Chapter 16-Personal Taxation and behavior Public economics
1 Chapter 16 – Personal Taxation and Behavior Public Economics
Introduction a key policy question is how do households respond to the incentives presented in the u.s tax code? · We will examine: Labor supply Savng Housing Portfolio composition
2 Introduction • A key policy question is how do households respond to the incentives presented in the U.S. tax code? • We will examine: – Labor supply – Saving – Housing – Portfolio Composition
Labor Supply Theoretical considerations Recall from previous discussions of the welfare system, that a labor supply problem has the following elements Time Endowment Budget constraint, with a price of leisure of Sw references
3 Labor Supply: Theoretical Considerations • Recall from previous discussions of the welfare system, that a labor supply problem has the following elements: – Time Endowment (T) – Budget constraint, with a price of leisure of $w – Preferences
Labor Supply Theoretical considerations Figure 16 1 shows a typical labor supply framework Person chooses ft of work in this example, and attains utility on indifference curve ii
4 Labor Supply: Theoretical Considerations • Figure 16.1 shows a typical labor supply framework. • Person chooses FT of work in this example, and attains utility on indifference curve ii
Figure 16.1 ⅱi Income Leisure Work Hours of leisure per week Time endowment
Figure 16.1
Labor Supply Theoretical considerations How do taxes affect the work decision? In Figure 16.2, tax reduces wage rate From Sw to $(1-t)w, because person only cares about part of wage he gets to keep ax reduces the opportunity cost of another hour of leisure Budget constraint rotates from TD to TH
6 Labor Supply: Theoretical Considerations • How do taxes affect the work decision? • In Figure 16.2, tax reduces wage rate – From $w to $(1-t)w, because person only cares about part of wage he gets to keep – Tax reduces the opportunity cost of another hour of leisure • Budget constraint rotates from TD to TH
Figure 16.2 2 E Slope=(1-tw E ours of wor 1 Hours of leisure per week Hours of work before tax
Figure 16.2
Labor Supply Theoretical considerations Based on the specific indifference curves in Figure 16.2, we can conclude the following The person is worse off after the tax, that is utility is lower In this case, the person reduces hours of work from FT to /T
8 Labor Supply: Theoretical Considerations • Based on the specific indifference curves in Figure 16.2, we can conclude the following: – The person is worse off after the tax, that is, utility is lower – In this case, the person reduces hours of work from FT to IT
Labor Supply Theoretical considerations Is it always the case that the person will reduce hours of work when a tax is imposed (or increased)? No. Figure 16.3 shows a case where hours of work increases from ft to JT (and the person is still worse off relative to no taxes)
9 Labor Supply: Theoretical Considerations • Is it always the case that the person will reduce hours of work when a tax is imposed (or increased)? • No. Figure 16.3 shows a case where hours of work increases from FT to JT (and the person is still worse off relative to no taxes)
Figure 16.3 D G E1 E3l Hours of work before tax F Hours of work after tax Hours of leisure per week
Figure 16.3
