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JON GRUBER: All right, so let's
continue our discussion

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00:00:25,620 --> 00:00:29,610
today of equity and
efficiency.

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00:00:29,610 --> 00:00:33,270
We talked last time about the
equity efficiency trade-off

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and the problem of
the leaky bucket.

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And we talked about how society
would value transfers

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from one group to another and
what the sources of the leak

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00:00:43,500 --> 00:00:44,750
in the bucket might be.

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00:00:47,280 --> 00:00:49,740
In today's lecture, we're
actually going to talk about

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what governments actually do to
transfer resources across

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income groups and what
effect that has.

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00:00:56,890 --> 00:00:58,300
Obviously this is a
very big topic.

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I'm sort of summarizing in one
lecture what takes about half

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a semester in the course I
teach on public policy.

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But this will give you sort of
an overview of kind of how we

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00:01:08,710 --> 00:01:11,130
think about these transfer
issues in the US.

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00:01:11,130 --> 00:01:13,480
And certainly if you want to
learn more about it, you can

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00:01:13,480 --> 00:01:15,650
learn more in 14.41.

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00:01:15,650 --> 00:01:18,910
So I want to start by talking
about the first side of the

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transfer equation, putting
money in the bucket, and

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00:01:21,540 --> 00:01:22,790
that's taxation.

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00:01:27,640 --> 00:01:33,020
Talk about taxation, putting
the money in the bucket.

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00:01:33,020 --> 00:01:35,320
We have a number of sorts
of taxation in the US.

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00:01:35,320 --> 00:01:37,300
I mean, look at the first
page of the handout.

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00:01:37,300 --> 00:01:40,250
This pie chart gives a breakdown
of where we raise

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00:01:40,250 --> 00:01:42,060
our money as a government
in the US.

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00:01:42,060 --> 00:01:43,420
So if you want to redistribute,
first you've got

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to raise money.

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00:01:43,920 --> 00:01:45,300
How do we raise it?

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00:01:45,300 --> 00:01:48,480
Well basically, the majority
of the money we raise is

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00:01:48,480 --> 00:01:51,470
raised through the income tax.

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00:01:51,470 --> 00:01:54,760
The income tax is a tax
on families' incomes.

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00:01:54,760 --> 00:01:58,180
And importantly, it's what we
call a progressive, so the

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00:01:58,180 --> 00:02:00,620
majority of money raised
from the income tax.

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00:02:00,620 --> 00:02:04,560
The income tax is what we
call a progressive tax.

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00:02:04,560 --> 00:02:08,990
What that means is the richer
you are, the higher share of

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income you pay in taxation.

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00:02:11,740 --> 00:02:12,300
Progressive.

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00:02:12,300 --> 00:02:15,380
As opposed to regressive tax,
is one where the richer you

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00:02:15,380 --> 00:02:16,860
are, the lower the percentage
of your

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00:02:16,860 --> 00:02:18,980
income you pay in taxation.

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00:02:18,980 --> 00:02:21,480
And once again, obviously
progressive/regressive has

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00:02:21,480 --> 00:02:23,150
some normative feel to it.

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00:02:23,150 --> 00:02:25,600
And the notion is once again,
under most social welfare

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functions, we're going to want a
function which redistributes

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from rich to poor.

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And that's a progressive
income tax system does.

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00:02:33,600 --> 00:02:36,330
So if you look at the next
page of the handout, this

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shows for current year, I think
it's for 2010, maybe

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2009, what tax rates look
like in the US.

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Now it's important to remember a
distinction between marginal

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tax rates and the taxes
you actually pay.

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What this graph shows is
your marginal tax rate.

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What that means is for the next
dollar that you earn,

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what percent do you
pay in taxes?

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So for example, for someone who
earns less than $16,700,

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for every dollar they earn,
they pay $0.10 in taxes.

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In fact, everybody pays that on
the first $16,700 they pay.

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So Bill Gates, on the first
$16,700 he earns pays $0.10.

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Then on every dollar beyond
that, you pay $0.15 till

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you've earned $67,900.

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Then you pay $0.25 and so on
until on every dollar above

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$373,000, you're paying $0.35.

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And the key point is these
are the marginal rates.

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So if your income is
$350,000, then your

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marginal rate is 33%.

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You're on the next to
the last bracket.

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But along the way, you've
paid lower rates.

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You pay the 10% on your first
$16,700 and so on.

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But the bottom line, this is a
progressive system where the

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higher your income, the more
you pay in tax on the next

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dollar earned.

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OK, and that's the way
the income tax works.

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And there's a lot of
other complicated

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features we can get into.

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But roughly speaking, you take
your income and you tax it

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progressively.

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And that determines what
you pay the government.

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Now if we flip back to the first
page, the second major

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source of revenues for the US

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government is payroll taxation.

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This is different from income
taxation in that this is a

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flat percent tax.

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So this is not progressive or
regressive, it's neutral.

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It a flat percent of
your income you

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pay in payroll taxation.

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So unlike the income tax where
the richer you are,

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00:04:49,180 --> 00:04:50,810
the more you pay.

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Here you pay a certain
flat percentage

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regardless of income.

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And this money goes to finance
the nation's--

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00:04:59,220 --> 00:05:01,550
what's called the nation's
social insurance program.

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And we'll focus on
that on Monday.

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But basically goes to finance
programs that help people if

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they suffer negative risks, like
get unemployed or need

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health care, et cetera.

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That's financed by
the payroll tax.

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The third source of taxation
is consumption taxation.

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00:05:26,480 --> 00:05:29,250
Consumption taxation.

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00:05:29,250 --> 00:05:33,610
As we can see in the US, that is
the third largest source of

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00:05:33,610 --> 00:05:37,040
revenues, about 15.7% of
government revenues come from

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consumption taxes.

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Now these are of two types.

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These are taxes on
consumption.

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There are two types.

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One type is the sales tax.

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00:05:46,790 --> 00:05:49,550
So in Massachusetts this is the
6 and a quarter percent.

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00:05:49,550 --> 00:05:51,870
Everything you buy in certain
categories, you pay 6 and a

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00:05:51,870 --> 00:05:55,850
quarter percent extra that
goes to the state.

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The other is excise taxes, which
are specific taxes that

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are levied on specific goods.

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00:06:03,500 --> 00:06:05,290
So there's an excise
tax on cigarettes.

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You pay a certain dollar amount
per pack of cigarettes

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00:06:11,270 --> 00:06:12,400
in excise tax.

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00:06:12,400 --> 00:06:14,010
Excise tax on alcohol.

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00:06:14,010 --> 00:06:16,410
Excise tax on gasoline.

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So these are specific
taxes on goods.

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And the important thing is these
consumption taxes are

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00:06:25,610 --> 00:06:27,875
often called indirect taxes.

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Because unlike income and
payroll taxes where you earn

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00:06:33,560 --> 00:06:35,190
$1, you pay tax on it.

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Here you don't pay the tax
till you spend the money.

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00:06:38,020 --> 00:06:39,540
So the consumption tax
does not tax you

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00:06:39,540 --> 00:06:41,090
directly on your income.

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It taxes you as you use your
income to buy things.

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So it's often called
the indirect tax.

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The fourth major source of tax
revenues is the property tax.

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This is a tax that you pay
on your actual wealth.

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00:07:02,820 --> 00:07:04,790
This is the third kind of tax.

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00:07:04,790 --> 00:07:08,110
So the first kind of tax we
tax you on your earnings,

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00:07:08,110 --> 00:07:09,990
either through income
or payroll taxes.

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00:07:09,990 --> 00:07:13,120
A second kind of tax, they tax
you on your consumption.

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00:07:13,120 --> 00:07:15,410
A third kind of tax, they
tax you on your wealth.

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00:07:15,410 --> 00:07:21,060
So literally every year, you pay
a certain fraction of the

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00:07:21,060 --> 00:07:24,530
value of your house, for
example, in a property tax to

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00:07:24,530 --> 00:07:25,250
your local government.

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00:07:25,250 --> 00:07:26,900
So it's another form
of taxation.

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00:07:26,900 --> 00:07:30,300
That's where we get about
10% of our revenues.

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00:07:30,300 --> 00:07:33,060
And then finally, there's
the corporate

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00:07:33,060 --> 00:07:37,860
tax, which is a tax--

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00:07:37,860 --> 00:07:41,130
this is sort of akin
to the income tax.

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00:07:41,130 --> 00:07:43,030
But instead of levied on
individuals, it's levied on

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corporations.

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It's money that corporations
pay as they

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00:07:46,430 --> 00:07:47,680
earn more in profits.

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So we tax lots of different
sources of income.

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We tax you lots of different
ways in the US.

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If you add it up overall,
we pay about 20% of

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00:08:01,800 --> 00:08:03,750
our income in taxation.

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00:08:03,750 --> 00:08:07,150
That is every dollar that's
earned in the US, about $0.20

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00:08:07,150 --> 00:08:09,540
goes to the government
on average.

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Now obviously it's different.

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00:08:10,465 --> 00:08:11,440
If you're richer, it's higher.

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00:08:11,440 --> 00:08:12,355
If you're poor, it's less.

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00:08:12,355 --> 00:08:14,380
It depends on how much you
consume, et cetera.

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00:08:14,380 --> 00:08:15,460
And your wealth, et cetera.

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But overall across everyone, on
average, about 20% of our

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00:08:20,610 --> 00:08:23,030
income goes to taxation.

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About one fifth of our GDP.

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The problem we have right now
is if you look at government

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00:08:29,190 --> 00:08:32,429
spending, that's more
like a quarter.

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00:08:32,429 --> 00:08:35,150
It's 24% of GDP.

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So we collect about a fifth of
our national income in taxes,

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00:08:38,500 --> 00:08:40,610
but we spend about a quarter.

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Thus we have a more
than trillion

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00:08:42,250 --> 00:08:44,430
dollar national deficit.

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So the problem we have right now
is we're collecting a lot

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00:08:47,340 --> 00:08:51,270
less in taxes than we're
spending as a government.

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Now, we're not going to get
into what's behind that.

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That has both some structural
sources,

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which we'll talk about.

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Most notably the incredible rise
in medical care spending.

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00:09:01,490 --> 00:09:03,490
And it has some cyclical
sources, which is in a

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00:09:03,490 --> 00:09:07,680
recession, naturally you spend
more because people need more

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00:09:07,680 --> 00:09:10,320
help from the government and you
tax less because there's

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00:09:10,320 --> 00:09:12,180
less income to be taxed.

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00:09:12,180 --> 00:09:14,300
So some of the reason we have
this huge deficit is that

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we're in a recession still.

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00:09:15,640 --> 00:09:17,810
We haven't come out of it yet.

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00:09:17,810 --> 00:09:20,345
Some of it is more structural in
that we have fundamentally

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00:09:20,345 --> 00:09:23,610
a system which is spending
beyond our means.

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00:09:23,610 --> 00:09:25,000
And we'll talk a bit
more about that.

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What I want to focus on now
is given this large set of

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00:09:33,930 --> 00:09:36,760
different things we should tax,
I want to focus on one

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00:09:36,760 --> 00:09:37,545
specific question.

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00:09:37,545 --> 00:09:39,240
There's lots questions
we could focus on.

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00:09:39,240 --> 00:09:41,770
And once again, in 14.41, we
talk about a lot of them.

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But I want to focus today on
one question of particular

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interest. Which is, what
should we tax?

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00:09:46,840 --> 00:09:50,780
I've just laid out here five
different things we can tax.

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00:09:50,780 --> 00:09:53,075
We can tax your income,
either progressively

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00:09:53,075 --> 00:09:54,810
or in a flat tax.

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00:09:54,810 --> 00:09:55,930
We can tax your consumption.

200
00:09:55,930 --> 00:09:57,280
We can tax your property.

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00:09:57,280 --> 00:09:59,080
We can tax corporations.

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What should we tax?

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00:10:01,000 --> 00:10:02,930
If we're going to raise this
20%, why do we do it in all

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00:10:02,930 --> 00:10:05,460
these different ways?

205
00:10:05,460 --> 00:10:09,230
For example, in Europe, taxation
is very different.

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In Europe, they raise much less
through income taxation

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00:10:13,170 --> 00:10:16,280
and much more through
consumption taxation.

208
00:10:16,280 --> 00:10:18,990
They have something in Europe
called the value-added tax.

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00:10:18,990 --> 00:10:20,910
You guys may have dealt with it
if you've traveled there,

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00:10:20,910 --> 00:10:22,790
traveled abroad-- the VAT.

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The value-added tax is basically
their version

212
00:10:24,500 --> 00:10:26,530
of the sales tax.

213
00:10:26,530 --> 00:10:29,610
It's basically a sales tax, but
each level of producer is

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00:10:29,610 --> 00:10:33,660
tax on the value they
add to production.

215
00:10:33,660 --> 00:10:36,140
And so in Europe, they tax
consumption a lot more and

216
00:10:36,140 --> 00:10:37,390
income a lot less.

217
00:10:39,630 --> 00:10:40,680
Is that a good idea or not?

218
00:10:40,680 --> 00:10:44,080
For example, one of the two
major deficit commissions

219
00:10:44,080 --> 00:10:46,620
that's just reporting these last
couple weeks on ways to

220
00:10:46,620 --> 00:10:48,810
get down the deficit, has
suggested we actually

221
00:10:48,810 --> 00:10:52,620
introduce a national sales tax
to move towards more like

222
00:10:52,620 --> 00:10:55,160
Europe and have more of our
taxation based on consumption

223
00:10:55,160 --> 00:10:57,570
and less based on income.

224
00:10:57,570 --> 00:11:00,250
What's the major argument
for this?

225
00:11:00,250 --> 00:11:04,260
Well, the major argument for
taxing consumption instead of

226
00:11:04,260 --> 00:11:06,880
taxing income comes back to what
we talked about a couple

227
00:11:06,880 --> 00:11:07,950
lectures ago.

228
00:11:07,950 --> 00:11:11,540
Which is that it promotes
savings.

229
00:11:11,540 --> 00:11:13,990
Remember, income can
be defined as

230
00:11:13,990 --> 00:11:15,270
consumption plus savings.

231
00:11:15,270 --> 00:11:18,090
You take your income and you
either consume it or save it.

232
00:11:18,090 --> 00:11:19,290
OK

233
00:11:19,290 --> 00:11:24,670
When we tax income, then we tax
both your consumption and

234
00:11:24,670 --> 00:11:25,920
your savings.

235
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When we tax consumption only,
we don't tax your savings.

236
00:11:33,730 --> 00:11:37,870
Assuming substitution effects
dominate, that will therefore

237
00:11:37,870 --> 00:11:39,540
promote savings.

238
00:11:39,540 --> 00:11:42,620
Taxing consumption rather
than taxing income

239
00:11:42,620 --> 00:11:44,770
will promote savings.

240
00:11:44,770 --> 00:11:48,690
Once again, assuming
substitution effects dominate.

241
00:11:48,690 --> 00:11:51,410
And the argument is, we know
through mechanisms we talked

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00:11:51,410 --> 00:11:53,170
about last time how important
savings is as

243
00:11:53,170 --> 00:11:55,880
an engine of growth.

244
00:11:55,880 --> 00:11:58,920
So the notion is that by moving
from a system of taxing

245
00:11:58,920 --> 00:12:02,390
income to a system of taxing
consumption, we can say to

246
00:12:02,390 --> 00:12:06,490
individuals, hey, you will have
a tax benefit to saving

247
00:12:06,490 --> 00:12:08,690
rather than spending.

248
00:12:08,690 --> 00:12:11,140
And that tax benefit you
have from savings will

249
00:12:11,140 --> 00:12:14,860
cause you to save more.

250
00:12:14,860 --> 00:12:16,640
And therefore, we'll
increase savings in

251
00:12:16,640 --> 00:12:17,040
society from doing this.

252
00:12:17,040 --> 00:12:21,330
And that's why many economists
favor moving away from an

253
00:12:21,330 --> 00:12:22,840
income tax to a consumption
tax.

254
00:12:22,840 --> 00:12:25,550
Actually, this was first
proposed by the depressing

255
00:12:25,550 --> 00:12:29,850
philosopher Thomas Hobbes back
in 16-something where he said,

256
00:12:29,850 --> 00:12:31,060
"A man should be taxed--

257
00:12:31,060 --> 00:12:32,660
because it was all
men back then.

258
00:12:32,660 --> 00:12:35,300
"A man should be taxed not based
on what he earns, but

259
00:12:35,300 --> 00:12:38,050
what he takes out of society
through consumption." That's

260
00:12:38,050 --> 00:12:39,830
sort of the philosophical
underpinnings of saying let's

261
00:12:39,830 --> 00:12:41,750
not tax people on what they
make, let's tax them on what

262
00:12:41,750 --> 00:12:44,100
they use, which is their
consumption.

263
00:12:44,100 --> 00:12:46,890
So that's got both a
philosophical merit to it and

264
00:12:46,890 --> 00:12:50,290
also this sort of efficiency
argument of promoting savings.

265
00:12:50,290 --> 00:12:51,520
So why not do this?

266
00:12:51,520 --> 00:12:54,360
Well, it's our friend that we've
been talking about these

267
00:12:54,360 --> 00:12:57,340
two lectures, the equity
efficiency trade-off, which is

268
00:12:57,340 --> 00:13:01,090
a tax on consumption
is very regressive.

269
00:13:01,090 --> 00:13:03,810
It falls much more heavily
on the poor.

270
00:13:03,810 --> 00:13:04,710
And why is that?

271
00:13:04,710 --> 00:13:06,680
Well, quite frankly because
the poor don't save

272
00:13:06,680 --> 00:13:08,270
and the rich do.

273
00:13:08,270 --> 00:13:11,240
The typical American lives
pretty much hand to mouth.

274
00:13:11,240 --> 00:13:12,820
They pretty much spend
what they earn.

275
00:13:12,820 --> 00:13:14,450
They don't save a whole lot.

276
00:13:14,450 --> 00:13:17,210
Most of savings in society is
done by the richest people in

277
00:13:17,210 --> 00:13:18,270
our society.

278
00:13:18,270 --> 00:13:21,550
The vast majority of wealth is
controlled by a small share of

279
00:13:21,550 --> 00:13:24,190
the population.

280
00:13:24,190 --> 00:13:28,310
As a result, if you went from an
income tax system, which is

281
00:13:28,310 --> 00:13:31,480
progressive, to a consumption
tax system where you're just

282
00:13:31,480 --> 00:13:36,940
taxing people on what they
spent, you would end up moving

283
00:13:36,940 --> 00:13:39,790
vastly towards a much more
regressive system.

284
00:13:39,790 --> 00:13:42,050
Now partly you could address
this by taxing consumption

285
00:13:42,050 --> 00:13:43,300
progressively.

286
00:13:43,300 --> 00:13:45,910
But at the end of the day, the
rich just don't consume a lot

287
00:13:45,910 --> 00:13:46,740
of what they earn.

288
00:13:46,740 --> 00:13:49,600
They pass it on to their kids.

289
00:13:49,600 --> 00:13:52,410
So at the end of the day, the
rich will just pay a lot less

290
00:13:52,410 --> 00:13:56,210
in taxes if you move to a
consumption tax system.

291
00:13:56,210 --> 00:13:58,040
And that's the issue.

292
00:13:58,040 --> 00:14:01,930
Now in Europe, what they do is
they address this problem by

293
00:14:01,930 --> 00:14:05,010
saying, fine, our tax system is
regressive, but we're going

294
00:14:05,010 --> 00:14:07,170
to spend a lot of money
on the poor.

295
00:14:07,170 --> 00:14:09,260
So I talked last time about a
system making sure nobody

296
00:14:09,260 --> 00:14:09,960
lived in poverty.

297
00:14:09,960 --> 00:14:10,900
Everybody got $10,000.

298
00:14:10,900 --> 00:14:12,560
No one lived in poverty.

299
00:14:12,560 --> 00:14:15,390
That's more of a European-style
system.

300
00:14:15,390 --> 00:14:17,650
So in Europe they say, yes, we
have a more regressive tax

301
00:14:17,650 --> 00:14:20,520
system, but a much more
progressive spending program.

302
00:14:20,520 --> 00:14:22,660
And put together, it's
a fairer system.

303
00:14:22,660 --> 00:14:24,530
And that may be something
to consider.

304
00:14:24,530 --> 00:14:27,580
But within the tax realm alone,
moving to consumption

305
00:14:27,580 --> 00:14:30,000
taxation will probably
promote efficiency,

306
00:14:30,000 --> 00:14:32,350
but would hurt equity.

307
00:14:32,350 --> 00:14:33,760
And once again, we have
that trade-off that

308
00:14:33,760 --> 00:14:35,010
we're always facing.

309
00:14:37,900 --> 00:14:40,370
Questions about that?

310
00:14:40,370 --> 00:14:42,430
A more interesting case where
this trade-off might not be

311
00:14:42,430 --> 00:14:46,710
quite so stark or a little more
subtle is thinking about

312
00:14:46,710 --> 00:14:57,376
excise taxation of "sin goods."
"Sin goods." So if we

313
00:14:57,376 --> 00:15:01,890
think about what's taxed by
excise taxation, they're on

314
00:15:01,890 --> 00:15:06,860
things like cigarettes,
alcohol, gasoline.

315
00:15:06,860 --> 00:15:11,480
Basically, goods which produce
what we call negative

316
00:15:11,480 --> 00:15:12,730
externalities.

317
00:15:21,390 --> 00:15:25,290
What a negative externality
is, is an activity which

318
00:15:25,290 --> 00:15:28,850
produces a negative consequence
that is not borne

319
00:15:28,850 --> 00:15:32,900
by the person engaged
in the activity.

320
00:15:32,900 --> 00:15:36,540
It's not borne by the person
engaged in the activity.

321
00:15:36,540 --> 00:15:39,250
There's a negative externality
that's

322
00:15:39,250 --> 00:15:40,770
associated with these goods.

323
00:15:40,770 --> 00:15:43,820
So for, example let's
take smoking.

324
00:15:43,820 --> 00:15:49,050
When I smoke, part of what I'm
doing is just killing myself.

325
00:15:49,050 --> 00:15:50,270
And that's not an externality.

326
00:15:50,270 --> 00:15:52,040
I'll come back to that.

327
00:15:52,040 --> 00:15:54,100
But if all you do through an
activity is hurt yourself,

328
00:15:54,100 --> 00:15:55,010
that's not an externality.

329
00:15:55,010 --> 00:15:57,120
An externality is the cost
imposed on society.

330
00:15:59,820 --> 00:16:03,740
The key insight from basic
economics is that anything you

331
00:16:03,740 --> 00:16:09,800
do that hurts only you is
not society's business.

332
00:16:09,800 --> 00:16:13,560
So for example, every cigarette
you smoke lowers

333
00:16:13,560 --> 00:16:15,266
your life by 7 minutes.

334
00:16:15,266 --> 00:16:19,420
Now not specifically, but on
average, every cigarette smoke

335
00:16:19,420 --> 00:16:21,690
lowers your life by 7 minutes.

336
00:16:21,690 --> 00:16:25,510
However, in a world with
rational consumers, the type

337
00:16:25,510 --> 00:16:28,530
we deal with in 14.01,
that's not a problem.

338
00:16:28,530 --> 00:16:31,090
When you go to buy that pack of
cigarettes, you should say,

339
00:16:31,090 --> 00:16:33,860
look, in addition to the $5 I
have to pay, I'm lowering my

340
00:16:33,860 --> 00:16:36,090
life by 140 minutes.

341
00:16:36,090 --> 00:16:40,430
I will decide whether my
enjoyment of smoking is worth

342
00:16:40,430 --> 00:16:42,650
the shortening of my life plus
the money I have to pay.

343
00:16:42,650 --> 00:16:43,475
If it is, I'll buy it.

344
00:16:43,475 --> 00:16:44,470
If not, I won't.

345
00:16:44,470 --> 00:16:46,190
I'll go off and smoke and
kill myself or not,

346
00:16:46,190 --> 00:16:48,840
but that's my problem.

347
00:16:48,840 --> 00:16:52,240
That's the standard economic
view of this, which is that

348
00:16:52,240 --> 00:16:55,060
basically what matters is not
the damage to yourself because

349
00:16:55,060 --> 00:16:56,620
that's a trade-off you make.

350
00:16:56,620 --> 00:17:00,860
You have an indifference curve
across life and smoking.

351
00:17:00,860 --> 00:17:01,750
You have an indifference
curve.

352
00:17:01,750 --> 00:17:03,400
And if you like smoking a lot,
you'll choose to have a

353
00:17:03,400 --> 00:17:04,329
shorter life to smoke.

354
00:17:04,329 --> 00:17:05,690
If you don't like smoking,
you won't.

355
00:17:05,690 --> 00:17:07,970
But that's a choice you've made
and the government has no

356
00:17:07,970 --> 00:17:10,839
role to interfere with that.

357
00:17:10,839 --> 00:17:13,450
Where the government has a
role to interfere is when

358
00:17:13,450 --> 00:17:14,800
there's a negative
externality.

359
00:17:14,800 --> 00:17:17,180
When the consequence of my
action affects other people

360
00:17:17,180 --> 00:17:18,460
and I don't bear the cost.

361
00:17:18,460 --> 00:17:23,619
So, for example, when I smoke,
if I'm, for example, on

362
00:17:23,619 --> 00:17:25,660
Medicare, over 65.

363
00:17:25,660 --> 00:17:29,520
If I smoke and get sick, then
the medical costs that are

364
00:17:29,520 --> 00:17:31,630
borne are borne by
the taxpayer.

365
00:17:31,630 --> 00:17:33,640
Because I'm on public
insurance.

366
00:17:33,640 --> 00:17:36,953
So when I'm over 65 and I'm on
free public insurance, which a

367
00:17:36,953 --> 00:17:38,530
lot of people aren't over 65.

368
00:17:38,530 --> 00:17:41,600
I'll talk about that in
a couple lectures.

369
00:17:41,600 --> 00:17:44,670
And I smoke, than those costs
are borne by society because

370
00:17:44,670 --> 00:17:47,890
they have to pay the cost
of my medical bills.

371
00:17:47,890 --> 00:17:51,320
Or more relevantly, take
secondhand smoke.

372
00:17:51,320 --> 00:17:56,620
If I smoked in this classroom
and you all got lung cancer as

373
00:17:56,620 --> 00:17:59,640
a result, that would be an
externality because I wouldn't

374
00:17:59,640 --> 00:18:04,820
be bearing the fact that you
got sick because I smoked.

375
00:18:04,820 --> 00:18:06,070
That's a negative externality.

376
00:18:08,500 --> 00:18:11,040
Higher medical costs alone
associated with smoking are

377
00:18:11,040 --> 00:18:13,880
$80 billion a year.

378
00:18:13,880 --> 00:18:16,040
Not to mention the secondhand
cost of smoke.

379
00:18:16,040 --> 00:18:16,960
Take drinking.

380
00:18:16,960 --> 00:18:18,690
What's the externality
for drinking?

381
00:18:18,690 --> 00:18:21,820
Now many, I would gather,
venture most people in this

382
00:18:21,820 --> 00:18:25,210
room have had consumed
alcohol.

383
00:18:25,210 --> 00:18:27,146
Often we've consumed it and
quite enjoyed it and consumed

384
00:18:27,146 --> 00:18:29,470
it responsibly.

385
00:18:29,470 --> 00:18:31,500
However, there's enormous
negative externality

386
00:18:31,500 --> 00:18:36,000
associated with alcohol,
which is drunk driving.

387
00:18:36,000 --> 00:18:40,280
Every year about 13,000 people
a year are killed by drunk

388
00:18:40,280 --> 00:18:43,660
drivers and about 400,000
are injured.

389
00:18:43,660 --> 00:18:46,300
Once again, that's an enormous
negative externality because I

390
00:18:46,300 --> 00:18:48,530
drink, I get drunk,
I kill someone.

391
00:18:48,530 --> 00:18:51,600
That's a cost I've imposed on
society that I don't bear.

392
00:18:51,600 --> 00:18:54,010
I'm going to be guilty and
stuff, but I'm not bearing

393
00:18:54,010 --> 00:19:00,130
that cost. That's a negative
externality of drinking.

394
00:19:00,130 --> 00:19:04,150
Consuming gasoline clearly has
a negative externality, which

395
00:19:04,150 --> 00:19:07,840
is the more I drive, the more
carbon I emit into the

396
00:19:07,840 --> 00:19:11,080
atmosphere, and the more
I cause global warming.

397
00:19:11,080 --> 00:19:13,030
The externality is that
basically by the best

398
00:19:13,030 --> 00:19:17,820
estimates, global temperatures
due to global warming, which a

399
00:19:17,820 --> 00:19:21,300
large share of it is caused by
driving, global temperatures

400
00:19:21,300 --> 00:19:24,080
will be up 5 to 10 degrees by
the end of the century.

401
00:19:24,080 --> 00:19:26,310
Now if you're from North Dakota
that may not sound like

402
00:19:26,310 --> 00:19:27,760
such a bad thing.

403
00:19:27,760 --> 00:19:29,360
But if you were say, from
Bangladesh, it might be

404
00:19:29,360 --> 00:19:31,020
because it'll be underwater.

405
00:19:31,020 --> 00:19:32,740
Or if you happen to like
visiting Cape Cod, it might be

406
00:19:32,740 --> 00:19:35,310
because it will also
be underwater.

407
00:19:35,310 --> 00:19:37,400
And these are the aspects of
global warming that are

408
00:19:37,400 --> 00:19:39,830
largely caused by activities
such as driving.

409
00:19:39,830 --> 00:19:41,230
It's a negative externality.

410
00:19:41,230 --> 00:19:43,940
By my driving, I'm putting
Bangladesh underwater.

411
00:19:43,940 --> 00:19:47,130
I'm not paying for that, so
that's a negative externality.

412
00:19:47,130 --> 00:19:50,420
And then finally, we get to the
toughest one and the most

413
00:19:50,420 --> 00:19:51,750
interesting one.

414
00:19:51,750 --> 00:19:53,060
And perhaps the most
important one going

415
00:19:53,060 --> 00:19:56,030
forward, which is obesity.

416
00:19:56,030 --> 00:19:59,380
Individuals who overeat and get
fat and overweight as a

417
00:19:59,380 --> 00:20:04,050
result cause an externality
because they have extra

418
00:20:04,050 --> 00:20:06,870
medical costs that society
has to bear.

419
00:20:06,870 --> 00:20:10,000
Currently, one third of
our nation is obese.

420
00:20:10,000 --> 00:20:12,455
And one in three children born
today will get diabetes.

421
00:20:15,600 --> 00:20:19,020
Largely from overeating
or poor lifestyle.

422
00:20:19,020 --> 00:20:21,670
That's an externality on society
and the extra medical

423
00:20:21,670 --> 00:20:24,250
costs that we'll bear.

424
00:20:24,250 --> 00:20:28,750
Since society bears these costs,
society then has the

425
00:20:28,750 --> 00:20:32,080
right to say, well, I'm going
to tax you on the

426
00:20:32,080 --> 00:20:33,200
costs you're imposing.

427
00:20:33,200 --> 00:20:35,535
We call that corrective
taxation.

428
00:20:41,620 --> 00:20:45,040
If you exert a negative
externality on society, then

429
00:20:45,040 --> 00:20:48,330
society has the right to come
and say, OK, we are now going

430
00:20:48,330 --> 00:20:52,740
to correct that by taxing
you on the cost

431
00:20:52,740 --> 00:20:55,310
you're imposing on society.

432
00:20:55,310 --> 00:20:57,780
So that's an argument for excise
tax that goes beyond

433
00:20:57,780 --> 00:20:59,440
the normal equity efficiency
trade-off.

434
00:20:59,440 --> 00:21:01,310
Any tax has the normal equity
efficiency trade-off.

435
00:21:03,850 --> 00:21:07,410
Sin goods have this extra
argument in the pro column,

436
00:21:07,410 --> 00:21:09,150
which is the negative
externalities.

437
00:21:09,150 --> 00:21:11,640
Which is that even aside from
the standard equity efficiency

438
00:21:11,640 --> 00:21:15,450
trade-off, because consuming
sin goods imposes negative

439
00:21:15,450 --> 00:21:19,430
externalities on society,
we should tax them more.

440
00:21:19,430 --> 00:21:21,940
And that's why we have excise
taxes above and beyond our

441
00:21:21,940 --> 00:21:24,860
sales taxes.

442
00:21:24,860 --> 00:21:27,400
Questions about that?

443
00:21:27,400 --> 00:21:32,470
Now, traditional economics often
stops there, but I hope

444
00:21:32,470 --> 00:21:34,310
that my discussion of shortening
your life by

445
00:21:34,310 --> 00:21:37,070
smoking left you at least a
little bit uncomfortable.

446
00:21:37,070 --> 00:21:38,760
I hope that when I said, well,
you shorten your life by

447
00:21:38,760 --> 00:21:40,400
smoking, that's your problem.

448
00:21:40,400 --> 00:21:42,160
You might say, well, gee,
that leaves me a little

449
00:21:42,160 --> 00:21:43,500
uncomfortable.

450
00:21:43,500 --> 00:21:44,785
And the reason you might say it
leaves you uncomfortable is

451
00:21:44,785 --> 00:21:47,840
you might think, well, maybe
people don't understand that.

452
00:21:47,840 --> 00:21:49,530
Maybe people don't realize
that every cigarette they

453
00:21:49,530 --> 00:21:50,940
smoke is shortening your
life seven minutes.

454
00:21:50,940 --> 00:21:52,900
And maybe they don't realize it
in particular when they're

455
00:21:52,900 --> 00:21:54,200
16 and start smoking.

456
00:21:54,200 --> 00:21:58,320
And then they get addicted
and they can't stop.

457
00:21:58,320 --> 00:22:02,090
In that case, we have actually
understated the argument for

458
00:22:02,090 --> 00:22:04,890
taxing these goods because then
we actually want to tax

459
00:22:04,890 --> 00:22:08,340
them to help you from
killing yourself.

460
00:22:08,340 --> 00:22:12,850
So for example, you take high
school seniors who smoke a

461
00:22:12,850 --> 00:22:14,100
pack a day of cigarettes.

462
00:22:17,240 --> 00:22:20,055
And ask them, will you be
smoking in five years?

463
00:22:23,120 --> 00:22:26,040
Of the ones that say, yes, I
will be smoking in five years,

464
00:22:26,040 --> 00:22:29,510
if you actually follow them up
five years later, 72% of them

465
00:22:29,510 --> 00:22:30,355
are smoking.

466
00:22:30,355 --> 00:22:32,860
So you got it pretty
much right.

467
00:22:32,860 --> 00:22:35,570
Of the ones that say no I will
not be smoking in five years,

468
00:22:35,570 --> 00:22:38,990
when you follow them up five
years later, 74% are smoking.

469
00:22:38,990 --> 00:22:41,190
They completely got it wrong.

470
00:22:41,190 --> 00:22:43,680
Clearly, the kind of underlying
rationality

471
00:22:43,680 --> 00:22:44,950
assumptions we make in
this course don't

472
00:22:44,950 --> 00:22:46,560
hold in some context.

473
00:22:46,560 --> 00:22:49,410
In that case, there may be a
role for the government to tax

474
00:22:49,410 --> 00:22:51,990
these sin goods even above
and beyond externalities.

475
00:22:51,990 --> 00:22:54,360
Basically, there maybe a role
for the government in helping

476
00:22:54,360 --> 00:22:56,800
people help themselves,
which is a dangerous

477
00:22:56,800 --> 00:22:58,570
place to go for economics.

478
00:22:58,570 --> 00:23:00,540
We tend to think of the
government as rolling in and

479
00:23:00,540 --> 00:23:02,520
fixing mistakes that might
affect society.

480
00:23:02,520 --> 00:23:04,890
But people, what they do for
themselves is perfectly fine.

481
00:23:04,890 --> 00:23:08,090
If they want to do crazy things,
that's their business.

482
00:23:08,090 --> 00:23:11,090
What behavioral economics leads
us to, where these sort

483
00:23:11,090 --> 00:23:13,290
of facts leads us to is
thinking, well, if people make

484
00:23:13,290 --> 00:23:15,360
mistakes, there may be a role
for the government in

485
00:23:15,360 --> 00:23:16,610
addressing those as well.

486
00:23:19,280 --> 00:23:24,910
That's a new area that economics
is pushing in, is

487
00:23:24,910 --> 00:23:27,740
thinking about, well, gee, if
individuals are actually not

488
00:23:27,740 --> 00:23:29,810
behaving in the perfectly
rationally way we learned

489
00:23:29,810 --> 00:23:32,930
about in 14.01, then is there
an even more aggressive role

490
00:23:32,930 --> 00:23:35,010
for the government in correcting
their behaviors?

491
00:23:35,010 --> 00:23:36,905
And this is discussed a lot
in my course 14.41.

492
00:23:36,905 --> 00:23:41,090
It also is discussed a lot in
14.13 Behavioral Economics,

493
00:23:41,090 --> 00:23:43,200
which talks a lot about these
issues, about these sort of

494
00:23:43,200 --> 00:23:46,790
issues of sort of how moving
beyond 14.01 might actually

495
00:23:46,790 --> 00:23:48,890
impact our thinking about
the proper role

496
00:23:48,890 --> 00:23:51,270
of government policy.

497
00:23:51,270 --> 00:23:54,600
So the bottom line is, we should
clearly tax these sin

498
00:23:54,600 --> 00:23:57,020
goods more because
of the negative

499
00:23:57,020 --> 00:23:58,180
externalities they impose.

500
00:23:58,180 --> 00:24:01,550
Because they impose costs on
society through higher medical

501
00:24:01,550 --> 00:24:05,860
costs, or more drunk driving
deaths, or global warming.

502
00:24:05,860 --> 00:24:09,245
And perhaps we should tax them
even more than that if people

503
00:24:09,245 --> 00:24:11,210
are actually making mistakes
in their consumption

504
00:24:11,210 --> 00:24:13,980
decisions, and the government
has a role to come in and help

505
00:24:13,980 --> 00:24:15,230
correct those mistakes.

506
00:24:17,340 --> 00:24:21,200
Questions or comments on that?

507
00:24:21,200 --> 00:24:25,430
Now, I just talked about what we
should tax and some of the

508
00:24:25,430 --> 00:24:27,790
issues in deciding what
we should tax.

509
00:24:27,790 --> 00:24:29,220
The other, of course,
issue is, well, how

510
00:24:29,220 --> 00:24:30,260
much should we tax?

511
00:24:30,260 --> 00:24:33,650
So not just what's the right
tax base, income or

512
00:24:33,650 --> 00:24:36,660
consumption or excise taxes
or whatever, but what's

513
00:24:36,660 --> 00:24:38,670
the right tax rate?

514
00:24:38,670 --> 00:24:41,900
And this is, of course, a very
important issue today because

515
00:24:41,900 --> 00:24:44,380
the number one public policy
issue we're dealing with now

516
00:24:44,380 --> 00:24:48,180
is the expiration the
Bush tax cuts.

517
00:24:48,180 --> 00:24:52,100
So if you go back to your chart,
the second page of the

518
00:24:52,100 --> 00:24:55,980
handout, the marginal
tax rates.

519
00:24:55,980 --> 00:25:01,680
Before 2001, these tax rates
were all about 5% higher.

520
00:25:01,680 --> 00:25:06,820
So the poorest paid 15% and
the richest paid 40%.

521
00:25:06,820 --> 00:25:11,720
In 2001 and in 2003, the Bush
administration cut tax rates a

522
00:25:11,720 --> 00:25:14,910
lot, cut these tax rates, cut
a bunch of other taxes,

523
00:25:14,910 --> 00:25:18,040
including corporate taxes, as
well as the property tax and

524
00:25:18,040 --> 00:25:19,970
other things.

525
00:25:19,970 --> 00:25:21,380
But everyone's focused
right now on the

526
00:25:21,380 --> 00:25:23,400
individual tax rates.

527
00:25:23,400 --> 00:25:25,590
They did so, but to make--

528
00:25:25,590 --> 00:25:28,050
due to some sort of budgetary
trickery they had to do to

529
00:25:28,050 --> 00:25:32,270
make it work, those tax cuts
actually expire in a month.

530
00:25:32,270 --> 00:25:34,920
What that means is if nothing
is done in a month,

531
00:25:34,920 --> 00:25:38,550
everybody's income tax
rate jumps up by 5%.

532
00:25:38,550 --> 00:25:41,780
So you can imagine that's
not delightful politics.

533
00:25:41,780 --> 00:25:43,560
Politicians are very upset
and worried about this.

534
00:25:43,560 --> 00:25:47,000
I don't know that people are so
much, but politicians are.

535
00:25:47,000 --> 00:25:49,630
And the current debate right now
is, well, what should we

536
00:25:49,630 --> 00:25:50,310
do about this?

537
00:25:50,310 --> 00:25:52,730
Should we extend the
Bush tax cuts?

538
00:25:52,730 --> 00:25:55,980
Should we continue to keep
tax rates lower?

539
00:25:55,980 --> 00:26:02,150
Or should we let them expire and
grab the extra revenues,

540
00:26:02,150 --> 00:26:04,280
as well the increased
progressivity that

541
00:26:04,280 --> 00:26:07,390
comes along with that?

542
00:26:07,390 --> 00:26:08,400
Well, should we?

543
00:26:08,400 --> 00:26:14,810
Well that depends on two issues,
equity and efficiency,

544
00:26:14,810 --> 00:26:16,340
the same issues we've
been discussing.

545
00:26:16,340 --> 00:26:19,880
The efficiency issue is, well,
what will the impact be on the

546
00:26:19,880 --> 00:26:25,380
economy from allowing
tax rates to rise?

547
00:26:25,380 --> 00:26:28,770
And in particular, some argue
there could be such a negative

548
00:26:28,770 --> 00:26:32,180
impact that you actually end up
hurting the government by

549
00:26:32,180 --> 00:26:34,020
allowing tax rates to rise.

550
00:26:34,020 --> 00:26:36,290
And this argument that appeals
to a famous notion known as

551
00:26:36,290 --> 00:26:40,295
the Laffer curve, named for a
conservative economist, Arthur

552
00:26:40,295 --> 00:26:42,830
Laffer, who advised Ronald
Reagan on his tax cuts in the

553
00:26:42,830 --> 00:26:44,400
early 1980s.

554
00:26:44,400 --> 00:26:49,660
The Laffer curve argument is
illustrated in Figure 24-3.

555
00:26:49,660 --> 00:26:53,110
So the point is, imagine
two tax--

556
00:26:53,110 --> 00:26:57,210
I want you to consider three
possibilities for tax rate: 0,

557
00:26:57,210 --> 00:27:00,160
100, and something in between.

558
00:27:00,160 --> 00:27:05,180
A tax rate of 0 clearly
raises 0 revenues.

559
00:27:05,180 --> 00:27:09,520
But a tax rate of 100% also
clearly raises 0 revenues.

560
00:27:09,520 --> 00:27:10,160
Why?

561
00:27:10,160 --> 00:27:13,900
Because if you're taxed 100%,
you'd never work.

562
00:27:13,900 --> 00:27:16,620
If literally everything you ever
made simply went to the

563
00:27:16,620 --> 00:27:18,440
government, people just
wouldn't work.

564
00:27:18,440 --> 00:27:22,410
As long as leisure's a normal
good, why would you work?

565
00:27:22,410 --> 00:27:24,350
Why would you reduce your
leisure if you didn't get to

566
00:27:24,350 --> 00:27:28,290
see any increased consumption
from it?

567
00:27:28,290 --> 00:27:29,770
So at a tax rate of 0, the

568
00:27:29,770 --> 00:27:31,510
government collects no revenues.

569
00:27:31,510 --> 00:27:33,560
At a tax rate of 100%,
the government

570
00:27:33,560 --> 00:27:35,280
also collects no revenues.

571
00:27:35,280 --> 00:27:37,110
And the tax rates in between,
the government collects at

572
00:27:37,110 --> 00:27:39,570
least some revenues.

573
00:27:39,570 --> 00:27:41,960
Given those three facts, we
know there must be some

574
00:27:41,960 --> 00:27:45,120
function that looks like the
one that's drawn here.

575
00:27:45,120 --> 00:27:46,490
Some parabolic function.

576
00:27:46,490 --> 00:27:47,970
We don't know its exact shape.

577
00:27:47,970 --> 00:27:51,340
But basically where it hits the
x-axis at 0 and 100 and is

578
00:27:51,340 --> 00:27:54,590
above the x-axis in between.

579
00:27:54,590 --> 00:27:58,100
It's just a theoretical
truism that you'll get

580
00:27:58,100 --> 00:27:59,930
a curve this shape.

581
00:27:59,930 --> 00:28:03,110
The question is, which side
of this curve are you on?

582
00:28:03,110 --> 00:28:07,040
If you're on what I've labeled
the correct side, then what

583
00:28:07,040 --> 00:28:11,290
that means is by raising taxes,
we raise revenues.

584
00:28:11,290 --> 00:28:14,580
But there is inevitably an
incorrect side, a wrong side,

585
00:28:14,580 --> 00:28:17,660
where taxes are so high
that by raising

586
00:28:17,660 --> 00:28:20,650
taxes, we lose money.

587
00:28:20,650 --> 00:28:22,130
How is that possible?

588
00:28:22,130 --> 00:28:24,040
Well, think about what
tax revenues are.

589
00:28:24,040 --> 00:28:30,120
Tax revenues are the tax rate
times the tax base.

590
00:28:30,120 --> 00:28:32,120
Well, what happens to tax
revenues when we increase

591
00:28:32,120 --> 00:28:45,000
taxes? dR d tau is equal to
B plus dB d tau times tau.

592
00:28:45,000 --> 00:28:48,230
That is, when you increase
taxes, you raise more money

593
00:28:48,230 --> 00:28:50,360
because you're raising more
money on the existing tax

594
00:28:50,360 --> 00:28:54,230
base, but if the tax base
itself shrinks--

595
00:28:54,230 --> 00:28:55,170
this is negative--

596
00:28:55,170 --> 00:28:57,120
then there's an offsetting
effect.

597
00:28:57,120 --> 00:28:59,810
The tax base could shrink
so much that you

598
00:28:59,810 --> 00:29:00,850
end up losing money.

599
00:29:00,850 --> 00:29:02,150
And that's what happens
on the wrong side

600
00:29:02,150 --> 00:29:03,130
of the Laffer curve.

601
00:29:03,130 --> 00:29:06,800
Taxes get so high that when you
raise a tax rate, people

602
00:29:06,800 --> 00:29:09,530
work so much less it's like the

603
00:29:09,530 --> 00:29:12,020
monopolist poisoning effect.

604
00:29:12,020 --> 00:29:14,890
The poisoning effect overwhelms
the initial effect

605
00:29:14,890 --> 00:29:17,130
and you actually lose money
by raising taxes.

606
00:29:17,130 --> 00:29:20,650
Just like a monopolist can lose
money by raising prices--

607
00:29:20,650 --> 00:29:22,030
by lowering prices.

608
00:29:22,030 --> 00:29:24,190
I'm sorry, a monopolist
can lose money.

609
00:29:24,190 --> 00:29:26,720
Here the government can lose
money by raising taxes through

610
00:29:26,720 --> 00:29:28,240
the same kind of poisoning
effect.

611
00:29:28,240 --> 00:29:29,580
And that's how we get
this Laffer curve.

612
00:29:32,380 --> 00:29:35,630
The first issue is, where
are we on this curve?

613
00:29:35,630 --> 00:29:37,730
And the answer is that we're
clearly currently on the

614
00:29:37,730 --> 00:29:39,900
correct side.

615
00:29:39,900 --> 00:29:41,910
We're clearly at our current
rates, and even if the rates

616
00:29:41,910 --> 00:29:43,860
go up under the Bush tax
cut, we're clearly

617
00:29:43,860 --> 00:29:44,540
on the correct side.

618
00:29:44,540 --> 00:29:46,680
Evidence is clear
on this point.

619
00:29:46,680 --> 00:29:49,750
More generally, the evidence is
that the efficiency cost of

620
00:29:49,750 --> 00:29:53,560
taxation today is around 40%.

621
00:29:53,560 --> 00:29:56,940
So the deadweight loss of
taxation is around 40%.

622
00:29:56,940 --> 00:30:03,260
That is for every dollar we put
in the bucket, about $0.40

623
00:30:03,260 --> 00:30:04,750
leaks out by the time--

624
00:30:04,750 --> 00:30:07,940
for every dollar we try to get
from a rich guy, about $0.40

625
00:30:07,940 --> 00:30:10,780
leaks out before we can
get to the poor guy.

626
00:30:10,780 --> 00:30:12,630
So we've got about a 40%
leak in the bucket.

627
00:30:17,310 --> 00:30:19,730
The Laffer curve would imply we
had more than 100% leak in

628
00:30:19,730 --> 00:30:20,480
the bucket.

629
00:30:20,480 --> 00:30:21,863
That we try to take a dollar
from the rich guy, we actually

630
00:30:21,863 --> 00:30:23,530
end up getting negative
money because we

631
00:30:23,530 --> 00:30:24,820
actually lose overall.

632
00:30:24,820 --> 00:30:26,420
So we're clearly far
from the wrong side

633
00:30:26,420 --> 00:30:27,960
of the Laffer curve.

634
00:30:27,960 --> 00:30:31,330
But clearly there's still
some leak in the bucket.

635
00:30:31,330 --> 00:30:36,180
And this comes to the issue
of, well, how do

636
00:30:36,180 --> 00:30:37,150
we feel about that?

637
00:30:37,150 --> 00:30:38,620
This is what we started
last lecture with.

638
00:30:38,620 --> 00:30:41,460
And that depends on our social
welfare function.

639
00:30:41,460 --> 00:30:44,880
So here's the way to
think about it.

640
00:30:44,880 --> 00:30:47,900
Currently what the Democrats
have proposed, for example, is

641
00:30:47,900 --> 00:30:49,980
to get rid of the Bush tax cuts
for everyone making more

642
00:30:49,980 --> 00:30:53,880
than $250,000 a year.

643
00:30:53,880 --> 00:30:59,640
If you do that, you would
raise on the order of--

644
00:30:59,640 --> 00:31:02,200
you get about the fifth of the
money you get from getting rid

645
00:31:02,200 --> 00:31:03,060
of all the tax breaks.

646
00:31:03,060 --> 00:31:05,590
That is, if we extend the tax
breaks for people below the

647
00:31:05,590 --> 00:31:09,710
richest group, but get rid of
the tax breaks above the

648
00:31:09,710 --> 00:31:10,120
richest group.

649
00:31:10,120 --> 00:31:13,040
So basically, the tax code stays
the same except this top

650
00:31:13,040 --> 00:31:15,180
rate jumps up.

651
00:31:15,180 --> 00:31:17,600
So basically the top two rates,
about halfway through

652
00:31:17,600 --> 00:31:19,250
the next to the last bracket
and the last bracket, they

653
00:31:19,250 --> 00:31:20,850
jump up and everything else
would stay the same.

654
00:31:24,230 --> 00:31:26,600
You'd raise a lot of money.

655
00:31:26,600 --> 00:31:31,320
You'd raise about $700 billion
over the next decade, which

656
00:31:31,320 --> 00:31:33,780
would go a long way toward
solving the deficit problem.

657
00:31:33,780 --> 00:31:37,240
Not solve it, but go a
long way that way.

658
00:31:37,240 --> 00:31:39,430
And you do so in a highly
progressive fashion in the

659
00:31:39,430 --> 00:31:42,170
sense that you would only
tax the richest people.

660
00:31:42,170 --> 00:31:44,280
On the other hand, there'd be
a very big efficiency loss.

661
00:31:44,280 --> 00:31:46,670
So $0.40 on every
dollar raised.

662
00:31:46,670 --> 00:31:47,920
So the question is,
is it worth it?

663
00:31:47,920 --> 00:31:51,100
Well, that just depends on the
social welfare function.

664
00:31:51,100 --> 00:31:54,660
My guess is for a utilitarian
social welfare function, it

665
00:31:54,660 --> 00:31:56,420
would say it's worth it.

666
00:31:56,420 --> 00:31:58,520
Because basically the marginal
utility of the rich would be

667
00:31:58,520 --> 00:32:00,530
so much lower than the marginal
utility of the poor,

668
00:32:00,530 --> 00:32:03,310
that even with a 40% loss,
it'd still be worth it.

669
00:32:03,310 --> 00:32:05,080
But you could certainly write
down social welfare functions

670
00:32:05,080 --> 00:32:06,590
where it's not worth it.

671
00:32:06,590 --> 00:32:09,930
And that's basically what the
debate needs to be about.

672
00:32:09,930 --> 00:32:13,650
The debate needs to be about,
how do we feel about the

673
00:32:13,650 --> 00:32:16,660
benefits of redistributing from
the rich to the poor and

674
00:32:16,660 --> 00:32:19,220
raising this money versus the
cost in terms of the leak in

675
00:32:19,220 --> 00:32:21,470
the bucket?

676
00:32:21,470 --> 00:32:23,290
And that's essentially what the
debate needs to be about.

677
00:32:23,290 --> 00:32:26,100
Now it's not what it is
about in Washington.

678
00:32:26,100 --> 00:32:29,710
It's much more about
other political

679
00:32:29,710 --> 00:32:31,180
factors, not just economics.

680
00:32:31,180 --> 00:32:34,550
But that's the right way to
think about evaluating it.

681
00:32:34,550 --> 00:32:36,970
Questions about that?

682
00:32:36,970 --> 00:32:37,430
Yeah.

683
00:32:37,430 --> 00:32:40,410
AUDIENCE: I don't see how, if
you say the deadweight loss is

684
00:32:40,410 --> 00:32:44,220
40%, it's completely lost. If
people are choosing to go to

685
00:32:44,220 --> 00:32:47,510
leisure, they're still getting
some value from that leisure.

686
00:32:47,510 --> 00:32:49,910
Couldn't it actually be that
that prevents being

687
00:32:49,910 --> 00:32:50,390
[UNINTELLIGIBLE].

688
00:32:50,390 --> 00:32:51,100
JON GRUBER: That's right,
they're getting value.

689
00:32:51,100 --> 00:32:53,250
This is above and beyond the
value from the leisure.

690
00:32:53,250 --> 00:32:55,900
So remember our deadweight
loss triangle.

691
00:32:55,900 --> 00:32:58,350
That very first person who
switches from work to leisure,

692
00:32:58,350 --> 00:33:00,120
you're right there is
no deadweight loss.

693
00:33:00,120 --> 00:33:01,940
Because that person was
indifferent between working

694
00:33:01,940 --> 00:33:03,130
and being in leisure.

695
00:33:03,130 --> 00:33:05,810
But as your deadweight loss
triangle grows, remember now

696
00:33:05,810 --> 00:33:07,660
you're talking to people who
are no longer indifferent.

697
00:33:07,660 --> 00:33:09,950
They would rather work
than be in leisure.

698
00:33:09,950 --> 00:33:13,770
So by forcing them out of work
by taxing them, you are losing

699
00:33:13,770 --> 00:33:16,340
the gap between how productive
they'd be at work and how much

700
00:33:16,340 --> 00:33:17,370
they value their leisure.

701
00:33:17,370 --> 00:33:20,065
So you're right, if all this tax
did is take the one person

702
00:33:20,065 --> 00:33:22,680
in society and cause them not
to work, then we wouldn't

703
00:33:22,680 --> 00:33:23,460
worry about it.

704
00:33:23,460 --> 00:33:26,190
It's people away from that where
they're really much more

705
00:33:26,190 --> 00:33:28,210
productive at work than
they are at home.

706
00:33:28,210 --> 00:33:32,370
That's where the efficiency
loss comes from.

707
00:33:32,370 --> 00:33:34,910
Other questions or comments?

708
00:33:34,910 --> 00:33:35,820
So that's one side.

709
00:33:35,820 --> 00:33:36,910
That's putting the money
in the bucket.

710
00:33:36,910 --> 00:33:38,740
What about taking the money
out of the bucket?

711
00:33:38,740 --> 00:33:41,150
That's the other side of the
efficiency story and the

712
00:33:41,150 --> 00:33:43,130
equity story.

713
00:33:43,130 --> 00:33:45,260
Well what about low income
transfers in the US?

714
00:33:45,260 --> 00:33:49,500
So we talked about
taxation, now

715
00:33:49,500 --> 00:33:52,040
let's talk about transfers.

716
00:33:52,040 --> 00:33:53,910
We have several types
of transfers in

717
00:33:53,910 --> 00:33:55,600
the US that we make.

718
00:33:58,410 --> 00:34:01,730
The most prominent
is what we call

719
00:34:01,730 --> 00:34:09,570
categorical cash transfers.

720
00:34:09,570 --> 00:34:11,800
Or what's often called
welfare.

721
00:34:11,800 --> 00:34:13,429
Now we use welfare in a
different context in this

722
00:34:13,429 --> 00:34:14,420
course, so it's confusing.

723
00:34:14,420 --> 00:34:16,469
We're hearing the term
"welfare." What they mean is

724
00:34:16,469 --> 00:34:18,010
money that's sent
to poor people.

725
00:34:18,010 --> 00:34:21,440
So when a regular person, not
an econ geek says welfare,

726
00:34:21,440 --> 00:34:23,510
they don't mean social
well-being, they mean money

727
00:34:23,510 --> 00:34:26,000
that's sent to poor people.

728
00:34:26,000 --> 00:34:28,469
A categorical cash transfer.

729
00:34:28,469 --> 00:34:31,380
The categorical term means that
we don't in the US just

730
00:34:31,380 --> 00:34:33,380
send money to you because
you're poor.

731
00:34:33,380 --> 00:34:34,909
We send to you because
you're poor and

732
00:34:34,909 --> 00:34:36,679
other things are true.

733
00:34:36,679 --> 00:34:42,000
So for example, we have a
program called TANF, Temporary

734
00:34:42,000 --> 00:34:44,320
Aid to Needy Families.

735
00:34:44,320 --> 00:34:50,340
This is cash that's sent to
single parent families who are

736
00:34:50,340 --> 00:34:51,250
low income.

737
00:34:51,250 --> 00:34:53,920
So if you're low income plus you
only have one parent, then

738
00:34:53,920 --> 00:34:55,170
you qualify for TANF.

739
00:35:00,580 --> 00:35:02,680
Actually the biggest cash
transfer program we have is

740
00:35:02,680 --> 00:35:06,300
called SSI, Supplemental
Security Income.

741
00:35:06,300 --> 00:35:10,790
This is sent to families that
are poor and are disabled.

742
00:35:10,790 --> 00:35:13,830
Sent to people, I'm sorry, that
are poor and disabled.

743
00:35:13,830 --> 00:35:17,190
So if you're just poor, we
don't give you anything.

744
00:35:17,190 --> 00:35:18,980
But if you're poor and disabled,
you get money.

745
00:35:18,980 --> 00:35:20,650
If you're poor and a single
mom, you get money.

746
00:35:23,360 --> 00:35:23,635
Why?

747
00:35:23,635 --> 00:35:25,770
Why do we impose these
conditions?

748
00:35:25,770 --> 00:35:28,360
Why do we do this, what's
called targeting?

749
00:35:33,200 --> 00:35:35,430
Why do we do this targeting
rather than just saying if

750
00:35:35,430 --> 00:35:36,680
you're poor, you get money?

751
00:35:39,280 --> 00:35:42,170
Now basically, the reason is
because of what we saw the

752
00:35:42,170 --> 00:35:43,810
last lecture.

753
00:35:43,810 --> 00:35:47,240
Which is we saw in the last
lecture the hazards of just

754
00:35:47,240 --> 00:35:49,580
giving money to people
because they're poor.

755
00:35:49,580 --> 00:35:51,350
Which if you just give money
to people because they're

756
00:35:51,350 --> 00:35:56,610
poor, then people will people
poor to qualify.

757
00:35:56,610 --> 00:35:58,840
So we saw last time in that
diagram was we said anyone

758
00:35:58,840 --> 00:36:02,490
below $10,000 gets bumped up
to $10,000, then everyone

759
00:36:02,490 --> 00:36:07,880
quits and says, I'm a zero
income guy, give me $10,000.

760
00:36:07,880 --> 00:36:12,140
However, if we, for example,
knew for sure--

761
00:36:12,140 --> 00:36:14,820
let's say that we are born with
stamped on our forehead

762
00:36:14,820 --> 00:36:16,940
our underlying earnings
ability.

763
00:36:16,940 --> 00:36:19,620
And I could look at you and
say, you're a $5,000 guy.

764
00:36:19,620 --> 00:36:21,050
Here's $5,000.

765
00:36:21,050 --> 00:36:23,360
You're a $20,000, you
don't get anything.

766
00:36:23,360 --> 00:36:26,300
OK, you're a zero guy,
here's $10,000.

767
00:36:26,300 --> 00:36:28,325
If I could read that off a
forehead, then there would be

768
00:36:28,325 --> 00:36:32,530
no efficiency loss from
transfers because I wouldn't

769
00:36:32,530 --> 00:36:33,960
change people's behavior.

770
00:36:33,960 --> 00:36:36,410
I'd know what they were going to
do anyway and I'd just give

771
00:36:36,410 --> 00:36:37,130
them the money.

772
00:36:37,130 --> 00:36:38,430
But there would be no
efficiency loss.

773
00:36:38,430 --> 00:36:40,570
There'd be no movement of people
could earn money moving

774
00:36:40,570 --> 00:36:42,720
to not earning money because I
wouldn't give you any more

775
00:36:42,720 --> 00:36:45,980
money than you could earn.

776
00:36:45,980 --> 00:36:48,840
So if we could perfectly target,
we could get rid of

777
00:36:48,840 --> 00:36:50,860
the leak in the bucket that
comes from transfers.

778
00:36:50,860 --> 00:36:53,510
But of course, we can't.

779
00:36:53,510 --> 00:36:54,470
So what do we do?

780
00:36:54,470 --> 00:36:58,470
We try to find things which are
correlated with having a

781
00:36:58,470 --> 00:37:00,800
low earnings ability.

782
00:37:00,800 --> 00:37:02,960
Like, for example,
being disabled.

783
00:37:02,960 --> 00:37:05,740
If you're disabled, we know
you're much less likely to

784
00:37:05,740 --> 00:37:08,800
earn a living than if
you're not disabled.

785
00:37:08,800 --> 00:37:12,440
Therefore, we can transfer money
to you and cause less

786
00:37:12,440 --> 00:37:14,960
deadweight loss.

787
00:37:14,960 --> 00:37:17,540
So if we take someone who
literally we know for sure,

788
00:37:17,540 --> 00:37:23,530
someone who is mentally
incapacitated, quadriplegic,

789
00:37:23,530 --> 00:37:24,980
basically can't function.

790
00:37:24,980 --> 00:37:28,410
We know for sure they're
going to earn zero.

791
00:37:28,410 --> 00:37:31,340
So there's no deadweight loss in
transferring money to them.

792
00:37:31,340 --> 00:37:32,850
There's a deadweight loss
of raising the money.

793
00:37:32,850 --> 00:37:34,090
But in terms of their
behavior, there's no

794
00:37:34,090 --> 00:37:35,260
deadweight loss.

795
00:37:35,260 --> 00:37:38,830
So the more we can target in
that way, the more we can

796
00:37:38,830 --> 00:37:41,430
safely redistribute.

797
00:37:41,430 --> 00:37:44,810
Now, the trick with this, of
course, is finding the

798
00:37:44,810 --> 00:37:47,930
targeting mechanism.

799
00:37:47,930 --> 00:37:53,870
And a good targeting mechanism
needs to have two features.

800
00:37:53,870 --> 00:37:57,370
The first is, it has to
find the poor people.

801
00:37:57,370 --> 00:37:58,580
You want a target on
something which is

802
00:37:58,580 --> 00:38:00,220
actually like being poor.

803
00:38:00,220 --> 00:38:04,370
Like we could say, I'm going to
redistribute to everybody

804
00:38:04,370 --> 00:38:07,280
who is a natural blonde and I
could have some test for a

805
00:38:07,280 --> 00:38:09,520
hair color.

806
00:38:09,520 --> 00:38:11,530
And that's immutable.

807
00:38:11,530 --> 00:38:13,250
What your natural hair
color is immutable.

808
00:38:13,250 --> 00:38:15,485
But that wouldn't redistribute
resources in the way you

809
00:38:15,485 --> 00:38:17,170
necessarily want in society.

810
00:38:17,170 --> 00:38:19,070
Natural blondes aren't
necessarily any poorer than

811
00:38:19,070 --> 00:38:22,390
non-natural blondes,
or other people.

812
00:38:22,390 --> 00:38:23,920
So first, somebody
that's poor.

813
00:38:23,920 --> 00:38:27,390
And second of all, we want
something ideally that's

814
00:38:27,390 --> 00:38:28,640
unchangeable.

815
00:38:32,380 --> 00:38:37,240
That is, I could redistribute
to everyone who's blonde.

816
00:38:37,240 --> 00:38:39,680
Let's say blonde people
were poorer.

817
00:38:39,680 --> 00:38:42,780
But I can change that by dying
my hair if you can't tell if

818
00:38:42,780 --> 00:38:45,290
I'm a natural blonde or not.

819
00:38:45,290 --> 00:38:48,050
So we want something which goes
to the poor, but which is

820
00:38:48,050 --> 00:38:49,300
also unchangeable.

821
00:38:51,370 --> 00:38:55,130
So for example, someone who's
severely disabled, that's a

822
00:38:55,130 --> 00:38:55,680
good example.

823
00:38:55,680 --> 00:38:57,730
Someone who's severely disabled,
nobody's going to

824
00:38:57,730 --> 00:39:02,040
become severely disabled to
qualify for some cash.

825
00:39:02,040 --> 00:39:03,110
Actually, there is
an exception.

826
00:39:03,110 --> 00:39:05,600
There was a place in Florida
they called Nub City where

827
00:39:05,600 --> 00:39:09,230
people were actually chopping
off their limbs to qualify to

828
00:39:09,230 --> 00:39:10,500
get cash benefits.

829
00:39:10,500 --> 00:39:13,480
There was a point in the US
where one third of all limb

830
00:39:13,480 --> 00:39:16,140
loss accidents in the
whole nation came

831
00:39:16,140 --> 00:39:18,500
from one city in Florida.

832
00:39:18,500 --> 00:39:22,205
So that disturbing example
aside, we don't think people

833
00:39:22,205 --> 00:39:25,100
will disable themselves
to get cash.

834
00:39:25,100 --> 00:39:27,250
Plus, they're poor people.

835
00:39:27,250 --> 00:39:29,430
Single motherhood, that's
a bit trickier.

836
00:39:29,430 --> 00:39:33,430
Being a single parent, isn't it
possible that people might

837
00:39:33,430 --> 00:39:35,370
become single parents to
qualify for the cash?

838
00:39:35,370 --> 00:39:37,800
Let's say my wife
and I are poor.

839
00:39:37,800 --> 00:39:40,100
We say, look, let's divorce.

840
00:39:40,100 --> 00:39:42,940
We won't be married, we can
still see each other.

841
00:39:42,940 --> 00:39:44,185
But you'll get a cash
transfer because

842
00:39:44,185 --> 00:39:46,080
you'll be a single mom.

843
00:39:46,080 --> 00:39:48,200
Well then that isn't
unchangeable.

844
00:39:48,200 --> 00:39:51,830
So the question then becomes
empirically, to what extent is

845
00:39:51,830 --> 00:39:52,990
single motherhood,
for example, a

846
00:39:52,990 --> 00:39:54,880
good targeting device?

847
00:39:54,880 --> 00:39:57,030
And the answer is,
it's pretty good.

848
00:39:57,030 --> 00:39:58,990
It turns out there's very
little of this behavior.

849
00:39:58,990 --> 00:40:01,470
We have lots of clever ways of
testing whether people are

850
00:40:01,470 --> 00:40:01,890
doing this.

851
00:40:01,890 --> 00:40:03,360
Turns out people
don't do that.

852
00:40:03,360 --> 00:40:05,640
Single motherhood is something
people really don't want.

853
00:40:05,640 --> 00:40:07,360
And basically if someone's a
single mother, it's a pretty

854
00:40:07,360 --> 00:40:11,280
unchangeable indication
that they're poor.

855
00:40:11,280 --> 00:40:15,960
In fact, it turns out that the
biggest problem we have in

856
00:40:15,960 --> 00:40:21,330
targeting is not poor
disability, but another

857
00:40:21,330 --> 00:40:24,025
program we have, which tries to
target money to people who

858
00:40:24,025 --> 00:40:26,120
hurt themselves on their job,
something called workers'

859
00:40:26,120 --> 00:40:28,790
compensation insurance, which
is insurance for people who

860
00:40:28,790 --> 00:40:29,940
get hurt on the job.

861
00:40:29,940 --> 00:40:31,970
Turns out there, it's
pretty easy to fake

862
00:40:31,970 --> 00:40:33,220
getting hurt on the job.

863
00:40:35,520 --> 00:40:38,790
And as a result, that's
not unchangeable.

864
00:40:41,470 --> 00:40:46,780
Even disability is not perfectly
unchangeable.

865
00:40:46,780 --> 00:40:49,560
There's a lot of evidence
actually because most

866
00:40:49,560 --> 00:40:54,090
disabilities today are not
people who are quadriplegic or

867
00:40:54,090 --> 00:40:56,810
other severe, extremely
sad cases.

868
00:40:56,810 --> 00:40:58,720
It's people who have things
which are hard to measure,

869
00:40:58,720 --> 00:41:02,370
like mental disability or back
pain where there's no

870
00:41:02,370 --> 00:41:06,090
quantifiable, truly quantifiable
test. In that

871
00:41:06,090 --> 00:41:09,176
case, it's hard to know if
you're really targeting to

872
00:41:09,176 --> 00:41:10,030
someone who need its
or someone who's

873
00:41:10,030 --> 00:41:12,350
just good at faking.

874
00:41:12,350 --> 00:41:15,410
And that leads once against, to
the difficult trade-offs in

875
00:41:15,410 --> 00:41:17,140
equity versus efficiency.

876
00:41:17,140 --> 00:41:18,890
On the one hand, we'd like
to target to people

877
00:41:18,890 --> 00:41:20,430
who really need it.

878
00:41:20,430 --> 00:41:22,240
On the other hand, if someone's
just faking, we

879
00:41:22,240 --> 00:41:23,720
don't want to be giving
them money.

880
00:41:23,720 --> 00:41:26,050
And that's exactly the trick
that we have to face in these

881
00:41:26,050 --> 00:41:28,480
kind of transfer programs.

882
00:41:28,480 --> 00:41:31,900
Now in this world of difficulty,
there has emerged

883
00:41:31,900 --> 00:41:33,930
a clear winner.

884
00:41:33,930 --> 00:41:35,950
And the clear winner is
something we call the Earned

885
00:41:35,950 --> 00:41:38,310
Income Tax Credit, the EITC.

886
00:41:41,910 --> 00:41:43,860
So once again, the problem is if
we just give money to poor

887
00:41:43,860 --> 00:41:46,600
people, we have the problems
we said last lecture.

888
00:41:46,600 --> 00:41:49,500
If we try to target to needy
groups, we have a problem that

889
00:41:49,500 --> 00:41:52,130
sometimes targeting devices
aren't perfect and people may

890
00:41:52,130 --> 00:41:53,380
change their behavior
to qualify.

891
00:41:56,250 --> 00:41:58,880
The third approach is something
called the EITC.

892
00:41:58,880 --> 00:42:01,580
Which is instead of just
giving people money, we

893
00:42:01,580 --> 00:42:05,500
actually give them a transfer
conditional on their work.

894
00:42:05,500 --> 00:42:07,285
This is a conditional
cash transfer.

895
00:42:15,850 --> 00:42:19,680
What the EITC is, is it's
a wage subsidy.

896
00:42:19,680 --> 00:42:22,510
It's literally the more you
work, the more you get from

897
00:42:22,510 --> 00:42:25,190
the government up to
a certain point.

898
00:42:25,190 --> 00:42:26,660
So to see this, let's
go to the last

899
00:42:26,660 --> 00:42:29,140
figure in the handout.

900
00:42:29,140 --> 00:42:31,600
Figure 24-4 shows the structure
of the Earned Income

901
00:42:31,600 --> 00:42:32,100
Tax Credit.

902
00:42:32,100 --> 00:42:34,310
Here's how it works.

903
00:42:34,310 --> 00:42:42,410
If your income is below $12,570,
this is for a family

904
00:42:42,410 --> 00:42:43,775
with two kids, I believe.

905
00:42:43,775 --> 00:42:48,190
If their income is below
$12,570, then for every dollar

906
00:42:48,190 --> 00:42:52,080
they earn, they get $0.40 extra
from the government.

907
00:42:52,080 --> 00:42:53,410
So it's a negative tax.

908
00:42:53,410 --> 00:42:56,820
Instead of being taxed, they
actually get a subsidy for

909
00:42:56,820 --> 00:42:57,480
every dollar they earn.

910
00:42:57,480 --> 00:42:59,300
So for every dollar you earn,
you get $0.40 from the

911
00:42:59,300 --> 00:43:00,470
government.

912
00:43:00,470 --> 00:43:04,500
Until you've got the
maximum of $5,028.

913
00:43:04,500 --> 00:43:08,650
But then, once your income's
above $16,400, that's then

914
00:43:08,650 --> 00:43:13,780
taken away at a rate of $0.21
So it's an after tax now of

915
00:43:13,780 --> 00:43:15,590
$0.21 per dollar you earn.

916
00:43:15,590 --> 00:43:19,145
Until by the time you've earned
$40,295 it's gone.

917
00:43:19,145 --> 00:43:23,460
So this is what we
call a targeted

918
00:43:23,460 --> 00:43:24,770
conditional cash transfer.

919
00:43:24,770 --> 00:43:28,420
It's targeted to low income
groups in that it phases out

920
00:43:28,420 --> 00:43:29,960
as your income goes up.

921
00:43:29,960 --> 00:43:35,800
But it rewards work by basically
saying that the more

922
00:43:35,800 --> 00:43:41,560
you earn up to a point,
the more you will get.

923
00:43:41,560 --> 00:43:43,870
Now the EITC effects are
somewhat complicated.

924
00:43:43,870 --> 00:43:45,360
I hope you can see right away.

925
00:43:45,360 --> 00:43:46,790
You might say, wait a second.

926
00:43:46,790 --> 00:43:48,380
This is a little bit
complicated.

927
00:43:48,380 --> 00:43:53,170
Because on the one hand, for
anyone earning less than

928
00:43:53,170 --> 00:43:57,020
$16,400, you're subsidizing
their work.

929
00:43:57,020 --> 00:44:00,160
Or anyone earning, sorry, less
than $12,570, you're seeing

930
00:44:00,160 --> 00:44:01,930
the more you earn,
the more you get.

931
00:44:01,930 --> 00:44:05,940
But once your income's
above $16,400, then

932
00:44:05,940 --> 00:44:07,690
you're actually taxed.

933
00:44:07,690 --> 00:44:09,180
Because we've given you
this check and we

934
00:44:09,180 --> 00:44:09,940
take it back away.

935
00:44:09,940 --> 00:44:12,300
That's the same as taxing you.

936
00:44:12,300 --> 00:44:16,320
So for example, consider a guy
who's at $16,400 who's

937
00:44:16,320 --> 00:44:21,810
considering earning $100 more.

938
00:44:21,810 --> 00:44:23,060
Or consider a guy at--

939
00:44:26,610 --> 00:44:29,822
yeah, so a guy at $16,400.

940
00:44:29,822 --> 00:44:32,210
And he's thinking about
earning $100 more.

941
00:44:32,210 --> 00:44:39,510
So currently his income is
$16,400 plus the $5,028 check

942
00:44:39,510 --> 00:44:40,760
he's getting from
the government.

943
00:44:43,850 --> 00:44:50,710
So his income now is 21,248.

944
00:44:50,710 --> 00:44:52,150
I'm sorry, 5,428.

945
00:44:52,150 --> 00:44:52,850
My bad.

946
00:44:52,850 --> 00:44:54,580
A little dyslexia.

947
00:44:54,580 --> 00:44:58,730
21,428 is his income.

948
00:44:58,730 --> 00:45:02,640
Now let's say he decides
to earn $100 more.

949
00:45:02,640 --> 00:45:04,125
If he earns $100 more, his wage

950
00:45:04,125 --> 00:45:09,050
income goes up to $16,500.

951
00:45:09,050 --> 00:45:11,880
His wage will go
up to $16,500.

952
00:45:11,880 --> 00:45:18,630
But his EITC falls
by $21 to $5,007.

953
00:45:18,630 --> 00:45:23,620
So his income only goes
up to $21,507.

954
00:45:23,620 --> 00:45:30,340
His income goes up by less than
$100 when he earns $100.

955
00:45:30,340 --> 00:45:33,890
So while the EITC incentivizes
you to work when you're low

956
00:45:33,890 --> 00:45:40,410
income, it disincentivizes work
when your income goes up.

957
00:45:40,410 --> 00:45:44,760
So this is once again why public
policy is fun and hard,

958
00:45:44,760 --> 00:45:45,970
which is there's a trade-off.

959
00:45:45,970 --> 00:45:47,350
There's always a trade-off
in this course.

960
00:45:47,350 --> 00:45:49,250
It's really annoying.

961
00:45:49,250 --> 00:45:52,110
There's a trade-off, which is
on the one hand, we want to

962
00:45:52,110 --> 00:45:54,580
target our program to give
the money to the

963
00:45:54,580 --> 00:45:57,570
lowest income groups.

964
00:45:57,570 --> 00:45:59,360
On the other hand, if you target
something, that means

965
00:45:59,360 --> 00:46:02,170
you have to take it away.

966
00:46:02,170 --> 00:46:05,370
Targeting equals taking away.

967
00:46:05,370 --> 00:46:07,490
What that means is by targeting
to the lowest income

968
00:46:07,490 --> 00:46:10,150
groups, we are taking it away
from these middle income

969
00:46:10,150 --> 00:46:14,950
people and taxing their work
just as we subsidize the work

970
00:46:14,950 --> 00:46:16,200
of the lowest income groups.

971
00:46:19,330 --> 00:46:22,540
Now, so how do we think
about this?

972
00:46:22,540 --> 00:46:24,186
Well, what we do in
this case is we go

973
00:46:24,186 --> 00:46:26,180
to empirical evidence.

974
00:46:26,180 --> 00:46:29,380
The EITC has grown enormously
over time.

975
00:46:29,380 --> 00:46:31,240
And nicely, it's grown
differently

976
00:46:31,240 --> 00:46:31,880
for different groups.

977
00:46:31,880 --> 00:46:34,130
For example, it's gotten a lot
bigger for families with lots

978
00:46:34,130 --> 00:46:37,080
of kids than for families
with no kids.

979
00:46:37,080 --> 00:46:39,240
So what we can do is we can
actually study what's happened

980
00:46:39,240 --> 00:46:41,010
to those kinds of families
over time as the

981
00:46:41,010 --> 00:46:42,450
EITC has gone up.

982
00:46:42,450 --> 00:46:45,260
What's happened to their
labor supply.

983
00:46:45,260 --> 00:46:47,370
And what you see, it's
quite striking.

984
00:46:47,370 --> 00:46:50,500
Which is there's been an
enormous increase in the

985
00:46:50,500 --> 00:46:53,570
share, especially of single
mothers who have gone from not

986
00:46:53,570 --> 00:46:56,520
working to working because
of the EITC.

987
00:46:56,520 --> 00:46:59,160
But you don't see them working
less hard because of EITC.

988
00:46:59,160 --> 00:47:01,450
That is, you see a lot of people
pulled-- if we go back

989
00:47:01,450 --> 00:47:02,640
to our diagram.

990
00:47:02,640 --> 00:47:05,650
See a lot of people pulled from
the zero earnings point

991
00:47:05,650 --> 00:47:08,060
into the positive
earnings range.

992
00:47:08,060 --> 00:47:10,220
But you don't see a lot of
people in the positive range

993
00:47:10,220 --> 00:47:11,820
earning less.

994
00:47:11,820 --> 00:47:14,020
So the good part of the EITC
has worked and the bad part

995
00:47:14,020 --> 00:47:16,870
hasn't really cost
us anything.

996
00:47:16,870 --> 00:47:17,650
Why is that?

997
00:47:17,650 --> 00:47:19,950
Well, there could
be two reasons.

998
00:47:19,950 --> 00:47:22,410
One could be because people are
a lot more responsive in

999
00:47:22,410 --> 00:47:23,480
their decision to
work than their

1000
00:47:23,480 --> 00:47:24,480
decision how hard to work.

1001
00:47:24,480 --> 00:47:27,240
For example, you may not even
choose how hard you work.

1002
00:47:27,240 --> 00:47:30,610
Maybe you work 40 hours at
McDonald's or you don't work.

1003
00:47:30,610 --> 00:47:32,610
So the first answer is the
decision to work or not may be

1004
00:47:32,610 --> 00:47:36,520
the most elastic, more elastic
than how hard you work.

1005
00:47:36,520 --> 00:47:37,990
The second could be that people
just don't understand

1006
00:47:37,990 --> 00:47:40,470
this program and they know they
get a check, but they

1007
00:47:40,470 --> 00:47:41,910
don't know how to do
this kind of math.

1008
00:47:41,910 --> 00:47:43,370
So they say I now I get a
check if I go to work.

1009
00:47:43,370 --> 00:47:44,150
I'm going to work.

1010
00:47:44,150 --> 00:47:46,100
But they don't figure, by the
way, if I work one hour less,

1011
00:47:46,100 --> 00:47:50,290
maybe I'll lower my
tax bill by $21.

1012
00:47:50,290 --> 00:47:54,230
Whatever the reason, the
EITC has worked.

1013
00:47:54,230 --> 00:47:57,370
It has solved the problem
of the leaky bucket.

1014
00:47:57,370 --> 00:47:59,940
In fact, it's put money into
the bucket at the bottom.

1015
00:47:59,940 --> 00:48:03,100
In the sense that when the
government transfers you $1,

1016
00:48:03,100 --> 00:48:06,440
you actually earn more rather
than earning less.

1017
00:48:06,440 --> 00:48:08,960
So we're not only ending the
leak in the bucket at the

1018
00:48:08,960 --> 00:48:10,660
bottom of the income
distribution, we're actually

1019
00:48:10,660 --> 00:48:13,190
improving, offsetting some of
the 40% leak that comes from

1020
00:48:13,190 --> 00:48:18,150
the top by getting people to
work harder under this EITC.

1021
00:48:18,150 --> 00:48:20,460
We're transferring in a way
which actually improves

1022
00:48:20,460 --> 00:48:22,200
efficiency.

1023
00:48:22,200 --> 00:48:24,560
So basically, EITC we can think
of as sort of a patch of

1024
00:48:24,560 --> 00:48:26,460
the bucket.

1025
00:48:26,460 --> 00:48:27,470
It's a patch to the bucket.

1026
00:48:27,470 --> 00:48:30,440
You're actually helping address
leaks in the bucket by

1027
00:48:30,440 --> 00:48:31,120
doing this.

1028
00:48:31,120 --> 00:48:33,100
Now you might say
that's great.

1029
00:48:33,100 --> 00:48:36,590
That means that we have solved
our problems. We'll just get

1030
00:48:36,590 --> 00:48:38,940
money to the poor through the
EITC and there's no leak to

1031
00:48:38,940 --> 00:48:40,100
the bucket at the bottom.

1032
00:48:40,100 --> 00:48:42,610
But the problem is, once again
it's not that simple because

1033
00:48:42,610 --> 00:48:45,680
some people truly can't work.

1034
00:48:45,680 --> 00:48:46,890
Some people truly can't work.

1035
00:48:46,890 --> 00:48:47,840
So you need to have something
for those

1036
00:48:47,840 --> 00:48:49,520
that truly can't work.

1037
00:48:49,520 --> 00:48:52,390
So an ideal system would be one
where if you truly can't

1038
00:48:52,390 --> 00:48:53,760
work, we give you money.

1039
00:48:53,760 --> 00:48:56,330
If you can work, you
get the EITC.

1040
00:48:56,330 --> 00:48:58,640
Once again, the problem being
we have to decide who it is

1041
00:48:58,640 --> 00:49:01,540
that truly can't work
and who can work.

1042
00:49:01,540 --> 00:49:05,410
And so basically, how leaky the
bucket is at the bottom

1043
00:49:05,410 --> 00:49:08,630
will depend on how good a job
we can do at telling who the

1044
00:49:08,630 --> 00:49:11,100
people are who can work, who the
people are who can't work.