Economics 483
Public Finance - Tax Policy

Professor George R. Zodrow
Department of Economics
Rice University

 

Virgil, of Old Rome, poet and author of the Aeneid, owned a Roman villa with land. Thereon, it is recorded, he buried a housefly after an elaborate funeral with pallbearers and eulogies. The ceremony qualified Virgil's land as a tax-free cemetery.

Reported by E.M Boyd, The Grab Bag


According to the Internal Revenue Service, the number used in the infamous Form 1040 was a random selection. In Old England, Lady Godiva rode naked through the streets of Coventry to protest oppressive taxes. The year was 1040.

Reported by Bernard Kameroff, 422 Tax Deductions


Our federal tax system is, in short, utterly impossible, utterly unjust and completely counterproductive...[It] reeks with injustice, and is fundamentally un-American.

President Ronald Reagan


It is time for a complete overhaul of our income tax system. I still tell you, it's a disgrace to the human race. All my life I've heard promises about tax reform, but it never quite happens.

President Jimmy Carter



The income tax has made more liars out of the American people than golf has. Even when you make a tax form out on the level, you don't know when it's through if you are a crook or a martyr.

Will Rogers


If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold, I'll tax the heat
If you take a walk, I'll tax your feet.

The Beatles, "Taxman"

A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.

Tax reform means "Don't tax you, don't tax me. Tax that fellow behind the tree."

Senator Russell B. Long (Louisiana)

Syllabus: Spring 2008

Text: Gruber, Public Finance and Public Policy , Second Edition, 2007

References:

Aaron and Gale, Economic Effects of Fundamental Tax Reform
Aaron and Pechman, How Taxes Affect Economic Behavior
Bradford, Untangling the Income Tax
Boskin, Frontiers of Tax Reform
Gale, Hines and Slemrod, Rethinking Estate and Gift Taxation
Graetz and Warren, Integration of the US Corporate and Individual Income Taxes
Hall and Rabushka, The Flat Tax
Fullerton and Rogers, Who Bears the Lifetime Tax Burden?
Quigley and Smolensky, Modern Public Finance
Slemrod, Does Atlas Shrug? The Economic Consequences of Taxing the Rich
Slemrod and Bakija, Taxing Ourselves: A Citizens Guide to Tax Reform
Steuerle, Contemporary U.S. Tax Policy
Zodrow, State Sales and Income Taxes: An Economic Analysis
Zodrow and Mieszkowski, United States Tax Reform in the 21st Century


Website: http://www.owlnet.rice.edu/~econ483/

Username: econ483

Office Hours: By appointment (zodrow@rice.edu or x4891)

Teaching Assistant: Athiphat Muthitacharoen (athiphat@rice.edu) and Zhaozhen Qian (zhaozhen.qian@rice.edu)

Prerequisites: Economics 370 and knowledge of basic differential and integral calculus.

Readings: The Gruber text is required and can be purchased at the Rice Campus Store.
Readings marked with an asterisk are optional. All required readings (other than those in the Gruber text) can be downloaded from the course website, as can selected optional readings. Selected items, including all of the references cited above, are also on reserve in Fondren Library.

 

GENERAL COURSE INFORMATION

 

The three hour exams will be given in class on (or near): Friday, February 1; Wednesday, February 27, 10-10:50 am; and Friday, March 28. The final exam will be given on Monday, April 28, 2008, 2-5:00 p.m. in HUM 119. Students who miss an exam without making prior arrangements with the instructor will automatically be given a grade equal to twenty points less than the minimum grade made on the exam. The final exam will be comprehensive, with a significant emphasis on material presented since the third hour exam.

In general, the course grade is determined as the weighted average of the numerical grades on the three hour exams (20% each) and the final exam (40%). There are, however, two exceptions to this general rule.

First, each student may elect to write a term paper. This paper should address a single narrowly defined tax policy issue in depth, and the instructor must approve the topic. Students are encouraged to choose a topic and begin research early in the semester. The paper should be at least 15 double-spaced pages in length. Details on preparation of the paper are provided below. For full credit, papers must be submitted electronically to zodrow@rice.edu by midnight on the last day of classes, Wednesday, April 23 . Papers may be turned in late at a penalty of 5 points per day. For students who elect to write a term paper, the course grade will be the maximum of the grades calculated by the following two methods:?

Lowest Hour Exam

Other Two Hour Exams

Final Exam

Tax Policy Paper

6%

18% (each)

38%

20%

20%

20% (each)

20%

20%

Thus, a good term paper will allow you to reduce significantly the weight attached to either your worst hour exam or your final exam in determining your final course grade. Please note, however, that it is quite possible that a poor term paper could lower your grade.

Second, all students are eligible for a bonus of up to 3 percentage points on their final cumulative class average based on their class participation.

The procedure described above is the sole determinant of the final course grade. Note in particular that the letter grade distributions provided for each hour exam during the semester are only suggestive of relative class standing.

A set of homework problems for the course is available at the web site. Homework problems should be completed within 3-5 days of the day the relevant material is covered in class. Although these problems will not be graded, they provide helpful amplifications and extensions of material covered in the lectures, as well as examples of questions that might be asked on the examinations. Solutions will be posted at the website approximately one week after the day the relevant material is covered in class. It is strongly recommended that students solve these problem sets, either individually or in study groups, before consulting the posted solutions.

The exams and the term paper are covered by the Rice Honor Code; the homework problems are not.

This website is maintained by Athiphat Muthitacharoen (athiphat@rice.edu). Please e-mail him if you have any problems with the website. Course information will also be posted as necessary at this site, so you should check it periodically.

Any student with a disability requiring accommodations in this class should come see me and also contact the Disability Support Services in the Ley Student Center .

P.S.
Exam Schedule:

Second Hour Exam: Wednesday, February 27, 10-10:50 am

Third Hour Exam: Friday, March 28, 10-10:50 am

Final Exam: Monday, April 28, 2008, 2-5:00 p.m. in HUM 119.

 


READING AND PROBLEM SET ASSIGNMENTS

         I. An Introduction to Taxation

  1. Introduction/Overview
    Gruber: 1 (skim), 2 (the microeconomics of public finance ?review carefully)
    *Report of President's Advisory Panel on Federal Tax Reform
    *Steuerle, Contemporary U. S. Tax Policy
    *McLure and Zodrow, "The Study and Practice of Income Tax Policy," in Quigley and Smolensky.
  2. Alternative Tax Bases for Individual and Business Tax Bases
    Lecture Outline: Alternative Ideal Tax Bases for Individuals
    Lecture Outline: Applying Alternative Ideal Tax Bases for Individuals
    Lecture Outline: Alternative Ideal Tax Bases for Businesses
    Notes: Alternative Tax Treatments of Individuals
    Notes: Alternative Tax Treatments of Business
    Gruber: 18.1, 18.4, 25.3-4
    *Bradford, Chs. 2-3.
    *Zodrow and Mieszkowski, "Introduction: The Fundamental Issue in Fundamental Tax Reform," in Zodrow and Mieszkowski.
    *Boskin, Frontiers of Tax Reform
    *Hall and Rabushka, The Flat Tax

Problem Set: Alternative Individual Tax Bases
Solution

  1. Individual Income Tax: Theory and Practice
    Lecture Outline: Individual Income Tax
    McLure and Zodrow, "Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform." pp. 37-48,54-58
    Gruber: 18.2, 18.5, 18.7
  2. Business Income Tax: Theory and Practice
    Lecture Outline: Business Taxes
    McLure and Zodrow, "Treasury I and the Tax Reform Act of 1986: The Economics and Politics of Tax Reform." pp. 48-54
    *Bird, "Why Tax Corporations?" http://www.fin.gc.ca/taxstudy/wp96-2e.html
    Gruber: 23.2

Problem Set: Alternative Business Tax Bases
Solution

II. Criteria for Evaluating Alternative Tax Systems

  1. Equity
    Gruber: 17.1, 18.3, 19.4, 20.4
    Lecture Outline: Equity
    Notes: Equity and Alternative Tax Bases.
    *Bradford, Ch. 8.
    *Mieszkowski and Palumbo, "Distributive Analysis of Tax Reform," in Zodrow and Mieszkowski
  2. Efficiency
    Gruber: 20.1.
    Lecture Outline: Efficiency
    Notes: Efficiency and Alternative Tax Bases.
    *Bradford, Ch. 9.
    *Gravelle, "Behavioral Responses to a Consumption Tax," in Zodrow and Mieszkowski.
    *Feldstein, "The Effect of Taxes on Efficiency and Growth", 2006 NBER working paper.

Problem Set: Efficiency Costs of Taxation
Solution

  1. Simplicity and Enforceability
    Slemrod and Bakija, "Tax Simplicity and Enforceability," in Slemrod and Bakija.
    Lecture Outline: Simplicity
    Notes: Simplicity and Alternative Tax Bases
    *Gale and Holtzblatt, "The Role of Administrative Issues in Tax Reform," in Zodrow and Mieszkowski.
    *Bradford, Ch. 12.

III. Taxes and Individual Behavior

  1. Taxation and Labor Supply
    Gruber: 21.
    Lecture Outline: Labor Supply
    Congressional Budget Office, "Labor Supply and Taxes," pp. 1-11.
    *Moffit and Wilhelm, "Labor Supply Decisions of the Affluent," in Slemrod.
    *Hausman, "Labor Supply," in Aaron and Pechman, pp. 27-84.

Problem Set: Taxation and Labor Supply
Solution

  1. Taxation and Saving
    Gruber: 22.
    Lecture Outline: Taxation and Saving
    Notes: Taxation and Saving
    *Auerbach, "The Bush Tax Cut and National Saving."
    *Engen and Gale, "The Effects of Fundamental Tax Reform on Saving," in Aaron and Gale pp. 83-121.
  2. Taxation and Risk-Taking; Taxation and Human Capital Accumulation
    Lecture Outline: Human Capital
    Lecture Outline: Risk-taking
    Gruber: 23.1-2.

Problem Set: Taxation and Saving
Solution

IV. Corporate Taxation and Firm Behavior

  1. Taxation, the Cost of Capital and Marginal Effective Tax Rates, and Investment
    Gruber: 24.4.
    Lecture Outline: Investment Overview
    Notes: Marginal Effective Tax Rates
  2. Tax Effects on the Cost of Capital and METRs/Debt Finance
    Lecture Outline: Debt Finance
    Notes: Marginal Effective Tax Rate Examples/Debt Finance

Problem Set: Investment and the Cost of Capital
Solution

3.      Tax Effects on the Cost of Capital and METRs/Equity Finance
Notes: Marginal Effective Tax Rate Examples/Equity Finance

4.      Taxation and Financing Decisions
Lecture Outline: Equity Fin Inv
Lecture Outline: Dividend Taxes
Gruber: 24.5
Notes: Traditional and New Views of Dividend Taxation

Problem Set: Taxation and Investment
Solution

5.      Taxation of Multinationals
Lecture Outline: International Tax
Notes: Capital Mobility and International Capital Taxation.
Gruber: 24.6-7.
*Ballard, "International Aspects of Fundamental Tax Reform," in Zodrow and Mieszkowski.

6.      Integration of the Individual and Corporate Income Taxes
Lecture Outline: Integration
Gruber: pp. 716.
Graetz and Warren, "Integration of Corporate and Individual Income Taxes: An Introduction." (To access this article, go to http://ps4ps6lm2r.search.serialssolutions.com/ , search for "Tax Notes" and then search for " 1999 TNT 186-89 Introduction".)
*Hubbard, "Capital Income Tax in Tax Reform," in Zodrow and Mieszkowski.

Problem Set: Income Tax Integration
Solution

 

V. Tax Incidence Analysis

  1. Basic Concepts of Tax Incidence Analysis
    Lecture Outline: Tax Incidence
    Gruber: 19.1-2.
    Fullerton and Rogers, Who Bears the Lifetime Tax Burden?, pp. 1-21.
  2. General Equilibrium Tax Incidence Analysis
    Gruber: 19.3-5, 24.3
    Notes: The Incidence of Taxes
    *Fullerton and Metcalf, "Tax Incidence".
    *Fullerton and Metcalf, "The Distribution of Tax Burdens: An Introduction."

Problem Set: General Equilibrium Modeling
Solution

VI. Special Topics

  1. Optimal Taxation
    Gruber: 20.2-3, 20.5.

Lecture Outline: Optimal Taxation

  1. Optimal Tax Reform
    Zodrow, "Transitional Issues in the Implementation of a Flat Tax or a National Retail Sales Tax," in Zodrow and Mieszkowski.
    Notes: Transitional Issues in Consumption Tax Reforms.
  2. Taxation of the Family
    Lecture Outline: Family Issues
    Congressional Budget Office, "For Better or For Worse: Marriage and the Federal Income Tax," pp, xiii-xix, 1-36.
    Gruber: 18.6.

Problem Set: Taxation and the Family
Solution

4.      Local Public Finance and the Property Tax
Gruber: 23.4.
Lecture Outline: State and Local Public Finance
Notes: Property Taxation

5.      State Sales and Corporate Income Taxes
Lecture Outline: State Taxes
Notes: Tax Revenue Sources for the State of Texas.
*Zodrow,1999, Ch. 5.

Problem Set: Intergovernmental Grants
Solution

6.      Taxation of Electronic Commerce
McLure, "Thinking Straight about the Taxation of Electronic Commerce"

7.      Estate and Gift Taxation
Lecture Outline: Estate Tax
Gruber: 23.3, 23.5.
Notes: The U.S. Experience with Estate Taxation.
*Diamond and Zodrow, "The US Experience with the Estate Tax and Its Implications for Wealth Transfer Taxation in Latin America."

GUIDELINES FOR RESEARCH PAPER

GENERAL INFORMATION

The optional research paper should address a single narrowly defined tax policy issue in depth; the topic must be approved by the instructor. Students are encouraged to choose a topic and begin research early in the semester . Although students may cite articles in the popular press and/or information from tax reform advocacy and other public policy web sites or blogs, the main source of information must be the academic literature on the issue being investigated, including both theoretical and empirical analyses as relevant. Comprehensive searches of this literature can be conducted using the following online data bases:

?nbsp; EconLit: http://libadm87.rice.edu/colldev/newalphaindexes.cfm (search “EconLit?  

?nbsp; National Tax Journal: http://ntanet.org (search “NTJ Full Text Articles?  

?nbsp; Tax Policy Center : http://www.taxpolicycenter.org/ (search “Tax Topics?  

?nbsp; National Bureau of Economic Research: http://papers.nber.org/papers.html  

?nbsp; Congressional Budget Office: http://www.cbo.gov/publications/ (search “Taxes?  

?nbsp; Joint Committee on Taxation: http://www.house.gov/jct/tableofcnts.html

?nbsp; Tax Notes: http://ps4ps6lm2r.search.serialssolutions.com/ (search "Tax Notes")

?nbsp; International Tax Notes: http://ps4ps6lm2r.search.serialssolutions.com/ (search "Internatinal Tax Notes")

?nbsp; State Tax Notes: http://ps4ps6lm2r.search.serialssolutions.com/ (search "State Tax Notes")

For example, a paper might explore the tax treatment of a specific item, such as fringe benefits, home mortgage interest, capital gains, charitable contributions, dividends, tax-exempt bonds, life insurance, financial institutions, child care expenses, etc. A good paper would include a clear statement of the issue, a description of alternative tax treatments including those recommended in current tax reform proposals, an evaluation of current and proposed treatments that draws on the relevant academic literature found in your literature search, a recommended policy change (or a recommendation to maintain the status quo and reject reform alternatives), and a thorough justification of your recommendation.

The paper should be at least 15 double-spaced pages in length. For full credit, papers must be submitted electronically as a MS Word document to zodrow@rice.edu by midnight on the last day of classes for the semester. Papers may be turned in late at a penalty of 5 points per day.

CITATIONS

All material taken from outside sources must be properly cited in the text and referenced in the bibliography. For material that is paraphrased, the citation in the text should take the form: Zodrow (2006). For material that is directly quoted, the quotation should be enclosed in quotation marks or offset in the text and the citation should take the form: Zodrow (2006, p. 207).

FORMAT FOR REFERENCES IN BIBLIOGRAPHY

Article:
Zodrow, George R. and Peter Mieszkowski, 1986. “Pigou, Tiebout, Property Taxation, and the Underprovision of Local Public Goods.?Journal of Urban Economics 19: 356-370.

Article in a Collective Volume:
Zodrow, George R., 2006. “Should Capital Income be Subject to Consumption-Based Taxation??In Taxing Capital Income, edited by Henry A. Aaron, Len Burman and C. Eugene Steuerle. Washington DC: Brookings Institution Press.

Book:
McLure, Charles E. Jr., John Mutti, Victor Thuronyi and George Zodrow, 1990. The Taxation of Income from Business and Capital in Colombia. Durham NC: Duke University Press.

Manuscript:
Diamond, John and George R. Zodrow, 2005. “Economic Effects of a Personal Capital Income Tax Add-On to a Consumption Tax,?Manuscript, Rice University.

Working Paper:
Diamond, John and George R. Zodrow, 2005. “The U.S. Experience with the Estate Tax and its Implications for Wealth Transfer Taxation in Latin America.?Baker Institute for Public Policy Working Paper (November). Houston TX: Baker Institute for Public Policy.

Edited Book:
Zodrow, George R. and Peter Mieszkowski (editors), 2002. United States Tax Reform in the 21st Century. Cambridge UK: Cambridge University Press.

Government Report:
Congressional Budget Office, 1997. The Economic Effects of Comprehensive Tax Reform. Washington DC: CBO.

 

Comments and questions to: athiphat@rice.edu

Last modified: Jan 11, 2008.