57.610 align:middle line:84% through this simple Ramsey intuition 00:48:57.610 --> 00:49:00.610 align:middle line:84% by actually getting the data, estimating these demand curves 00:49:00.610 --> 00:49:02.290 align:middle line:84% and income distributions, and advising 00:49:02.290 --> 00:49:03.530 align:middle line:90% the government on what to do. 00:49:03.530 --> 00:49:04.242 align:middle line:90% Yeah. 00:49:04.242 --> 00:49:06.242 align:middle line:84% AUDIENCE: I think I'm getting a little confused. 00:49:06.242 --> 00:49:10.105 align:middle line:84% I thought if we should tax things that are more elastic. 00:49:10.105 --> 00:49:10.730 align:middle line:90% JON GRUBER: No. 00:49:10.730 --> 00:49:11.270 align:middle line:90% OK. 00:49:11.270 --> 00:49:14.610 align:middle line:90% I'm talking taxes and subsidies. 00:49:14.610 --> 00:49:18.250 align:middle line:84% So we should, if there's multiple goods we're taxing, 00:49:18.250 --> 00:49:21.290 align:middle line:84% we should tax things that are more inelastic. 00:49:21.290 --> 00:49:22.170 align:middle line:90% AUDIENCE: Oh. 00:49:22.170 --> 00:49:24.350 align:middle line:84% JON GRUBER: But this is a different example. 00:49:24.350 --> 00:49:25.892 align:middle line:84% Now, we're not taxing multiple goods, 00:49:25.892 --> 00:49:28.050 align:middle line:84% we're taxing one and subsidizing two. 00:49:28.050 --> 00:49:29.350 align:middle line:90% So it's a different example. 00:49:29.350 --> 00:49:31.410 align:middle line:84% AUDIENCE: In curve C, the oils and gas, 00:49:31.410 --> 00:49:34.170 align:middle line:84% since it won't be elastic, that's why 00:49:34.170 --> 00:49:35.730 align:middle line:90% it's lower than your cost? 00:49:35.730 --> 00:49:38.410 align:middle line:84% JON GRUBER: Well, no, it's just a small tax is why 00:49:38.410 --> 00:49:39.670 align:middle line:90% it's a small deadweight loss. 00:49:39.670 --> 00:49:40.212 align:middle line:90% AUDIENCE: Oh. 00:49:40.212 --> 00:49:42.830 align:middle line:84% JON GRUBER: It's a 40% subsidy in the first 2 and 5% tax. 00:49:42.830 --> 00:49:43.872 align:middle line:90% AUDIENCE: The elasticity. 00:49:43.872 --> 00:49:45.130 align:middle line:90% JON GRUBER: Yeah. 00:49:45.130 --> 00:49:46.370 align:middle line:90% All right? 00:49:46.370 --> 00:49:47.210 align:middle line:90% Yeah. 00:49:47.210 --> 00:49:49.813 align:middle line:84% AUDIENCE: How much objectivity if you're in determining equity 00:49:49.813 --> 00:49:50.730 align:middle line:90% away from [INAUDIBLE]? 00:49:50.730 --> 00:49:52.355 align:middle line:84% JON GRUBER: Oh, there's no objectivity. 00:49:52.355 --> 00:49:53.170 align:middle line:90% Zero. 00:49:53.170 --> 00:49:56.530 align:middle line:84% I mean, basically, it's all-- that's why the economists like 00:49:56.530 --> 00:49:57.870 align:middle line:90% focusing on efficiency. 00:49:57.870 --> 00:50:00.530 align:middle line:84% Efficiency is, in some sense, is a little more judgment 00:50:00.530 --> 00:50:01.470 align:middle line:90% free units. 00:50:01.470 --> 00:50:04.330 align:middle line:84% Not necessarily, because I have to make judgments on how perfect 00:50:04.330 --> 00:50:05.850 align:middle line:90% the market is. 00:50:05.850 --> 00:50:07.490 align:middle line:84% So there's still judgment involved 00:50:07.490 --> 00:50:12.130 align:middle line:84% in efficiency calculations, but a lot of equity is all judgment. 00:50:12.130 --> 00:50:12.810 align:middle line:90% OK? 00:50:12.810 --> 00:50:13.350 align:middle line:90% All right. 00:50:13.350 --> 00:50:16.490 align:middle line:84% So that's an example of how you apply this method. 00:50:16.490 --> 00:50:19.543 align:middle line:84% Now, of course in the world today, most revenue in the US 00:50:19.543 --> 00:50:21.960 align:middle line:84% especially, most revenue is not raised by commodity taxes. 00:50:21.960 --> 00:50:23.680 align:middle line:90% It's raised by income taxes. 00:50:23.680 --> 00:50:28.560 align:middle line:84% So how can we take the intuition from Ramsey 00:50:28.560 --> 00:50:30.120 align:middle line:90% and apply it to income taxes? 00:50:30.120 --> 00:50:33.440 align:middle line:84% Well, let's consider the following example. 00:50:33.440 --> 00:50:35.720 align:middle line:84% Imagine the following assumptions. 00:50:35.720 --> 00:50:38.420 align:middle line:84% First of all, everyone in society is identical. 00:50:38.420 --> 00:50:42.560 align:middle line:84% Assumption one, everyone in society is identical. 00:50:42.560 --> 00:50:45.880 align:middle line:84% Assumption two, there's diminishing 00:50:45.880 --> 00:50:50.920 align:middle line:84% marginal utility of income, which we always assume. 00:50:50.920 --> 00:50:52.680 align:middle line:90% OK. 00:50:52.680 --> 00:50:56.800 align:middle line:84% Assumption three, there's a utilitarian social welfare 00:50:56.800 --> 00:50:57.800 align:middle line:90% function. 00:50:57.800 --> 00:51:00.840 align:middle line:84% So we just care about the sum of utilities. 00:51:00.840 --> 00:51:05.057 align:middle line:84% And assumption four, is that income is not elastic, 00:51:05.057 --> 00:51:07.140 align:middle line:84% that people just sort of, what they earn is fixed. 00:51:07.140 --> 00:51:09.840 align:middle line:84% It doesn't depend on things like taxes. 00:51:09.840 --> 00:51:12.560 align:middle line:84% Identical individuals, diminishing marginal utility 00:51:12.560 --> 00:51:17.300 align:middle line:84% of income, utilitarian social welfare function, fixed income. 00:51:17.300 --> 00:51:19.708 align:middle line:90% What's the optimal tax system? 00:51:19.708 --> 00:51:21.500 align:middle line:84% You can tell me, based on those four facts, 00:51:21.500 --> 00:51:24.125 align:middle line:84% you can tell me what the optimal tax system is in this society. 00:51:24.125 --> 00:51:30.440 align:middle line:90% 00:51:30.440 --> 00:51:31.453 align:middle line:90% Yeah. 00:51:31.453 --> 00:51:33.120 align:middle line:84% AUDIENCE: Anyone who makes above average 00:51:33.120 --> 00:51:34.800 align:middle line:90% should get taxed to the average. 00:51:34.800 --> 00:51:37.680 align:middle line:84% JON GRUBER: 100% tax rate above some point. 00:51:37.680 --> 00:51:41.080 align:middle line:84% Basically say, look, everybody gets X. If you're above that, 00:51:41.080 --> 00:51:41.622 align:middle line:90% you get 100%. 00:51:41.622 --> 00:51:42.997 align:middle line:84% If you're below that, we're going 00:51:42.997 --> 00:51:44.300 align:middle line:90% to bring you up to that level. 00:51:44.300 --> 00:51:46.140 align:middle line:84% Basically, equal distribution of income. 00:51:46.140 --> 00:51:46.640 align:middle line:90% Why? 00:51:46.640 --> 00:51:50.600 align:middle line:84% Why should there be equal distribution of income? 00:51:50.600 --> 00:51:52.140 align:middle line:90% Yeah. 00:51:52.140 --> 00:51:53.932 align:middle line:84% AUDIENCE: That's the same pair of benefits. 00:51:53.932 --> 00:51:55.432 align:middle line:84% JON GRUBER: Yeah, because basically, 00:51:55.432 --> 00:51:58.180 align:middle line:84% if you and Alec are identical, I give Alec another dollar, 00:51:58.180 --> 00:51:59.722 align:middle line:84% it makes him less happy that it makes 00:51:59.722 --> 00:52:02.320 align:middle line:84% you sad, because diminishing marginal utility of income. 00:52:02.320 --> 00:52:07.623 align:middle line:84% So the key point is a natural starting point, 00:52:07.623 --> 00:52:10.040 align:middle line:84% if you're a utilitarian, first, being a utilitarian is not 00:52:10.040 --> 00:52:10.832 align:middle line:90% a crazy left wing-- 00:52:10.832 --> 00:52:12.248 align:middle line:84% utilitarian is just you're saying, 00:52:12.248 --> 00:52:13.700 align:middle line:90% we care about everybody equally. 00:52:13.700 --> 00:52:16.060 align:middle line:90% That's not exactly left wing. 00:52:16.060 --> 00:52:18.363 align:middle line:84% If you start with utilitarian social welfare function, 00:52:18.363 --> 00:52:20.280 align:middle line:84% you actually get that a natural starting point 00:52:20.280 --> 00:52:21.755 align:middle line:84% is a perfect distribution of income 00:52:21.755 --> 00:52:23.880 align:middle line:84% in society, which is about the leftiest outcome you 00:52:23.880 --> 00:52:26.180 align:middle line:90% can imagine. 00:52:26.180 --> 00:52:27.840 align:middle line:84% So what's wrong with this, what's 00:52:27.840 --> 00:52:31.560 align:middle line:84% wrong with it is the fourth assumption, which 00:52:31.560 --> 00:52:34.040 align:middle line:90% that incomes are not fixed. 00:52:34.040 --> 00:52:39.400 align:middle line:84% Then we tax individuals, we will create a leak in the bucket. 00:52:39.400 --> 00:52:42.440 align:middle line:84% But let's remember, there's also the issue that, of course, 00:52:42.440 --> 00:52:43.782 align:middle line:90% individuals aren't identical. 00:52:43.782 --> 00:52:45.740 align:middle line:84% So there's two things that are wrong with this. 00:52:45.740 --> 00:52:48.040 align:middle line:84% One, individuals aren't identical. 00:52:48.040 --> 00:52:48.880 align:middle line:90% OK. 00:52:48.880 --> 00:52:51.520 align:middle line:84% Remember, economics expresses preferences. 00:52:51.520 --> 00:52:53.020 align:middle line:84% I didn't just start with James Dean. 00:52:53.020 --> 00:52:54.600 align:middle line:90% How about Scrooge McDuck? 00:52:54.600 --> 00:52:57.720 align:middle line:84% Anybody know who Scrooge McDuck is? 00:52:57.720 --> 00:52:58.918 align:middle line:90% Geez, you guys. 00:52:58.918 --> 00:52:59.960 align:middle line:90% OK, we got four at least. 00:52:59.960 --> 00:53:01.460 align:middle line:84% Four times five times many people. 00:53:01.460 --> 00:53:03.320 align:middle line:84% Scrooge McDuck is this Disney character 00:53:03.320 --> 00:53:05.237 align:middle line:84% who loves money so much he has a swimming pool 00:53:05.237 --> 00:53:07.440 align:middle line:90% full of money he swims in. 00:53:07.440 --> 00:53:09.573 align:middle line:84% Scrooge McDuck might not actually 00:53:09.573 --> 00:53:11.740 align:middle line:84% exhibit diminishing marginal utility of consumption. 00:53:11.740 --> 00:53:13.200 align:middle line:84% He just likes more and more and more. 00:53:13.200 --> 00:53:15.420 align:middle line:84% We should respect that as economists because remember, 00:53:15.420 --> 00:53:16.920 align:middle line:84% utility social welfare function doesn't 00:53:16.920 --> 00:53:18.260 align:middle line:90% judge the structure of utility. 00:53:18.260 --> 00:53:19.657 align:middle line:90% It just adds it up. 00:53:19.657 --> 00:53:21.240 align:middle line:84% So in that case, it might be efficient 00:53:21.240 --> 00:53:24.240 align:middle line:84% if Scrooge McDuck have a lot more money, because he actually 00:53:24.240 --> 00:53:25.960 align:middle line:90% loves money. 00:53:25.960 --> 00:53:30.800 align:middle line:84% So the bottom line is, our starting point's 00:53:30.800 --> 00:53:32.920 align:middle line:84% in equal distribution of income society. 00:53:32.920 --> 00:53:35.200 align:middle line:84% But if people are different, i.e. 00:53:35.200 --> 00:53:38.520 align:middle line:84% Different marginal utilities of consumption, and if income 00:53:38.520 --> 00:53:40.120 align:middle line:90% is endogenous, i.e. 00:53:40.120 --> 00:53:42.620 align:middle line:84% Taxes affect how much resources there are in a society, 00:53:42.620 --> 00:53:45.320 align:middle line:84% then we don't want equal distribution of income. 00:53:45.320 --> 00:53:49.280 align:middle line:84% So now we want to say, how do we think 00:53:49.280 --> 00:53:52.200 align:middle line:84% about setting tax rates in a world where 00:53:52.200 --> 00:53:57.480 align:middle line:84% people, the amount they earn depends on the tax rate? 00:53:57.480 --> 00:54:02.600 align:middle line:84% Well, this leads to the famous Laffer curve. 00:54:02.600 --> 00:54:04.880 align:middle line:84% Arthur Laffer was a right wing economist 00:54:04.880 --> 00:54:08.187 align:middle line:84% who was very influential in the tax-- we talked about the tax 00:54:08.187 --> 00:54:10.520 align:middle line:84% revolution in America being kicked off by Proposition 13 00:54:10.520 --> 00:54:15.800 align:middle line:84% in California, which capped property taxes. 00:54:15.800 --> 00:54:17.960 align:middle line:84% It was a big factor in electing Ronald Reagan. 00:54:17.960 --> 00:54:20.840 align:middle line:84% And Ronald Reagan's big was, implemented some of the largest 00:54:20.840 --> 00:54:22.220 align:middle line:90% tax cuts in history. 00:54:22.220 --> 00:54:23.880 align:middle line:84% And his intellectual case was based 00:54:23.880 --> 00:54:25.920 align:middle line:90% on the work of Arthur Laffer. 00:54:25.920 --> 00:54:30.760 align:middle line:84% Laffer drew a famous Laffer curve, 00:54:30.760 --> 00:54:34.600 align:middle line:84% which was theoretically, absolutely right. 00:54:34.600 --> 00:54:36.100 align:middle line:84% What did the Laffer curve look like? 00:54:36.100 --> 00:54:38.725 align:middle line:84% The Laffer curve-- I don't have to draw it because it's already 00:54:38.725 --> 00:54:42.320 align:middle line:84% drawn for you --looked like figure 20-9. 00:54:42.320 --> 00:54:43.700 align:middle line:84% What did Arthur Laffer point out? 00:54:43.700 --> 00:54:47.000 align:middle line:84% He pointed out, he made three observations. 00:54:47.000 --> 00:54:49.100 align:middle line:90% First, he said a tax rate of 0. 00:54:49.100 --> 00:54:52.415 align:middle line:84% So on the x-axis is tax rates, on the y-axis is revenues. 00:54:52.415 --> 00:54:53.540 align:middle line:90% He made three observations. 00:54:53.540 --> 00:54:57.880 align:middle line:84% First of all, at a tax rate of 0, you raise no revenues. 00:54:57.880 --> 00:55:00.040 align:middle line:90% Unimpeachably true. 00:55:00.040 --> 00:55:05.480 align:middle line:84% Second of all, for some positive tax rate, you do raise revenues. 00:55:05.480 --> 00:55:06.880 align:middle line:90% Unimpeachably true. 00:55:06.880 --> 00:55:10.310 align:middle line:84% And third, almost certainly true, but not unimpeachable, 00:55:10.310 --> 00:55:13.870 align:middle line:84% at 100% tax rate, you also raise no revenues. 00:55:13.870 --> 00:55:16.250 align:middle line:84% Because if leisure is a normal good, 00:55:16.250 --> 00:55:18.550 align:middle line:84% no one would work if you couldn't keep any income. 00:55:18.550 --> 00:55:19.450 align:middle line:90% Maybe not true. 00:55:19.450 --> 00:55:21.810 align:middle line:84% There's nerds like us who'd work anyway, 00:55:21.810 --> 00:55:23.950 align:middle line:90% but it's not a crazy assumption. 00:55:23.950 --> 00:55:26.990 align:middle line:84% Given those three assumptions, you, by necessity, 00:55:26.990 --> 00:55:29.850 align:middle line:84% get a figure of the type of figure 20-8. 00:55:29.850 --> 00:55:31.950 align:middle line:84% It can be shaped very differently, 00:55:31.950 --> 00:55:36.630 align:middle line:84% but it hits the x-axis at 0 and 100%, 00:55:36.630 --> 00:55:39.270 align:middle line:90% and is positive in between. 00:55:39.270 --> 00:55:41.310 align:middle line:84% That is what we call the Laffer curve. 00:55:41.310 --> 00:55:43.850 align:middle line:84% And Laffer argued that in a world like this, 00:55:43.850 --> 00:55:51.150 align:middle line:84% there is a revenue maximizing tax rate where basically, once 00:55:51.150 --> 00:55:53.130 align:middle line:84% you get higher than that tax rate, 00:55:53.130 --> 00:55:56.230 align:middle line:84% you actually, each additional increase in taxes 00:55:56.230 --> 00:55:57.077 align:middle line:90% lowers revenue. 00:55:57.077 --> 00:55:59.410 align:middle line:84% You might say, how can an increase in tax lower revenue? 00:55:59.410 --> 00:56:01.210 align:middle line:84% Well, it's graphically true here. 00:56:01.210 --> 00:56:02.690 align:middle line:90% There must be a point. 00:56:02.690 --> 00:56:04.915 align:middle line:84% If you accept my three premises, there 00:56:04.915 --> 00:56:06.790 align:middle line:84% must be a point at which raising the tax rate 00:56:06.790 --> 00:56:08.830 align:middle line:90% actually lowers taxes. 00:56:08.830 --> 00:56:13.830 align:middle line:90% And that's because the tax base. 00:56:13.830 --> 00:56:17.190 align:middle line:84% The amount of tax revenues you get is what? 00:56:17.190 --> 00:56:21.270 align:middle line:84% It's the tax rate times the tax base. 00:56:21.270 --> 00:56:24.790 align:middle line:84% But the tax base is a function of the tax rate 00:56:24.790 --> 00:56:27.710 align:middle line:84% because people change how hard they work 00:56:27.710 --> 00:56:30.510 align:middle line:84% and what they earn when taxes go up. 00:56:30.510 --> 00:56:45.270 align:middle line:84% So dR, d tau, equals, dR d tau equals B plus tau times Db d 00:56:45.270 --> 00:56:47.770 align:middle line:90% tau, which is negative. 00:56:47.770 --> 00:56:50.590 align:middle line:90% 00:56:50.590 --> 00:56:55.070 align:middle line:84% So when you raise tax rates, there's two offsetting effects. 00:56:55.070 --> 00:56:59.990 align:middle line:84% You first of all get money because you have an existing 00:56:59.990 --> 00:57:05.430 align:middle line:84% base, but you then lose money because the base shrinks. 00:57:05.430 --> 00:57:09.740 align:middle line:84% The peak of the Laffer curve is the point at which this is 0. 00:57:09.740 --> 00:57:11.490 align:middle line:84% That is 0 at the peak of the Laffer curve. 00:57:11.490 --> 00:57:14.970 align:middle line:84% And to the right of that peak, you lose money by raising taxes. 00:57:14.970 --> 00:57:19.230 align:middle line:84% The second term dominates the first. 00:57:19.230 --> 00:57:25.950 align:middle line:84% So this is the underlying economics of the Laffer curve. 00:57:25.950 --> 00:57:29.850 align:middle line:84% And this says that there is an optimal tax rate. 00:57:29.850 --> 00:57:31.870 align:middle line:84% The optimal tax rate is not 100%, 00:57:31.870 --> 00:57:35.330 align:middle line:84% as we implied in the previous example, in my simple example. 00:57:35.330 --> 00:57:36.870 align:middle line:84% The optimal tax rate, once again, we 00:57:36.870 --> 00:57:41.950 align:middle line:84% solved this in the appendix, but basically, the optimal tax rate 00:57:41.950 --> 00:57:46.247 align:middle line:84% is to say, how do we maximize social welfare while raising 00:57:46.247 --> 00:57:47.330 align:middle line:90% a given amount of revenue? 00:57:47.330 --> 00:57:48.247 align:middle line:90% It's more complicated. 00:57:48.247 --> 00:57:50.510 align:middle line:84% I'll throw in commodity taxes, whereas, how do I 00:57:50.510 --> 00:57:53.270 align:middle line:84% minimize deadweight loss while raising 00:57:53.270 --> 00:57:55.270 align:middle line:90% a given amount of revenue? 00:57:55.270 --> 00:57:58.630 align:middle line:84% Optimal income taxes say, how do I 00:57:58.630 --> 00:58:01.830 align:middle line:84% maximize social welfare while raising 00:58:01.830 --> 00:58:03.230 align:middle line:90% a given amount of revenue? 00:58:03.230 --> 00:58:05.910 align:middle line:84% And the resulting optimal income tax formula 00:58:05.910 --> 00:58:08.150 align:middle line:84% is of the form-- the optimal income tax 00:58:08.150 --> 00:58:12.550 align:middle line:84% formula is of the form that you want to set income taxes such 00:58:12.550 --> 00:58:16.030 align:middle line:84% that the margin utility of individual i 00:58:16.030 --> 00:58:19.070 align:middle line:84% above the marginal revenue raised from individual i 00:58:19.070 --> 00:58:21.750 align:middle line:90% equals lambda. 00:58:21.750 --> 00:58:24.670 align:middle line:84% So it's a little bit different formula. 00:58:24.670 --> 00:58:26.910 align:middle line:84% You raise taxes until the margin utility 00:58:26.910 --> 00:58:30.990 align:middle line:84% of income for the next dollar of revenues 00:58:30.990 --> 00:58:33.510 align:middle line:90% is equal across all people. 00:58:33.510 --> 00:58:36.390 align:middle line:84% This is sort of hard to understand. 00:58:36.390 --> 00:58:42.130 align:middle line:84% So basically, but it reflects two trade offs, 00:58:42.130 --> 00:58:44.790 align:middle line:84% a trade off two different factors. 00:58:44.790 --> 00:58:52.230 align:middle line:84% The first factor is that basically, essentially, 00:58:52.230 --> 00:58:55.590 align:middle line:84% the first factor is vertical equity 00:58:55.590 --> 00:58:59.230 align:middle line:84% that basically says you want to tax the rich more because they 00:58:59.230 --> 00:59:03.700 align:middle line:84% have a lower marginal utility of income, marginal utility 00:59:03.700 --> 00:59:04.663 align:middle line:90% of consumption. 00:59:04.663 --> 00:59:06.080 align:middle line:84% The second factor, however, again, 00:59:06.080 --> 00:59:10.780 align:middle line:84% is behavioral responses, which is as you tax the rich more, 00:59:10.780 --> 00:59:13.900 align:middle line:84% they may respond by earning less income, 00:59:13.900 --> 00:59:16.740 align:middle line:84% and that will mean that the marginal revenue raised 00:59:16.740 --> 00:59:18.940 align:middle line:90% from them is lower. 00:59:18.940 --> 00:59:22.380 align:middle line:90% You lower marginal revenue. 00:59:22.380 --> 00:59:24.500 align:middle line:90% This is a hard intuition. 00:59:24.500 --> 00:59:26.140 align:middle line:90% So let's see it in an example. 00:59:26.140 --> 00:59:29.980 align:middle line:90% Go to figure 20-10. 00:59:29.980 --> 00:59:34.300 align:middle line:84% We've got two people in this example OK. 00:59:34.300 --> 00:59:38.800 align:middle line:84% Dr. H, who has a high income, and Dr. L, who is a low income. 00:59:38.800 --> 00:59:40.312 align:middle line:84% I don't know why that's a doctor. 00:59:40.312 --> 00:59:41.520 align:middle line:90% Can you make a note, Valerie? 00:59:41.520 --> 00:59:43.228 align:middle line:84% I don't know why they made that a doctor. 00:59:43.228 --> 00:59:47.460 align:middle line:84% It should be Mr. L and Dr. H. Or Mrs. L and Dr. H, whatever. 00:59:47.460 --> 00:59:48.202 align:middle line:90% OK. 00:59:48.202 --> 00:59:50.160 align:middle line:84% So basically, what you have here on the x-axis, 00:59:50.160 --> 00:59:51.580 align:middle line:90% you have the tax rate. 00:59:51.580 --> 00:59:53.800 align:middle line:84% On the y-axis, you have this ratio I talked about, 00:59:53.800 --> 00:59:56.580 align:middle line:84% which is marginal utility or marginal revenue. 00:59:56.580 --> 01:00:02.727 align:middle line:84% So the curve for Dr. L is higher than Dr. H 01:00:02.727 --> 01:00:04.560 align:middle line:84% because they have a higher marginal utility, 01:00:04.560 --> 01:00:06.540 align:middle line:90% because they're poorer. 01:00:06.540 --> 01:00:13.340 align:middle line:84% So what that says is that we'd like to tax H more than L. 01:00:13.340 --> 01:00:17.220 align:middle line:84% The problem is that when we tax H too much, 01:00:17.220 --> 01:00:22.300 align:middle line:84% he eventually gets so poor that you want to stop taxing him. 01:00:22.300 --> 01:00:25.060 align:middle line:84% So this says that the optimal tax rate, where lambda equals 01:00:25.060 --> 01:00:28.580 align:middle line:84% that ratio, is going to be a 10% tax rate on the poor 01:00:28.580 --> 01:00:31.060 align:middle line:90% and a 20% tax rate on the rich. 01:00:31.060 --> 01:00:32.820 align:middle line:84% It's not going to be tax the rich-- to put 01:00:32.820 --> 01:00:34.380 align:middle line:90% everything on the rich. 01:00:34.380 --> 01:00:37.065 align:middle line:84% Put everything on the rich, then, first of all, 01:00:37.065 --> 01:00:38.440 align:middle line:84% you'll lower the marginal utility 01:00:38.440 --> 01:00:40.138 align:middle line:84% so much they'll be poorer than the poor. 01:00:40.138 --> 01:00:42.180 align:middle line:84% And second of all, you won't make as much revenue 01:00:42.180 --> 01:00:44.580 align:middle line:90% because they're elastic. 01:00:44.580 --> 01:00:47.900 align:middle line:84% And so that's basically how we think about optimal income 01:00:47.900 --> 01:00:49.020 align:middle line:90% taxes. 01:00:49.020 --> 01:00:51.060 align:middle line:90% The bottom line is a trade off. 01:00:51.060 --> 01:00:53.077 align:middle line:84% Just like you want to tax the rich more, 01:00:53.077 --> 01:00:55.660 align:middle line:84% but you want to respect the fact that you don't want to shrink 01:00:55.660 --> 01:00:57.160 align:middle line:90% the size of the pie too much. 01:00:57.160 --> 01:01:00.580 align:middle line:84% And that's inherently the equity efficiency trade off. 01:01:00.580 --> 01:01:02.580 align:middle line:90% OK. 01:01:02.580 --> 01:01:05.580 align:middle line:90% Questions about that? 01:01:05.580 --> 01:01:09.162 align:middle line:84% So the bottom line is, of all this, 01:01:09.162 --> 01:01:11.620 align:middle line:84% is essentially, we're thinking about this equity efficiency 01:01:11.620 --> 01:01:13.260 align:middle line:90% trade off. 01:01:13.260 --> 01:01:15.220 align:middle line:84% And we can implement it by thinking 01:01:15.220 --> 01:01:18.780 align:middle line:84% about what's the fairness benefit, in terms of targeting 01:01:18.780 --> 01:01:21.420 align:middle line:84% people with low marginal consumption, 01:01:21.420 --> 01:01:24.420 align:middle line:84% versus the efficiency cost, in terms of distorting 01:01:24.420 --> 01:01:27.620 align:middle line:90% people's earnings. 01:01:27.620 --> 01:01:29.580 align:middle line:84% And we'll come back to this in chapter 25 01:01:29.580 --> 01:01:31.955 align:middle line:84% and talk about what this all implies, what the income tax 01:01:31.955 --> 01:01:33.380 align:middle line:90% schedule should look like. 01:01:33.380 --> 01:01:36.660 align:middle line:84% Now, I want to cover one other topic before we stop, which 01:01:36.660 --> 01:01:40.980 align:middle line:84% is related to this and is near and dear to my heart, which 01:01:40.980 --> 01:01:45.872 align:middle line:84% is thinking about tax benefit linkages and the financing 01:01:45.872 --> 01:01:47.080 align:middle line:90% of social insurance programs. 01:01:47.080 --> 01:01:49.372 align:middle line:84% And this goes back to the article which most influenced 01:01:49.372 --> 01:01:52.540 align:middle line:84% my career, which is an article by the economist Larry Summers, 01:01:52.540 --> 01:01:53.800 align:middle line:90% who was my thesis advisor. 01:01:53.800 --> 01:01:55.675 align:middle line:84% Many of you know him from other runs of life, 01:01:55.675 --> 01:01:58.620 align:middle line:84% being the Secretary of the Treasury, President of Harvard. 01:01:58.620 --> 01:02:00.400 align:middle line:84% The guy who said inflation is going to go through the roof. 01:02:00.400 --> 01:02:02.040 align:middle line:84% All the things we know about Larry Summers. 01:02:02.040 --> 01:02:03.582 align:middle line:84% But he's also a very famous academic. 01:02:03.582 --> 01:02:05.797 align:middle line:84% And he wrote an article which, by his own admission, 01:02:05.797 --> 01:02:08.380 align:middle line:84% he did not think was a big deal when he wrote it, but ended up 01:02:08.380 --> 01:02:12.140 align:middle line:84% being an incredibly influential article. 01:02:12.140 --> 01:02:16.100 align:middle line:84% And Summers' article made basically the following point. 01:02:16.100 --> 01:02:22.500 align:middle line:90% Let's go to figure 20-11. 01:02:22.500 --> 01:02:25.060 align:middle line:84% At the time Summers wrote this article, 01:02:25.060 --> 01:02:27.780 align:middle line:84% a very hot topic in public policy 01:02:27.780 --> 01:02:31.340 align:middle line:84% was the topic of employer mandates. 01:02:31.340 --> 01:02:34.260 align:middle line:84% The idea was if we want to get-- if we 01:02:34.260 --> 01:02:37.852 align:middle line:84% can deliver social benefits by making employers deliver them. 01:02:37.852 --> 01:02:39.560 align:middle line:84% It was an idea that came out of the left. 01:02:39.560 --> 01:02:41.020 align:middle line:90% It was a liberal idea. 01:02:41.020 --> 01:02:43.777 align:middle line:84% And this was the fundamental idea behind, for example, 01:02:43.777 --> 01:02:45.860 align:middle line:84% ideas that people like Bill Clinton were proposing 01:02:45.860 --> 01:02:48.277 align:middle line:84% for universal health care reform in the 1990s, was, 01:02:48.277 --> 01:02:50.860 align:middle line:84% let's get universal health care reform by making employers pay 01:02:50.860 --> 01:02:52.620 align:middle line:90% for it. 01:02:52.620 --> 01:02:53.420 align:middle line:90% OK. 01:02:53.420 --> 01:02:56.620 align:middle line:84% Let's make, in particular, let's mandate 01:02:56.620 --> 01:02:59.340 align:middle line:84% that employers provide health insurance to all 01:02:59.340 --> 01:03:01.860 align:middle line:90% their employees. 01:03:01.860 --> 01:03:04.340 align:middle line:84% Now, people said that would be a disaster. 01:03:04.340 --> 01:03:06.843 align:middle line:90% It will cause mass layoffs. 01:03:06.843 --> 01:03:07.760 align:middle line:90% Why did they say that? 01:03:07.760 --> 01:03:13.100 align:middle line:84% Well, they said that because of figures like figure 20-11 a. 01:03:13.100 --> 01:03:17.060 align:middle line:84% They said, look, if you tax employers, 01:03:17.060 --> 01:03:21.300 align:middle line:84% that will raise the cost of labor now, if you tax employers. 01:03:21.300 --> 01:03:23.400 align:middle line:84% If you make employer provide health insurance, 01:03:23.400 --> 01:03:25.983 align:middle line:84% take a benefit no employers will provide and you make it easy. 01:03:25.983 --> 01:03:28.820 align:middle line:84% Or suddenly make all employers provide, I don't know, 01:03:28.820 --> 01:03:30.360 align:middle line:84% nose jobs, I don't know, whatever. 01:03:30.360 --> 01:03:31.735 align:middle line:84% Something they weren't providing. 01:03:31.735 --> 01:03:34.700 align:middle line:84% If you suddenly make them all provide that, 01:03:34.700 --> 01:03:36.500 align:middle line:90% that's going to add a new cost. 01:03:36.500 --> 01:03:39.060 align:middle line:84% Workers will now come with a new cost that 01:03:39.060 --> 01:03:41.420 align:middle line:84% will lower the demand for labor, once again, ignoring 01:03:41.420 --> 01:03:43.100 align:middle line:90% labor market imperfections. 01:03:43.100 --> 01:03:46.660 align:middle line:84% Lower the demand for labor, reduce the amount of workers 01:03:46.660 --> 01:03:49.162 align:middle line:84% from L1 to L2, and create a huge deadweight loss. 01:03:49.162 --> 01:03:50.620 align:middle line:84% And therefore, we shouldn't mandate 01:03:50.620 --> 01:03:53.250 align:middle line:90% employers to provide benefits. 01:03:53.250 --> 01:03:56.330 align:middle line:84% Summers said, actually, that's wrong. 01:03:56.330 --> 01:03:58.790 align:middle line:84% Because if we mandate employers to provide benefits, 01:03:58.790 --> 01:04:00.090 align:middle line:90% something else happens. 01:04:00.090 --> 01:04:01.730 align:middle line:90% We make work more valuable. 01:04:01.730 --> 01:04:02.330 align:middle line:90% Why? 01:04:02.330 --> 01:04:05.130 align:middle line:84% Because now you don't just get a wage, you get this benefit 01:04:05.130 --> 01:04:07.530 align:middle line:84% and you can only get it by working. 01:04:07.530 --> 01:04:09.470 align:middle line:84% So people are now going to want to work. 01:04:09.470 --> 01:04:12.250 align:middle line:84% It's like, OK, so imagine the benefit we 01:04:12.250 --> 01:04:17.857 align:middle line:84% mandate is that everyone gets a vacation to Disney. 01:04:17.857 --> 01:04:19.690 align:middle line:84% You're going to mandate all employer provide 01:04:19.690 --> 01:04:21.090 align:middle line:90% a vacation to Disney. 01:04:21.090 --> 01:04:21.690 align:middle line:90% OK. 01:04:21.690 --> 01:04:23.550 align:middle line:84% Well, employers will have to pay more, 01:04:23.550 --> 01:04:25.615 align:middle line:84% but now people are like, wow, if I go work-- 01:04:25.615 --> 01:04:26.990 align:middle line:84% I'm not working but if I go work, 01:04:26.990 --> 01:04:28.115 align:middle line:90% I get a vacation to Disney. 01:04:28.115 --> 01:04:29.507 align:middle line:90% I might want to go work now. 01:04:29.507 --> 01:04:31.590 align:middle line:84% That's an extra benefit that'll entice me to work. 01:04:31.590 --> 01:04:34.730 align:middle line:84% That will shift out my labor supply curve. 01:04:34.730 --> 01:04:39.410 align:middle line:84% That is like panel B. So now, the demand curve 01:04:39.410 --> 01:04:44.450 align:middle line:84% has shifted down but supply has shifted out. 01:04:44.450 --> 01:04:47.530 align:middle line:90% That has two effects. 01:04:47.530 --> 01:04:51.850 align:middle line:84% First of all, the reduction in employment is smaller. 01:04:51.850 --> 01:04:55.250 align:middle line:84% Instead of level of employment falling from L1 to L2, 01:04:55.250 --> 01:04:56.950 align:middle line:90% it now only falls to L3. 01:04:56.950 --> 01:04:59.730 align:middle line:90% 01:04:59.730 --> 01:05:03.450 align:middle line:84% That leads to a lower deadweight loss. 01:05:03.450 --> 01:05:06.090 align:middle line:90% The deadweight loss is lower. 01:05:06.090 --> 01:05:10.770 align:middle line:84% It also leads wages to fall more. 01:05:10.770 --> 01:05:15.890 align:middle line:84% Wages that are falling to W2 fall to W3. 01:05:15.890 --> 01:05:18.970 align:middle line:84% Indeed, to really drive home the intuition, 01:05:18.970 --> 01:05:23.650 align:middle line:84% imagine a world where every employee valued 01:05:23.650 --> 01:05:27.330 align:middle line:84% the benefit of a trip to Disney at exactly what it costs 01:05:27.330 --> 01:05:30.410 align:middle line:90% the employer to provide that. 01:05:30.410 --> 01:05:34.170 align:middle line:84% Everybody in the world valued the trip to Disney 01:05:34.170 --> 01:05:36.850 align:middle line:90% at exactly its cost. 01:05:36.850 --> 01:05:38.230 align:middle line:90% What would that imply? 01:05:38.230 --> 01:05:42.890 align:middle line:90% That would imply figure 20-11. 01:05:42.890 --> 01:05:46.410 align:middle line:84% Where the reduction in demand from providing the trip 01:05:46.410 --> 01:05:49.410 align:middle line:84% to Disney, from the cost of providing the trip to Disney, 01:05:49.410 --> 01:05:53.290 align:middle line:84% was the same as the increase in supply from people 01:05:53.290 --> 01:05:55.810 align:middle line:84% working because they like the trip to Disney. 01:05:55.810 --> 01:05:59.050 align:middle line:90% What happens in that case? 01:05:59.050 --> 01:06:01.570 align:middle line:90% There is no change in labor. 01:06:01.570 --> 01:06:03.936 align:middle line:90% Why? 01:06:03.936 --> 01:06:05.270 align:middle line:90% Why is there no change in labor? 01:06:05.270 --> 01:06:05.950 align:middle line:90% What's happened? 01:06:05.950 --> 01:06:08.323 align:middle line:84% What have you done with this new rule? 01:06:08.323 --> 01:06:09.990 align:middle line:84% If the government mandates every-- yeah. 01:06:09.990 --> 01:06:11.150 align:middle line:90% What have you done? 01:06:11.150 --> 01:06:14.150 align:middle line:84% AUDIENCE: [INAUDIBLE] the compensation is the same. 01:06:14.150 --> 01:06:17.130 align:middle line:84% They just replaced it from wages to wages plus Disney. 01:06:17.130 --> 01:06:20.210 align:middle line:84% JON GRUBER: Exactly, you haven't changed compensation at all. 01:06:20.210 --> 01:06:22.390 align:middle line:84% You've simply shifted the nature of compensation. 01:06:22.390 --> 01:06:25.690 align:middle line:84% You see wages have fallen by the entire amount 01:06:25.690 --> 01:06:28.290 align:middle line:84% of the cost of their trip to Disney, 01:06:28.290 --> 01:06:31.673 align:middle line:84% or what we call full shifting to wages. 01:06:31.673 --> 01:06:34.090 align:middle line:84% Then the world where employees and employees value benefit 01:06:34.090 --> 01:06:37.690 align:middle line:84% the most, in fact, there might be no deadweight loss 01:06:37.690 --> 01:06:38.790 align:middle line:90% for mandating benefits. 01:06:38.790 --> 01:06:41.370 align:middle line:84% Not only might the deadweight loss be smaller, 01:06:41.370 --> 01:06:46.410 align:middle line:84% like in figure 20-11, it might be 0, like in figure or 20-12. 01:06:46.410 --> 01:06:49.930 align:middle line:84% You actually get no deadweight loss 01:06:49.930 --> 01:06:51.450 align:middle line:90% from-- yeah --from any benefits. 01:06:51.450 --> 01:06:52.113 align:middle line:90% Alec. 01:06:52.113 --> 01:06:53.530 align:middle line:84% AUDIENCE: So if there are benefits 01:06:53.530 --> 01:06:57.150 align:middle line:84% from something like health care, why does private health not fall 01:06:57.150 --> 01:06:57.730 align:middle line:90% in this? 01:06:57.730 --> 01:07:00.272 align:middle line:84% JON GRUBER: The University of Chicago question would be, 01:07:00.272 --> 01:07:02.230 align:middle line:84% and some is addressed figure 20-12, like, well, 01:07:02.230 --> 01:07:02.922 align:middle line:90% this is stupid. 01:07:02.922 --> 01:07:05.130 align:middle line:84% Because if this was really true, why didn't employers 01:07:05.130 --> 01:07:06.290 align:middle line:90% be doing it already? 01:07:06.290 --> 01:07:08.232 align:middle line:84% If I like Disney, and I like it as much 01:07:08.232 --> 01:07:10.690 align:middle line:84% as it costs them to provide it, why wouldn't every employer 01:07:10.690 --> 01:07:12.410 align:middle line:90% provide Disney? 01:07:12.410 --> 01:07:14.730 align:middle line:84% To which Summers had a very good response, 01:07:14.730 --> 01:07:16.770 align:middle line:84% and he didn't use Disney as an example. 01:07:16.770 --> 01:07:22.690 align:middle line:84% He said, imagine this example was-- imagine this is the 1980s, 01:07:22.690 --> 01:07:27.370 align:middle line:84% and health insurance excludes AIDS coverage and you're going 01:07:27.370 --> 01:07:29.370 align:middle line:90% to add benefits for AIDS. 01:07:29.370 --> 01:07:33.130 align:middle line:84% And let's say that the average employee, it's very cheap 01:07:33.130 --> 01:07:34.450 align:middle line:90% because AIDS is rare. 01:07:34.450 --> 01:07:37.050 align:middle line:84% So let's say the average employee values that as exactly 01:07:37.050 --> 01:07:40.530 align:middle line:90% its cost, or maybe more. 01:07:40.530 --> 01:07:43.640 align:middle line:84% Why would employers still not do it? 01:07:43.640 --> 01:07:44.240 align:middle line:90% Yeah. 01:07:44.240 --> 01:07:45.680 align:middle line:90% AUDIENCE: PR backlash? 01:07:45.680 --> 01:07:47.438 align:middle line:84% JON GRUBER: No, I mean, forget the PR. 01:07:47.438 --> 01:07:49.480 align:middle line:84% I mean, today's world, that would be good, right? 01:07:49.480 --> 01:07:51.380 align:middle line:90% Why do employers not do it? 01:07:51.380 --> 01:07:51.880 align:middle line:90% Yeah. 01:07:51.880 --> 01:07:53.047 align:middle line:90% AUDIENCE: Adverse selection. 01:07:53.047 --> 01:07:54.798 align:middle line:90% JON GRUBER: Adverse selection. 01:07:54.798 --> 01:07:56.840 align:middle line:84% All the workers who know they're at risk for AIDS 01:07:56.840 --> 01:07:57.960 align:middle line:90% come work for you. 01:07:57.960 --> 01:07:59.460 align:middle line:84% And it doesn't cost you the average, 01:07:59.460 --> 01:08:01.680 align:middle line:90% it costs you the full cost. 01:08:01.680 --> 01:08:05.040 align:middle line:84% So no employer wants to go first and be the employer that 01:08:05.040 --> 01:08:07.200 align:middle line:84% covers AIDS, because then they get 01:08:07.200 --> 01:08:08.720 align:middle line:90% all the workers that have it. 01:08:08.720 --> 01:08:10.340 align:middle line:90% Same with worker's compensation. 01:08:10.340 --> 01:08:14.170 align:middle line:84% Why would you not want to be the one employer in 1904 that 01:08:14.170 --> 01:08:15.420 align:middle line:90% offered worker's compensation? 01:08:15.420 --> 01:08:17.640 align:middle line:84% Because all the clumsy workers are going to come work for you 01:08:17.640 --> 01:08:19.200 align:middle line:90% and you're going to go bankrupt. 01:08:19.200 --> 01:08:23.880 align:middle line:84% Any benefit, even if it's valued fully or valued more than fully, 01:08:23.880 --> 01:08:26.920 align:middle line:84% might not be offered because no employer wants to move first. 01:08:26.920 --> 01:08:29.700 align:middle line:84% In that world, a mandate can actually be efficient. 01:08:29.700 --> 01:08:33.660 align:middle line:84% Indeed, if people value the benefit more than it's cost, 01:08:33.660 --> 01:08:36.479 align:middle line:84% a mandate could be efficiency increasing. 01:08:36.479 --> 01:08:39.920 align:middle line:84% Not only not efficiency reducing, efficiency increasing. 01:08:39.920 --> 01:08:42.660 align:middle line:84% It's a very powerful insight, a simple insight. 01:08:42.660 --> 01:08:44.600 align:middle line:84% His articles even called some simple economics 01:08:44.600 --> 01:08:48.960 align:middle line:84% and mandated benefits, but a very powerful insight. 01:08:48.960 --> 01:08:50.200 align:middle line:90% OK. 01:08:50.200 --> 01:08:56.080 align:middle line:84% So the bottom line is that, and it comes back to Tiebout. 01:08:56.080 --> 01:08:56.708 align:middle line:90% Why? 01:08:56.708 --> 01:08:58.000 align:middle line:90% Because what was Tiebout about? 01:08:58.000 --> 01:09:00.279 align:middle line:84% He was about tax benefit linkages. 01:09:00.279 --> 01:09:04.000 align:middle line:84% Why did communities provide the efficient level of public goods 01:09:04.000 --> 01:09:05.760 align:middle line:90% in the Tiebout model? 01:09:05.760 --> 01:09:08.399 align:middle line:84% Because the Tiebout model, the taxes you paid exactly 01:09:08.399 --> 01:09:10.439 align:middle line:90% were the benefits you got. 01:09:10.439 --> 01:09:13.120 align:middle line:84% Likewise here, something that people value, 01:09:13.120 --> 01:09:15.880 align:middle line:84% the cost of employer's efficient to provide, 01:09:15.880 --> 01:09:17.859 align:middle line:84% because they'll just pay for it in lower wages. 01:09:17.859 --> 01:09:20.500 align:middle line:84% There's a full tax benefit linkage. 01:09:20.500 --> 01:09:21.760 align:middle line:90% OK. 01:09:21.760 --> 01:09:24.640 align:middle line:90% Questions about that argument? 01:09:24.640 --> 01:09:26.979 align:middle line:84% Now, this argument raises some interesting issues. 01:09:26.979 --> 01:09:29.437 align:middle line:84% One issue is what Alec raised, which is why don't employers 01:09:29.437 --> 01:09:30.520 align:middle line:90% do it already? 01:09:30.520 --> 01:09:33.160 align:middle line:84% The other issue is, well, what's going 01:09:33.160 --> 01:09:36.319 align:middle line:84% to determine how big these tax benefit linkages are? 01:09:36.319 --> 01:09:39.075 align:middle line:84% Well, let's go back to our Disney example. 01:09:39.075 --> 01:09:41.700 align:middle line:84% In fact, Disney is kind of fun for adults, but let's be honest, 01:09:41.700 --> 01:09:42.702 align:middle line:90% it's more fun for kids. 01:09:42.702 --> 01:09:45.160 align:middle line:84% So there's going to be a lot of difference in how employees 01:09:45.160 --> 01:09:46.852 align:middle line:90% will value that Disney benefit. 01:09:46.852 --> 01:09:48.560 align:middle line:84% Likewise, there'll be a lot of difference 01:09:48.560 --> 01:09:50.359 align:middle line:84% how people would value the AIDS benefit. 01:09:50.359 --> 01:09:53.560 align:middle line:84% If I know I'm in a heterosexual relationship 01:09:53.560 --> 01:09:55.880 align:middle line:84% and I'm never going to get a blood transfusion, 01:09:55.880 --> 01:09:58.200 align:middle line:90% I might not value AIDS coverage. 01:09:58.200 --> 01:10:03.665 align:middle line:84% So basically, as a result, there's 01:10:03.665 --> 01:10:06.040 align:middle line:84% going to be differences across people in this tax benefit 01:10:06.040 --> 01:10:08.123 align:middle line:84% linkage, and that's going to complicate the model. 01:10:08.123 --> 01:10:10.500 align:middle line:84% His model is written for the average tax benefit linkage, 01:10:10.500 --> 01:10:14.080 align:middle line:84% but heterogeneity will make the model more complicated. 01:10:14.080 --> 01:10:15.720 align:middle line:90% OK. 01:10:15.720 --> 01:10:17.360 align:middle line:90% Here's another issue. 01:10:17.360 --> 01:10:19.597 align:middle line:84% Actually, Summers, I'm going to talk about Summers. 01:10:19.597 --> 01:10:21.180 align:middle line:84% There's a big event for him on Friday. 01:10:21.180 --> 01:10:22.780 align:middle line:84% I'll be speaking about this paper at that event. 01:10:22.780 --> 01:10:24.020 align:middle line:90% I won't mention this point. 01:10:24.020 --> 01:10:27.145 align:middle line:84% But actually, there's a mistake in the title, 01:10:27.145 --> 01:10:28.520 align:middle line:84% because this actually has nothing 01:10:28.520 --> 01:10:31.280 align:middle line:90% to do with mandated benefits. 01:10:31.280 --> 01:10:33.743 align:middle line:90% Take unemployment insurance. 01:10:33.743 --> 01:10:35.660 align:middle line:84% There's no mandate for unemployment insurance. 01:10:35.660 --> 01:10:36.465 align:middle line:90% You're just taxed. 01:10:36.465 --> 01:10:38.840 align:middle line:84% Employers are taxed for all their employees' unemployment 01:10:38.840 --> 01:10:39.680 align:middle line:90% insurance. 01:10:39.680 --> 01:10:41.760 align:middle line:90% The analysis is the same. 01:10:41.760 --> 01:10:44.600 align:middle line:84% Employers pay a tax, employees get benefits. 01:10:44.600 --> 01:10:46.820 align:middle line:84% So because the employee unemployment insurance, 01:10:46.820 --> 01:10:51.425 align:middle line:84% I'm more willing to work because if I get laid off, I'm covered. 01:10:51.425 --> 01:10:52.800 align:middle line:84% So really, this article should be 01:10:52.800 --> 01:10:54.640 align:middle line:84% called some simple economics of benefits 01:10:54.640 --> 01:10:56.760 align:middle line:90% that are attached to work. 01:10:56.760 --> 01:10:58.360 align:middle line:90% Let me flip it around. 01:10:58.360 --> 01:11:00.520 align:middle line:84% Actually, the reason this model doesn't really 01:11:00.520 --> 01:11:02.280 align:middle line:84% apply to Clinton health care reform 01:11:02.280 --> 01:11:04.440 align:middle line:84% is Clinton wanted to tax employers 01:11:04.440 --> 01:11:07.960 align:middle line:84% and use the money to provide insurance to everyone. 01:11:07.960 --> 01:11:10.520 align:middle line:84% Well, what happens if you provide insurance to everyone? 01:11:10.520 --> 01:11:13.200 align:middle line:84% Then you don't get the labor supply shift, even 01:11:13.200 --> 01:11:15.000 align:middle line:90% though it's a mandated benefit. 01:11:15.000 --> 01:11:17.360 align:middle line:84% If you're giving to non-workers too, 01:11:17.360 --> 01:11:18.900 align:middle line:90% there's no labor supply shift. 01:11:18.900 --> 01:11:20.960 align:middle line:84% The key trick that makes this work 01:11:20.960 --> 01:11:23.440 align:middle line:84% is that you're restricting the benefit to the people who 01:11:23.440 --> 01:11:25.000 align:middle line:90% are paying the taxes. 01:11:25.000 --> 01:11:28.040 align:middle line:84% That's what delivers the tax benefit linkage. 01:11:28.040 --> 01:11:31.787 align:middle line:90% If the benefit is, so anything. 01:11:31.787 --> 01:11:33.120 align:middle line:90% It doesn't have to be a mandate. 01:11:33.120 --> 01:11:37.813 align:middle line:84% Anything which limits the employer cost, 01:11:37.813 --> 01:11:39.480 align:middle line:84% limits the benefit to those who actually 01:11:39.480 --> 01:11:40.855 align:middle line:84% have to go work for the employer, 01:11:40.855 --> 01:11:43.320 align:middle line:84% is going to have the Summers offsetting effect. 01:11:43.320 --> 01:11:43.880 align:middle line:90% OK. 01:11:43.880 --> 01:11:44.380 align:middle line:90% Yeah. 01:11:44.380 --> 01:11:46.520 align:middle line:84% AUDIENCE: Insurance benefits is one 01:11:46.520 --> 01:11:52.418 align:middle line:84% of which this mandate exists, or one in which enough businesses 01:11:52.418 --> 01:11:53.460 align:middle line:90% have made the first move? 01:11:53.460 --> 01:11:53.860 align:middle line:90% JON GRUBER: Well, no. 01:11:53.860 --> 01:11:55.260 align:middle line:84% I mean, basically, we know this mandate exists. 01:11:55.260 --> 01:11:56.800 align:middle line:90% So take workers compensation. 01:11:56.800 --> 01:11:57.860 align:middle line:90% Perfect example. 01:11:57.860 --> 01:11:59.380 align:middle line:84% This mandate exists for workers' compensation. 01:11:59.380 --> 01:12:01.047 align:middle line:84% We have mandated workers' comp coverage. 01:12:01.047 --> 01:12:03.360 align:middle line:84% AUDIENCE: I guess I meant more for health care. 01:12:03.360 --> 01:12:06.400 align:middle line:84% JON GRUBER: Health care, there was 01:12:06.400 --> 01:12:08.820 align:middle line:84% a small mandate in the original Affordable Care Act. 01:12:08.820 --> 01:12:10.542 align:middle line:84% There's a mandate in Massachusetts. 01:12:10.542 --> 01:12:13.000 align:middle line:84% Some states have mandates, but basically, it doesn't really 01:12:13.000 --> 01:12:14.300 align:middle line:90% exist for health insurance. 01:12:14.300 --> 01:12:17.223 align:middle line:84% But it does exist, for example, if you offer health insurance 01:12:17.223 --> 01:12:18.640 align:middle line:84% and you're one of the kinds that's 01:12:18.640 --> 01:12:21.720 align:middle line:84% regulated by the state, which is plans above x employees. 01:12:21.720 --> 01:12:22.460 align:middle line:90% X varies. 01:12:22.460 --> 01:12:23.960 align:middle line:84% You have to include certain features 01:12:23.960 --> 01:12:25.180 align:middle line:90% in your health insurance. 01:12:25.180 --> 01:12:26.580 align:middle line:90% Now, the ACA made that national. 01:12:26.580 --> 01:12:28.840 align:middle line:84% But before the ACA, for example, in Massachusetts, 01:12:28.840 --> 01:12:29.940 align:middle line:90% you had to cover IVF. 01:12:29.940 --> 01:12:32.280 align:middle line:90% In other states, you didn't. 01:12:32.280 --> 01:12:33.540 align:middle line:90% So that was a mandate. 01:12:33.540 --> 01:12:34.830 align:middle line:84% But we didn't mandate people who had insurance. 01:12:34.830 --> 01:12:36.872 align:middle line:84% We mandated what you have to cover if you had it. 01:12:36.872 --> 01:12:38.950 align:middle line:84% Worker's comp is the best example. 01:12:38.950 --> 01:12:40.550 align:middle line:84% And indeed, my first ever published 01:12:40.550 --> 01:12:43.550 align:middle line:84% article was looking at, well, what happens 01:12:43.550 --> 01:12:45.290 align:middle line:90% if you mandate worker's comp? 01:12:45.290 --> 01:12:47.230 align:middle line:84% What is the extent of the shifting? 01:12:47.230 --> 01:12:49.710 align:middle line:84% And I found, and worked with the late, great economist Alan 01:12:49.710 --> 01:12:53.150 align:middle line:84% Krueger, I found that, in fact, workers' comp was almost fully 01:12:53.150 --> 01:12:54.790 align:middle line:90% shifted to wages. 01:12:54.790 --> 01:12:56.917 align:middle line:84% That is when as the cost of workers' comp went up. 01:12:56.917 --> 01:12:59.250 align:middle line:84% Now, I couldn't study the introduction of workers' comp. 01:12:59.250 --> 01:13:01.337 align:middle line:84% Later articles did that and found the same thing. 01:13:01.337 --> 01:13:03.170 align:middle line:84% I was looking at a world with workers' comp. 01:13:03.170 --> 01:13:04.870 align:middle line:84% What happens when worker's comp gets more expensive or less 01:13:04.870 --> 01:13:05.950 align:middle line:90% expensive? 01:13:05.950 --> 01:13:08.870 align:middle line:84% What we found was when workers' comp gets more expensive, 01:13:08.870 --> 01:13:11.950 align:middle line:84% it lowers wages and doesn't lower employment, 01:13:11.950 --> 01:13:15.990 align:middle line:84% which is consistent with figure 20-12. 01:13:15.990 --> 01:13:19.530 align:middle line:84% I then went on, and in my thesis asked the question, well, 01:13:19.530 --> 01:13:21.270 align:middle line:84% wait a second, what happens if it's 01:13:21.270 --> 01:13:25.950 align:middle line:84% a benefit that doesn't affect everyone, like maternity leave? 01:13:25.950 --> 01:13:28.577 align:middle line:84% What if we mandate maternity leave? 01:13:28.577 --> 01:13:30.910 align:middle line:84% Which most countries in the world mandate paid maternity 01:13:30.910 --> 01:13:31.170 align:middle line:90% leave. 01:13:31.170 --> 01:13:32.587 align:middle line:84% We mandate unpaid maternity leave. 01:13:32.587 --> 01:13:34.962 align:middle line:84% In some states, we actually mandate paid maternity leave, 01:13:34.962 --> 01:13:35.910 align:middle line:90% like Massachusetts. 01:13:35.910 --> 01:13:37.950 align:middle line:90% But in most states, we don't. 01:13:37.950 --> 01:13:40.150 align:middle line:84% Well, that's complicated, because that's 01:13:40.150 --> 01:13:43.030 align:middle line:90% a benefit only to some workers. 01:13:43.030 --> 01:13:47.150 align:middle line:84% So if you can perfectly adjust every worker's wage, 01:13:47.150 --> 01:13:49.230 align:middle line:84% then you'd see the same model operate, but just 01:13:49.230 --> 01:13:50.863 align:middle line:90% for the workers who benefit. 01:13:50.863 --> 01:13:53.030 align:middle line:84% But if it turns out it's hard to set different wages 01:13:53.030 --> 01:13:54.110 align:middle line:84% for different workers because they'll 01:13:54.110 --> 01:13:56.650 align:middle line:84% be pissed or discrimination, then it'll be hard to do it. 01:13:56.650 --> 01:13:58.483 align:middle line:84% So I actually studied an interesting feature 01:13:58.483 --> 01:14:01.630 align:middle line:84% of the system, which is when I was born and until the mid 01:14:01.630 --> 01:14:06.710 align:middle line:84% 1970s, the way health insurance was set up is it said if you 01:14:06.710 --> 01:14:09.930 align:middle line:84% break your arm or have a burst appendix or have cancer, 01:14:09.930 --> 01:14:11.550 align:middle line:90% we'll pay your medical bills. 01:14:11.550 --> 01:14:14.350 align:middle line:84% But if you have a baby, here's 200 bucks. 01:14:14.350 --> 01:14:16.650 align:middle line:84% The idea was that childbirth was not a medical event, 01:14:16.650 --> 01:14:18.270 align:middle line:90% it was a choice. 01:14:18.270 --> 01:14:22.670 align:middle line:84% So insurance did not pay for the cost of childbirth. 01:14:22.670 --> 01:14:24.750 align:middle line:84% This was then viewed as discriminatory 01:14:24.750 --> 01:14:26.970 align:middle line:84% and a number of states started passing laws, 01:14:26.970 --> 01:14:31.310 align:middle line:84% mandates, mandating insurance coverage childbirth. 01:14:31.310 --> 01:14:35.390 align:middle line:84% Well, this was a major increase in the cost of health insurance. 01:14:35.390 --> 01:14:38.030 align:middle line:84% So I looked at what happened to the wages 01:14:38.030 --> 01:14:41.350 align:middle line:84% in the states that mandated this maternity coverage. 01:14:41.350 --> 01:14:44.030 align:middle line:84% Then, in 1977, the federal government 01:14:44.030 --> 01:14:45.730 align:middle line:90% mandated for the whole country. 01:14:45.730 --> 01:14:47.650 align:middle line:84% So we ran the reverse of the experiment. 01:14:47.650 --> 01:14:49.550 align:middle line:84% So ever since, some states that added it 01:14:49.550 --> 01:14:51.910 align:middle line:84% and then the rest states had to add it. 01:14:51.910 --> 01:14:53.390 align:middle line:84% And I looked at both and I looked 01:14:53.390 --> 01:14:54.765 align:middle line:84% at what happened to the wages of, 01:14:54.765 --> 01:14:57.370 align:middle line:84% for example, married women relative to say, 01:14:57.370 --> 01:15:01.710 align:middle line:84% men or very older women who weren't of childbearing age. 01:15:01.710 --> 01:15:03.190 align:middle line:84% And what I found there was actually 01:15:03.190 --> 01:15:04.810 align:middle line:84% group specific shifting, that is, 01:15:04.810 --> 01:15:07.810 align:middle line:84% the relative wages of married women and actually, 01:15:07.810 --> 01:15:09.267 align:middle line:84% to some extent of their husbands, 01:15:09.267 --> 01:15:11.350 align:middle line:84% since their husbands provide the health insurance, 01:15:11.350 --> 01:15:13.830 align:middle line:84% actually went down relative to the wages of groups 01:15:13.830 --> 01:15:19.150 align:middle line:84% like young, single women or older women or unmarried 01:15:19.150 --> 01:15:22.110 align:middle line:84% men, which is consistent with the ability of firms 01:15:22.110 --> 01:15:25.110 align:middle line:84% to actually shift those costs even within the firm. 01:15:25.110 --> 01:15:28.630 align:middle line:84% It's consistent with this kind of model working within firms. 01:15:28.630 --> 01:15:30.690 align:middle line:90% Now, does it work perfectly? 01:15:30.690 --> 01:15:33.510 align:middle line:84% No, but the idea is that this kind of model 01:15:33.510 --> 01:15:36.410 align:middle line:84% actually works across firms and within firms as well. 01:15:36.410 --> 01:15:36.910 align:middle line:90% Yeah. 01:15:36.910 --> 01:15:39.160 align:middle line:84% AUDIENCE: So does the labor supply for the [INAUDIBLE] 01:15:39.160 --> 01:15:40.368 align:middle line:90% I mean, for the women change? 01:15:40.368 --> 01:15:42.910 align:middle line:84% JON GRUBER: Well, I mean, that's what's implied, that it did. 01:15:42.910 --> 01:15:45.330 align:middle line:84% The ultimate, you can only look at equilibrium outcome. 01:15:45.330 --> 01:15:46.230 align:middle line:90% Labor didn't change. 01:15:46.230 --> 01:15:47.590 align:middle line:90% AUDIENCE: OK. 01:15:47.590 --> 01:15:50.450 align:middle line:84% JON GRUBER: So what this says, is this good news or bad news? 01:15:50.450 --> 01:15:51.890 align:middle line:90% Well, actually, it's mixed news. 01:15:51.890 --> 01:15:53.710 align:middle line:90% Here's the good news. 01:15:53.710 --> 01:15:56.830 align:middle line:84% My evidence implies we can mandate paid maternity leave 01:15:56.830 --> 01:15:59.430 align:middle line:84% and women will not lose their jobs. 01:15:59.430 --> 01:16:00.710 align:middle line:90% That's the good news. 01:16:00.710 --> 01:16:04.190 align:middle line:84% If you want to extrapolate from my now 30-year-old paper 01:16:04.190 --> 01:16:06.550 align:middle line:90% to today. 01:16:06.550 --> 01:16:09.870 align:middle line:84% The bad news is you're not helping women. 01:16:09.870 --> 01:16:12.162 align:middle line:84% You're just redistributing the way they're compensated. 01:16:12.162 --> 01:16:13.662 align:middle line:84% So if you think I'm going to mandate 01:16:13.662 --> 01:16:15.567 align:middle line:84% maternity leave because I want to help women, 01:16:15.567 --> 01:16:16.650 align:middle line:90% well, in fact, you're not. 01:16:16.650 --> 01:16:18.275 align:middle line:84% You're just giving them maternity leave 01:16:18.275 --> 01:16:20.070 align:middle line:90% instead of wages. 01:16:20.070 --> 01:16:22.670 align:middle line:84% But the good news, at least they won't lose their job. 01:16:22.670 --> 01:16:25.383 align:middle line:84% So in some sense, it's an either/or. 01:16:25.383 --> 01:16:26.800 align:middle line:84% You don't get the efficiency loss, 01:16:26.800 --> 01:16:28.940 align:middle line:84% but you also don't get the equity gain in some sense, 01:16:28.940 --> 01:16:30.180 align:middle line:84% of helping people out because they pay for it 01:16:30.180 --> 01:16:31.860 align:middle line:90% themselves out of their wages. 01:16:31.860 --> 01:16:32.700 align:middle line:90% OK. 01:16:32.700 --> 01:16:33.280 align:middle line:90% Yeah. 01:16:33.280 --> 01:16:36.357 align:middle line:84% AUDIENCE: What were ways, if you can like, vertically integrate 01:16:36.357 --> 01:16:37.940 align:middle line:84% it in more ways that they would rather 01:16:37.940 --> 01:16:38.940 align:middle line:90% have indirect [INAUDIBLE]? 01:16:38.940 --> 01:16:39.720 align:middle line:84% JON GRUBER: Yeah, great question. 01:16:39.720 --> 01:16:41.303 align:middle line:84% I couldn't investigate it in my paper. 01:16:41.303 --> 01:16:44.520 align:middle line:84% Maybe they did it through slower promotions. 01:16:44.520 --> 01:16:47.060 align:middle line:84% The other thing, this is a very high inflation environment. 01:16:47.060 --> 01:16:48.935 align:middle line:84% So they could have done it by just not giving 01:16:48.935 --> 01:16:51.380 align:middle line:84% them raises as quickly as they did other groups. 01:16:51.380 --> 01:16:52.880 align:middle line:84% So there are ways they could adjust, 01:16:52.880 --> 01:16:54.172 align:middle line:90% but I can't really get at that. 01:16:54.172 --> 01:16:55.140 align:middle line:90% It's a good question. 01:16:55.140 --> 01:16:55.880 align:middle line:90% All right. 01:16:55.880 --> 01:16:57.140 align:middle line:90% Yeah. 01:16:57.140 --> 01:17:01.380 align:middle line:90% AUDIENCE: With-- sorry. 01:17:01.380 --> 01:17:03.760 align:middle line:84% Wouldn't fight not being laid off? 01:17:03.760 --> 01:17:07.780 align:middle line:84% Like, even with the lower wages, isn't because people value, 01:17:07.780 --> 01:17:08.483 align:middle line:90% sort of-- 01:17:08.483 --> 01:17:09.400 align:middle line:90% JON GRUBER: Right, no. 01:17:09.400 --> 01:17:12.420 align:middle line:84% But I mean, if you look at figure 20-12, 01:17:12.420 --> 01:17:14.260 align:middle line:90% they're indifferent. 01:17:14.260 --> 01:17:16.820 align:middle line:84% Maybe they're even better off because maybe they valued it 01:17:16.820 --> 01:17:19.153 align:middle line:90% more than it cost the employer. 01:17:19.153 --> 01:17:21.820 align:middle line:84% But it's not like suddenly we're delivering this massive benefit 01:17:21.820 --> 01:17:23.200 align:middle line:90% to women for free. 01:17:23.200 --> 01:17:25.740 align:middle line:84% They're paying for it in lower wages. 01:17:25.740 --> 01:17:26.360 align:middle line:90% All right. 01:17:26.360 --> 01:17:28.277 align:middle line:84% AUDIENCE: Sure, but it's still in between what 01:17:28.277 --> 01:17:29.660 align:middle line:90% is not [INAUDIBLE] work out. 01:17:29.660 --> 01:17:30.820 align:middle line:84% JON GRUBER: Well, I mean, basically, it's 01:17:30.820 --> 01:17:31.880 align:middle line:90% like the minimum wage argument. 01:17:31.880 --> 01:17:34.547 align:middle line:84% How do we feel about giving more wages to some low wage workers, 01:17:34.547 --> 01:17:35.980 align:middle line:84% but other people lose their jobs? 01:17:35.980 --> 01:17:39.273 align:middle line:84% So that's, the equity is harder, because it depends on that, 01:17:39.273 --> 01:17:40.440 align:middle line:90% but the efficiency is clear. 01:17:40.440 --> 01:17:43.020 align:middle line:84% It's much more efficient to not have people lose their jobs. 01:17:43.020 --> 01:17:43.713 align:middle line:90% Yeah. 01:17:43.713 --> 01:17:45.088 align:middle line:84% AUDIENCE: [INAUDIBLE] the benefit 01:17:45.088 --> 01:17:46.922 align:middle line:90% have a floor for [INAUDIBLE]. 01:17:46.922 --> 01:17:48.880 align:middle line:84% JON GRUBER: Yeah, I mean, that's another thing. 01:17:48.880 --> 01:17:50.180 align:middle line:84% People look at the interaction with the floor 01:17:50.180 --> 01:17:52.347 align:middle line:84% and that suggests that there, you couldn't shift it. 01:17:52.347 --> 01:17:54.600 align:middle line:84% And that would cause some job losses, 01:17:54.600 --> 01:17:57.203 align:middle line:84% but then women's wages wouldn't fall as much. 01:17:57.203 --> 01:17:59.120 align:middle line:84% So the bottom line is the efficiency is clear. 01:17:59.120 --> 01:18:01.280 align:middle line:84% The more you shift to wages, the less inefficiency. 01:18:01.280 --> 01:18:03.943 align:middle line:84% The equity is a bit hard because on the one hand, 01:18:03.943 --> 01:18:06.360 align:middle line:84% you reduce job losses, on the other hand, you lower wages. 01:18:06.360 --> 01:18:08.520 align:middle line:84% The point is not that I have a bottom line equity. 01:18:08.520 --> 01:18:10.280 align:middle line:84% The point is it's not as good as it seems. 01:18:10.280 --> 01:18:11.780 align:middle line:84% You say women are losing their jobs, 01:18:11.780 --> 01:18:13.200 align:middle line:90% and that's wonderful for women. 01:18:13.200 --> 01:18:13.720 align:middle line:90% Not necessarily. 01:18:13.720 --> 01:18:16.345 align:middle line:84% It might not be losing their job because their wages are lower. 01:18:16.345 --> 01:18:19.290 align:middle line:90% OK, so let me stop there. 01:18:19.290 --> 01:18:23.000 align:middle line:90%