Advanced Course in Public Economics 2017
Dominik Sachs
European University Institute
Format
We will meet twice a week: Monday 3-5pm and Friday at 9-11 am. There will be 2 problem
sets. Some problems will be theoretical and some will be computational (Matlab). You will
also have to give a short presentation on one of the papers listed below or a related research
idea of yours. Problem sets count 30% of the grade each. Class participation and presentation
count 20% each. Below is an outline of what we are going to do and when.
Lecture I: Principles of Welfare Economics and Basic Concepts of Taxation
This will be a refresher of what you probably have already learnt. We discuss the foundations
of welfare economics and the requirements (cardinal or ordinal measurement of utility, interpersonal comparison of utility) of various welfare criteria. Then, we will consider the canoncial
model of tax incidence and also study the concept of excess burden.
Lectures II - IV: Basics of Mirrlees Income Taxation
We will use these 3 meetings to learn the basics of optimal nonlinear taxation in the spirit of
Mirrlees (1971). We’ll mainly focus on the version without income effects (Diamond 1998).
• We’ll start with the workhorse model and thereby also have a short refresher about
mechanism design and optimal control. After a derivation of the optimality conditions
with this approach, we will derive them more intuitively with a tax perturbation as in
Piketty (1997) and Saez (2001). We will then go to the computer (using Matlab) and see
what the formulas quantitatively imply and how sensitive results are. In particular, we
will also think a bit more about the optimal top tax rate.
• We will then also follow a recent approach to invert the problem (Werning 2007) and ask
the question whether some given (arbitrarily nonlinear) tax schedule is Pareto efficient.
If it is not Pareto efficient, a feasible tax reform exists which makes everybody weakly
better of. Thus, we will extend the idea of the Laffer bound to nonlinear taxes.
• We will quickly talk about what happens if individuals adjust their labor supply along
the extensive margin (Diamond 1980, Saez 2002b).
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Lectures V-VI: Income Taxation in general equilibrium – tax incidence
and optimal taxation
Here we do two things. On the one hand, we try to bring together the classical tax incidence
that we studied in the first lecture with the nonlinear income tax framework from lectures IIIV. Thus, we will introduce endogenous wages into canonical Mirrlees (1971)-model and study
the incidence of nonlinear income tax reforms and follow the analysis in Sachs, Tsyvinski, and
Werquin (2016). Then, we move on to discussing optimal taxation in general equilibrium and
also study the papers by Stiglitz (1982), Rothschild and Scheuer (2013) and Ales, Kurnaz, and
Sleet (2015).
Lecture VII-VIII: Commodity Taxation and Human Capital
We go back to a partial equilibrium framework and ask to what extend it is desirable for
the social planer to tax different goods at different rates (or use commodity taxation at all).
We thereby revisit the famous uniform commodity taxation result by Atkinson and Stiglitz
(1976) and then discuss also when it is violated (Christiansen 1984, Saez 2002a, Jacobs and
Boadway 2014)
We then consider a very particular good: education/human capital. We ask how the results
of the optimal tax problem changes if human capital is endogenous. In particular we will
derive the result that education subsidies and redistribution are ‘siamese twins’ (Bovenberg
and Jacobs 2005). Besides this paper, we’ll also study some more recent papers on the issue, in
particular, we’ll have a closer look at Findeisen and Sachs (2016), who study college education
subsidies.
Lectures IX-X: Empirical Topics
We’ll study modern empirical research design’s in public finance and look at some concrete
recent examples: regression discontinuity design (Castleman and Long 2015) , regression kink
design (Gelber, Moore, and Strand 2016), bunching at kinks and bunching at notches (Saez
2010, Kleven and Waseem 2013, Kleven 2016)
References
Ales, L., M. Kurnaz, and C. M. Sleet (2015): “Tasks, talents and taxes,” American
Economic Review (forthcoming).
Atkinson, A., and J. Stiglitz (1976): “The Design of Tax Structure: Direct versus Indirect
Taxation,” Journal of Public Economics, 6(1-2), 55–75.
Bovenberg, L., and B. Jacobs (2005): “Redistribution and Education Subsidies are Siamese
Twins,” Journal of Public Economics, 89(11-12), 2005–2035.
Castleman, B. L., and B. T. Long (2015): “Looking beyond enrollment: The causal effect of need-based grants on college access, persistence, and graduation,” Journal of Labor
Economics (forthcoming).
Christiansen, V. (1984): “Which commodity taxes should supplement the income tax?,”
Journal of public economics, 24(2), 195–220.
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Diamond, P. (1980): “Income Taxation with Fixed Hours of Work,” Journal of Public Economics, 13(1), 101–110.
Diamond, P. A. (1998): “Optimal Income Taxation: An Example with a U-Shaped Pattern
of Optimal Marginal Tax Rates,” American Economic Review, 88(1), 83–95.
Findeisen, S., and D. Sachs (2016): “Optimal Need-Based Financial Aid,” Working Paper.
Gelber, A., T. Moore, and A. Strand (2016): “The Effect of Disability Insurance Payments on Beneficiaries? Earnings,” NBER Working Paper.
Jacobs, B., and R. Boadway (2014): “Optimal linear commodity taxation under optimal
non-linear income taxation,” Journal of Public Economics, 117, 201–210.
Kleven, H. J. (2016): “Bunching,” Annual Review of Economics, 8(1).
Kleven, H. J., and M. Waseem (2013): “Using notches to uncover optimization frictions
and structural elasticities: Theory and evidence from Pakistan,” The Quarterly Journal of
Economics.
Mirrlees, J. A. (1971): “An Exploration in the Theory of Optimum Income Taxation,” The
Review of Economic Studies, 38(2), 175–208.
Piketty, T. (1997): “La redistribution fiscale face au chomage,” Revue française d’économie,
12(1), 157–201.
Rothschild, C., and F. Scheuer (2013): “Redistributive Taxation in the Roy Model,” The
Quarterly Journal of Economics, 128(2), 623–668.
Sachs, D., A. Tsyvinski, and N. Werquin (2016): “Nonlinear Tax Incidence and Optimal
Taxation in General Equilibrium,” NBER Working Paper 22646.
Saez, E. (2001): “Using Elasticities to Derive Optimal Income Tax Rates,” Review of Economic
Studies, 68(1), 205–229.
Saez, E. (2002a): “The desirability of commodity taxation under non-linear income taxation
and heterogeneous tastes,” Journal of Public Economics, 83(2), 217–230.
(2002b): “Optimal Income Transfer Programs: Intensive versus Extensive Labor Supply Responses,” Quarterly Journal of Economics, 117(3), 1039–1073.
(2010): “Do taxpayers bunch at kink points?,” American Economic Journal: Economic
Policy, 2(3), 180–212.
Stiglitz, J. E. (1982): “Self-Selection and Pareto Efficient Taxation,” Journal of Public Economics, 17(2), 213–240.
Werning, I. (2007): “Pareto efficient income taxation,” Massachusetts Institute of Technology,
Mimeo.
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