WEBVTT 00:00:00.000 --> 00:00:00.483 align:middle line:90% 00:00:00.483 --> 00:00:00.983 align:middle line:90% [SQUEAKING] 00:00:00.983 --> 00:00:03.381 align:middle line:90% [RUSTLING] 00:00:03.381 --> 00:00:03.881 align:middle line:90% 00:00:03.881 --> 00:00:06.296 align:middle line:90% [CLICKING] 00:00:06.296 --> 00:00:09.375 align:middle line:90% 00:00:09.375 --> 00:00:10.000 align:middle line:90% JON GRUBER: OK. 00:00:10.000 --> 00:00:12.580 align:middle line:84% Well, thank you for coming to the last lecture. 00:00:12.580 --> 00:00:17.040 align:middle line:84% Once again, I'm sorry again about having to move the time. 00:00:17.040 --> 00:00:22.400 align:middle line:84% I have a good excuse, which is my co-author, Simon Johnson, 00:00:22.400 --> 00:00:23.920 align:middle line:84% won the Nobel Prize and has invited 00:00:23.920 --> 00:00:26.137 align:middle line:84% me to come to the celebration in Stockholm. 00:00:26.137 --> 00:00:27.720 align:middle line:84% So I'm flying out tonight to Stockholm 00:00:27.720 --> 00:00:29.340 align:middle line:84% to go to the Nobel Prize celebration. 00:00:29.340 --> 00:00:31.500 align:middle line:84% So I'm sorry it comes out of your hide, 00:00:31.500 --> 00:00:33.160 align:middle line:90% but I couldn't pass that up. 00:00:33.160 --> 00:00:36.480 align:middle line:84% So anyway, that's why we're doing this today. 00:00:36.480 --> 00:00:39.103 align:middle line:84% Reminder, the final review will be-- 00:00:39.103 --> 00:00:40.520 align:middle line:84% the final review will be in class, 00:00:40.520 --> 00:00:42.200 align:middle line:90% normal class time on Monday. 00:00:42.200 --> 00:00:44.800 align:middle line:84% So we're talking about chapter 25, 00:00:44.800 --> 00:00:48.280 align:middle line:84% and we're talking about wrapping up all our lessons on taxes. 00:00:48.280 --> 00:00:50.360 align:middle line:84% And in particular, the motivation for the chapter 00:00:50.360 --> 00:00:55.040 align:middle line:84% is why we might want a flatter, simpler tax code. 00:00:55.040 --> 00:00:56.980 align:middle line:84% And we talked about three reasons. 00:00:56.980 --> 00:01:01.820 align:middle line:84% The first reason is evasion, that a flatter tax 00:01:01.820 --> 00:01:03.760 align:middle line:84% code with fewer opportunities for evasion-- 00:01:03.760 --> 00:01:06.340 align:middle line:84% with fewer loopholes and things like that 00:01:06.340 --> 00:01:08.820 align:middle line:84% will make it harder to evade taxes. 00:01:08.820 --> 00:01:10.420 align:middle line:84% The second was simplicity, which is 00:01:10.420 --> 00:01:13.080 align:middle line:84% people like filing simpler tax forms, 00:01:13.080 --> 00:01:14.780 align:middle line:90% although that comes with costs. 00:01:14.780 --> 00:01:16.133 align:middle line:90% And the third is efficiency. 00:01:16.133 --> 00:01:18.300 align:middle line:84% And this was highlighting-- we ended with last time, 00:01:18.300 --> 00:01:21.420 align:middle line:90% was highlighting that the more-- 00:01:21.420 --> 00:01:24.140 align:middle line:84% that essentially the total effect 00:01:24.140 --> 00:01:26.260 align:middle line:84% on tax revenue-- of tax on tax revenues 00:01:26.260 --> 00:01:28.580 align:middle line:84% is really the central parameter for thinking 00:01:28.580 --> 00:01:30.460 align:middle line:84% about the efficiencies of taxation 00:01:30.460 --> 00:01:35.380 align:middle line:84% is essentially the elasticity of the tax base with respect 00:01:35.380 --> 00:01:36.940 align:middle line:90% to the tax rate. 00:01:36.940 --> 00:01:38.740 align:middle line:84% It is essentially the key parameter 00:01:38.740 --> 00:01:40.800 align:middle line:84% for thinking about the efficiency of taxation. 00:01:40.800 --> 00:01:42.758 align:middle line:84% There's lots of things that go into that, which 00:01:42.758 --> 00:01:44.940 align:middle line:84% is labor supply effects, and savings effects, 00:01:44.940 --> 00:01:46.220 align:middle line:90% and things like that. 00:01:46.220 --> 00:01:48.910 align:middle line:84% But the key elasticity is the elasticity 00:01:48.910 --> 00:01:51.140 align:middle line:84% of the tax base with respect to the tax rate. 00:01:51.140 --> 00:01:52.612 align:middle line:90% So what do we know about that? 00:01:52.612 --> 00:01:54.320 align:middle line:84% What do we know about that key parameter? 00:01:54.320 --> 00:01:56.528 align:middle line:84% Actually, we've learned some very interesting things. 00:01:56.528 --> 00:01:58.820 align:middle line:84% The literature, which grew up in the last 25 years, 00:01:58.820 --> 00:02:00.567 align:middle line:84% which is focused on this key parameter. 00:02:00.567 --> 00:02:01.900 align:middle line:90% We know some interesting things. 00:02:01.900 --> 00:02:05.520 align:middle line:84% First of all, we know that overall, the elasticity 00:02:05.520 --> 00:02:07.800 align:middle line:90% of the tax base-- 00:02:07.800 --> 00:02:14.120 align:middle line:84% the tax base with respect to the tax rate is about minus 0.4. 00:02:14.120 --> 00:02:18.360 align:middle line:84% That is, for every 10% you raise taxes, 00:02:18.360 --> 00:02:21.240 align:middle line:84% your revenues go up by-- for every 10% you raise the tax 00:02:21.240 --> 00:02:26.520 align:middle line:84% rate, revenues go up by about 6% as opposed to-- 00:02:26.520 --> 00:02:28.380 align:middle line:84% the direct effect would imply zero. 00:02:28.380 --> 00:02:30.960 align:middle line:84% So that says there's offsetting indirect effects 00:02:30.960 --> 00:02:32.745 align:middle line:90% of raising the tax rate. 00:02:32.745 --> 00:02:34.620 align:middle line:84% What do we know about these indirect effects? 00:02:34.620 --> 00:02:35.995 align:middle line:84% Well, we know a couple of things. 00:02:35.995 --> 00:02:38.200 align:middle line:84% First of all, almost none of this 00:02:38.200 --> 00:02:40.680 align:middle line:84% is through what you might call the Laffer effect. 00:02:40.680 --> 00:02:43.360 align:middle line:84% Almost none of this is through people working less hard 00:02:43.360 --> 00:02:45.280 align:middle line:90% or saving less. 00:02:45.280 --> 00:02:48.000 align:middle line:90% It instead comes from the more-- 00:02:48.000 --> 00:02:49.520 align:middle line:84% the other indirect effects of things 00:02:49.520 --> 00:02:53.120 align:middle line:84% like people taking more tax breaks, 00:02:53.120 --> 00:02:55.443 align:middle line:84% changing how they report their income, and cheating. 00:02:55.443 --> 00:02:56.860 align:middle line:84% So that's the first thing we know, 00:02:56.860 --> 00:02:59.940 align:middle line:84% is that there is an elastic tax base, but almost 00:02:59.940 --> 00:03:03.740 align:middle line:84% all of it is from what we call non-economic responses, 00:03:03.740 --> 00:03:08.500 align:middle line:84% or nonfundamental economic supply responses, 00:03:08.500 --> 00:03:12.460 align:middle line:84% and more recording and things like that. 00:03:12.460 --> 00:03:15.500 align:middle line:84% The second thing we know is the elasticity of the tax 00:03:15.500 --> 00:03:16.940 align:middle line:84% base with respect to the tax rate 00:03:16.940 --> 00:03:19.980 align:middle line:84% is basically zero for the nonrich. 00:03:19.980 --> 00:03:22.020 align:middle line:84% That basically, for people who aren't rich, 00:03:22.020 --> 00:03:24.660 align:middle line:84% there is not much effect of changing the tax 00:03:24.660 --> 00:03:26.940 align:middle line:84% rate on their reported taxable income. 00:03:26.940 --> 00:03:28.080 align:middle line:90% Once again, not surprising. 00:03:28.080 --> 00:03:30.163 align:middle line:84% There's not a lot of opportunities for doing much. 00:03:30.163 --> 00:03:31.620 align:middle line:84% If you're a regular working stiff 00:03:31.620 --> 00:03:34.000 align:middle line:84% and you just-- all your income is withheld, 00:03:34.000 --> 00:03:36.380 align:middle line:84% there's not a lot of games you can play. 00:03:36.380 --> 00:03:38.420 align:middle line:84% So that's the second thing we know. 00:03:38.420 --> 00:03:42.620 align:middle line:84% The third thing we know is the tax base is fairly elastic 00:03:42.620 --> 00:03:45.740 align:middle line:84% for the wealthiest taxpayers, that the wealth-- 00:03:45.740 --> 00:03:49.040 align:middle line:84% when you raise the tax rate for the wealthiest taxpayers, 00:03:49.040 --> 00:03:51.180 align:middle line:84% this elasticity is more like around-- 00:03:51.180 --> 00:03:54.440 align:middle line:84% best system's around maybe minus 0.7 or 0.8. 00:03:54.440 --> 00:03:58.640 align:middle line:84% That basically, the richest taxpayers 00:03:58.640 --> 00:04:02.280 align:middle line:84% are very responsive in what they report as income with respect 00:04:02.280 --> 00:04:02.947 align:middle line:90% to the tax rate. 00:04:02.947 --> 00:04:05.530 align:middle line:84% Once again, it doesn't appear that they're working less harder 00:04:05.530 --> 00:04:06.280 align:middle line:90% saving less. 00:04:06.280 --> 00:04:10.240 align:middle line:84% It's that they're doing various things to-- 00:04:10.240 --> 00:04:14.640 align:middle line:84% they're doing various things to lower their tax burden, 00:04:14.640 --> 00:04:16.339 align:middle line:84% like changing how they're compensated, 00:04:16.339 --> 00:04:18.600 align:middle line:90% cheating, things like that. 00:04:18.600 --> 00:04:23.560 align:middle line:84% So that leaves us with a couple of-- 00:04:23.560 --> 00:04:25.340 align:middle line:84% this leaves us with a couple of lessons. 00:04:25.340 --> 00:04:28.160 align:middle line:90% 00:04:28.160 --> 00:04:31.080 align:middle line:84% Oh, the other thing the rich do, actually-- the super rich do, 00:04:31.080 --> 00:04:34.193 align:middle line:84% and there's a fun literature on this, is they move. 00:04:34.193 --> 00:04:36.860 align:middle line:84% So there's a large literature on the mobility of the super rich. 00:04:36.860 --> 00:04:39.920 align:middle line:84% There's articles looking at top-paid soccer players 00:04:39.920 --> 00:04:43.200 align:middle line:84% and top-paid executives, especially in Europe, 00:04:43.200 --> 00:04:45.260 align:middle line:84% that if a European country raises top tax rate, 00:04:45.260 --> 00:04:46.743 align:middle line:90% they move to another country. 00:04:46.743 --> 00:04:47.660 align:middle line:90% So that's another way. 00:04:47.660 --> 00:04:49.840 align:middle line:84% Once again, something that a rich person 00:04:49.840 --> 00:04:51.880 align:middle line:84% can do that a regular Joe isn't going 00:04:51.880 --> 00:04:54.028 align:middle line:84% to move the country because the tax rate changed. 00:04:54.028 --> 00:04:55.820 align:middle line:84% But a rich person is a big enough incentive 00:04:55.820 --> 00:04:57.920 align:middle line:84% that they can change their residency. 00:04:57.920 --> 00:05:01.060 align:middle line:84% So basically, there's lots of responses. 00:05:01.060 --> 00:05:03.980 align:middle line:90% Where does this leave us? 00:05:03.980 --> 00:05:07.640 align:middle line:84% Well, basically what it says is there is a-- once again, 00:05:07.640 --> 00:05:12.180 align:middle line:84% it's a strong economic pressure towards a broader, flatter tax 00:05:12.180 --> 00:05:13.500 align:middle line:90% system. 00:05:13.500 --> 00:05:18.540 align:middle line:84% That basically, steeper tax systems, which 00:05:18.540 --> 00:05:22.860 align:middle line:84% have more loopholes and more rates and things like that, 00:05:22.860 --> 00:05:25.580 align:middle line:84% tend to leave opportunities for evasion, 00:05:25.580 --> 00:05:27.660 align:middle line:84% they make the tax system complicated, 00:05:27.660 --> 00:05:29.040 align:middle line:90% and they have efficiency losses. 00:05:29.040 --> 00:05:30.540 align:middle line:84% Remember, we talked about in chapter 00:05:30.540 --> 00:05:35.020 align:middle line:84% 20 progressive taxation has large efficiency losses because 00:05:35.020 --> 00:05:36.860 align:middle line:90% of the-- 00:05:36.860 --> 00:05:39.340 align:middle line:84% progressive taxation of large efficiency losses 00:05:39.340 --> 00:05:42.820 align:middle line:84% because of the deadweight loss at the top. 00:05:42.820 --> 00:05:47.460 align:middle line:84% Now of course, pushing against all this is progressivity. 00:05:47.460 --> 00:05:49.360 align:middle line:84% Yes, it's less efficient to tax the rich, 00:05:49.360 --> 00:05:53.040 align:middle line:84% but it also raises-- it's also more vertically equitable. 00:05:53.040 --> 00:05:55.520 align:middle line:84% And in fact, as I said, the only time I've ever gotten 00:05:55.520 --> 00:05:58.600 align:middle line:84% praised in the Wall Street Journal in my life was-- 00:05:58.600 --> 00:06:00.680 align:middle line:84% I wrote an article with a very famous economist 00:06:00.680 --> 00:06:03.480 align:middle line:84% named Emmanuel Saez, who was a student of mine here at MIT. 00:06:03.480 --> 00:06:06.650 align:middle line:84% And what we did was we highlighted, look, 00:06:06.650 --> 00:06:09.240 align:middle line:84% you can have your cake and eat it too 00:06:09.240 --> 00:06:13.120 align:middle line:84% if you have a system that has modestly progressive tax rates, 00:06:13.120 --> 00:06:14.763 align:middle line:90% but a large rebate. 00:06:14.763 --> 00:06:16.680 align:middle line:84% So we proposed something where essentially tax 00:06:16.680 --> 00:06:19.440 align:middle line:84% rates were pretty flat, but that there was-- 00:06:19.440 --> 00:06:20.960 align:middle line:84% but that there was a large rebate 00:06:20.960 --> 00:06:23.240 align:middle line:84% to the poor out of that tax system. 00:06:23.240 --> 00:06:24.760 align:middle line:84% So yes, the super rich didn't pay 00:06:24.760 --> 00:06:26.520 align:middle line:84% much higher rates than the medium rich, 00:06:26.520 --> 00:06:28.555 align:middle line:84% but the poor were very protected. 00:06:28.555 --> 00:06:30.180 align:middle line:84% And the Wall Street Journal, of course, 00:06:30.180 --> 00:06:33.400 align:middle line:84% loved that, because the super rich were paying less taxes. 00:06:33.400 --> 00:06:36.000 align:middle line:84% I think that Emanuel has then gone on 00:06:36.000 --> 00:06:38.335 align:middle line:84% to be-- he's changed his tune a little bit. 00:06:38.335 --> 00:06:39.960 align:middle line:84% He has gone on to be one of the leading 00:06:39.960 --> 00:06:42.472 align:middle line:84% advocates for very aggressive taxation of the rich. 00:06:42.472 --> 00:06:44.680 align:middle line:84% He's gone on to have an incredible career documenting 00:06:44.680 --> 00:06:47.180 align:middle line:84% how wealth has been concentrated in the hands of the wealthy 00:06:47.180 --> 00:06:50.680 align:middle line:84% and arguing that for political, as well as economic reasons, 00:06:50.680 --> 00:06:52.320 align:middle line:84% we do want to tax the rich more highly. 00:06:52.320 --> 00:06:57.380 align:middle line:84% But this is kind of where that logic comes from. 00:06:57.380 --> 00:07:01.420 align:middle line:84% And I would say there's a broad economic consensus 00:07:01.420 --> 00:07:04.020 align:middle line:84% that the tax system we had in 1986, 00:07:04.020 --> 00:07:07.380 align:middle line:84% three rates, broad tax base, no different rate for capital 00:07:07.380 --> 00:07:10.220 align:middle line:84% gains, you couldn't really take as many tax breaks, 00:07:10.220 --> 00:07:11.980 align:middle line:84% was preferred to what we have today. 00:07:11.980 --> 00:07:14.420 align:middle line:90% So why don't we have that? 00:07:14.420 --> 00:07:17.980 align:middle line:84% Well, there's two reasons, political and economic. 00:07:17.980 --> 00:07:20.140 align:middle line:84% The political is pretty straightforward, 00:07:20.140 --> 00:07:22.500 align:middle line:84% which is that basically, it is easier 00:07:22.500 --> 00:07:24.700 align:middle line:84% to do policy if you call it a tax break 00:07:24.700 --> 00:07:26.440 align:middle line:84% than to call it a spending increase. 00:07:26.440 --> 00:07:28.140 align:middle line:84% And this is shown vividly in 1992. 00:07:28.140 --> 00:07:29.860 align:middle line:84% When Bill Clinton was elected, he 00:07:29.860 --> 00:07:32.840 align:middle line:84% promised that there'd be massive investments. 00:07:32.840 --> 00:07:34.900 align:middle line:84% He was putting people first was his campaign that 00:07:34.900 --> 00:07:37.740 align:middle line:84% was going to involve massive investments in education, 00:07:37.740 --> 00:07:41.060 align:middle line:84% in local infrastructure, et cetera. 00:07:41.060 --> 00:07:42.800 align:middle line:84% And as soon as he tried to put those in, 00:07:42.800 --> 00:07:46.580 align:middle line:84% he realized that it was very hard to increase spending 00:07:46.580 --> 00:07:48.720 align:middle line:84% at the federal level at that point 00:07:48.720 --> 00:07:51.420 align:middle line:84% because people were saying, well, that's what Democrats do. 00:07:51.420 --> 00:07:52.440 align:middle line:90% They're big-spending democrats. 00:07:52.440 --> 00:07:53.340 align:middle line:90% They're going to do that. 00:07:53.340 --> 00:07:54.680 align:middle line:84% But as soon as he said no, instead 00:07:54.680 --> 00:07:57.222 align:middle line:84% of spending on education, I'm going to tax cut for education. 00:07:57.222 --> 00:07:59.220 align:middle line:84% Well, everyone loved that, because it's free. 00:07:59.220 --> 00:08:01.160 align:middle line:90% It's a tax cut. 00:08:01.160 --> 00:08:04.880 align:middle line:84% And basically, the point is that I showed you last time the tax 00:08:04.880 --> 00:08:09.820 align:middle line:84% expenditures, the holes in our tax code because of tax breaks. 00:08:09.820 --> 00:08:14.335 align:middle line:84% Well, that's not in the official government budget statistics. 00:08:14.335 --> 00:08:16.960 align:middle line:84% Government statistics determines what we spend and what we tax. 00:08:16.960 --> 00:08:18.620 align:middle line:84% And so people were like, look, that's great. 00:08:18.620 --> 00:08:19.280 align:middle line:90% Do it as a tax break. 00:08:19.280 --> 00:08:19.740 align:middle line:90% I love that. 00:08:19.740 --> 00:08:20.490 align:middle line:90% Don't do spending. 00:08:20.490 --> 00:08:22.160 align:middle line:90% That's big government. 00:08:22.160 --> 00:08:24.920 align:middle line:84% So it turns out there's a political asymmetry 00:08:24.920 --> 00:08:27.640 align:middle line:84% in how easy it is to get changes done calling it 00:08:27.640 --> 00:08:29.840 align:middle line:84% a tax break versus calling it spending. 00:08:29.840 --> 00:08:31.880 align:middle line:90% So that's the politics. 00:08:31.880 --> 00:08:34.600 align:middle line:84% The economics is much more interesting, 00:08:34.600 --> 00:08:35.740 align:middle line:90% and the economics is real. 00:08:35.740 --> 00:08:37.200 align:middle line:84% And this comes back to this concept 00:08:37.200 --> 00:08:39.200 align:middle line:84% we talked about in chapter 18, which 00:08:39.200 --> 00:08:41.200 align:middle line:84% is the concept of horizontal equity, 00:08:41.200 --> 00:08:43.880 align:middle line:84% or fairness across similar people. 00:08:43.880 --> 00:08:46.980 align:middle line:84% And this is highlighted because, basically, 00:08:46.980 --> 00:08:49.700 align:middle line:84% when you change taxes, you create 00:08:49.700 --> 00:08:52.380 align:middle line:90% critical horizontal inequities. 00:08:52.380 --> 00:08:56.420 align:middle line:84% And to see this, let's focus on the concept of tax shelters. 00:08:56.420 --> 00:08:57.940 align:middle line:90% What are tax shelters? 00:08:57.940 --> 00:09:02.140 align:middle line:84% Tax shelters are activities whose only reason for existence 00:09:02.140 --> 00:09:03.780 align:middle line:90% is tax minimization. 00:09:03.780 --> 00:09:06.020 align:middle line:84% They are not economically productive, 00:09:06.020 --> 00:09:08.758 align:middle line:84% or they're economically inefficient. 00:09:08.758 --> 00:09:10.800 align:middle line:84% Let's say that, they're economically inefficient. 00:09:10.800 --> 00:09:13.260 align:middle line:84% But they exist because of tax breaks. 00:09:13.260 --> 00:09:17.880 align:middle line:84% So basically, essentially, to turn an example of that, 00:09:17.880 --> 00:09:19.880 align:middle line:84% let's think back to the mid-1980s, 00:09:19.880 --> 00:09:23.260 align:middle line:84% the Golden era of-- pre the Tax Reform Act of '86 00:09:23.260 --> 00:09:26.700 align:middle line:84% was the golden era of tax shelters. 00:09:26.700 --> 00:09:31.660 align:middle line:84% And that was because there was very favorable tax treatment 00:09:31.660 --> 00:09:33.700 align:middle line:90% of a number of asset classes. 00:09:33.700 --> 00:09:37.260 align:middle line:84% For example, if you invested in real estate, 00:09:37.260 --> 00:09:39.240 align:middle line:84% you got rapid depreciation deductions. 00:09:39.240 --> 00:09:43.260 align:middle line:84% We had very accelerated depreciation. 00:09:43.260 --> 00:09:47.320 align:middle line:84% And you could treat your profits as capital gains, 00:09:47.320 --> 00:09:50.240 align:middle line:90% 60% of which were tax exempt. 00:09:50.240 --> 00:09:53.040 align:middle line:84% So you could rapidly depreciate and take your profits 00:09:53.040 --> 00:09:54.920 align:middle line:90% as capital gains. 00:09:54.920 --> 00:09:59.760 align:middle line:84% There was an investment tax credit and other features. 00:09:59.760 --> 00:10:05.020 align:middle line:84% And this led to a large rise in tax shelter activities. 00:10:05.020 --> 00:10:07.600 align:middle line:84% By the mid-1980s, more than $10 billion a year 00:10:07.600 --> 00:10:10.760 align:middle line:84% was being invested in tax shelters. 00:10:10.760 --> 00:10:14.220 align:middle line:84% And one investor, one industry insider, 00:10:14.220 --> 00:10:16.740 align:middle line:84% estimated that the sector where this was most visible 00:10:16.740 --> 00:10:19.240 align:middle line:84% was oil and gas, because there was huge breaks for investing 00:10:19.240 --> 00:10:20.360 align:middle line:90% in oil and gas. 00:10:20.360 --> 00:10:25.240 align:middle line:84% They estimated that 75% of all investment in independent oil 00:10:25.240 --> 00:10:28.040 align:middle line:84% and gas companies came because of tax shelters. 00:10:28.040 --> 00:10:30.200 align:middle line:90% So how does this work? 00:10:30.200 --> 00:10:32.140 align:middle line:90% Let's imagine a simple example. 00:10:32.140 --> 00:10:35.900 align:middle line:84% Imagine that you hadn't had-- let's say, 00:10:35.900 --> 00:10:41.318 align:middle line:84% someone in 1983 had an income of $250,000, 00:10:41.318 --> 00:10:42.860 align:middle line:84% which today sounds like chump change, 00:10:42.860 --> 00:10:44.940 align:middle line:84% but was actually pretty rich in 1983. 00:10:44.940 --> 00:10:48.440 align:middle line:84% That put you in the top bracket, the top 50%. 00:10:48.440 --> 00:10:51.800 align:middle line:84% There was a-- 50% tax rate was the top rate in 1983, 00:10:51.800 --> 00:10:55.700 align:middle line:84% and you'd be at that rate with income $250,000. 00:10:55.700 --> 00:11:00.660 align:middle line:84% Now, imagine that you wanted to invest $100,000 of that income 00:11:00.660 --> 00:11:05.340 align:middle line:84% in an oil venture which yielded no income, 00:11:05.340 --> 00:11:09.020 align:middle line:84% and you sold one year later for $90,000. 00:11:09.020 --> 00:11:12.220 align:middle line:84% Well, that would be pretty dumb, absent taxes. 00:11:12.220 --> 00:11:14.400 align:middle line:90% But with taxes, not so dumb. 00:11:14.400 --> 00:11:17.460 align:middle line:84% Let's look at the math, and that's on table 25-1. 00:11:17.460 --> 00:11:20.020 align:middle line:90% 00:11:20.020 --> 00:11:23.940 align:middle line:84% So you invest your $100,000 in an oil venture. 00:11:23.940 --> 00:11:26.400 align:middle line:84% You sell it a year later for $90,000. 00:11:26.400 --> 00:11:27.880 align:middle line:90% So you've lost $10,000. 00:11:27.880 --> 00:11:32.160 align:middle line:84% But at the same time, there was a special tax break, 00:11:32.160 --> 00:11:37.260 align:middle line:84% which was a 60% deduction for all investment in oil and gas. 00:11:37.260 --> 00:11:39.960 align:middle line:90% So you get to deduct $60,000. 00:11:39.960 --> 00:11:43.140 align:middle line:84% This was a deduction of your spending in that year. 00:11:43.140 --> 00:11:44.620 align:middle line:90% You deduct 60% of your spending. 00:11:44.620 --> 00:11:47.920 align:middle line:90% So you get a $60,000 deduction. 00:11:47.920 --> 00:11:52.280 align:middle line:84% So that's going to save you $30,000 in taxes at your 50% 00:11:52.280 --> 00:11:52.860 align:middle line:90% rate. 00:11:52.860 --> 00:11:57.720 align:middle line:84% Moreover, next year, you get to deduct the $10,000 loss you 00:11:57.720 --> 00:11:58.440 align:middle line:90% took. 00:11:58.440 --> 00:12:00.580 align:middle line:90% That saves you another $5,000. 00:12:00.580 --> 00:12:05.480 align:middle line:84% So on net, you make $25,000 by making this investment. 00:12:05.480 --> 00:12:07.080 align:middle line:84% So this is an example how tax shelters 00:12:07.080 --> 00:12:11.680 align:middle line:84% can promote economically inefficient investments. 00:12:11.680 --> 00:12:13.840 align:middle line:90% And that's what was happening. 00:12:13.840 --> 00:12:17.123 align:middle line:84% In fact, my father was very mad when the Tax Reform Act of 1986 00:12:17.123 --> 00:12:19.540 align:middle line:84% passed because he had money in some of these tax shelters. 00:12:19.540 --> 00:12:20.620 align:middle line:90% They were totally legal. 00:12:20.620 --> 00:12:23.160 align:middle line:84% It was a productive investment opportunity. 00:12:23.160 --> 00:12:24.220 align:middle line:90% So what happens? 00:12:24.220 --> 00:12:25.220 align:middle line:90% Was my dad mad? 00:12:25.220 --> 00:12:27.600 align:middle line:84% Well, in 1986, they wipe out the tax shelters. 00:12:27.600 --> 00:12:30.520 align:middle line:84% They say these tax shelters can't be used anymore. 00:12:30.520 --> 00:12:32.280 align:middle line:90% Well, here's the problem. 00:12:32.280 --> 00:12:37.480 align:middle line:84% Asset prices had adjusted to the existence of these tax shelters. 00:12:37.480 --> 00:12:39.360 align:middle line:84% What that means is that if you had invested 00:12:39.360 --> 00:12:45.180 align:middle line:84% in a totally legal activity that was money making, suddenly, 00:12:45.180 --> 00:12:47.140 align:middle line:90% you could get screwed. 00:12:47.140 --> 00:12:50.100 align:middle line:90% Let's think about that. 00:12:50.100 --> 00:12:52.820 align:middle line:84% Let's think about that in a simple example. 00:12:52.820 --> 00:12:54.260 align:middle line:84% Imagine that there's two apartment 00:12:54.260 --> 00:12:57.260 align:middle line:90% buildings for sale in a city. 00:12:57.260 --> 00:12:59.300 align:middle line:84% One is in a low-income neighborhood 00:12:59.300 --> 00:13:01.940 align:middle line:84% and one is in a high-income neighborhood. 00:13:01.940 --> 00:13:05.780 align:middle line:84% The building in the low-income neighborhood is worth $100,000, 00:13:05.780 --> 00:13:08.640 align:middle line:84% and the building in high-income neighborhoods is worth $200,000. 00:13:08.640 --> 00:13:09.772 align:middle line:90% This is a much nicer board. 00:13:09.772 --> 00:13:10.480 align:middle line:90% I don't know why. 00:13:10.480 --> 00:13:13.020 align:middle line:84% It just feels better to write with chalk on this board. 00:13:13.020 --> 00:13:16.260 align:middle line:84% The income in the high-income neighborhood, 00:13:16.260 --> 00:13:18.260 align:middle line:90% it's worth $200,000. 00:13:18.260 --> 00:13:21.980 align:middle line:84% But the government has a special tax break 00:13:21.980 --> 00:13:24.580 align:middle line:84% where, for every dollar you spend 00:13:24.580 --> 00:13:26.960 align:middle line:84% on investing in low-income neighborhoods, 00:13:26.960 --> 00:13:29.460 align:middle line:84% they'll give you $1 in tax credit. 00:13:29.460 --> 00:13:31.900 align:middle line:84% So if you spend $100K on a building in a low-income 00:13:31.900 --> 00:13:34.980 align:middle line:84% neighborhood, the government is going to give you another $100k 00:13:34.980 --> 00:13:36.900 align:middle line:90% tax credit. 00:13:36.900 --> 00:13:40.760 align:middle line:84% What that means is that these buildings are worth the same. 00:13:40.760 --> 00:13:43.320 align:middle line:90% They both were $200k. 00:13:43.320 --> 00:13:45.200 align:middle line:90% So you invest. 00:13:45.200 --> 00:13:47.380 align:middle line:90% Paul buys one, I buy one. 00:13:47.380 --> 00:13:48.760 align:middle line:90% We spend our $200k. 00:13:48.760 --> 00:13:49.635 align:middle line:90% We each invested one. 00:13:49.635 --> 00:13:51.052 align:middle line:84% Then the next year, the government 00:13:51.052 --> 00:13:52.400 align:middle line:90% says, we're getting rid of this. 00:13:52.400 --> 00:13:54.500 align:middle line:90% What does that do? 00:13:54.500 --> 00:13:56.200 align:middle line:90% That screws me. 00:13:56.200 --> 00:13:58.560 align:middle line:84% Paul and I had equally valuable assets. 00:13:58.560 --> 00:14:01.172 align:middle line:84% But since my asset was due to an embodied tax break, when 00:14:01.172 --> 00:14:02.880 align:middle line:84% they removed that tax break, I'm screwed, 00:14:02.880 --> 00:14:04.380 align:middle line:90% through no fault of my own. 00:14:04.380 --> 00:14:05.860 align:middle line:90% No one's evading taxes. 00:14:05.860 --> 00:14:07.560 align:middle line:90% No one's cheating here. 00:14:07.560 --> 00:14:09.840 align:middle line:84% They're just following the rules. 00:14:09.840 --> 00:14:12.120 align:middle line:84% And this is a clearest example of what 00:14:12.120 --> 00:14:14.160 align:middle line:90% we call a horizontal inequity. 00:14:14.160 --> 00:14:16.057 align:middle line:84% The two people took the same action 00:14:16.057 --> 00:14:17.640 align:middle line:84% because something out of their control 00:14:17.640 --> 00:14:20.240 align:middle line:84% ended up with very different tax burdens, very different 00:14:20.240 --> 00:14:24.120 align:middle line:90% economic implications. 00:14:24.120 --> 00:14:27.040 align:middle line:84% So this occurs because-- this leads to what we 00:14:27.040 --> 00:14:29.420 align:middle line:90% call a transitional inequity. 00:14:29.420 --> 00:14:35.360 align:middle line:90% 00:14:35.360 --> 00:14:37.980 align:middle line:84% A transitional inequity, which is basically 00:14:37.980 --> 00:14:40.720 align:middle line:84% as you change the tax code, you are 00:14:40.720 --> 00:14:42.220 align:middle line:84% screwing people who made investments 00:14:42.220 --> 00:14:45.780 align:middle line:90% based on previous rules. 00:14:45.780 --> 00:14:47.620 align:middle line:90% And that is very-- 00:14:47.620 --> 00:14:50.540 align:middle line:84% that can be very costly for them. 00:14:50.540 --> 00:14:55.100 align:middle line:90% So as a result, you don't-- 00:14:55.100 --> 00:14:58.220 align:middle line:84% realistically, you're not always going to immediately do 00:14:58.220 --> 00:15:00.020 align:middle line:90% the right thing. 00:15:00.020 --> 00:15:03.260 align:middle line:84% You might want to make adjustments 00:15:03.260 --> 00:15:05.182 align:middle line:84% that ease the pain of those who suffer 00:15:05.182 --> 00:15:06.640 align:middle line:84% from those transitional inequities. 00:15:06.640 --> 00:15:07.442 align:middle line:90% Let's be clear. 00:15:07.442 --> 00:15:08.400 align:middle line:90% The people who suffer-- 00:15:08.400 --> 00:15:09.442 align:middle line:90% Paul and I are rich guys. 00:15:09.442 --> 00:15:13.180 align:middle line:84% If we're buying this building in 1983, we're rich guys. 00:15:13.180 --> 00:15:16.980 align:middle line:84% So the person who's imposed pain on is a rich guy. 00:15:16.980 --> 00:15:19.540 align:middle line:84% But nonetheless, there is-- so this 00:15:19.540 --> 00:15:21.922 align:middle line:84% is where vertical and horizontal inequities can conflict. 00:15:21.922 --> 00:15:24.380 align:middle line:84% When they got rid of the tax shelters in the Tax Reform Act 00:15:24.380 --> 00:15:27.860 align:middle line:84% of 1986, rich people got screwed because they-- 00:15:27.860 --> 00:15:29.500 align:middle line:90% now some poor people got-- 00:15:29.500 --> 00:15:30.780 align:middle line:90% "screwed" is the wrong word. 00:15:30.780 --> 00:15:33.240 align:middle line:90% They had transitional inequity. 00:15:33.240 --> 00:15:34.798 align:middle line:84% Some poor people, mostly rich people. 00:15:34.798 --> 00:15:36.840 align:middle line:84% So the question is, you're writing the Tax Reform 00:15:36.840 --> 00:15:37.740 align:middle line:90% Act of '86. 00:15:37.740 --> 00:15:38.860 align:middle line:90% Here's your conflict. 00:15:38.860 --> 00:15:41.360 align:middle line:84% On the one hand, you don't feel so bad for them 00:15:41.360 --> 00:15:42.687 align:middle line:90% because they're rich. 00:15:42.687 --> 00:15:44.520 align:middle line:84% On the other hand, you do feel bad for them, 00:15:44.520 --> 00:15:45.500 align:middle line:90% because it's unfair. 00:15:45.500 --> 00:15:46.720 align:middle line:84% They made a legal investment, and they're 00:15:46.720 --> 00:15:47.780 align:middle line:90% getting hit very differently. 00:15:47.780 --> 00:15:48.280 align:middle line:90% Yeah? 00:15:48.280 --> 00:15:50.200 align:middle line:84% AUDIENCE: And this was a transfer 00:15:50.200 --> 00:15:52.987 align:middle line:84% from the person who made this investment to the government 00:15:52.987 --> 00:15:53.820 align:middle line:90% in this case, right? 00:15:53.820 --> 00:15:55.987 align:middle line:84% JON GRUBER: Basically, yeah, which, essentially, you 00:15:55.987 --> 00:15:58.195 align:middle line:84% can think of it as if the government is a big sponge, 00:15:58.195 --> 00:15:59.280 align:middle line:90% that's basically right. 00:15:59.280 --> 00:16:03.060 align:middle line:84% So in some sense, what do you do with that? 00:16:03.060 --> 00:16:05.000 align:middle line:84% So what the Tax Reform Act of '86 did 00:16:05.000 --> 00:16:07.280 align:middle line:84% is they essentially limited tax shelters, 00:16:07.280 --> 00:16:08.540 align:middle line:90% but it didn't get rid of them. 00:16:08.540 --> 00:16:11.840 align:middle line:84% They eased the pain by limiting what-- 00:16:11.840 --> 00:16:13.880 align:middle line:84% by limiting your use of tax shelters, 00:16:13.880 --> 00:16:15.800 align:middle line:90% but not getting rid of them. 00:16:15.800 --> 00:16:20.200 align:middle line:84% But this is what leads to a common feature that's discussed 00:16:20.200 --> 00:16:23.480 align:middle line:84% in political-- a term you might have heard in political economic 00:16:23.480 --> 00:16:25.800 align:middle line:84% policy, which is the term "grandfathering." 00:16:25.800 --> 00:16:29.980 align:middle line:84% "Grandfathering" is the notion that when you change policy, 00:16:29.980 --> 00:16:32.200 align:middle line:84% you exclude those who were previously affected 00:16:32.200 --> 00:16:35.920 align:middle line:84% by the policy as a way of trying to deal with horizontal equity. 00:16:35.920 --> 00:16:41.340 align:middle line:84% So for example, in Virginia, every Virginian 65 and older 00:16:41.340 --> 00:16:44.620 align:middle line:84% received a tax deduction of $12,000. 00:16:44.620 --> 00:16:47.860 align:middle line:84% Virginia was in budget trouble, so they wanted to get rid of it. 00:16:47.860 --> 00:16:50.940 align:middle line:90% But people went nuts. 00:16:50.940 --> 00:16:53.300 align:middle line:84% And so he literally put in a grandfather clause. 00:16:53.300 --> 00:16:53.800 align:middle line:90% Get it? 00:16:53.800 --> 00:16:56.600 align:middle line:84% Because they're over 65, where basically he said, 00:16:56.600 --> 00:16:58.860 align:middle line:84% OK, anybody who has already turned 00:16:58.860 --> 00:17:01.760 align:middle line:84% 65 as of the date of this law, they still get it. 00:17:01.760 --> 00:17:03.540 align:middle line:90% It's future people who don't. 00:17:03.540 --> 00:17:08.380 align:middle line:84% Now on the one hand, he costs he costs Virginia $300 million 00:17:08.380 --> 00:17:09.540 align:middle line:90% by doing that. 00:17:09.540 --> 00:17:12.010 align:middle line:84% $300 million in lost revenues, revenue that could have been 00:17:12.010 --> 00:17:14.260 align:middle line:84% used for highly valuable activities rather than giving 00:17:14.260 --> 00:17:17.167 align:middle line:84% money away to often very wealthy 65-year-olds. 00:17:17.167 --> 00:17:19.500 align:middle line:84% On the other hand, maybe he wouldn't have passed the law 00:17:19.500 --> 00:17:21.339 align:middle line:90% if he hadn't done it. 00:17:21.339 --> 00:17:23.915 align:middle line:84% So this is the difficulty we face 00:17:23.915 --> 00:17:26.540 align:middle line:84% when we try to actually change government policies to recognize 00:17:26.540 --> 00:17:29.920 align:middle line:84% many decisions and things are based on pre-existing policies. 00:17:29.920 --> 00:17:32.420 align:middle line:84% And that means that essentially, you want-- 00:17:32.420 --> 00:17:34.080 align:middle line:90% you might want to go-- 00:17:34.080 --> 00:17:37.560 align:middle line:90% you might want to go slow. 00:17:37.560 --> 00:17:39.600 align:middle line:90% Questions about that? 00:17:39.600 --> 00:17:45.360 align:middle line:84% So big picture where we are at this point is flatter-- 00:17:45.360 --> 00:17:49.160 align:middle line:84% flatter, less loophole-ridden tax codes economists 00:17:49.160 --> 00:17:49.920 align:middle line:90% like better. 00:17:49.920 --> 00:17:51.820 align:middle line:84% We love where were at with the Tax Reform Act of '86. 00:17:51.820 --> 00:17:53.060 align:middle line:90% We wish we would get back there. 00:17:53.060 --> 00:17:54.935 align:middle line:84% But there's political and economic challenges 00:17:54.935 --> 00:17:57.520 align:middle line:90% facing us and getting there. 00:17:57.520 --> 00:18:02.780 align:middle line:84% Now that is one piece, one way to get to simpler taxation. 00:18:02.780 --> 00:18:04.280 align:middle line:84% But there's another way we could get 00:18:04.280 --> 00:18:06.620 align:middle line:84% there, which is we could just say, 00:18:06.620 --> 00:18:10.480 align:middle line:84% look, why are we taxing income at all? 00:18:10.480 --> 00:18:13.840 align:middle line:84% Thomas Hobbes, in his famous treatise Leviathan, 00:18:13.840 --> 00:18:16.360 align:middle line:84% said, it is fair to tax people on what they extract 00:18:16.360 --> 00:18:19.760 align:middle line:84% from the economy as roughly measured by their consumption, 00:18:19.760 --> 00:18:22.000 align:middle line:84% than to tax them what they produce for the economy 00:18:22.000 --> 00:18:24.240 align:middle line:84% as roughly measured by their income. 00:18:24.240 --> 00:18:26.002 align:middle line:84% Why do we tax people who are making money? 00:18:26.002 --> 00:18:27.960 align:middle line:84% Why don't we tax people who are spending money? 00:18:27.960 --> 00:18:30.440 align:middle line:84% Why don't we, instead of an income tax, 00:18:30.440 --> 00:18:33.020 align:middle line:90% have a consumption tax? 00:18:33.020 --> 00:18:36.163 align:middle line:84% And there's a number of reasons why moving from an income tax 00:18:36.163 --> 00:18:38.580 align:middle line:84% to a consumption tax-- think of it as an-- we'll come back 00:18:38.580 --> 00:18:41.460 align:middle line:84% to details, but think of it as a national sales tax. 00:18:41.460 --> 00:18:43.580 align:middle line:84% Well, there's a number of reasons why that might 00:18:43.580 --> 00:18:46.220 align:middle line:90% be a positive thing to do. 00:18:46.220 --> 00:18:52.340 align:middle line:84% The first reason-- so what are the pros and cons 00:18:52.340 --> 00:18:53.860 align:middle line:90% of a consumption tax? 00:18:53.860 --> 00:18:56.540 align:middle line:84% The pros of a consumption tax first 00:18:56.540 --> 00:19:01.420 align:middle line:90% is improved capital allocation. 00:19:01.420 --> 00:19:02.360 align:middle line:90% Why is that? 00:19:02.360 --> 00:19:04.620 align:middle line:84% Well, if you think about an income tax, 00:19:04.620 --> 00:19:08.260 align:middle line:84% different kinds of investments are treated differently. 00:19:08.260 --> 00:19:10.262 align:middle line:84% Even in the Tax Reform Act of '86, 00:19:10.262 --> 00:19:12.720 align:middle line:84% capital gains, even though they were no longer tax favored, 00:19:12.720 --> 00:19:14.428 align:middle line:84% were still implicitly favored because you 00:19:14.428 --> 00:19:16.740 align:middle line:84% didn't have to-- weren't taxed until realization. 00:19:16.740 --> 00:19:18.500 align:middle line:84% And in general, tax systems generally 00:19:18.500 --> 00:19:22.700 align:middle line:84% feel different tax-- there's tax wedges between different kinds 00:19:22.700 --> 00:19:25.360 align:middle line:84% of investments that have the same economic return. 00:19:25.360 --> 00:19:26.420 align:middle line:90% And that's inefficient. 00:19:26.420 --> 00:19:28.128 align:middle line:84% With the consumption tax, that goes away. 00:19:28.128 --> 00:19:29.837 align:middle line:84% You invest in whatever the hell you want, 00:19:29.837 --> 00:19:31.760 align:middle line:84% and we tax you when you consume it. 00:19:31.760 --> 00:19:35.218 align:middle line:84% So there's no reason not to make the most productive investment 00:19:35.218 --> 00:19:37.260 align:middle line:84% because they're treated the same by the tax code. 00:19:37.260 --> 00:19:39.880 align:middle line:84% We're just taxing what you get out of your investment. 00:19:39.880 --> 00:19:42.760 align:middle line:84% You might invest less overall if there's a high consumption tax 00:19:42.760 --> 00:19:42.980 align:middle line:90% rate. 00:19:42.980 --> 00:19:45.230 align:middle line:84% But there's no reason it would distort your allocation 00:19:45.230 --> 00:19:48.240 align:middle line:90% across investment opportunities. 00:19:48.240 --> 00:19:51.000 align:middle line:90% So that's one reason we like it. 00:19:51.000 --> 00:19:57.320 align:middle line:84% The second reason we like it is both more-- 00:19:57.320 --> 00:20:08.537 align:middle line:84% it both increases savings and improves horizontal equity 00:20:08.537 --> 00:20:11.120 align:middle line:84% in an improvement dimension-- in an important dimension, which 00:20:11.120 --> 00:20:15.380 align:middle line:84% is the horizontal equity between savers and non-savers. 00:20:15.380 --> 00:20:20.400 align:middle line:84% And to see this, let's go to table 25-2. 00:20:20.400 --> 00:20:23.880 align:middle line:90% 00:20:23.880 --> 00:20:27.102 align:middle line:84% Well, first of all, figure 25-5, this shows how little we rely 00:20:27.102 --> 00:20:29.560 align:middle line:84% on consumption taxation, how much they do around the world. 00:20:29.560 --> 00:20:31.880 align:middle line:84% So 25-5 shows you that in the US, 00:20:31.880 --> 00:20:34.960 align:middle line:84% 18% of our tax revenues are raised by consumption taxes. 00:20:34.960 --> 00:20:38.480 align:middle line:84% The OECD average is almost twice that at 32%. 00:20:38.480 --> 00:20:41.760 align:middle line:90% 00:20:41.760 --> 00:20:43.660 align:middle line:84% And in fact, as you see to the right 00:20:43.660 --> 00:20:45.220 align:middle line:90% are more developing countries. 00:20:45.220 --> 00:20:47.180 align:middle line:84% In the developing world, most of the revenue 00:20:47.180 --> 00:20:48.400 align:middle line:90% comes from consumption taxes. 00:20:48.400 --> 00:20:50.880 align:middle line:84% Income taxation is more of a developed world concept. 00:20:50.880 --> 00:20:54.100 align:middle line:84% But even in the developed world, we're a relative outlier. 00:20:54.100 --> 00:20:54.820 align:middle line:90% Yeah? 00:20:54.820 --> 00:20:57.140 align:middle line:84% AUDIENCE: Is this because consumption taxes are 00:20:57.140 --> 00:20:58.055 align:middle line:90% easier to administer? 00:20:58.055 --> 00:21:00.180 align:middle line:84% JON GRUBER: This is exactly what I'm talking about. 00:21:00.180 --> 00:21:01.660 align:middle line:90% I'm going to get there. 00:21:01.660 --> 00:21:05.080 align:middle line:84% So basically, why do we like consumption taxes? 00:21:05.080 --> 00:21:08.740 align:middle line:84% So one is improved capital allocation. 00:21:08.740 --> 00:21:11.440 align:middle line:84% One is because it increased savings, 00:21:11.440 --> 00:21:12.440 align:middle line:90% and it's fair to savers. 00:21:12.440 --> 00:21:14.660 align:middle line:90% So let's go to table 25-2. 00:21:14.660 --> 00:21:17.540 align:middle line:90% Consider Homer and Marge. 00:21:17.540 --> 00:21:23.500 align:middle line:84% Imagine Homer and Marge each earn $100 in period one. 00:21:23.500 --> 00:21:28.600 align:middle line:84% And imagine there's a 50% income tax rate. 00:21:28.600 --> 00:21:29.820 align:middle line:90% 50% income tax rate. 00:21:29.820 --> 00:21:33.240 align:middle line:90% So they each pay $50 in taxes. 00:21:33.240 --> 00:21:37.400 align:middle line:84% Homer being Homer then eats everything that's left. 00:21:37.400 --> 00:21:41.900 align:middle line:90% Marge being Marge saves $25.61-- 00:21:41.900 --> 00:21:45.940 align:middle line:90% saves $24.39. 00:21:45.940 --> 00:21:49.560 align:middle line:84% There's a reason I chose that particular weird number. 00:21:49.560 --> 00:21:58.200 align:middle line:84% Now in period two, Marge earns $2.44 in interest. 00:21:58.200 --> 00:22:00.960 align:middle line:84% Homer earns nothing, because Homer didn't save any money. 00:22:00.960 --> 00:22:02.220 align:middle line:90% Well, we have an income tax. 00:22:02.220 --> 00:22:03.980 align:middle line:90% So her interest is also taxed. 00:22:03.980 --> 00:22:07.280 align:middle line:84% She pays $1.20 in taxes on her interest. 00:22:07.280 --> 00:22:09.680 align:middle line:84% So her period two consumption is equal to her period one 00:22:09.680 --> 00:22:13.880 align:middle line:90% consumption at $25.61. 00:22:13.880 --> 00:22:17.380 align:middle line:84% So Homer is a full-time period one consumer, 00:22:17.380 --> 00:22:21.680 align:middle line:84% Marge is a "split your consumption equally" person. 00:22:21.680 --> 00:22:23.220 align:middle line:90% So otherwise identical. 00:22:23.220 --> 00:22:27.860 align:middle line:90% Same income, same animator. 00:22:27.860 --> 00:22:29.895 align:middle line:84% But one person likes eating all their income 00:22:29.895 --> 00:22:32.020 align:middle line:84% in the first period, one person likes splitting it. 00:22:32.020 --> 00:22:33.660 align:middle line:90% Well, look what happens. 00:22:33.660 --> 00:22:36.940 align:middle line:84% The PDV of taxes of Marge is higher, 00:22:36.940 --> 00:22:39.700 align:middle line:84% even though they had the same opportunities going in. 00:22:39.700 --> 00:22:44.120 align:middle line:84% Because Marge chose to save, she pays more in taxes. 00:22:44.120 --> 00:22:44.620 align:middle line:90% Why? 00:22:44.620 --> 00:22:47.900 align:middle line:90% 00:22:47.900 --> 00:22:49.900 align:middle line:90% What's driving that? 00:22:49.900 --> 00:22:53.940 align:middle line:84% What's driving the higher amount of taxes Marge pays in PDV? 00:22:53.940 --> 00:22:54.720 align:middle line:90% Not even in PDV. 00:22:54.720 --> 00:22:57.020 align:middle line:84% What drives the higher tax she pays? 00:22:57.020 --> 00:22:58.760 align:middle line:84% Well, they're both taxed on their income. 00:22:58.760 --> 00:23:01.060 align:middle line:84% What's the difference with Marge? 00:23:01.060 --> 00:23:01.600 align:middle line:90% Yeah. 00:23:01.600 --> 00:23:02.860 align:middle line:90% AUDIENCE: Higher income. 00:23:02.860 --> 00:23:04.660 align:middle line:84% JON GRUBER: She's taxed on her interest. 00:23:04.660 --> 00:23:07.140 align:middle line:90% Marge is double taxed. 00:23:07.140 --> 00:23:09.220 align:middle line:84% Because she's taxed first on the income, 00:23:09.220 --> 00:23:12.540 align:middle line:84% she then saves what she earns and is taxed again 00:23:12.540 --> 00:23:14.900 align:middle line:90% on the interest on that savings. 00:23:14.900 --> 00:23:17.940 align:middle line:84% So there is double taxation in this system. 00:23:17.940 --> 00:23:19.480 align:middle line:90% Marge is taxed twice. 00:23:19.480 --> 00:23:22.220 align:middle line:84% Homer is only taxed once because it doesn't save. 00:23:22.220 --> 00:23:27.300 align:middle line:84% So what this means is that Marge pays more taxes. 00:23:27.300 --> 00:23:30.280 align:middle line:84% So now let's replace this with a consumption tax 00:23:30.280 --> 00:23:33.212 align:middle line:90% system designed to raise-- 00:23:33.212 --> 00:23:34.920 align:middle line:84% with a consumption tax system And the way 00:23:34.920 --> 00:23:36.753 align:middle line:84% the consumption tax system is going to work, 00:23:36.753 --> 00:23:38.912 align:middle line:84% it's going to be 100% tax on consumption. 00:23:38.912 --> 00:23:40.620 align:middle line:84% What that means, it's a weird expression. 00:23:40.620 --> 00:23:41.660 align:middle line:90% "Consumption tax" sounds crazy. 00:23:41.660 --> 00:23:43.577 align:middle line:84% What it means is for every dollar you consume, 00:23:43.577 --> 00:23:44.950 align:middle line:90% you pay $1 to the government. 00:23:44.950 --> 00:23:47.200 align:middle line:84% It's a government sharing of consumption expenditures. 00:23:47.200 --> 00:23:49.742 align:middle line:84% For every dollar you consume, pay a dollar to the government. 00:23:49.742 --> 00:23:51.640 align:middle line:84% Now let's look at these same people. 00:23:51.640 --> 00:23:53.680 align:middle line:90% They each earn $100. 00:23:53.680 --> 00:23:57.060 align:middle line:84% Homer spends $50 and pays $50 in taxes. 00:23:57.060 --> 00:23:59.560 align:middle line:84% Homer is treated the same way he was last time. 00:23:59.560 --> 00:24:01.120 align:middle line:90% He doesn't care. 00:24:01.120 --> 00:24:02.420 align:middle line:90% Income tax, he pays $50. 00:24:02.420 --> 00:24:04.440 align:middle line:90% Consumption tax, he pays $50. 00:24:04.440 --> 00:24:07.640 align:middle line:90% Marge, however, saves. 00:24:07.640 --> 00:24:10.760 align:middle line:84% She consumes, actually, a little bit more 00:24:10.760 --> 00:24:16.000 align:middle line:84% in period one than she did before, $26.19 instead of $25.61 00:24:16.000 --> 00:24:17.680 align:middle line:90% and saves the rest. 00:24:17.680 --> 00:24:19.200 align:middle line:90% She earns interest. 00:24:19.200 --> 00:24:22.200 align:middle line:84% Therefore, she can consume more in the second period, 00:24:22.200 --> 00:24:23.680 align:middle line:90% but she doesn't pay any tax. 00:24:23.680 --> 00:24:26.360 align:middle line:84% She then pays a consumption tax on consumption. 00:24:26.360 --> 00:24:28.620 align:middle line:84% So in the first period, she consumes $26.19, 00:24:28.620 --> 00:24:31.180 align:middle line:84% pays $26.19 in consumption taxation. 00:24:31.180 --> 00:24:33.160 align:middle line:84% In the second period, she consumes $26.19, 00:24:33.160 --> 00:24:35.040 align:middle line:90% pays $26.19 in taxation. 00:24:35.040 --> 00:24:37.740 align:middle line:84% I should have said the interest rate here is 10%. 00:24:37.740 --> 00:24:45.700 align:middle line:84% So in PDV, her tax burden is the same as Homer's, because there's 00:24:45.700 --> 00:24:48.460 align:middle line:90% a 10% discount rate. 00:24:48.460 --> 00:24:55.620 align:middle line:84% So basically what you see is that under consumption taxation, 00:24:55.620 --> 00:24:57.540 align:middle line:90% two things happen. 00:24:57.540 --> 00:25:01.780 align:middle line:84% Taxes fall for the saver, relative to the consumer, 00:25:01.780 --> 00:25:04.020 align:middle line:84% and you have more horizontal equity 00:25:04.020 --> 00:25:06.380 align:middle line:90% between savers and consumers. 00:25:06.380 --> 00:25:08.860 align:middle line:84% The first system unfairly penalized-- "unfairly" 00:25:08.860 --> 00:25:10.360 align:middle line:84% in the view of horizontal equity, 00:25:10.360 --> 00:25:13.500 align:middle line:84% unfairly penalized those who choose to save. 00:25:13.500 --> 00:25:15.380 align:middle line:90% The second one does not. 00:25:15.380 --> 00:25:18.060 align:middle line:84% So the argument for a consumption tax system 00:25:18.060 --> 00:25:20.860 align:middle line:84% is that it will lead to more savings and fairer 00:25:20.860 --> 00:25:22.600 align:middle line:90% fair treatment of savers. 00:25:22.600 --> 00:25:24.480 align:middle line:84% And indeed, this is the main reason 00:25:24.480 --> 00:25:26.920 align:middle line:84% why I think probably the majority of economists 00:25:26.920 --> 00:25:29.840 align:middle line:84% would favor replacing the income tax with a consumption tax. 00:25:29.840 --> 00:25:31.882 align:middle line:84% I don't know if there's a majority, but certainly 00:25:31.882 --> 00:25:32.965 align:middle line:90% a healthy minority. 00:25:32.965 --> 00:25:34.340 align:middle line:84% I'll talk about multiple reasons. 00:25:34.340 --> 00:25:37.142 align:middle line:84% This is the main reason that basically would improve savings, 00:25:37.142 --> 00:25:39.600 align:middle line:84% and therefore improve the amount of capital in the economy, 00:25:39.600 --> 00:25:41.680 align:middle line:90% and improve productivity. 00:25:41.680 --> 00:25:44.480 align:middle line:84% So that's the second main argument 00:25:44.480 --> 00:25:46.320 align:middle line:90% for consumption taxation. 00:25:46.320 --> 00:25:49.800 align:middle line:84% The third main argument is one that Steven alluded to, 00:25:49.800 --> 00:25:53.400 align:middle line:90% which is simplicity. 00:25:53.400 --> 00:25:56.280 align:middle line:84% Enough with 250 pages of instructions, 00:25:56.280 --> 00:25:57.780 align:middle line:90% and all these forms and stuff. 00:25:57.780 --> 00:26:01.600 align:middle line:84% Just whatever you buy, you pay a tax. 00:26:01.600 --> 00:26:02.660 align:middle line:90% It's pretty simple. 00:26:02.660 --> 00:26:05.190 align:middle line:90% 00:26:05.190 --> 00:26:07.840 align:middle line:90% It's pretty simple. 00:26:07.840 --> 00:26:14.760 align:middle line:90% Moreover, related to that is-- 00:26:14.760 --> 00:26:15.260 align:middle line:90% yeah. 00:26:15.260 --> 00:26:16.060 align:middle line:90% So simplicity. 00:26:16.060 --> 00:26:17.993 align:middle line:90% So those are the big three pros. 00:26:17.993 --> 00:26:20.160 align:middle line:84% So you ask, why do countries have consumption taxes? 00:26:20.160 --> 00:26:22.380 align:middle line:90% These are the reasons. 00:26:22.380 --> 00:26:24.980 align:middle line:90% What are the cons? 00:26:24.980 --> 00:26:27.340 align:middle line:84% Well, the cons are also pretty strong. 00:26:27.340 --> 00:26:33.060 align:middle line:84% The main con, of course, is vertical equity. 00:26:33.060 --> 00:26:35.188 align:middle line:84% And that's because you say, well, 00:26:35.188 --> 00:26:36.480 align:middle line:90% why is vertical equity changed? 00:26:36.480 --> 00:26:39.100 align:middle line:84% They both pay the same consumption tax rate. 00:26:39.100 --> 00:26:42.400 align:middle line:84% It's a flat consumption tax of 50%, or 100%. 00:26:42.400 --> 00:26:43.200 align:middle line:90% Who cares? 00:26:43.200 --> 00:26:46.900 align:middle line:84% Vertical equity changes because the rich save and the poor 00:26:46.900 --> 00:26:48.580 align:middle line:90% don't. 00:26:48.580 --> 00:26:53.140 align:middle line:84% So the facts are that those in the lowest income 00:26:53.140 --> 00:26:56.060 align:middle line:84% quintile in America, the bottom 50% income distribution, 00:26:56.060 --> 00:26:58.198 align:middle line:84% saves 3% of their lifetime income. 00:26:58.198 --> 00:26:59.740 align:middle line:84% So over their whole lives, everything 00:26:59.740 --> 00:27:02.300 align:middle line:84% they earn, their savings amount to 3% of that. 00:27:02.300 --> 00:27:03.860 align:middle line:84% Those in the richest quintile save 00:27:03.860 --> 00:27:06.160 align:middle line:90% 25% of their lifetime income. 00:27:06.160 --> 00:27:09.460 align:middle line:84% And the richer you get, the more you're saving. 00:27:09.460 --> 00:27:12.760 align:middle line:84% Elon Musk just can't spend the money fast enough. 00:27:12.760 --> 00:27:15.900 align:middle line:84% By definition, your savings can be very high the richer you get. 00:27:15.900 --> 00:27:20.980 align:middle line:84% So basically, in the top 1% of the income distribution, 00:27:20.980 --> 00:27:24.560 align:middle line:84% those people save roughly half their lifetime income. 00:27:24.560 --> 00:27:27.680 align:middle line:84% Well, changing to this tax system, 00:27:27.680 --> 00:27:30.180 align:middle line:84% while from the perspective of that table looks fair, 00:27:30.180 --> 00:27:33.100 align:middle line:84% remember we've got to think about the transitional impact. 00:27:33.100 --> 00:27:36.560 align:middle line:84% We're going to move to a much more regressive tax system. 00:27:36.560 --> 00:27:40.537 align:middle line:84% This, essentially, is a huge tax break for the rich 00:27:40.537 --> 00:27:42.120 align:middle line:84% because basically, they're the savers, 00:27:42.120 --> 00:27:44.700 align:middle line:84% and the system favors savers relative to the existing system. 00:27:44.700 --> 00:27:46.700 align:middle line:84% It's neutral relative to no taxation. 00:27:46.700 --> 00:27:50.600 align:middle line:84% But relative to today's system, it favors savers. 00:27:50.600 --> 00:27:58.100 align:middle line:84% Now you might say, look, we could-- 00:27:58.100 --> 00:27:59.300 align:middle line:90% you might say, well, look. 00:27:59.300 --> 00:28:01.342 align:middle line:84% There's a couple of ways we could deal with this. 00:28:01.342 --> 00:28:02.948 align:middle line:84% First of all, the rich save the money. 00:28:02.948 --> 00:28:03.740 align:middle line:90% What happens to it? 00:28:03.740 --> 00:28:06.560 align:middle line:84% Well, eventually, they just leave it to their kids. 00:28:06.560 --> 00:28:10.800 align:middle line:84% So if you had a consumption tax that included estates 00:28:10.800 --> 00:28:14.610 align:middle line:84% as a form of consumption, that would solve the problem. 00:28:14.610 --> 00:28:16.110 align:middle line:84% So you said in your consumption, I'm 00:28:16.110 --> 00:28:17.980 align:middle line:84% including what you leave behind, well, then they 00:28:17.980 --> 00:28:18.740 align:middle line:90% wouldn't escape the tax. 00:28:18.740 --> 00:28:19.760 align:middle line:84% It wouldn't matter if they saved more. 00:28:19.760 --> 00:28:21.460 align:middle line:90% They'd eventually get caught. 00:28:21.460 --> 00:28:25.020 align:middle line:84% The problem is, we already have a huge fight over a tiny estate 00:28:25.020 --> 00:28:25.780 align:middle line:90% tax. 00:28:25.780 --> 00:28:27.900 align:middle line:84% And indeed, there's an article about this. 00:28:27.900 --> 00:28:30.275 align:middle line:84% It came out right before I taught the lecture, a New York 00:28:30.275 --> 00:28:32.780 align:middle line:84% Times article just yesterday, maybe two days ago, 00:28:32.780 --> 00:28:38.500 align:middle line:90% about noting that the share-- 00:28:38.500 --> 00:28:40.140 align:middle line:84% the wealth of the richest Americans 00:28:40.140 --> 00:28:43.420 align:middle line:84% has gone up four times in the last 30-- gone up 00:28:43.420 --> 00:28:46.060 align:middle line:84% fourfold in the last 30 years, but estate tax revenues 00:28:46.060 --> 00:28:49.140 align:middle line:84% have stayed flat because we've increased 00:28:49.140 --> 00:28:51.340 align:middle line:84% the-- we increased so much the exemptions, 00:28:51.340 --> 00:28:53.780 align:middle line:84% and people are taking more advantage of the loopholes. 00:28:53.780 --> 00:28:55.500 align:middle line:84% So the notion that we're going to suddenly put 00:28:55.500 --> 00:28:57.292 align:middle line:84% in a massive-- we're going to massively tax 00:28:57.292 --> 00:28:59.020 align:middle line:84% every dollar in every estate is insane. 00:28:59.020 --> 00:29:00.340 align:middle line:90% That's not going to happen. 00:29:00.340 --> 00:29:01.528 align:middle line:90% So we could get rid of that. 00:29:01.528 --> 00:29:02.320 align:middle line:90% We're not going to. 00:29:02.320 --> 00:29:02.620 align:middle line:90% Yeah? 00:29:02.620 --> 00:29:04.700 align:middle line:84% AUDIENCE: Sorry, what was the thing that has gone up? 00:29:04.700 --> 00:29:07.033 align:middle line:84% JON GRUBER: The amount of wealth the richest are holding 00:29:07.033 --> 00:29:09.740 align:middle line:84% has gone up, but they're not paying any more in estate taxes. 00:29:09.740 --> 00:29:11.100 align:middle line:84% AUDIENCE: The absolute amount or [INAUDIBLE]? 00:29:11.100 --> 00:29:12.433 align:middle line:90% JON GRUBER: The absolute amount. 00:29:12.433 --> 00:29:13.232 align:middle line:90% AUDIENCE: Oh, wow. 00:29:13.232 --> 00:29:15.047 align:middle line:90% JON GRUBER: So that's one way. 00:29:15.047 --> 00:29:16.880 align:middle line:84% Another way you could do is say, well, look. 00:29:16.880 --> 00:29:19.880 align:middle line:84% We could have a progressive consumption tax. 00:29:19.880 --> 00:29:21.440 align:middle line:90% We could basically say, look. 00:29:21.440 --> 00:29:23.880 align:middle line:84% Instead of having a sales tax, we 00:29:23.880 --> 00:29:25.380 align:middle line:84% would-- a sales tax, by definition, 00:29:25.380 --> 00:29:26.663 align:middle line:90% can't be progressive. 00:29:26.663 --> 00:29:28.580 align:middle line:84% You can't walk in and say, that's a nice suit. 00:29:28.580 --> 00:29:30.020 align:middle line:84% I'm going to charge you more for your cookies. 00:29:30.020 --> 00:29:31.357 align:middle line:90% It's not going to work. 00:29:31.357 --> 00:29:33.440 align:middle line:84% But you could say, what if instead of a sales tax, 00:29:33.440 --> 00:29:34.777 align:middle line:90% we had an expenditure tax. 00:29:34.777 --> 00:29:36.360 align:middle line:84% The way the expenditure tax would work 00:29:36.360 --> 00:29:39.200 align:middle line:84% is literally I'd add up what you spend all year 00:29:39.200 --> 00:29:41.920 align:middle line:84% and I would apply a progressive tax schedule to that, just 00:29:41.920 --> 00:29:43.800 align:middle line:90% like I do to income. 00:29:43.800 --> 00:29:46.680 align:middle line:84% The problem is it's impossible, because if you 00:29:46.680 --> 00:29:49.200 align:middle line:84% think tracking income is hard, tracking spending is 00:29:49.200 --> 00:29:50.960 align:middle line:90% a nightmare. 00:29:50.960 --> 00:29:52.970 align:middle line:84% There's no way that we can actually-- 00:29:52.970 --> 00:29:55.220 align:middle line:84% and countries that have tried, it's absolutely failed. 00:29:55.220 --> 00:29:57.360 align:middle line:84% No one's ever been able to successfully implement 00:29:57.360 --> 00:29:58.260 align:middle line:90% an expenditure tax. 00:29:58.260 --> 00:29:58.760 align:middle line:90% Yeah? 00:29:58.760 --> 00:30:02.120 align:middle line:84% AUDIENCE: Are there any behavioral studies-- or impacts 00:30:02.120 --> 00:30:04.840 align:middle line:84% of-- are there any studies or research 00:30:04.840 --> 00:30:07.600 align:middle line:84% around the behavioral impacts of having a consumption tax? 00:30:07.600 --> 00:30:10.260 align:middle line:84% In terms of how it might affect consumption? 00:30:10.260 --> 00:30:11.520 align:middle line:90% JON GRUBER: Yeah. 00:30:11.520 --> 00:30:12.020 align:middle line:90% Oh, yeah. 00:30:12.020 --> 00:30:13.312 align:middle line:90% It does what you think it does. 00:30:13.312 --> 00:30:16.570 align:middle line:84% It lowers consumption, increases savings, absolutely. 00:30:16.570 --> 00:30:19.090 align:middle line:84% So that's one argument against it. 00:30:19.090 --> 00:30:20.850 align:middle line:84% There's actually a subtle version 00:30:20.850 --> 00:30:22.750 align:middle line:84% of this vertical equity argument, 00:30:22.750 --> 00:30:24.710 align:middle line:90% which is a targeting argument. 00:30:24.710 --> 00:30:26.690 align:middle line:84% Remember when we talked about welfare, 00:30:26.690 --> 00:30:29.050 align:middle line:84% we talked about how a good welfare 00:30:29.050 --> 00:30:32.410 align:middle line:84% system might find who really needs help and target them. 00:30:32.410 --> 00:30:34.890 align:middle line:84% Well, there's a similar issue in taxation, 00:30:34.890 --> 00:30:38.450 align:middle line:84% which is imagine a world where you can't-- you know who's rich 00:30:38.450 --> 00:30:40.930 align:middle line:84% and poor, but you can't tell who's really needy 00:30:40.930 --> 00:30:42.187 align:middle line:90% and who's not. 00:30:42.187 --> 00:30:43.770 align:middle line:84% And some of the rich guys are actually 00:30:43.770 --> 00:30:46.330 align:middle line:84% unskilled guys working incredibly hard. 00:30:46.330 --> 00:30:48.810 align:middle line:84% Some are guys who just are living off the fat of the land 00:30:48.810 --> 00:30:51.193 align:middle line:84% and happen to make a lot of extra money 00:30:51.193 --> 00:30:52.610 align:middle line:84% through their parents or whatever. 00:30:52.610 --> 00:30:54.890 align:middle line:84% You'd like to tax the latter and not the former. 00:30:54.890 --> 00:30:57.210 align:middle line:84% Well, you can't, because they both have high income. 00:30:57.210 --> 00:31:01.370 align:middle line:84% But it turns out, if being a saver 00:31:01.370 --> 00:31:04.010 align:middle line:84% is correlated with being a high underlying ability with someone 00:31:04.010 --> 00:31:05.930 align:middle line:84% who underlying is going to be rich, 00:31:05.930 --> 00:31:09.190 align:middle line:84% you might want to use the amount you save as a way to tax people. 00:31:09.190 --> 00:31:11.230 align:middle line:84% You want to say, gee, you save a lot. 00:31:11.230 --> 00:31:13.390 align:middle line:84% That must mean you're a guy who really is rich. 00:31:13.390 --> 00:31:16.150 align:middle line:84% Let's come grab you, and let's tax you instead of a targeting. 00:31:16.150 --> 00:31:17.670 align:middle line:90% It's a little subtle. 00:31:17.670 --> 00:31:22.657 align:middle line:84% The other major problem is the transition issue. 00:31:22.657 --> 00:31:23.490 align:middle line:90% Here's the question. 00:31:23.490 --> 00:31:25.390 align:middle line:90% Think about this for a minute. 00:31:25.390 --> 00:31:25.890 align:middle line:90% Come on. 00:31:25.890 --> 00:31:27.370 align:middle line:84% Last few opportunities to answer questions. 00:31:27.370 --> 00:31:27.650 align:middle line:90% Let's go. 00:31:27.650 --> 00:31:28.370 align:middle line:90% Here we go. 00:31:28.370 --> 00:31:29.750 align:middle line:90% Think about this for a minute. 00:31:29.750 --> 00:31:36.150 align:middle line:84% Think about three groups of people, babies, 40-year-olds, 00:31:36.150 --> 00:31:38.070 align:middle line:90% and 70-year-olds. 00:31:38.070 --> 00:31:40.590 align:middle line:84% And imagine we're going to replace the existing income 00:31:40.590 --> 00:31:43.650 align:middle line:84% tax with an equal revenue consumption tax. 00:31:43.650 --> 00:31:46.550 align:middle line:90% 00:31:46.550 --> 00:31:48.530 align:middle line:90% Who wins and who loses? 00:31:48.530 --> 00:31:51.270 align:middle line:90% 00:31:51.270 --> 00:31:54.790 align:middle line:84% Let's start with who loses, because that's the easier one. 00:31:54.790 --> 00:31:56.040 align:middle line:90% Who loses when I take-- 00:31:56.040 --> 00:31:57.790 align:middle line:84% I'm going to say, look, starting tomorrow, 00:31:57.790 --> 00:31:58.957 align:middle line:90% I'm not going to tax income. 00:31:58.957 --> 00:32:02.030 align:middle line:84% I'm just going to tax your consumption. 00:32:02.030 --> 00:32:04.630 align:middle line:84% But I'm going to have to raise the same amount of revenue. 00:32:04.630 --> 00:32:06.170 align:middle line:90% Who's the big loser in that? 00:32:06.170 --> 00:32:06.705 align:middle line:90% Yeah? 00:32:06.705 --> 00:32:07.830 align:middle line:90% AUDIENCE: The 70-year-olds. 00:32:07.830 --> 00:32:08.950 align:middle line:90% JON GRUBER: Because? 00:32:08.950 --> 00:32:11.270 align:middle line:84% AUDIENCE: They are probably retired, make no income, 00:32:11.270 --> 00:32:12.010 align:middle line:90% but they still-- 00:32:12.010 --> 00:32:13.270 align:middle line:84% JON GRUBER: They paid income tax their whole life. 00:32:13.270 --> 00:32:14.270 align:middle line:84% And now, as they spend their money, 00:32:14.270 --> 00:32:15.395 align:middle line:90% they're going to hit again. 00:32:15.395 --> 00:32:17.770 align:middle line:90% They are totally screwed. 00:32:17.770 --> 00:32:19.330 align:middle line:90% Who benefits the most? 00:32:19.330 --> 00:32:21.490 align:middle line:84% Well, the babies, because this consumption tax 00:32:21.490 --> 00:32:23.370 align:middle line:84% is going to increase the capital stock, 00:32:23.370 --> 00:32:25.370 align:middle line:90% raising wages in the long run. 00:32:25.370 --> 00:32:27.138 align:middle line:84% The 40-year-olds are kind of indifferent. 00:32:27.138 --> 00:32:27.930 align:middle line:90% Maybe 35-year-olds. 00:32:27.930 --> 00:32:29.638 align:middle line:84% I don't know what age you're indifferent. 00:32:29.638 --> 00:32:33.770 align:middle line:84% But the bottom line is this parallels a bit our discussion 00:32:33.770 --> 00:32:35.010 align:middle line:90% of Social Security. 00:32:35.010 --> 00:32:36.570 align:middle line:84% There's a bit of a legacy debt issue 00:32:36.570 --> 00:32:39.210 align:middle line:84% here when you switch from income to consumption taxes, which 00:32:39.210 --> 00:32:43.017 align:middle line:84% is that basically, you have ended up screwing the people who 00:32:43.017 --> 00:32:44.850 align:middle line:84% paid income tax their whole life and now are 00:32:44.850 --> 00:32:47.050 align:middle line:84% going to have to pay a consumption tax as they draw 00:32:47.050 --> 00:32:48.570 align:middle line:90% their savings down. 00:32:48.570 --> 00:32:50.810 align:middle line:84% And that's going to be a very hard thing-- 00:32:50.810 --> 00:32:54.810 align:middle line:84% that's going to be a very hard thing to deal with, much like-- 00:32:54.810 --> 00:32:56.910 align:middle line:84% and indeed, people have estimated models. 00:32:56.910 --> 00:32:59.790 align:middle line:84% Enoch asked about the economic effects of consumption taxes. 00:32:59.790 --> 00:33:02.490 align:middle line:84% People have estimated models showing that consumption taxes 00:33:02.490 --> 00:33:04.170 align:middle line:90% increase efficiency. 00:33:04.170 --> 00:33:06.064 align:middle line:84% But if you have to bribe old people-- imagine 00:33:06.064 --> 00:33:07.522 align:middle line:84% you had to say to old people, we're 00:33:07.522 --> 00:33:08.790 align:middle line:84% going to put in the consumption tax, 00:33:08.790 --> 00:33:10.248 align:middle line:84% and we're going to grandfather you. 00:33:10.248 --> 00:33:12.990 align:middle line:84% We're going to make you not pay, and just put that on extra debt. 00:33:12.990 --> 00:33:14.710 align:middle line:84% That would undo all the efficiency gains 00:33:14.710 --> 00:33:16.193 align:middle line:90% of moving to consumption tax. 00:33:16.193 --> 00:33:18.110 align:middle line:84% The consumption tax, a of the efficiency gains 00:33:18.110 --> 00:33:20.108 align:middle line:84% come from actually screwing the old people. 00:33:20.108 --> 00:33:21.650 align:middle line:84% And if you're not willing to do that, 00:33:21.650 --> 00:33:23.692 align:middle line:84% you're not going to get a lot of efficiency gains 00:33:23.692 --> 00:33:25.230 align:middle line:84% from switching to consumption tax. 00:33:25.230 --> 00:33:28.710 align:middle line:90% So that's the third problem. 00:33:28.710 --> 00:33:30.510 align:middle line:90% A fourth problem is-- 00:33:30.510 --> 00:33:31.970 align:middle line:84% so you can't do an expenditure tax. 00:33:31.970 --> 00:33:33.010 align:middle line:90% You to do a sales tax. 00:33:33.010 --> 00:33:38.230 align:middle line:84% Well, the fourth problem is compliance, which is basically 00:33:38.230 --> 00:33:42.830 align:middle line:84% when I earn income, for most people, that's recorded 00:33:42.830 --> 00:33:44.288 align:middle line:90% in ways the government tracks. 00:33:44.288 --> 00:33:46.330 align:middle line:84% But I can always buy stuff off the back of a van. 00:33:46.330 --> 00:33:48.310 align:middle line:90% The government has no idea. 00:33:48.310 --> 00:33:50.230 align:middle line:84% So it's actually-- and imagine a world 00:33:50.230 --> 00:33:51.675 align:middle line:84% where there's 25% sales tax, which 00:33:51.675 --> 00:33:54.050 align:middle line:84% is what we'll be talking about to replace the income tax. 00:33:54.050 --> 00:33:55.230 align:middle line:84% There'll be a lot of incentive to buy stuff 00:33:55.230 --> 00:33:56.605 align:middle line:84% off the back of vans, and there'd 00:33:56.605 --> 00:33:58.897 align:middle line:84% be new apps that wouldn't be tracked by the government. 00:33:58.897 --> 00:33:59.930 align:middle line:90% Bitcoin would take off. 00:33:59.930 --> 00:34:02.162 align:middle line:84% Actually, the Bitcoin advocate should love this. 00:34:02.162 --> 00:34:04.370 align:middle line:84% Everyone suddenly starts using Bitcoin to buy things, 00:34:04.370 --> 00:34:06.912 align:middle line:84% the government couldn't track it, and they'd never pay taxes. 00:34:06.912 --> 00:34:09.090 align:middle line:90% So compliance is a nightmare. 00:34:09.090 --> 00:34:11.511 align:middle line:84% And then finally, we have a more subtle problem, 00:34:11.511 --> 00:34:12.969 align:middle line:84% but a subtle problem that motivates 00:34:12.969 --> 00:34:17.210 align:middle line:84% the next step, which is what you can call the cascading problem. 00:34:17.210 --> 00:34:20.489 align:middle line:84% The cascading problem is that some consumption goods 00:34:20.489 --> 00:34:24.290 align:middle line:84% are intermediate inputs into other consumption goods. 00:34:24.290 --> 00:34:26.929 align:middle line:84% So think about the classic example of fruit basket. 00:34:26.929 --> 00:34:30.032 align:middle line:84% Well, imagine a fruit basket maker where you buy the fruit, 00:34:30.032 --> 00:34:31.949 align:middle line:84% you put it in your basket-- you buy the fruit, 00:34:31.949 --> 00:34:33.870 align:middle line:84% you buy the basket, you put them together, and you sell it. 00:34:33.870 --> 00:34:35.287 align:middle line:84% Well, if you pay consumption taxes 00:34:35.287 --> 00:34:37.727 align:middle line:84% on the fruit and consumption taxes on the basket, 00:34:37.727 --> 00:34:39.810 align:middle line:84% and then you sell this consumption tax on what you 00:34:39.810 --> 00:34:41.688 align:middle line:90% sell, that's double taxation. 00:34:41.688 --> 00:34:44.230 align:middle line:84% Now if you have three levels of inputs, it's triple taxation. 00:34:44.230 --> 00:34:46.210 align:middle line:90% It explodes. 00:34:46.210 --> 00:34:49.070 align:middle line:84% So in a world where consumption taxes could be levied on inputs, 00:34:49.070 --> 00:34:52.290 align:middle line:90% in theory, you have a problem. 00:34:52.290 --> 00:34:56.090 align:middle line:84% So these are the arguments against that. 00:34:56.090 --> 00:35:00.010 align:middle line:84% But these last two in particular have 00:35:00.010 --> 00:35:03.050 align:middle line:84% led to a particular form of consumption tax 00:35:03.050 --> 00:35:04.770 align:middle line:84% that's used around the world called 00:35:04.770 --> 00:35:07.150 align:middle line:84% the value-added tax, which any of you who've 00:35:07.150 --> 00:35:10.390 align:middle line:84% traveled to Europe, you've dealt with the value-added tax. 00:35:10.390 --> 00:35:11.843 align:middle line:90% The value-added tax. 00:35:11.843 --> 00:35:13.010 align:middle line:90% What is the value-added tax? 00:35:13.010 --> 00:35:17.770 align:middle line:84% The value-added tax is literally-- it's what it says. 00:35:17.770 --> 00:35:22.230 align:middle line:84% It's a cascading consumption tax where each level of production 00:35:22.230 --> 00:35:26.310 align:middle line:84% is taxed only on its value added. 00:35:26.310 --> 00:35:28.650 align:middle line:90% So let's look at an example. 00:35:28.650 --> 00:35:31.890 align:middle line:84% Imagine you're making a kitchen table, Table 25-3. 00:35:31.890 --> 00:35:34.110 align:middle line:84% Not your main kitchen table, end table 25-3. 00:35:34.110 --> 00:35:36.630 align:middle line:90% 00:35:36.630 --> 00:35:38.450 align:middle line:84% Basically, you've got three stages. 00:35:38.450 --> 00:35:40.635 align:middle line:84% First, the logger cuts down the wood 00:35:40.635 --> 00:35:42.010 align:middle line:84% and sells it to the manufacturer. 00:35:42.010 --> 00:35:44.490 align:middle line:84% The manufacturer makes the table and sells it to retailer. 00:35:44.490 --> 00:35:47.110 align:middle line:84% The retailer sells the table to you. 00:35:47.110 --> 00:35:51.390 align:middle line:84% So the logger has no inputs, and maybe buys an ax or whatever. 00:35:51.390 --> 00:35:52.990 align:middle line:90% But assume he has no inputs. 00:35:52.990 --> 00:35:58.870 align:middle line:84% He sells the wood for $25, says value added is $25. 00:35:58.870 --> 00:36:03.070 align:middle line:84% The manufacturer buys the wood for $25, 00:36:03.070 --> 00:36:07.250 align:middle line:84% then sells the table to a retailer for $75. 00:36:07.250 --> 00:36:10.770 align:middle line:90% So his value added is $50. 00:36:10.770 --> 00:36:14.490 align:middle line:84% The retailer sells the table to you for $100. 00:36:14.490 --> 00:36:20.370 align:middle line:84% She paid $75 for it, so her value added is $25. 00:36:20.370 --> 00:36:23.790 align:middle line:84% So what we do is at each level, we tax people the value added. 00:36:23.790 --> 00:36:25.070 align:middle line:90% How does it actually work? 00:36:25.070 --> 00:36:28.210 align:middle line:84% It literally works that the manufacturer has 00:36:28.210 --> 00:36:31.498 align:middle line:84% to produce the receipts for what they paid for their wood, 00:36:31.498 --> 00:36:33.790 align:middle line:84% and their receipts for what they sold their tables for, 00:36:33.790 --> 00:36:35.570 align:middle line:84% and they're taxed on the difference. 00:36:35.570 --> 00:36:40.550 align:middle line:84% And what that means is if you want to raise $20, 00:36:40.550 --> 00:36:43.930 align:middle line:84% you could either have a 20% tax on $100 table 00:36:43.930 --> 00:36:46.210 align:middle line:84% at the end of the day, or you could 00:36:46.210 --> 00:36:49.070 align:middle line:84% have a $5 tax on the loggers, $10 on the manufacturers, 00:36:49.070 --> 00:36:50.970 align:middle line:90% and $5 on the retailers. 00:36:50.970 --> 00:36:52.750 align:middle line:90% Now either way, you raise $20. 00:36:52.750 --> 00:36:55.970 align:middle line:84% But there's two key advantages to the value-added tax. 00:36:55.970 --> 00:36:58.753 align:middle line:84% The first is it gets rid of the cascading effect, 00:36:58.753 --> 00:37:01.170 align:middle line:84% because everyone's only taxed-- you only tax on your value 00:37:01.170 --> 00:37:01.670 align:middle line:90% added. 00:37:01.670 --> 00:37:04.390 align:middle line:84% So that fruit basket person would 00:37:04.390 --> 00:37:06.790 align:middle line:84% get to deduct from her taxes what she paid 00:37:06.790 --> 00:37:08.650 align:middle line:90% to get the fruit in the basket. 00:37:08.650 --> 00:37:11.190 align:middle line:84% So they only tax the value added. 00:37:11.190 --> 00:37:18.048 align:middle line:84% The second advantage is that it helps with compliance. 00:37:18.048 --> 00:37:19.590 align:middle line:84% And why does it help with compliance? 00:37:19.590 --> 00:37:23.510 align:middle line:84% Why don't people just cheat like mad in this? 00:37:23.510 --> 00:37:24.150 align:middle line:90% Yeah? 00:37:24.150 --> 00:37:25.692 align:middle line:84% AUDIENCE: Because instead of having-- 00:37:25.692 --> 00:37:29.933 align:middle line:84% each person is faced with a smaller tax hit along the way. 00:37:29.933 --> 00:37:31.850 align:middle line:84% JON GRUBER: Smaller tax hit, that's one thing. 00:37:31.850 --> 00:37:34.170 align:middle line:84% And we know from the last thing that the smaller the tax rate, 00:37:34.170 --> 00:37:35.337 align:middle line:90% the less incentive to cheat. 00:37:35.337 --> 00:37:36.710 align:middle line:90% But it's better than that. 00:37:36.710 --> 00:37:37.950 align:middle line:90% There's another feature. 00:37:37.950 --> 00:37:41.170 align:middle line:84% This feature becomes self-enforcing. 00:37:41.170 --> 00:37:41.670 align:middle line:90% Why? 00:37:41.670 --> 00:37:42.470 align:middle line:90% Yeah. 00:37:42.470 --> 00:37:44.030 align:middle line:84% AUDIENCE: Because if someone cheats before you, then 00:37:44.030 --> 00:37:44.697 align:middle line:90% you get screwed. 00:37:44.697 --> 00:37:46.550 align:middle line:90% JON GRUBER: Yeah, exactly. 00:37:46.550 --> 00:37:52.023 align:middle line:84% If the logger claims he only sold it for $20, 00:37:52.023 --> 00:37:53.690 align:middle line:84% then the government says, wait a second. 00:37:53.690 --> 00:37:55.150 align:middle line:84% The logger says $20, but this table manufacturer 00:37:55.150 --> 00:37:56.690 align:middle line:90% is saying he bought it for $25. 00:37:56.690 --> 00:37:57.830 align:middle line:90% Something's going wrong. 00:37:57.830 --> 00:37:59.910 align:middle line:90% So it becomes self-enforcing. 00:37:59.910 --> 00:38:01.970 align:middle line:84% So if you're going to do it-- basically, 00:38:01.970 --> 00:38:06.530 align:middle line:84% this is a well-functioning consumption tax design. 00:38:06.530 --> 00:38:13.490 align:middle line:84% So that is one way you can do the consumption tax. 00:38:13.490 --> 00:38:17.267 align:middle line:84% Now the US-- there's actually another way 00:38:17.267 --> 00:38:18.850 align:middle line:84% you can get the consumption tax, which 00:38:18.850 --> 00:38:21.750 align:middle line:84% the US is part of the way to getting there, 00:38:21.750 --> 00:38:24.730 align:middle line:90% which is, what is consumption? 00:38:24.730 --> 00:38:29.850 align:middle line:84% Consumption is income minus savings. 00:38:29.850 --> 00:38:32.330 align:middle line:90% The US taxes income. 00:38:32.330 --> 00:38:34.590 align:middle line:84% We can move to consumption tax in two ways. 00:38:34.590 --> 00:38:39.690 align:middle line:84% We could tax consumption or we could let people deduct savings. 00:38:39.690 --> 00:38:42.090 align:middle line:84% If we let people deduct savings from their income, 00:38:42.090 --> 00:38:43.810 align:middle line:90% then you're taxing consumption. 00:38:43.810 --> 00:38:44.750 align:middle line:90% Well, guess what. 00:38:44.750 --> 00:38:46.270 align:middle line:90% We do a whole lot of that. 00:38:46.270 --> 00:38:49.890 align:middle line:90% 00:38:49.890 --> 00:38:52.730 align:middle line:84% We have low tax rates on capital income. 00:38:52.730 --> 00:38:55.890 align:middle line:84% We have savings, retirement accounts, et cetera. 00:38:55.890 --> 00:38:58.850 align:middle line:84% So actually, we are in between income and consumption tax, 00:38:58.850 --> 00:39:01.310 align:middle line:84% because we have a lot of tax breaks for savings 00:39:01.310 --> 00:39:04.108 align:middle line:84% that we covered in chapter 22 and chapter 23. 00:39:04.108 --> 00:39:06.650 align:middle line:84% Basically, the tax break for capital gains is, in some sense, 00:39:06.650 --> 00:39:08.270 align:middle line:90% an incentive to save. 00:39:08.270 --> 00:39:10.130 align:middle line:84% So we have lots of tax breaks for savings. 00:39:10.130 --> 00:39:13.990 align:middle line:84% So we're actually partway to a consumption tax in the US. 00:39:13.990 --> 00:39:17.070 align:middle line:84% And once again, you can now see the argument for why, 00:39:17.070 --> 00:39:20.470 align:middle line:84% which is gee, by taxing income instead of consumption, 00:39:20.470 --> 00:39:22.962 align:middle line:84% we are reducing incentives to save. 00:39:22.962 --> 00:39:24.670 align:middle line:84% So we want to increase incentives to save 00:39:24.670 --> 00:39:26.130 align:middle line:90% by moving to a consumption tax. 00:39:26.130 --> 00:39:32.190 align:middle line:84% But the same vertical equity argument applies. 00:39:32.190 --> 00:39:35.270 align:middle line:84% Essentially, the fundamental trade off here 00:39:35.270 --> 00:39:38.350 align:middle line:84% is between efficiency and equity, 00:39:38.350 --> 00:39:39.790 align:middle line:84% that basically, it would probably 00:39:39.790 --> 00:39:43.710 align:middle line:84% be more efficient to have a value-added tax than an income 00:39:43.710 --> 00:39:45.350 align:middle line:90% tax. 00:39:45.350 --> 00:39:48.110 align:middle line:90% But it would be less equitable. 00:39:48.110 --> 00:39:51.390 align:middle line:84% And like many other things, for that reason, 00:39:51.390 --> 00:39:55.350 align:middle line:84% it's hard to imagine today that if the fairly liberal countries 00:39:55.350 --> 00:39:58.090 align:middle line:84% in Europe had an income tax, they'd be 00:39:58.090 --> 00:39:59.970 align:middle line:90% very eager to switch to a VAT. 00:39:59.970 --> 00:40:03.410 align:middle line:84% But since they had a VAT a long time ago, for a long time, 00:40:03.410 --> 00:40:05.150 align:middle line:90% they are able to do that. 00:40:05.150 --> 00:40:06.170 align:middle line:90% Yeah? 00:40:06.170 --> 00:40:09.450 align:middle line:84% AUDIENCE: How do you reason about the macroeconomic benefits 00:40:09.450 --> 00:40:13.410 align:middle line:84% of spending versus saving on the book, because-- 00:40:13.410 --> 00:40:16.650 align:middle line:84% JON GRUBER: So basically, it's confusing for you 00:40:16.650 --> 00:40:18.855 align:middle line:84% because you guys just lived through a big recession. 00:40:18.855 --> 00:40:21.230 align:middle line:84% As I said, this course runs in a full-employment economy. 00:40:21.230 --> 00:40:23.930 align:middle line:84% In the long run, saving is productive, 00:40:23.930 --> 00:40:25.730 align:middle line:84% because saving converts to capital. 00:40:25.730 --> 00:40:27.987 align:middle line:84% Now we've lived through a period-- 00:40:27.987 --> 00:40:30.570 align:middle line:84% in the short run, when there's periods of insufficient demand, 00:40:30.570 --> 00:40:31.510 align:middle line:90% you want to spend. 00:40:31.510 --> 00:40:32.890 align:middle line:90% You want to encourage spending. 00:40:32.890 --> 00:40:34.410 align:middle line:84% But in the long run, you want to encourage savings, 00:40:34.410 --> 00:40:36.630 align:middle line:84% because that builds the capital stock in the economy. 00:40:36.630 --> 00:40:38.672 align:middle line:84% So it's really a short run, long run distinction, 00:40:38.672 --> 00:40:43.070 align:middle line:84% or a full-employment macro versus cyclical macro. 00:40:43.070 --> 00:40:45.370 align:middle line:84% We talked about this in chapter four. 00:40:45.370 --> 00:40:49.330 align:middle line:84% So basically that is kind of the fundamental trade-off 00:40:49.330 --> 00:40:53.690 align:middle line:84% we face when we think about how do we 00:40:53.690 --> 00:40:56.670 align:middle line:84% deal with thinking about consumption versus income 00:40:56.670 --> 00:40:57.663 align:middle line:90% taxation. 00:40:57.663 --> 00:40:58.330 align:middle line:90% Other questions? 00:40:58.330 --> 00:40:59.090 align:middle line:90% Yeah, Enoch. 00:40:59.090 --> 00:41:01.510 align:middle line:84% AUDIENCE: That was less equitable. 00:41:01.510 --> 00:41:02.510 align:middle line:90% JON GRUBER: What's that? 00:41:02.510 --> 00:41:05.670 align:middle line:84% AUDIENCE: [INAUDIBLE] less equitable? 00:41:05.670 --> 00:41:07.690 align:middle line:84% JON GRUBER: Less equitable than an income tax? 00:41:07.690 --> 00:41:08.110 align:middle line:90% AUDIENCE: Than an income tax. 00:41:08.110 --> 00:41:10.110 align:middle line:84% JON GRUBER: Yes, not than other consumption tax. 00:41:10.110 --> 00:41:14.110 align:middle line:84% Less equitable than income tax, absolutely. 00:41:14.110 --> 00:41:15.510 align:middle line:90% Other questions? 00:41:15.510 --> 00:41:16.410 align:middle line:90% Yeah. 00:41:16.410 --> 00:41:20.727 align:middle line:84% AUDIENCE: Would it help if we bundle that [INAUDIBLE]? 00:41:20.727 --> 00:41:22.810 align:middle line:84% JON GRUBER: Well, that's a very interesting thing. 00:41:22.810 --> 00:41:25.352 align:middle line:84% So in Europe-- this is actually a really fascinating contrast 00:41:25.352 --> 00:41:27.670 align:middle line:84% between the way taxation works in the US and Europe. 00:41:27.670 --> 00:41:32.887 align:middle line:84% Europe actually has much higher taxes on labor or consumption. 00:41:32.887 --> 00:41:34.470 align:middle line:84% Remember an income tax and consumption 00:41:34.470 --> 00:41:35.637 align:middle line:90% tax operate in similar ways. 00:41:35.637 --> 00:41:39.790 align:middle line:84% They have much higher taxes on the average Joe. 00:41:39.790 --> 00:41:42.690 align:middle line:84% And they actually have fairly low taxes on capital. 00:41:42.690 --> 00:41:44.200 align:middle line:84% So you might think, well, gee, we 00:41:44.200 --> 00:41:45.450 align:middle line:90% thought liberals owned Europe. 00:41:45.450 --> 00:41:47.367 align:middle line:84% Well, the difference is they raise extra money 00:41:47.367 --> 00:41:49.990 align:middle line:84% and do a lot more pro-poor spending. 00:41:49.990 --> 00:41:53.030 align:middle line:84% Not a UBI, because they want to target the poor. 00:41:53.030 --> 00:41:55.770 align:middle line:84% But the idea is if you-- and in some sense, 00:41:55.770 --> 00:41:56.970 align:middle line:90% this is quite interesting. 00:41:56.970 --> 00:41:58.590 align:middle line:90% Actually, great question. 00:41:58.590 --> 00:42:02.530 align:middle line:84% This is why Andrew Yang was off his rocker. 00:42:02.530 --> 00:42:04.550 align:middle line:84% Sorry for all you Yang fans out here. 00:42:04.550 --> 00:42:06.310 align:middle line:90% That's 2020 election going back. 00:42:06.310 --> 00:42:12.610 align:middle line:84% But Yang wanted to move to a consumption tax to fund a UBI. 00:42:12.610 --> 00:42:14.450 align:middle line:90% Think about that for a second. 00:42:14.450 --> 00:42:17.210 align:middle line:84% We have a current income tax, which is progressive. 00:42:17.210 --> 00:42:20.015 align:middle line:84% He wants to move to a flat consumption tax 00:42:20.015 --> 00:42:21.390 align:middle line:84% and then give money to everybody, 00:42:21.390 --> 00:42:23.370 align:middle line:90% including the rich guys. 00:42:23.370 --> 00:42:25.670 align:middle line:84% That doesn't help progressivity at all. 00:42:25.670 --> 00:42:27.270 align:middle line:84% That massively hurts progressivity. 00:42:27.270 --> 00:42:28.770 align:middle line:84% You're essentially going from a progressive income tax 00:42:28.770 --> 00:42:31.130 align:middle line:84% system to a flat system where you're giving everybody 00:42:31.130 --> 00:42:32.510 align:middle line:90% the same amount of money. 00:42:32.510 --> 00:42:35.410 align:middle line:84% Now a consumption tax that funded a basic demo grant where 00:42:35.410 --> 00:42:39.388 align:middle line:84% everybody got $20,000, that could be equitable. 00:42:39.388 --> 00:42:41.430 align:middle line:84% So you could-- that's basically what Europe does. 00:42:41.430 --> 00:42:44.330 align:middle line:84% What Europe does is they have a consumption tax that funds 00:42:44.330 --> 00:42:46.330 align:middle line:90% very progressive spending. 00:42:46.330 --> 00:42:48.522 align:middle line:84% But a consumption tax to fund a UBI 00:42:48.522 --> 00:42:50.730 align:middle line:84% is just-- we're just going to move from a progressive 00:42:50.730 --> 00:42:51.430 align:middle line:90% to a flat system. 00:42:51.430 --> 00:42:52.690 align:middle line:84% Everybody pays the same tax, everybody 00:42:52.690 --> 00:42:55.530 align:middle line:84% gets the same money, the richer in the same place as the poor. 00:42:55.530 --> 00:42:57.110 align:middle line:84% That doesn't do us any-- that hurts. 00:42:57.110 --> 00:42:58.250 align:middle line:90% Does that make sense? 00:42:58.250 --> 00:42:58.750 align:middle line:90% Sorry. 00:42:58.750 --> 00:43:00.167 align:middle line:84% Sorry for you Yang fans out there. 00:43:00.167 --> 00:43:00.690 align:middle line:90% Yeah? 00:43:00.690 --> 00:43:01.510 align:middle line:84% AUDIENCE: You said a basic what grant? 00:43:01.510 --> 00:43:02.250 align:middle line:90% JON GRUBER: What's that? 00:43:02.250 --> 00:43:02.910 align:middle line:90% AUDIENCE: You said a basic-- 00:43:02.910 --> 00:43:04.452 align:middle line:84% JON GRUBER: A basic demo grant, which 00:43:04.452 --> 00:43:07.570 align:middle line:84% is just a flat amount of money to just-- 00:43:07.570 --> 00:43:08.150 align:middle line:90% I'm sorry. 00:43:08.150 --> 00:43:08.650 align:middle line:90% I'm sorry. 00:43:08.650 --> 00:43:09.410 align:middle line:90% Let me back up. 00:43:09.410 --> 00:43:10.110 align:middle line:90% I said it wrong. 00:43:10.110 --> 00:43:12.090 align:middle line:84% Amount of money that's targeted to the poor. 00:43:12.090 --> 00:43:12.970 align:middle line:90% I didn't mean a demo grant. 00:43:12.970 --> 00:43:14.870 align:middle line:84% A base amount of money that's targeted to the poor. 00:43:14.870 --> 00:43:16.650 align:middle line:84% So in other words, think about something where you say, well, 00:43:16.650 --> 00:43:19.390 align:middle line:84% consumption tax, and basically, we're going to take everyone 00:43:19.390 --> 00:43:22.090 align:middle line:84% below this level of consumption and give them an extra $20,000. 00:43:22.090 --> 00:43:24.430 align:middle line:84% Or alternatively, what Europe does is not that. 00:43:24.430 --> 00:43:26.390 align:middle line:84% They say we're going to have a high taxation, 00:43:26.390 --> 00:43:28.310 align:middle line:84% and we're going to have universal health care. 00:43:28.310 --> 00:43:30.150 align:middle line:84% That's going to mostly help the poor. 00:43:30.150 --> 00:43:31.850 align:middle line:84% And you might say it's universal. 00:43:31.850 --> 00:43:33.770 align:middle line:84% Why isn't universal health care like universal basic income? 00:43:33.770 --> 00:43:35.430 align:middle line:84% Well, going back to health care chapters, 00:43:35.430 --> 00:43:37.013 align:middle line:84% universal health care in Europe is not 00:43:37.013 --> 00:43:38.470 align:middle line:84% the same as universal basic income 00:43:38.470 --> 00:43:40.750 align:middle line:84% for a simple reason, which is that the health 00:43:40.750 --> 00:43:42.270 align:middle line:90% care is mediocre. 00:43:42.270 --> 00:43:45.590 align:middle line:84% So the rich guys have to buy extra. 00:43:45.590 --> 00:43:47.770 align:middle line:84% Essentially, it is not truly universal. 00:43:47.770 --> 00:43:49.270 align:middle line:84% It's basically better for poor guys, 00:43:49.270 --> 00:43:50.903 align:middle line:90% and the rich guys buy extra. 00:43:50.903 --> 00:43:52.570 align:middle line:84% But what Europe does basically is set up 00:43:52.570 --> 00:43:57.050 align:middle line:84% a more traditional welfare state funded by higher taxes. 00:43:57.050 --> 00:43:59.810 align:middle line:84% And it's not clear which way we feel about that. 00:43:59.810 --> 00:44:02.930 align:middle line:84% It's a very interesting contrast in how they do it. 00:44:02.930 --> 00:44:05.250 align:middle line:90% Other questions? 00:44:05.250 --> 00:44:06.230 align:middle line:90% Yeah. 00:44:06.230 --> 00:44:07.530 align:middle line:84% AUDIENCE: That term, [? "demi ?] grant," what-- 00:44:07.530 --> 00:44:08.630 align:middle line:90% JON GRUBER: That's UBI. 00:44:08.630 --> 00:44:11.890 align:middle line:90% I used the wrong term. 00:44:11.890 --> 00:44:12.810 align:middle line:90% Yeah? 00:44:12.810 --> 00:44:15.370 align:middle line:84% AUDIENCE: So does consumption have 00:44:15.370 --> 00:44:18.170 align:middle line:84% a much lower variance than income, 00:44:18.170 --> 00:44:20.890 align:middle line:90% meaning do the rich guys-- 00:44:20.890 --> 00:44:22.487 align:middle line:90% JON GRUBER: Great question. 00:44:22.487 --> 00:44:24.070 align:middle line:84% AUDIENCE: Sorry, I don't know how to-- 00:44:24.070 --> 00:44:24.570 align:middle line:90% JON GRUBER: No, no. 00:44:24.570 --> 00:44:24.870 align:middle line:90% Let me. 00:44:24.870 --> 00:44:25.950 align:middle line:84% You actually asked a great question. 00:44:25.950 --> 00:44:26.783 align:middle line:90% I didn't cover this. 00:44:26.783 --> 00:44:28.810 align:middle line:84% I covered this in chapter 19 in the book. 00:44:28.810 --> 00:44:31.293 align:middle line:84% So when we talk about progressivity-- 00:44:31.293 --> 00:44:32.710 align:middle line:84% I think I'll answer your question. 00:44:32.710 --> 00:44:33.330 align:middle line:90% Let's see. 00:44:33.330 --> 00:44:34.705 align:middle line:84% When we talk about progressivity, 00:44:34.705 --> 00:44:37.370 align:middle line:84% we talk about in terms of current income. 00:44:37.370 --> 00:44:39.890 align:middle line:84% But current income is not a good measure, in many cases, 00:44:39.890 --> 00:44:41.210 align:middle line:90% of lifetime income. 00:44:41.210 --> 00:44:43.650 align:middle line:84% So for example, you are currently very poor. 00:44:43.650 --> 00:44:46.430 align:middle line:84% You will eventually all be well off, I predict. 00:44:46.430 --> 00:44:50.190 align:middle line:90% 00:44:50.190 --> 00:44:51.790 align:middle line:90% So it's not really-- 00:44:51.790 --> 00:44:53.790 align:middle line:84% so if I say right now, you've got the same thing 00:44:53.790 --> 00:44:55.998 align:middle line:84% as some guy working at a gas station, well, lifetime, 00:44:55.998 --> 00:44:58.165 align:middle line:84% you're going to have way higher income than some guy 00:44:58.165 --> 00:44:59.330 align:middle line:90% working at the gas station. 00:44:59.330 --> 00:45:01.270 align:middle line:84% But I'm taxing you on your income now. 00:45:01.270 --> 00:45:03.430 align:middle line:84% Consumption under the life cycle model 00:45:03.430 --> 00:45:06.230 align:middle line:84% is a representation of my lifetime income. 00:45:06.230 --> 00:45:09.430 align:middle line:84% So under a life cycle model with borrowing, 00:45:09.430 --> 00:45:12.242 align:middle line:84% you should be borrowing right now and consuming more. 00:45:12.242 --> 00:45:13.950 align:middle line:84% Now you're not fully, but you're probably 00:45:13.950 --> 00:45:15.658 align:middle line:84% consuming more than you would if you knew 00:45:15.658 --> 00:45:17.430 align:middle line:90% this was your permanent income. 00:45:17.430 --> 00:45:19.638 align:middle line:84% If you knew forever this was going to be your income, 00:45:19.638 --> 00:45:22.310 align:middle line:84% you probably wouldn't consume what you're consuming today. 00:45:22.310 --> 00:45:24.290 align:middle line:84% So the point is, that's why people said, 00:45:24.290 --> 00:45:26.170 align:middle line:84% when we think about tax fairness, 00:45:26.170 --> 00:45:28.870 align:middle line:84% the right measure is not income, it's consumption. 00:45:28.870 --> 00:45:32.310 align:middle line:84% And in fact, if you use consumption, 00:45:32.310 --> 00:45:36.270 align:middle line:84% the tax system appears much less progressive 00:45:36.270 --> 00:45:38.790 align:middle line:90% than if you use income. 00:45:38.790 --> 00:45:43.310 align:middle line:84% And basically-- because a lot of the low-income people 00:45:43.310 --> 00:45:45.350 align:middle line:84% are actually going to end up rich. 00:45:45.350 --> 00:45:47.670 align:middle line:84% So they're actually-- we're actually 00:45:47.670 --> 00:45:49.810 align:middle line:90% taxing rich people to too low. 00:45:49.810 --> 00:45:52.130 align:middle line:84% The rich people won't end up being poor, 00:45:52.130 --> 00:45:55.130 align:middle line:84% but some of the poor people could end up being rich. 00:45:55.130 --> 00:45:58.390 align:middle line:84% And so basically, that's-- is that what you're getting at? 00:45:58.390 --> 00:46:00.430 align:middle line:84% AUDIENCE: That was interesting, but I guess-- 00:46:00.430 --> 00:46:00.930 align:middle line:90% wait. 00:46:00.930 --> 00:46:01.530 align:middle line:90% JON GRUBER: Interesting? 00:46:01.530 --> 00:46:02.150 align:middle line:90% OK, I'm good. 00:46:02.150 --> 00:46:02.550 align:middle line:90% I'm done. 00:46:02.550 --> 00:46:02.770 align:middle line:90% Next. 00:46:02.770 --> 00:46:03.270 align:middle line:90% No. 00:46:03.270 --> 00:46:04.915 align:middle line:90% Go ahead. 00:46:04.915 --> 00:46:06.790 align:middle line:84% AUDIENCE: That was like part of the question. 00:46:06.790 --> 00:46:10.170 align:middle line:84% But another part was, so the poorest people 00:46:10.170 --> 00:46:11.730 align:middle line:84% versus the richest people, there's 00:46:11.730 --> 00:46:13.310 align:middle line:90% a huge gap in what they make. 00:46:13.310 --> 00:46:16.350 align:middle line:84% But I'm wondering if the gap in what they spend-- 00:46:16.350 --> 00:46:17.662 align:middle line:90% if people kind of-- 00:46:17.662 --> 00:46:18.370 align:middle line:90% JON GRUBER: Yeah. 00:46:18.370 --> 00:46:21.050 align:middle line:90% And why does that matter? 00:46:21.050 --> 00:46:22.770 align:middle line:84% AUDIENCE: I was wondering because if we 00:46:22.770 --> 00:46:28.050 align:middle line:84% do tax consumption in a flat way, then that is less 00:46:28.050 --> 00:46:30.930 align:middle line:90% equitable if people kind of-- 00:46:30.930 --> 00:46:34.690 align:middle line:84% if people's consumption converges to a mean. 00:46:34.690 --> 00:46:36.330 align:middle line:84% Or not a mean, but something kind of-- 00:46:36.330 --> 00:46:39.970 align:middle line:84% JON GRUBER: In other words, you're saying, in some sense, 00:46:39.970 --> 00:46:42.450 align:middle line:84% equity is about signaling who really needs help and who 00:46:42.450 --> 00:46:42.950 align:middle line:90% doesn't. 00:46:42.950 --> 00:46:44.450 align:middle line:84% You're saying consumption is a worse 00:46:44.450 --> 00:46:49.670 align:middle line:84% signal, in some sense, of who really, truly needs help? 00:46:49.670 --> 00:46:50.670 align:middle line:90% AUDIENCE: Maybe. 00:46:50.670 --> 00:46:52.855 align:middle line:84% Because there's certain necessary-- 00:46:52.855 --> 00:46:53.730 align:middle line:90% JON GRUBER: Yeah, no. 00:46:53.730 --> 00:46:54.030 align:middle line:90% Exactly. 00:46:54.030 --> 00:46:56.370 align:middle line:84% You're saying that if we tax consumption, in some sense, 00:46:56.370 --> 00:46:58.432 align:middle line:84% we're going to tax-- even if you're really poor, 00:46:58.432 --> 00:47:00.390 align:middle line:84% you're going to have some level of consumption. 00:47:00.390 --> 00:47:02.030 align:middle line:84% So we're going to-- yes, that's a great point, 00:47:02.030 --> 00:47:04.590 align:middle line:84% that basically we're going to end up-- it's, in some sense, 00:47:04.590 --> 00:47:07.670 align:middle line:90% a less-- 00:47:07.670 --> 00:47:10.710 align:middle line:84% essentially, your point and my point bound the truth. 00:47:10.710 --> 00:47:13.030 align:middle line:84% So my point is consumption's a good measure 00:47:13.030 --> 00:47:15.590 align:middle line:84% because it represents your lifetime resources. 00:47:15.590 --> 00:47:18.630 align:middle line:84% Your point is consumption is a bad measure because you've got 00:47:18.630 --> 00:47:20.110 align:middle line:90% to consume a certain amount. 00:47:20.110 --> 00:47:22.030 align:middle line:84% The truth depends on to what extent 00:47:22.030 --> 00:47:24.192 align:middle line:84% the life cycle model explains reality. 00:47:24.192 --> 00:47:26.650 align:middle line:84% If people really behaved by the life cycle model perfectly, 00:47:26.650 --> 00:47:28.233 align:middle line:84% then consumption is the right measure. 00:47:28.233 --> 00:47:30.790 align:middle line:84% But if they don't, and they basically have to spend extra 00:47:30.790 --> 00:47:33.415 align:middle line:84% just to survive, and it's money they don't-- are never actually 00:47:33.415 --> 00:47:35.707 align:middle line:84% going to have, they're going to be in debt for the rest 00:47:35.707 --> 00:47:37.450 align:middle line:84% of their lives and never pay it off, 00:47:37.450 --> 00:47:39.510 align:middle line:84% then that's a problem with consumption taxation. 00:47:39.510 --> 00:47:40.450 align:middle line:90% Does that make sense? 00:47:40.450 --> 00:47:41.075 align:middle line:90% AUDIENCE: Yeah. 00:47:41.075 --> 00:47:41.790 align:middle line:90% Thank you. 00:47:41.790 --> 00:47:42.550 align:middle line:90% JON GRUBER: OK. 00:47:42.550 --> 00:47:44.065 align:middle line:90% So that's consumption taxation. 00:47:44.065 --> 00:47:46.190 align:middle line:84% Now there's another approach, which is just to say, 00:47:46.190 --> 00:47:47.050 align:middle line:90% well, look. 00:47:47.050 --> 00:47:50.030 align:middle line:84% Let's just keep the income tax system, but go to a flat tax. 00:47:50.030 --> 00:47:52.150 align:middle line:84% And this was the very popular proposal, 00:47:52.150 --> 00:47:57.650 align:middle line:84% like Herman Cain's and others, was basically a flat tax. 00:47:57.650 --> 00:48:00.930 align:middle line:84% And so here's, for example, a way-- the most famous economist 00:48:00.930 --> 00:48:05.507 align:middle line:84% flat tax examples, the Hall-Rabushka tax. 00:48:05.507 --> 00:48:06.590 align:middle line:90% Here's how they set it up. 00:48:06.590 --> 00:48:08.910 align:middle line:84% It's actually pretty interesting. 00:48:08.910 --> 00:48:12.330 align:middle line:84% It's not a flat tax, but it's a simpler tax. 00:48:12.330 --> 00:48:16.250 align:middle line:84% Basically, they say all corporations, 00:48:16.250 --> 00:48:25.890 align:middle line:84% all businesses pay a VAT, but they deduct the wages they pay. 00:48:25.890 --> 00:48:27.850 align:middle line:84% So it's a VAT with an extra deduction. 00:48:27.850 --> 00:48:29.290 align:middle line:90% You deduct the wages you pay. 00:48:29.290 --> 00:48:32.770 align:middle line:90% 00:48:32.770 --> 00:48:39.850 align:middle line:84% Individuals then pay taxes just on their wages and capital 00:48:39.850 --> 00:48:42.650 align:middle line:90% income is exempted-- 00:48:42.650 --> 00:48:45.550 align:middle line:84% all capital income is exempted from taxes. 00:48:45.550 --> 00:48:48.950 align:middle line:84% So basically, this is like a VAT. 00:48:48.950 --> 00:48:50.390 align:middle line:90% So why not just use a VAT? 00:48:50.390 --> 00:48:54.730 align:middle line:84% The difference is that a VAT can't be progressive, 00:48:54.730 --> 00:48:56.910 align:middle line:90% but this can be progressive. 00:48:56.910 --> 00:48:59.090 align:middle line:90% So we take wages out of the VAT. 00:48:59.090 --> 00:49:02.510 align:middle line:84% But then we have a progressive tax schedule on wages. 00:49:02.510 --> 00:49:05.510 align:middle line:84% And that way is a way of introducing progressivity 00:49:05.510 --> 00:49:08.715 align:middle line:90% into a consumption tax system. 00:49:08.715 --> 00:49:10.590 align:middle line:84% Then the question is, well, how much progress 00:49:10.590 --> 00:49:14.030 align:middle line:84% do you want to introduce and how fast should the tax rate be? 00:49:14.030 --> 00:49:17.440 align:middle line:84% And basically, the answer is you can raise a lot of money-- 00:49:17.440 --> 00:49:19.690 align:middle line:84% the other thing they would do is they'd-- beyond this, 00:49:19.690 --> 00:49:20.890 align:middle line:90% all loopholes are gone. 00:49:20.890 --> 00:49:22.370 align:middle line:84% Health insurance deductions gone. 00:49:22.370 --> 00:49:23.120 align:middle line:90% Everything's gone. 00:49:23.120 --> 00:49:25.230 align:middle line:84% Charitable deduction, all loopholes, are gone. 00:49:25.230 --> 00:49:26.570 align:middle line:90% So you have a huge tax base. 00:49:26.570 --> 00:49:28.670 align:middle line:84% It's the broadest possible tax base. 00:49:28.670 --> 00:49:31.270 align:middle line:84% And it turns out you can then raise a lot of money 00:49:31.270 --> 00:49:33.550 align:middle line:90% with a fairly low rate. 00:49:33.550 --> 00:49:35.830 align:middle line:84% The problem is that low rate leads 00:49:35.830 --> 00:49:37.330 align:middle line:84% to a lot of change in progressivity. 00:49:37.330 --> 00:49:39.890 align:middle line:84% So for example, here's a flat tax. 00:49:39.890 --> 00:49:43.610 align:middle line:84% Here's an example of a Hall-Rabushka tax 00:49:43.610 --> 00:49:44.848 align:middle line:90% for certain parameters. 00:49:44.848 --> 00:49:46.390 align:middle line:84% You could design it any way you want. 00:49:46.390 --> 00:49:48.970 align:middle line:84% This is just to give you an example of a flat tax 00:49:48.970 --> 00:49:54.532 align:middle line:84% where basically what you see is tax rates rise for those who 00:49:54.532 --> 00:49:56.490 align:middle line:84% are more towards the bottom of the distribution 00:49:56.490 --> 00:50:00.608 align:middle line:84% because you have a flatter tax, you're raising the bottom rate, 00:50:00.608 --> 00:50:03.150 align:middle line:84% and they fall a lot for those at the top of the distribution. 00:50:03.150 --> 00:50:05.290 align:middle line:84% You raise the same amount of money, 00:50:05.290 --> 00:50:09.465 align:middle line:84% but basically, it ends up a flatter tax rate system is going 00:50:09.465 --> 00:50:10.590 align:middle line:90% to have less progressivity. 00:50:10.590 --> 00:50:12.790 align:middle line:84% And the Tax Reform Act of '86, let's be clear, 00:50:12.790 --> 00:50:15.210 align:middle line:84% the richest people only paid twice as high 00:50:15.210 --> 00:50:18.290 align:middle line:84% a rate as the poorest people, whereas today the richest people 00:50:18.290 --> 00:50:20.130 align:middle line:84% pay a rate that's about four times. 00:50:20.130 --> 00:50:22.512 align:middle line:84% So the top rate is almost four times the bottom rate. 00:50:22.512 --> 00:50:23.970 align:middle line:84% Tax Reform Act of '86, the top rate 00:50:23.970 --> 00:50:25.970 align:middle line:90% was only twice the bottom rate. 00:50:25.970 --> 00:50:28.110 align:middle line:84% Now there are people who don't pay tax at all. 00:50:28.110 --> 00:50:29.110 align:middle line:90% They're always exempted. 00:50:29.110 --> 00:50:32.090 align:middle line:84% But among taxpayers, if you replaced-- 00:50:32.090 --> 00:50:34.850 align:middle line:84% if you followed my advice and got rid of today's system 00:50:34.850 --> 00:50:38.230 align:middle line:84% with the Tax Reform Act of '86, people are like, wait a second. 00:50:38.230 --> 00:50:40.690 align:middle line:84% You've gone from a bottom rate of 10 and a top rate of 40 00:50:40.690 --> 00:50:42.770 align:middle line:84% to a bottom rate of 15 and a top rate of 33. 00:50:42.770 --> 00:50:43.790 align:middle line:90% How is that fair? 00:50:43.790 --> 00:50:44.590 align:middle line:90% Yeah? 00:50:44.590 --> 00:50:46.750 align:middle line:84% AUDIENCE: How has the ratio of effective tax 00:50:46.750 --> 00:50:48.910 align:middle line:84% rate between the poorest and richest people 00:50:48.910 --> 00:50:51.870 align:middle line:84% changed over time, rather than just what's on the schedules? 00:50:51.870 --> 00:50:53.190 align:middle line:90% JON GRUBER: Under this system? 00:50:53.190 --> 00:50:53.887 align:middle line:90% AUDIENCE: Like-- 00:50:53.887 --> 00:50:54.970 align:middle line:90% JON GRUBER: Oh, have they? 00:50:54.970 --> 00:50:55.470 align:middle line:90% AUDIENCE: Like, historically-- 00:50:55.470 --> 00:50:56.887 align:middle line:84% JON GRUBER: Oh, that's chapter 19. 00:50:56.887 --> 00:50:58.165 align:middle line:90% We showed that. 00:50:58.165 --> 00:50:58.790 align:middle line:90% We showed that. 00:50:58.790 --> 00:51:00.330 align:middle line:84% That was in the tables in chapter 19. 00:51:00.330 --> 00:51:01.830 align:middle line:84% Basically, what's happened over time 00:51:01.830 --> 00:51:04.135 align:middle line:84% is poor people have paid less tax as a percent 00:51:04.135 --> 00:51:05.510 align:middle line:84% of their income, rich people have 00:51:05.510 --> 00:51:08.030 align:middle line:84% paid about the same amount, or a somewhat rising share 00:51:08.030 --> 00:51:10.270 align:middle line:84% of their income in taxes, not rising as much 00:51:10.270 --> 00:51:11.710 align:middle line:90% as inequality has risen. 00:51:11.710 --> 00:51:13.630 align:middle line:90% But actually, it's interesting. 00:51:13.630 --> 00:51:15.090 align:middle line:90% We say they get tax breaks. 00:51:15.090 --> 00:51:17.870 align:middle line:84% Well, the truth is, the share of income the rich pay in taxes 00:51:17.870 --> 00:51:19.930 align:middle line:90% actually gone up over time. 00:51:19.930 --> 00:51:23.190 align:middle line:84% But, critically, let me back off on that. 00:51:23.190 --> 00:51:26.710 align:middle line:84% That depends on how you treat unrealized capital gains. 00:51:26.710 --> 00:51:29.230 align:middle line:84% If, like I talked about the other day, 00:51:29.230 --> 00:51:32.470 align:middle line:84% you treat unrealized capital gains as income, 00:51:32.470 --> 00:51:34.463 align:middle line:84% then the rich pay much, much lower taxes. 00:51:34.463 --> 00:51:35.880 align:middle line:84% AUDIENCE: That's what [INAUDIBLE]. 00:51:35.880 --> 00:51:36.630 align:middle line:90% JON GRUBER: Right. 00:51:36.630 --> 00:51:39.517 align:middle line:84% But that's a controversial topic, 00:51:39.517 --> 00:51:41.850 align:middle line:84% is should we think about this, because it's not actually 00:51:41.850 --> 00:51:42.350 align:middle line:90% income. 00:51:42.350 --> 00:51:43.612 align:middle line:90% They didn't realize that. 00:51:43.612 --> 00:51:45.070 align:middle line:84% And how should we think about that? 00:51:45.070 --> 00:51:47.267 align:middle line:84% So basically, the progressive tax system 00:51:47.267 --> 00:51:49.850 align:middle line:84% depends a lot on how you think about unrealized capital gains. 00:51:49.850 --> 00:51:50.070 align:middle line:90% AUDIENCE: Sure. 00:51:50.070 --> 00:51:51.528 align:middle line:84% So I guess maybe the same question, 00:51:51.528 --> 00:51:54.850 align:middle line:84% but based off of the flow of wealth rather than income 00:51:54.850 --> 00:51:55.502 align:middle line:90% per se? 00:51:55.502 --> 00:51:56.210 align:middle line:90% JON GRUBER: Yeah. 00:51:56.210 --> 00:51:58.930 align:middle line:84% Then, basically-- I mean, I don't know the full 00:51:58.930 --> 00:52:00.972 align:middle line:84% distribution, but the tax rates on the rich are-- 00:52:00.972 --> 00:52:02.805 align:middle line:84% I don't know if they're lower than the poor. 00:52:02.805 --> 00:52:04.690 align:middle line:84% But for many rich people, they are. 00:52:04.690 --> 00:52:06.330 align:middle line:84% For the wealthiest people, they are. 00:52:06.330 --> 00:52:08.467 align:middle line:84% So basically, you get this strange inversion, then, 00:52:08.467 --> 00:52:10.050 align:middle line:84% because the super wealthy are the ones 00:52:10.050 --> 00:52:13.210 align:middle line:84% with huge unrealized capital gains. 00:52:13.210 --> 00:52:17.370 align:middle line:84% I don't know how much it would change $25,000 versus $200,000 00:52:17.370 --> 00:52:17.910 align:middle line:90% incomes. 00:52:17.910 --> 00:52:21.330 align:middle line:84% But the billionaires get a huge break. 00:52:21.330 --> 00:52:25.170 align:middle line:84% So basically, where does this leave us? 00:52:25.170 --> 00:52:29.450 align:middle line:84% Well, this leaves a situation where the tax section ends 00:52:29.450 --> 00:52:32.290 align:middle line:84% up a bit where the redistribution section ended up 00:52:32.290 --> 00:52:35.010 align:middle line:84% with our fundamental equity efficiency trade-off, 00:52:35.010 --> 00:52:37.550 align:middle line:84% that we can design a more efficient tax 00:52:37.550 --> 00:52:39.383 align:middle line:90% system if it's flatter. 00:52:39.383 --> 00:52:41.050 align:middle line:84% A flatter system will be more efficient. 00:52:41.050 --> 00:52:42.300 align:middle line:90% It would help with compliance. 00:52:42.300 --> 00:52:43.870 align:middle line:90% It would help with simplicity. 00:52:43.870 --> 00:52:48.030 align:middle line:84% But you would have vertical equity concerns. 00:52:48.030 --> 00:52:51.470 align:middle line:84% So it seems to me-- now my editorializing, 00:52:51.470 --> 00:52:55.910 align:middle line:84% it seems to me the best of both worlds is have the flat tax base 00:52:55.910 --> 00:52:57.950 align:middle line:84% and just have a steeper schedule. 00:52:57.950 --> 00:53:01.830 align:middle line:84% Basically, in some sense, there's two steps. 00:53:01.830 --> 00:53:04.270 align:middle line:90% There's the base and the rates. 00:53:04.270 --> 00:53:07.110 align:middle line:84% The holes we've put in the tax base 00:53:07.110 --> 00:53:08.890 align:middle line:84% are a major source of inefficiency. 00:53:08.890 --> 00:53:11.790 align:middle line:84% In fact, one of my favorite economic studies 00:53:11.790 --> 00:53:15.710 align:middle line:84% re-estimated this taxable income elasticity 00:53:15.710 --> 00:53:17.850 align:middle line:90% at different kinds of tax basis. 00:53:17.850 --> 00:53:20.310 align:middle line:84% The US, the tax base has changed over time. 00:53:20.310 --> 00:53:23.050 align:middle line:84% And they found the more comprehensive was the tax base, 00:53:23.050 --> 00:53:25.750 align:middle line:90% the lower was that elasticity. 00:53:25.750 --> 00:53:26.530 align:middle line:90% Why? 00:53:26.530 --> 00:53:29.430 align:middle line:84% Because there's less loopholes to take advantage of. 00:53:29.430 --> 00:53:35.430 align:middle line:84% So in some sense, this is the tau-squared effect on steroids, 00:53:35.430 --> 00:53:38.930 align:middle line:90% that basically, the more that-- 00:53:38.930 --> 00:53:39.810 align:middle line:90% not the tau-squared. 00:53:39.810 --> 00:53:42.610 align:middle line:84% I mean, it's the whole deadweight loss debate 00:53:42.610 --> 00:53:43.450 align:middle line:90% on steroids. 00:53:43.450 --> 00:53:48.450 align:middle line:84% We talked about how higher tax rates can cause deadweight loss, 00:53:48.450 --> 00:53:51.090 align:middle line:84% and in particular, among high-income payers. 00:53:51.090 --> 00:53:54.150 align:middle line:84% But the deadweight loss itself is a function of the base. 00:53:54.150 --> 00:53:55.930 align:middle line:90% It's not exogenous. 00:53:55.930 --> 00:53:59.245 align:middle line:84% The more comprehensive is the base, the less deadweight loss 00:53:59.245 --> 00:54:01.370 align:middle line:84% from taxation, because much of that deadweight loss 00:54:01.370 --> 00:54:03.203 align:middle line:84% comes from fucking around with trying to get 00:54:03.203 --> 00:54:04.610 align:middle line:90% different holes in the base. 00:54:04.610 --> 00:54:05.890 align:middle line:90% That's gone. 00:54:05.890 --> 00:54:09.530 align:middle line:84% So it's actually a fascinating interaction that taxes-- 00:54:09.530 --> 00:54:12.550 align:middle line:84% when you broaden the base, you not only raise more money, 00:54:12.550 --> 00:54:15.690 align:middle line:84% you make taxes more efficient to collect. 00:54:15.690 --> 00:54:18.330 align:middle line:84% So it's an extra boost to the Haig-Simons argument. 00:54:18.330 --> 00:54:19.830 align:middle line:84% The Haig-Simons argument was-- yeah, 00:54:19.830 --> 00:54:20.830 align:middle line:84% this is the way I want to say it. 00:54:20.830 --> 00:54:23.370 align:middle line:84% The Haig-Simons you remember our deadweight loss formula, 00:54:23.370 --> 00:54:26.010 align:middle line:84% was a function of elasticities and tau squared. 00:54:26.010 --> 00:54:28.262 align:middle line:84% The Haig-Simons argument was all about tau squared. 00:54:28.262 --> 00:54:29.970 align:middle line:84% But there's actually an elasticities part 00:54:29.970 --> 00:54:31.730 align:middle line:84% of the Haig-Simons argument, which 00:54:31.730 --> 00:54:34.490 align:middle line:84% is when the base becomes more comprehensive, you not only get 00:54:34.490 --> 00:54:37.250 align:middle line:84% to lower the rates, lowering the tau squared effect, 00:54:37.250 --> 00:54:39.570 align:middle line:84% but you lower the deadweight loss of taxation, 00:54:39.570 --> 00:54:41.430 align:middle line:90% lowering the elasticity effect. 00:54:41.430 --> 00:54:43.470 align:middle line:84% So a broader base has a double whammy 00:54:43.470 --> 00:54:46.030 align:middle line:90% in terms of tax efficiency. 00:54:46.030 --> 00:54:48.910 align:middle line:84% So basically, what we should do is move back to the Tax Reform 00:54:48.910 --> 00:54:50.350 align:middle line:90% Act of '86 base. 00:54:50.350 --> 00:54:52.850 align:middle line:84% I would advocate somewhat more progressive rates. 00:54:52.850 --> 00:54:55.070 align:middle line:84% But that's, then, just a social debate about-- we 00:54:55.070 --> 00:54:57.790 align:middle line:84% just have a social debate about the inefficiency of higher 00:54:57.790 --> 00:55:01.170 align:middle line:84% rates versus the social redistribution. 00:55:01.170 --> 00:55:03.070 align:middle line:84% But once we get the base off the table, 00:55:03.070 --> 00:55:04.990 align:middle line:84% there's not much of their much inefficiency 00:55:04.990 --> 00:55:06.670 align:middle line:90% from progressive taxes. 00:55:06.670 --> 00:55:08.250 align:middle line:84% And that, I think, is the key thing. 00:55:08.250 --> 00:55:09.470 align:middle line:90% Does that make sense? 00:55:09.470 --> 00:55:11.470 align:middle line:84% That's the key thing to realize, that the base-- 00:55:11.470 --> 00:55:12.845 align:middle line:84% that the inefficiency of taxation 00:55:12.845 --> 00:55:15.830 align:middle line:84% depends on how you define the base being taxed. 00:55:15.830 --> 00:55:17.990 align:middle line:90% OK? 00:55:17.990 --> 00:55:20.550 align:middle line:84% Well, let me then wrap up with a couple of final points 00:55:20.550 --> 00:55:21.670 align:middle line:90% I want to cover. 00:55:21.670 --> 00:55:24.190 align:middle line:84% The first point, and the most important point, 00:55:24.190 --> 00:55:26.990 align:middle line:84% is what I want you to take away from this course. 00:55:26.990 --> 00:55:28.910 align:middle line:84% Now if I took anyone in this class 00:55:28.910 --> 00:55:31.950 align:middle line:84% and convinced them to get a PhD in economics, that's a bonus. 00:55:31.950 --> 00:55:34.410 align:middle line:84% But the main thing I want you to take away from this course 00:55:34.410 --> 00:55:37.490 align:middle line:84% is just how to be intelligent consumers of information 00:55:37.490 --> 00:55:39.010 align:middle line:90% about government policy. 00:55:39.010 --> 00:55:41.198 align:middle line:84% I don't expect you to remember-- the only thing 00:55:41.198 --> 00:55:43.490 align:middle line:84% I expect you remember is between Medicare and Medicaid. 00:55:43.490 --> 00:55:45.250 align:middle line:84% Other than that, you can forget the rest. 00:55:45.250 --> 00:55:47.610 align:middle line:84% I just want you to remember when you 00:55:47.610 --> 00:55:49.610 align:middle line:84% read an article about this wonderful signing tax 00:55:49.610 --> 00:55:51.345 align:middle line:90% break to think, wait a second. 00:55:51.345 --> 00:55:52.470 align:middle line:90% Is that a good idea or not? 00:55:52.470 --> 00:55:53.450 align:middle line:84% That depends on how much money you're 00:55:53.450 --> 00:55:54.850 align:middle line:84% going to spend versus how much the behavior is 00:55:54.850 --> 00:55:55.970 align:middle line:90% going to encourage. 00:55:55.970 --> 00:56:00.850 align:middle line:84% When you read something about a new social insurance program, 00:56:00.850 --> 00:56:03.110 align:middle line:84% to think, well, what's the benefit of that, 00:56:03.110 --> 00:56:04.568 align:middle line:84% and what's it going to do, in terms 00:56:04.568 --> 00:56:05.793 align:middle line:90% of inducing bad moral hazard? 00:56:05.793 --> 00:56:07.710 align:middle line:84% When you hear something about the environment, 00:56:07.710 --> 00:56:09.918 align:middle line:84% think about is that the best way to try to accomplish 00:56:09.918 --> 00:56:11.130 align:middle line:90% this environmental goal? 00:56:11.130 --> 00:56:14.810 align:middle line:84% So just be smart consumers and go out there. 00:56:14.810 --> 00:56:20.650 align:middle line:84% We are in a period of time of the lowest respect for expertise 00:56:20.650 --> 00:56:23.890 align:middle line:90% of my lifetime. 00:56:23.890 --> 00:56:26.810 align:middle line:84% We have a crisis of expertise, and part of the problem 00:56:26.810 --> 00:56:28.310 align:middle line:90% is due to a place like MIT. 00:56:28.310 --> 00:56:29.470 align:middle line:90% And why is it due to MIT? 00:56:29.470 --> 00:56:32.870 align:middle line:84% Because we don't talk in ways that people can understand. 00:56:32.870 --> 00:56:35.630 align:middle line:84% We talked to each other through very erudite articles, 00:56:35.630 --> 00:56:38.935 align:middle line:84% and we don't explain to people clearly 00:56:38.935 --> 00:56:40.310 align:middle line:84% how to think about these problems 00:56:40.310 --> 00:56:44.230 align:middle line:84% in a nonjudgmental, nondismissive, clearly 00:56:44.230 --> 00:56:46.030 align:middle line:90% understandable way. 00:56:46.030 --> 00:56:48.270 align:middle line:84% I've given you the tools to do that here. 00:56:48.270 --> 00:56:50.560 align:middle line:84% So now go out and do it in the real world. 00:56:50.560 --> 00:56:52.310 align:middle line:84% Make sure, when you're encountering people 00:56:52.310 --> 00:56:54.610 align:middle line:84% in the real world, and they're thinking about these issues, 00:56:54.610 --> 00:56:57.193 align:middle line:84% that you help them understand the right way to think about it. 00:56:57.193 --> 00:57:00.650 align:middle line:84% Once again in a non-paternalistic way, 00:57:00.650 --> 00:57:04.150 align:middle line:84% but in a way which puts these tools to use. 00:57:04.150 --> 00:57:06.070 align:middle line:84% So that's the main thing I want to get out. 00:57:06.070 --> 00:57:07.570 align:middle line:84% The last thing I'd like to end with, 00:57:07.570 --> 00:57:09.945 align:middle line:84% and I apologize for-- how many people took 14.01 with me? 00:57:09.945 --> 00:57:10.790 align:middle line:90% I know Enoch did. 00:57:10.790 --> 00:57:11.290 align:middle line:90% OK. 00:57:11.290 --> 00:57:12.810 align:middle line:84% I apologize for the same joke again. 00:57:12.810 --> 00:57:13.970 align:middle line:84% But others that didn't hear the joke, 00:57:13.970 --> 00:57:15.690 align:middle line:84% it's my favorite joke of all time. 00:57:15.690 --> 00:57:17.830 align:middle line:84% So my favorite economic joke of all time, 00:57:17.830 --> 00:57:22.110 align:middle line:84% which is about the doctor, priest, and the economist who go 00:57:22.110 --> 00:57:23.350 align:middle line:90% golfing. 00:57:23.350 --> 00:57:24.690 align:middle line:90% They're on the golf course. 00:57:24.690 --> 00:57:28.530 align:middle line:84% They get on the golf course, and there's someone ahead of them, 00:57:28.530 --> 00:57:31.930 align:middle line:84% one person playing alone who's going unbelievably slow. 00:57:31.930 --> 00:57:35.130 align:middle line:84% They are taking 25 shots for every hole. 00:57:35.130 --> 00:57:37.530 align:middle line:84% And I'm not a golfer, but apparently good etiquette 00:57:37.530 --> 00:57:39.390 align:middle line:84% in golf is if you're very slow and there's people behind you, 00:57:39.390 --> 00:57:42.070 align:middle line:84% you're supposed to let them play through to get ahead of you, 00:57:42.070 --> 00:57:43.890 align:middle line:90% and the golfer wouldn't do it. 00:57:43.890 --> 00:57:46.035 align:middle line:84% And so they were like-- there was 00:57:46.035 --> 00:57:48.410 align:middle line:84% lines of like 20 people waiting behind this person taking 00:57:48.410 --> 00:57:49.030 align:middle line:90% forever. 00:57:49.030 --> 00:57:50.670 align:middle line:84% Finally, after nine holes, they quit. 00:57:50.670 --> 00:57:51.712 align:middle line:90% They go to the clubhouse. 00:57:51.712 --> 00:57:52.920 align:middle line:90% They're pounding their beers. 00:57:52.920 --> 00:57:53.810 align:middle line:90% They're really upset. 00:57:53.810 --> 00:57:55.818 align:middle line:84% And they're like, God, what an asshole. 00:57:55.818 --> 00:57:56.610 align:middle line:90% I can't believe it. 00:57:56.610 --> 00:57:57.230 align:middle line:90% Let's play through. 00:57:57.230 --> 00:57:59.188 align:middle line:84% And someone comes up and says, well, excuse me. 00:57:59.188 --> 00:58:00.505 align:middle line:90% Are you new at this club? 00:58:00.505 --> 00:58:01.630 align:middle line:90% And they said, yes, we are. 00:58:01.630 --> 00:58:04.130 align:middle line:84% I said, well, I know you're new, because if you weren't new, 00:58:04.130 --> 00:58:07.210 align:middle line:84% you'd understand the person you're playing behind is blind. 00:58:07.210 --> 00:58:08.988 align:middle line:84% And actually the reason they take so long 00:58:08.988 --> 00:58:10.030 align:middle line:90% is because they're blind. 00:58:10.030 --> 00:58:12.210 align:middle line:84% And actually, it's pretty amazing they make it at all. 00:58:12.210 --> 00:58:13.310 align:middle line:90% That's pretty incredible. 00:58:13.310 --> 00:58:14.910 align:middle line:84% So you might want to think about that. 00:58:14.910 --> 00:58:16.827 align:middle line:84% And they walk off, and there's a dead silence. 00:58:16.827 --> 00:58:18.350 align:middle line:90% And the doctor goes, oh my God. 00:58:18.350 --> 00:58:20.250 align:middle line:84% I can't believe that I said such a mean thing 00:58:20.250 --> 00:58:21.210 align:middle line:90% about a blind person. 00:58:21.210 --> 00:58:23.208 align:middle line:84% My whole job is to help sick people, 00:58:23.208 --> 00:58:24.750 align:middle line:84% and here I am insulting blind people. 00:58:24.750 --> 00:58:27.310 align:middle line:84% I'm going to dedicate a wing of my hospital to the blind. 00:58:27.310 --> 00:58:29.133 align:middle line:90% And the priest goes, well, you? 00:58:29.133 --> 00:58:30.050 align:middle line:90% I mean, what about me? 00:58:30.050 --> 00:58:32.467 align:middle line:84% I'm supposed to be this holy man who takes care of people, 00:58:32.467 --> 00:58:34.010 align:middle line:84% and I'm insulting this blind person. 00:58:34.010 --> 00:58:36.090 align:middle line:84% I'm going to set up a free soup kitchen for the blind. 00:58:36.090 --> 00:58:38.070 align:middle line:84% And they go to the economist, and the economist 00:58:38.070 --> 00:58:41.056 align:middle line:84% says, well, if he's blind, why doesn't he golf at night? 00:58:41.056 --> 00:58:41.910 align:middle line:90% [LAUGHTER] 00:58:41.910 --> 00:58:42.952 align:middle line:90% And I love that joke. 00:58:42.952 --> 00:58:45.410 align:middle line:84% That could, of course, be told about any engineering field. 00:58:45.410 --> 00:58:48.830 align:middle line:84% I love that joke, because it shows our roles 00:58:48.830 --> 00:58:51.390 align:middle line:90% to be a pain in the ass. 00:58:51.390 --> 00:58:56.110 align:middle line:84% A well-communicated, nonpaternalistic, effective pain 00:58:56.110 --> 00:58:57.870 align:middle line:90% in the ass. 00:58:57.870 --> 00:59:00.050 align:middle line:84% And that's what I hope I trained you in here, 00:59:00.050 --> 00:59:02.425 align:middle line:84% and you'll learn in 14.01, you'll learn economics at MIT, 00:59:02.425 --> 00:59:05.390 align:middle line:84% is how to be a pain in the ass, and how to basically live up 00:59:05.390 --> 00:59:07.150 align:middle line:84% to our title of "the dismal science" 00:59:07.150 --> 00:59:10.110 align:middle line:84% in a way which actually makes the world a better place. 00:59:10.110 --> 00:59:11.210 align:middle line:90% So I'll stop there. 00:59:11.210 --> 00:59:12.913 align:middle line:90% Good luck on your exam. 00:59:12.913 --> 00:59:14.330 align:middle line:84% And I hope to see all of you more. 00:59:14.330 --> 00:59:16.070 align:middle line:84% Remember, like I said, my door is-- 00:59:16.070 --> 00:59:18.790 align:middle line:84% I'm still around in the spring, so feel free to stop by. 00:59:18.790 --> 00:59:19.690 align:middle line:90% Thanks. 00:59:19.690 --> 00:59:22.440 align:middle line:90% [APPLAUSE] 00:59:22.440 --> 00:59:28.000 align:middle line:90%