Beruflich Dokumente
Kultur Dokumente
Dan Silverman
ASU Economics
Fall 2016
Fall 2016
1 / 19
Fall 2016
2 / 19
Fairness/Equity
Fall 2016
3 / 19
Fall 2016
4 / 19
Fall 2016
5 / 19
Measuring Inequality
Fall 2016
6 / 19
Measuring Inequality
Country
USA
Japan
India
Canada
Germany
Norway
Sweden
South Africa
Brazil
Mexico
China
Fall 2016
7 / 19
Measuring Inequality
International Income Distributions
Country
Norway
Sweden
Australia
Canada
Netherlands
poorest 10%
3.9
3.6
2
2.5
2.8
Share of income
Gini
poorest 20% richest 20% richest 10%
9.6
37.2
23.4
25.8
9.1
36.6
22.2
25
5.9
41.3
25.4
35.2
7
40.4
25
33.1
7.3
40.1
25.1
32.6
USA
UK
Mexico
Brazil
South Africa
1.9
2.1
1
0.5
0.7
5.4
6.1
3.1
2
2
45.8
44
59.1
64.4
66.5
29.9
28.5
43.1
46.7
46.9
40.8
36
54.6
59.1
59.3
Russia
India
China
1.8
3.9
1.8
4.9
8.9
4.7
51.3
41.6
50
36
27.4
33.1
45.6
32.5
44.7
Fall 2016
8 / 19
Fall 2016
9 / 19
An extreme logic: With tax rates at 100% no one would bother to work and
so tax revenue would become zero.
Simple example: Worker earns $20 per hour
Disutility of working h hours given by h2
Worker solves
max (1
) 20h
h2
(1
) 20
(1
= 0,
) 10 = h
2h
Fall 2016
10 / 19
= (1
= 10
) 10
10 2
We can then think of the tax rate that will maximize tax revenue. Such a
solves
max 10
10 2
20
10
0,
1
2
Fall 2016
11 / 19
T*
Tax rate
T is the tax rate that gives rise to the maximum amount of tax revenue.
Silverman (ASU Economics)
Fall 2016
12 / 19
Laer (Plus)
Fall 2016
13 / 19
Laer (Plus)
Laers theoretical response:
Suppose the economys output y is described by the production function
f (L, K ) = y
Where labor (L) and capital (K ) are combined to make productive outputs.
Optimality in a competitive market implies marginal product equals marginal
cost
= w
fK (L, K ) = r
fL (L, K )
Fall 2016
14 / 19
Laer (Plus)
= w
= r =r
Tax revenue is Lw .
Fall 2016
15 / 19
Laer (Plus)
= r (1
) = r ,
r
r =
(1 )
fK ( L , K )
(1)
Fall 2016
16 / 19
Laer (Plus)
If capital ies the country (to avoid taxes) what happens to wages?
Depends on whether labor and capital are substitutes
f 2
?0?
LK
2
We usually assume they are complements ( LfK > 0). (Does that make
sense?)
If so, wages will fall as capital ees and the marginal product of labor goes
down.
Fall 2016
17 / 19
Laer (Plus)
OK, but have we really hurt the workers if the transfers are going to them?
Tax revenues
K r K + L w L
Suppose (pretty reasonably)
K r =
L w
2
And suppose L = 15% and K = 20%. Then tax revenues could go down
by increasing the tax on capital.
Fall 2016
18 / 19
Laer and other supply-side economists argued that taxes were to the right
of T and that increasing taxes on captial income would decrease tax
revenues.
Therefore, Laer argued, reducing the tax rate would bring about an increase
in tax revenue.
This was exactly what many wanted to hear to justify his tax cuts.
Unfortunately reality has proved to be at odds with Laers prediction by
and large tax cuts have caused a shortfalls in tax revenue.
Most professional economists agree that we are to the left of T for labor
income.
More debate about the right level of capital income taxation.
Fall 2016
19 / 19