Public economics in an age of austerity (the graz schumpeter lectures)

www.ebook3000.com Public Economics in an Age of Austerity Governments all round the world are facing problems with their public finances At a time of austerity, how much should spending be cut and how much should taxes be raised? Does the national debt represent a burden for future generations? Should taxes on the rich be raised? This book examines how the tools of public economics can be applied to answer such key questions and to suggest alternatives to the austerity policies currently being pursued The fiscal problems faced are not simply the result of the post-2008 economic crisis but reflect a deep-seated fault line in modern economies There has to be fiscal consolidation to provide for an ageing population, increased investment in education, and climate change The book describes how public economics can help us think about alternative ways of meeting this challenge It casts doubt on conventionally held views, such as those concerned with top tax rates, the undesirability of taxing capital income, the targeting of child benefits, and the merging of income tax and social security contributions The final part goes beyond national boundaries and considers global public economics, focusing on the pressing problem of financing development The conclusion of the book is that there are significant choices to be made Not all austerity packages are the same: there are alternatives It would be possible to raise taxes more and to cut spending less It is important to consider the full range of possible policies In considering these alternatives, modern public economics provides a useful framework, but it has major limitations Economists are too often prisoners within the theoretical walls they have erected and fail to see that important considerations are missing Economists have paid too little attention to the ethical basis underlying their policy recommendations A B Atkinson is a Fellow of Nuffield College, of which he was Warden from 1994 to 2005 and is currently Centennial Professor at the London School of Economics He was knighted on 2001 for services to economics, and is a Chevalier de la Légion d’Honneur www.ebook3000.com The Graz Schumpeter Lectures Previous titles in the series: Evolutionary Economics and Creative Destruction J Stanley Metcalfe Knowledge, Institutions and Evolution in Economics Brian J Loasby Schumpeter and the Endogeneity of Technology Some American Perspectives Nathan Rosenberg Consumption Takes Time Implications for Economic Theory Ian Steedman Exchange Rates and International Finance Markets An Asset-Theoretic Approach with Schumpeterian Perspective Erich W Streissler An Unholy Trinity Labor, Capital and Land in the New Economy Duncan K Foley Politics and Economics in the History of the European Union Alan S Milward The Dynamics of Industrial Capitalism Schumpeter, Chandler, and the New Economy Richard N Langlois Growth, Distribution and Innovations Understanding Their Interrelations Amit Bhaduri www.ebook3000.com 10.Complex Economics Individual and Collective Rationality Alan Kirman 11.Public Economics in an Age of Austerity A B Atkinson For more information, please visit the Graz Schumpeter Society’s website: http://www.uni-graz.at/gsg www.ebook3000.com This page intentionally left blank www.ebook3000.com Public Economics in an Age of Austerity A B Atkinson www.ebook3000.com First published 2014 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2014 A B Atkinson The right of A B Atkinson to be identified as author of this work has been asserted by him in accordance with the Copyright, Designs and Patent Act 1988 All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging in Publication Data Public economics in an age of austerity / A B Atkinson pages cm – (The Graz Schumpeter lectures) Finance, Public Taxation Social policy I Title HJ141.A747 2014 336–dc23 2013040860 ISBN: 978-1-138-01815-0 (hbk) ISBN: 978-1-315-77988-1 (ebk) Typeset in Times New Roman by Taylor & Francis Books www.ebook3000.com Contents Illustrations Preface viii ix Public economics and austerity Taxing the rich 18 Models can become prisons 37 Global public economics 59 Conclusions 83 Bibliography Index 87 94 www.ebook3000.com Illustrations Tables 1.1 Optimal indirect tax structure under different assumptions about the possibilities for direct taxation 4.1 Distribution of income among world citizens 1992 79 Figures 1.1 Gross disposable real income of households from 1999 to 2012, compared with GDP, Euro area (17) 1.2 Alternative routes for austerity 1.3 A simple overlapping generations model 2.1 Shares of the top per cent in the United Kingdom 2.2 The evolution of the proportion ‘rich’ in the United States since 1960 2.3 Top tax rates in the UK from 1909 to 2011 2.4 Transmitted wealth in the UK as percentage of total personal income 2.5 Ratio of personal wealth to personal income in the UK 4.1 Tax/spending or differential incidence? 4.2 Fiscal architecture: national taxation 4.3 Possible global fiscal architecture 4.4 Different dimensions of redistribution 4.5 Alternative forms for the social marginal valuation of income 13 18 21 22 35 35 69 72 73 76 81 Boxes 1.1 2.1 2.2 2.3 4.1 4.2 The Atkinson–Stiglitz theorem Determination of the optimal top tax rate Optimal taxation in a tournament model The copula function Summary of Millennium Development Goals The optimal provision of official development assistance (ODA) www.ebook3000.com 23 27 31 60 63 Preface I am most grateful for the invitation to present the Graz Schumpeter Lectures in October 2012 There are at least three reasons for being grateful The first is that it gave me the opportunity to visit Graz, where my wife and I were most warmly welcomed We should like to thank Richard Sturn, Heinz Kurz, Christian Gehrke, their families and colleagues for making our stay so enjoyable and interesting Our thanks too to Johanna Pfeifer for making such efficient arrangements The second reason is that the preparation of the lectures gave me grounds for collecting my thoughts about both current austerity policies and the underlying state of public economics As noted below, I have drawn on a number of earlier pieces of work, but the four lecture series challenged me to bring them together It also led to my re-reading, or reading for the first time, the writings of Joseph Schumpeter, many of which are highly relevant to my subject, notably his remarkable 1918 essay on ‘Die Krise des Steuerstaates’ (‘The crisis of the tax state’), republished in translation in Schumpeter (1991) The third reason for gratitude is that the lecture attracted a large student audience, who posed excellent questions, both inside and outside the lecture room The Lectures build on a review article I have written on the work of the UK team chaired by Sir James Mirrlees, published in the Journal of Economic Literature (Atkinson, 2012) The Lectures draw also on material presented in three earlier public lectures In September 2011, I gave the first Amartya Sen Lecture, with the title ‘Public economics after The idea of justice’, at the annual conference of the Human Development and Capability Association in the Hague The Sen Lecture has been published in the Journal of Human Development and Capabilities (Atkinson, 2012a) In January 2012, I gave the fifth Sandmo Lecture, with the title ‘Public economics in an age of austerity’, at the Norwegian School of Economics and Business Administration in Bergen Chapter draws substantially on the Fourth Jelle Zijlstra Lecture (Atkinson, 2005) given at the Free University, Amsterdam, on 12 December 2005, when I was a visiting fellow at the Netherlands Institute for Advanced Studies Empirical aspects of the research reported in the Lectures draw on work carried out in conjunction with a number of colleagues, whom I would like to www.ebook3000.com 86 A B Atkinson that the coaches were insufficiently ‘T-shaped’ They had become specialists, focusing on the backs or the forwards, or on kicking, or on running, without being able to see the whole picture They could not join up the back play with the forwards; they could not develop a whole strategy It has seemed to me for some time that much the same applies to economics We have, as Nicholas Stern (2010) argued in his Presidential Address to the European Economic Association, become too specialized We have made great progress in deepening – moving the vertical further down – but have tended to lose sight of the wider context and to ignore important considerations that are not in the model The different branches of economics are increasing our understanding, but they are not being joined up We need not just specialists in public economics but also economists who appreciate developments in other fields and who can integrate these developments into their public finance analyses Even within fields, there are increasing divisions between theorists and applied economists, as illustrated by the proportion of NBER Working Papers classified as ‘Both theory and empirical’, which has decreased from 29.1 per cent in 1990 to 5.5 per cent in 2010 (Chetty and Finkelstein, 2012) That said, public economics has a lot to offer and there is a great deal of interesting research to be done! Bibliography Aaberge, R., Atkinson, A B., Königs, S., and Lakner, C., forthcoming, ‘Wages, capital and top incomes’ Addison, T and Chowdhury, A R., 2004, ‘A global lottery and a global premium bond’ in Atkinson (2004) Ahde, M., Pentikäinen, A., and Seppänen, J.-M., 2002, Global Lottery, Crisis Management Initiative ry, Helsinki Arrow, K J and Hahn, F H., 1971, General competitive analysis, North-Holland, Amsterdam Atkeson, A., Chari, V V., and Kehoe, P J., 1999, ‘Taxing capital income: A bad idea’, Federal Reserve Bank of Minneapolis Quarterly Review, vol 23 (Summer): 3–17 Atkinson, A B., 1969, Poverty in Britain and the reform of social security, Cambridge University Press, Cambridge ——, 1970, ‘On the measurement of inequality’, Journal of Economic Theory, vol 2: 244–63 ——, 1972, Unequal shares, Allen Lane, London ——, 1990, ‘Public economics and the economic public’, European Economic Review, vol 34: 225–48 ——, 1998, Poverty in Europe, Blackwell, Oxford Atkinson, A B., editor, 2004, New sources of development finance, Oxford University Press, Oxford Atkinson, A B., 2004a, New sources of development finance: Funding the Millennium Development Goals, WIDER Policy Brief No 10 ——, 2005, Global public finance and funding the Millennium Development Goals, Jelle Zijlstra Lecture 4, NIAS, Wassenaar ——, 2009, ‘Giving overseas and public policy’, Journal of Public Economics, vol 93: 647–53 ——, 2012, ‘The Mirrlees Review and the state of public economics’, Journal of Economic Literature, vol 50: 770–80 ——, 2012a, ‘Public economics after The idea of justice’, Journal of Human Development and Capabilities, vol 13: 521–36 ——, 2013, ‘Wealth and inheritance in Britain from 1896 to the present’, CASE paper 178, Centre for the Analysis of Social Exclusion, London School of Economics Atkinson, A B and Bourguignon, F., 1989, ‘The design of direct taxation and family benefits’, Journal of Public Economics, vol 41: 3–29 Atkinson, A B and Brandolini, A., 2010, ‘On analysing the world distribution of income’, World Bank Economic Review, vol 24: 1–37 88 Bibliography Atkinson, A B and Morelli, S., 2013, A chartbook of economic inequality, http://inete conomics.org/research_note/chartbook-economic-inequality-25-countries-1911-2010 Atkinson, A B and Sandmo, A., 1980, ‘Welfare implications of the taxation of savings’, Economic Journal, vol 90: 529–49 Atkinson, A B., and Stiglitz, J E., 1976, ‘The design of tax structure: Direct versus indirect taxation’, Journal of Public Economics, vol 6: 55–75 ——, 1980, Lectures on public economics, McGraw-Hill, New York Auerbach, A and Hines, J R., 2003, ‘Perfect taxation and imperfect competition’ in S Cnossen and H W Sinn, editors, Public finance and public policy in the new century, MIT Press, Cambridge Balassone, F and Franco, D., 2000, ‘Public investment, the Stability Pact and the “golden rule”’, Fiscal Studies, vol 21: 207–29 Banks, J and Diamond, P A., 2010, ‘The base for direct taxation’ in Mirrlees (2010) Basu, K and 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public economics research, 1980–2010’, NBER Reporter, Number 1: 1–6 Chetty, R., Looney, A., and Kroft, K., 2009, ‘Salience and taxation: Theory and evidence’, American Economic Review, vol 99: 1,145–77 Clark, T., Elsby, M., and Love, S., 2001, ‘Twenty five years of falling investment?’, IFS Briefing Paper, London Cowell, F A., 1986, ‘Welfare benefits and the economics of takeup’, TIDI Discussion Paper 89, STICERD, London School of Economics Cowell, F A., editor, 2003, The economics of poverty and inequality, Volume I, Edward Elgar, Cheltenham Cribb, J., Hood, A., Joyce, R., and Phillips, D., 2013, Living standards, poverty and inequality in the UK: 2013, Institute for Fiscal Studies, London Currie, J., 2004, ‘The take up of social benefits’, NBER Working Paper 10488 Dasgupta, P., 2007, ‘Commentary: The Stern Review’s economics of climate change’, National Institute Economic Review, vol 199: 4–7 DeLong, B., 2006, ‘Partha Dasgupta makes a mistake in his critique of the Stern Review’, 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vol 20: 202–46 Office for Budget Responsibility, 2013, Economic and fiscal outlook, March 2013, Cm 8573, HMSO, London Okun, A M., 1975, Equality and efficiency, Brookings Institution, Washington, D.C Oswald, A, 1983, ‘Altruism, jealousy and the theory of optimal non-linear taxation’, Journal of Public Economics, vol 20: 77–87 Pazner, E., 1972, ‘Merit goods and the theory of taxation’, Public Finance, vol 27: 460–72 Persson, M and Sandmo, A., 2005, ‘Taxation and tournaments’, Journal of Public Economic Theory, vol 7: 543–59 Pestieau, P., 2010, ‘Commentary’ in Mirrlees (2010) Pigou, A C., 1912, Wealth and welfare, Macmillan, London ——, 1932, The economics of welfare, fourth edition, Macmillan, London ——, 1947, A study in public finance, third edition, Macmillan, London Piketty, T., 2001, Les hauts revenus en France au 20ème siècle, Grasset, Paris ——, 2011, ‘On the long-run evolution of inheritance: France 1820–2050’, Quarterly Journal of Economics, vol 126: 1,071–131 Piketty, T and Saez, E., 2003, ‘Income inequality in the United States, 1913–98’, Quarterly Journal of Economics, vol 118: 1–39 ——, 2007, ‘Income and wage inequality in the United States, 1913–2002’ in A B Atkinson and T Piketty, editors, Top incomes over the twentieth century, Oxford University Press, Oxford ——, forthcoming, ‘A theory of optimal inheritance taxation’, Econometrica, vol x Piketty, T., Saez, E., and Stantcheva, S., forthcoming, ‘Optimal taxation of top labor incomes: A tale of three elasticities’, American Economic Journal, Economic Policy, vol x Plueger, D., 2009, ‘Earned Income Tax Credit participation rate for the tax year 2005’, Recent research on tax administration and compliance, IRS Research Bulletin, 151–95 Qizilbash, M., 1996, ‘Capabilities, well-being, and human development: A survey’, Journal of Development Studies, vol 33: 143–62 Rabin, M., 2013, ‘Incorporating limited rationality into economics’, Journal of Economic Literature, vol 51: 528–43 Ramsey, F P., 1927, ‘A contribution to the theory of taxation’, Economic Journal, vol 37: 47–61 Rawls, J., 1971, A theory of justice, Harvard University Press, Cambridge Reinhorn, L J., 2012, ‘Optimal taxation with monopolistic competition’, International tax and public finance, vol 19: 216–36 Robinson, J., 1933, The economics of imperfect competition, Macmillan, London 92 Bibliography Robson, A and Samuelson, L., 2011, ‘The evolution of decision and experienced utilities’, Theoretical Economics, vol 6: 311–39 Romer, D., 1996, Advanced macroeconomics, McGraw-Hill, New York Rowse, A L., 1995, Historians I have known, Duckworth, London Samuelson, P A., 1958, ‘An exact consumption-loan model of interest with or without the social contrivance of money’, Journal of Political Economy, vol 66: 467–82 ——, 1964, ‘Principles of efficiency – Discussion’, American Economic Review, Papers and Proceedings, vol 54: 94–95 Sandmo, A., 1975, ‘Optimal taxation in the presence of externalities’, Swedish Journal of Economics, vol 77: 86–98 ——, 1983, ‘Ex post welfare economics and the theory of merit goods’, Economica, vol 50: 19–33 ——, 1990, ‘Tax distortions and household production’, Oxford Economic Papers, vol 42: 78–90 ——, 2007, ‘The welfare economics of global public goods’, NHH Department of Economics Discussion Paper 35/2007 ——, 2011, Economics evolving, Princeton University Press, Princeton Schumpeter, J A., 1949, ‘Vilfredo Pareto (1848–1923)’, Quarterly Journal of Economics, vol 63: 147–73 ——, 1991, The economics and sociology of capitalism, edited by R Swedberg, Princeton University Press, Princeton Seade, J., 1985, ‘Profitable cost increases and the shifting of taxation’, Warwick Economics Research Papers 260 Sen, A., 1980, ‘Equality of what?’ in S McMurrin, editor, The Tanner Lectures on Human Values, Volume I, Cambridge University Press, Cambridge ——, 1987, On ethics and economics, Basil Blackwell, Oxford ——, 1993, ‘Capability and well-being’ in M C Nussbaum and A Sen, editors, The quality of life, Clarendon Press, Oxford ——, 2009, The idea of justice, Allen Lane, London Smith, A., 1904 (1776), An inquiry into the nature and causes of the wealth of nations, Methuen, London Solow, R M., 1971, ‘Some implications of alternative criteria for the firm’ in R Marris and A Wood, editors, The corporate economy, Macmillan, London, 318–42 Stark, T., 1972, The distribution of personal income in the United Kingdom, 1949–1963, Cambridge University Press, Cambridge Stein, J., 2012, ‘Interview with Jeremy C Stein’, Newsletter, Study Centre Gerzensee, January Stern, N H., 2007, The economics of climate change: The Stern review, Cambridge University Press, Cambridge ——, 2010, ‘Imperfections in the economics of public policy, imperfections in markets, and climate change’, Journal of the European Economic Association, vol 8: 253–88 Stewart, F., 1996, ‘Basic needs, capabilities, and human development’ in A Offer, editor, In pursuit of the quality of life, Oxford University Press, Oxford Su, C.-L and Judd, K L., 2006, ‘Optimal income taxation with multidimensional taxpayer types’, unpublished paper, Stanford University Swedberg, R., 1991, Joseph A Schumpeter: His life and work, Polity Press, Cambridge Tanzi, V., 1999 ‘Is there a need for a world tax organisation?’ in A Razin and E Sadka, editors, The economics of globalization, Cambridge University Press, New York Bibliography 93 Tawney, R H., 1913, ‘Poverty as an industrial problem’, inaugural lecture, reproduced in Memoranda on the Problems of Poverty, William Morris Press, London United Nations, 2012, The global partnership for development: Making rhetoric a reality, Report of the MDG Gap Task Force, United Nations, New York ——, 2013, ‘A life of dignity for all: Accelerating progress towards the Millennium Development Goals and advancing the UN development agenda beyond 2015’, Report of the Secretary-General, United Nations, New York Vickery, C., 1977, ‘The time-poor: A new look at poverty’, Journal of Human Resources, vol 12: 27–48 Watkins, G P., 1907, ‘The growth of large fortunes’, Publications of the American Economic Association, vol 8: 1–170 Weitzman, M L., 2007, ‘A review of the Stern Review on the Economics of Climate Change’, Journal of Economic Literature, vol XLV: 703–24 Yaniv, G., 1997, ‘Welfare fraud and welfare stigma’, Journal of Economic Psychology, vol 18: 435–45 Index Aaberge, Rolf 32 Addison, Tony 68 Arrow–Debreu model 10, 38, 41, 58, 74 Arrow, Kenneth J 41 Atkinson, Anthony Barnes 18, 32, 35, 43, 67, 76; Atkinson–Stiglitz theorem 9, 33, 40, 41; Lectures on public economics 16, 59; Unequal shares 18, 19, 34 Auerbach, Alan J 11 austerity 1, 6; austerity argument 6; austerity programme 1, 5, 12, 17, 57 (alternatives and choices 6–17, 83; fair distribution of 44); criticism 85; fiscal austerity and decline in ODA volume 61, 64; lessons to learn 83–84; public economics 1–18, 83 Austria 10, 30, 50 Balassone, Fabrizio 14–15 Banks, J 40 banks, rescue of 6, 64 Baron, Jonathan 53, 54 Basu, Kaushik 57 Baumol, William J 27 Becker, Gary S 51 behavioural economics 39, 70, 71, 84; child benefit and modelling behaviour 49–51, 52; income tax/ social security contributions integration 53–55, 57 Bewley, Truman F 41 Blanchard, Olivier J 44 Bourguignon, Franỗois 58, 7879 Brandolini, Andrea 79, 81 Brewer, Mike 24, 50 budget constraint 47, 49, 51, 53, 55; government budget constraint 6, 38, 39 capability 56–57, 58, 83, 85; functionings and capabilities 56–57 capital income: inherited wealth 33; labour/capital income joint taxation 30–32, 33 (asymmetric joint distribution 32); neutral tax system 39, 42, 83; optimal taxation of 30–33, 36, 43–44, 45–46; savings tax 37, 39, 43–44, 46, 58; taxing capital income 2, 6, 37, 83; taxing capital income and introducing real time 38–46 (infinitely lived dynasties model 41–43, 44; overlapping generations model 43–46); zero capital tax 33, 37, 39–40, 41, 42–43, 46, 58; see also taxing the rich Chamley, Christophe 15, 41–43 Chari, Varadarajan V 37, 43 charitable conservatism 80 Chetty, Raj 53, 54, 86 child benefit 2, 37, 46, 84; children in the social welfare function 48–49; gender equality 39, 49, 58, 85; income-testing 46–52, 84 (stigma 51, 52); Mirrlees Review 50; modelling behaviour and incomplete take-up 49–51, 52; neglect of children in economic models 46–47, 52; optimal design of taxation 46–47, 52; public economics 46, 51; public spending cuts 37, 46, 52; reducing child benefit/reducing income tax 48, 49; UK Child Tax Credit 50–51; universal child benefit 51, 52, 58; withdrawal of 48 Chowdhury, Abdur R 68 Churchill, Winston 22 climate change: expenditure in 5; global public economics 16, 81; global taxes (energy tax 68, 69, 70, 71, 74; global environmental tax 67, 68); global Index warming 71; Stern Review 77; see also environmental issues; global public economics competition: imperfect competition 10–12, 17, 84; monopolistic competition 11; perfect competition 10, 58; standard economic model 17; see also Arrow–Debreu model consumption 17, 49, 51, 56; by future generations 14, 15; consumer sovereignty 55; distributional issues 74, 76–77, 80; taxing capital income and introducing real time 39, 40, 42, 43–45 copula function 31–32, 33 Currie, Janet 51, 58 Dasgupta, Partha 77 Davenport, Michael W S 66 DeLong, Brad 77 development financing 2, 16, 81; see also global public economics; MDGs; ODA Diamond, Peter 4, 23–24, 40, 43, 53 discounting 14, 17; discount rate 43, 45, 77; pure discount rate 14, 15, 17, 85; social discount rate 17, 77 distributional issues 9, 12, 44, 49, 74–75, 81; austerity programmes, criticism 85; consumption 74, 76, 77, 80; distribution of income among world citizens 79–80; distributional indifference 76; elasticity of social marginal value of income 66, 75–81; equity and redistribution 62, 74–81; income distribution 19, 30, 36, 79; leaky bucket experiment 75–76, 77; public debt 14; public economics 74; redistribution between countries 66–67, 78; redistribution between/ within countries 78–81; redistribution over time 76–78, 85; social marginal valuation of income 75–81 passim; see also global public economics; ODA Earned Income Tax Credit 50 earning power 12, 47, 48, 84 economic crisis 3, 5, 6, 42, 61; 1976 Sterling Crisis 15, 64; 2008 financial crisis 85–86 economic model 2, 37–58; Arrow–Debreu model 10, 38, 41, 58; capital income tax 2, 37, 38–46; child benefit 2, 37, 46–52; general equilibrium model 3, 95 39–41, 74; infinitely lived dynasties model 41–43, 44, 58; limiting/ restrictive aspect of models 37–38, 84, 86; overlapping generations model 13, 43–46, 58; standard modelling 53; tournament model 27–28, 38; underlying economic model and economic assumptions 8, 10–12, 17, 37–38, 84 Economists 5, 25, 38, 42, 84; and rugby 85–86 Edgeworth, Francis Ysidro 40, 65 education 5, 60; spending cuts 14, 15 elasticity 17, 71; social marginal value of income 66, 75–81; Stern Review 77; taxable income 23–25, 26, 29, 59, 62, 63 the elderly: expenditure on 5, 15; larger dependent population 5; raising taxes on older generations 16, 17, 83; spending cuts 14, 17 employment 56 environmental issues 5, 12, 15; see also climate change equity: direct/indirect taxation balance 8–11; equity and redistribution 62, 74–81; horizontal equity 28; intergenerational equity 15, 77, 83, 85; public economics, equity/efficiency balancing 74; see also inequality Erosa, Andres 43, 44 Estate Duty 33 executive remuneration 27 externality 8, 9, 11, 53 fairness 28–29, 39, 85 Feldstein, Martin S 80 Finkelstein, Amy 54, 86 fiscal consolidation 12, 17, 37, 83; government capital investment 2; zero capital tax 37, 39, 46, 58; see also tax Fischer, Stanley 44 food industry 8, 10, 11, 26; see also VAT France 19, 21, 34, 50, 79; Hollande, President 21, 55 Franco, Daniele 14–15 Frankel, Herbert 64 G20 16 GDP (Gross Domestic Product) 3, 6, 10, 52, 78; GDP/HDI comparison 3–4, 5; public investment/GDP ratio 15 gender equality 52, 60; child benefit 39, 49, 58, 85 96 Index general equilibrium theory 3, 39–41, 74 Germany 50, 79 Gervais, Martin 43, 44 global public economics 2, 16–17, 59–82; climate change 16, 81; global cosmopolitanism 16, 62; global fiscal architecture 72–73; global perspective 17, 59; global welfare economics 17; MDGs 59–62, 65, 74; public economics, national focus 59; public/international economics integration 59; tax competition 16, 59; World Tax Authority 2, 73; see also distributional issues; global public economics and alternatives to ODA; ODA global public economics and alternatives to ODA 67–74, 84–85; ‘double dividend’ argument 68, 69, 71–72, 73, 74; fiscal architecture 69, 72–73, 84; global lottery/global ‘prize bond’ 67, 68, 70; global taxes 2, 67, 68–74 (CTT/Tobin tax 67, 68, 71, 72, 82, 84; energy tax 68, 69, 70, 71, 74; FTT 70–71; global environmental tax 67, 68); logrolling 71–72; private donation 67, 68; remittance 67, 68, 71; tax incidence 69, 70–71, 73, 84; tax/ spending vs differential incidence 69–70; see also global public economics; ODA Hahn, Frank H 41 Hill, Claire A 53 Hines, James R 11 household: HDI 3, (GDP/HDI comparison 3–4, 5); household income 15, 75; theory of the household 51, 84 housing 15, 34 hyperbolic discounting 51, 54 ILO (International Labour Organization) 56 IMF (International Monetary Fund) 15, 30 income: average income 20; distribution of income among world citizens 79–80; elasticity and taxable income 23–25, 26, 29, 59, 62, 63; household income 3–4, 5, 15, 75; income distribution 19, 30, 36, 79; income inequality 26, 49, 74, 76; income tax 8, 12; income tax/social security contributions integration 2, 37, 52–57, 58, 84; inequality aversion 76; labour income 19, 27–28, 30–32, 33, 84; low income 10, 48; lowering the income tax 48, 49; marginal income 25, 26; non-linear income tax 9; personal income tax 21–22, 31, 37, 52–57, 84; reducing child benefit/reducing income tax 48, 49; social marginal valuation 48, 49, 63, 64, 66, 75–81 passim; top income 18–21, 36 (rise in 19, 20–21, 30, 36); UK 18, 19, 30; US 19, 20–21, 30, 31, 32; see also capital income; distributional issues; inherited wealth; optimal income taxation; taxing the rich inequality 74, 80, 82; charitable conservatism 80–81; earning power 12; economic welfare 74; Gini coefficient 79, 80, 81; growing inequality and optimal tax formula 26, 29; income inequality 26, 49, 74, 76; inherited wealth 33; pre-war levels of 19; UK 18, 19; US 19; withincountry inequality 80; see also distributional issues; equity inherited wealth 12, 84; Estate Duty 33; failure to tax 18; France 34; inequality 33; inherited wealth tax 2, 19, 33–36; Mirrlees Review 34; personal wealth/personal income ratio 34, 35, 84; UK 34–35; see also taxing the rich; wealth Institute for Fiscal Studies inter-generational issues: debt and inter-generational choices 12–14, 17, 83; infinitely lived dynasties model 41–43, 44, 58; inter-generational choices 12–14, 17, 83; intergenerational equity 15, 77, 83, 85; inter-generational justice 17, 44, 76; overlapping generations model 13, 43–46, 58; redistribution over time 76–78, 85 Ireland 30, 50 Judd, Kenneth L 41–43 Kaldor, Nicholas 12 Kanbur, Ravi 36, 56 Kaplow, Louis Karagiannaki, Eleni 34 Keane, Michael P 25 Keen, Michael 56 Index Kehoe, Patrick J 37, 43 Keynes, John Maynard 38, 42 Konishi, Hideo Königs, S 32 Kravis, Irving B 66 Kroft, Kory 53 labour share 30 Lakner, C 32 Laroque, Guy R leaky bucket experiment 75–76 Little, Ian M D 80 Lloyd George, David 22 Looney, Adam 53 López-Calva, Luis F 57 Lucas, Robert 3, 15, 33, 39–40, 41, 74 macro-economics 3–5, 9, 43, 44; public economics/macro-economics divorce marginal tax rate 25, 28–29, 33, 59; effective marginal tax rate 25, 52–53 Matsaganis, Manos 50 McCaffery, Edward J 53, 54 MDGs (Millennium Development Goals) 59–62, 65, 74; funding 61, 67–69, 71; see also global public economics; ODA Meade Committee Mendez, Ruben 16 Mill, John Stuart 34 Millennium Development Goals 59–61 Mirrlees, Sir James 2, 47; Dimensions of tax design 3; inverse square law 76, 80; Mirrlees Review 34, 37, 39, 50, 70 (income tax/social security contributions integration 52, 53, 55; taxing the rich 2, 10, 11, 23–26, 30, 36); Tax by design 2–3 Moffitt, Robert 51 Morelli, Salvatore 18 Morrisson, Christian 78–79 Musgrave, Richard 3, 56 Myles, Gareth 10–11 net worth Netherlands 30, 50 Nordhaus, William D 77 Nussbaum, Martha C 57 ODA (Official Development Assistance) 2, 62–67; to approach 65; burdensharing 66–67; critical level for ODA contribution 66–67; fiscal austerity and decline in ODA volume 61, 64; 97 leakage 64, 66, 75; marginal value of income 66, 75; motives for ODA 62, 65; optimal provision of 62–64, 75; private giving 65, 67–68; redistribution between countries 66–67, 78; social objectives 64; social welfare function 63, 64 (national/ global social welfare function 64–65); UK, protecting ODA from cuts 64, 84; see also global public economics; global public economics and alternatives to ODA OECD (Organization for Economic Cooperation and Development) 6, 30, 42; modified OECD scale 49, 82; OECD Development Assistance Committee 61, 65, 66 Okun, Arthur 75 oligopolistic firm 10, 11, 38 optimal income taxation 15, 19, 21–30, 48, 58; capital income 30–33, 36, 43–44, 45–46; child benefit 46–47, 52; objections to optimal tax formula 19, 24–30, 32–33 (assumptions about other taxes 25–26, 29; broader social objectives/fairness 28–29; confidence intervals 24–25, 29; departure from the standard competitive model of the labour market 27–28, 29; growing inequality 26, 29; inter-dependency 26–27, 29, 36); optimal taxation in a tournament model 27–28, 38; zero capital income tax 33, 42; see also taxing the rich Oswald, Andrew J 36 Pareto distribution 23, 24, 36 Paulus, Alari 50 Persson, Mats 27 Pestieau, Pierre 32 Pigou, Arthur Cecil 6, 38, 74 Piketty, Thomas 19, 27, 30, 34 Portugal 50, 66 poverty 19, 60; charitable conservatism 80–81; poverty trap 29; time poor 51 pricing 10, 11, 38, 63, 70 profit share 30 public debt: debt as a burden on future generations 12, 13–14, 83; debt interest 6; distributional issues 14; externally/internally held debt 13, 59; inter-generational choices 12–14, 17, 83 public economics: austerity programme 1–18, 83; behavioural public 98 Index economics 38, 53; capital income tax 46; child benefit 46, 51; distributional issues 74; economists’ overspecialization 3, 86; equity/efficiency balancing 74; limitations 84–85; national focus 59; normative basis 16, 38, 39, 85; older style of public economics/law background 85; public economics/macro-economics divorce 3; public/international economics integration 59; public policy 1, 2, 57; range of instruments 8–10, 17, 83; underlying economic model and economic assumptions 8, 10–12, 17, 37–38, 84 public investment: protecting public investment for the future 16, 17; public infrastructure investment 14; public investment/GDP ratio 15; spending cuts 14–16 public policy 84; economic modelling 37; individual utility 38; public economics 1, 2, 57 public spending 6, 57; cuts in 6, 15, 57 (child benefit 37, 46, 52; education 14, 15; the elderly 14, 17); emphasis on spending cuts as shift in social objectives 17, 83; public investment 14–16; reducing government spending 6–7, 15; spending cuts and inter-generational choices 14–16 Rabin, Matthew 53–54 Ramsey, Frank P 58 Rawls, John Bordley 22–23, 56 Reinhorn, Leslie J, 11 Ricardo, David 13, 31; Ricardian equivalence 13–14 Robinson, Joan 11 Robson, Arthur 54 Romer, David 44 Saez, Emmanuel 23–24, 27, 30 Samuelson, Larry 54 Samuelson, Paul A 43, 62, 63, 74 Sandmo, Agnar 11, 13–14, 27, 43, 45, 51, 55, 64 savings 12; debt as a burden on future generations 13–14; dissavings 12; savings tax 43–44, 58 (double taxation of savings 39; ‘neutral’ taxation of savings 37, 39, 43, 46); see also capital income Schumpeter, Joseph 1, 36, 38; ‘The crisis of the tax state’ 5, 20, 42, 55; Das Wesen 41 Seade, Jesus 10 Sen, Amartya 56–57, 85 Shephard, Andrew 24, 50 Slemrod, Joel 53 Smith, Adam social issues: social justice 19, 58, 85; social objectives 17, 28–29, 44, 45, 46, 64, 83; see also child benefit; social welfare function social security contributions 2, 25–26, 52; criticism 52; income tax/social security contributions integration 2, 37, 52–57, 58, 84; Mirrlees Review 52, 53, 55; taxpayer response to taxation 52–55, 57; transparency 52, 55; UK 52 social welfare function 36, 44–46, 47, 52, 58, 63, 85; Bergson–Samuelson social welfare function 58; children in the social welfare function 48–49; individual utility 38, 47, 54, 56, 58, 85; national/global social welfare function 64–65; ODA 63, 64–65; utilitarian social welfare function 38, 39, 44–45, 54–55, 58, 85 (alternatives to utilitarianism 55–57, 85); see also welfare stabilization policy 3–4; automatic stabilization 3, 4, Stantcheva, Stefanie 27, 30 Stark, Thomas 20 steady state 42, 43, 58, 84 Stein, Jeremy 54 Stern, Nicholas 86; Stern Review 77 Stiglitz, Joe 16, 59; Atkinson–Stiglitz theorem 9, 33, 40, 41 subsidy 9, 11, 40, 55, 73 supermarkets 11 Sutherland, Holly 50 take-up 49–51 Tawney, Richard Henry 19 tax: avoidance of 55; choices for taxes 7–12 (range of instruments 8–10, 83; underlying model of the economy and economic assumptions 8, 10–12); crisis of the tax state 55; direct/ indirect taxation 8–12, 38, 70; evasion of 55; expenditure tax 12; fiscal architecture 72; fiscal policy 4, 5, 19, 42, 83; global taxes 2, 67, 68–74, 84; longer-term fiscal problem 1, 5; poll Index tax 8–9; revenue constraint 6, 28, 47–48; revenue maximization 22, 28, 29; tax competition 16, 59; tax increase 19; tax wedge 25, 53, 57, 58; zero rate 8, 9, 10, 33, 37, 39–40, 41, 42–43, 46, 58; see also fiscal consolidation; income; marginal tax rate; optimal income taxation; tax increase/spending cuts balance; taxing the rich; VAT tax increase/spending cuts balance 2, 6–7, 15, 17, 83; 25%/75% ratio 2, 6, 7; medium and long-term implications 17; reducing government spending 6–7, 15; reducing private spending 6; see also tax taxing the rich 2, 16, 18–36; capital income 2, 6, 30–31, 36; elasticity of taxable income 23–25, 26, 29, 59, 62, 63; fairness in taxation 28–29, 39, 85; France 19, 21; labour/capital income joint taxation 30–32, 33; labour income 19, 27–28, 30–32, 33, 36, 38; marginal tax rate 25, 28–29, 33, 59; Mirrlees Review 2, 10, 11, 23–26, 30, 36; optimal income taxation 19, 21–30, 32–33, 36, 58; Osborne, George 22, 25; personal income tax 21–22; revenue maximization 22, 28, 29; ‘the rich’ 19–21, 36; top income 18–21, 36; top tax rate on income 2, 21–24, 36, 59, 83; UK 19, 21–22, 36; see also capital income; inherited wealth; optimal income taxation taxpayer 72; response to taxation 52–55, 57, 84 time poverty 51 transparency 52, 55, 58, 85 Tuomala, Matti 36, 56 UK (United Kingdom): 1976 Sterling Crisis 15, 64; 2008 financial crisis 85–86; Blair, Tony 15, 21; Brown, Gordon 15, 21; Child Tax Credit 99 50–51; Conservative and Liberal Coalition 15, 22, 36, 46; Conservative Government 21; HM Treasury 16–17, 77; income 18, 19, 30; inequality 18, 19; inherited wealth 34–35; Labour Government 15, 21, 22; protecting ODA from cuts 64, 84; social security contributions 52; taxing the rich 19, 21–22, 36; Thatcher, Margaret 6, 21 UN (United Nations): Ban Ki-moon 61, 64, 67; General Assembly 67; UNICEF 67–68; see also MDGs Universal Credit 29 US (United States): Earned Income Tax Credit 50; Eisenhower, Dwight David 12–13; income 19, 20–21, 30, 31, 32; inequality 19 Utilitarianism 38, 39, 44, 45, 54, 55, 58, 85; alternatives to 55–57, 85 utility maximization 38–39, 47, 49, 54, 85; individual utility 38, 47, 54, 56, 58, 85; ‘quasi-maximization’ 54 VAT (value added tax) 2; direct/indirect taxation balance 8–10; food industry 8, 10, 11, 26; luxury rate 11–12; VAT broader base 2, 10, 84; VAT reform on retail prices 10 Vickery, Clair 51 Watkins, George Pendleton 20 wealth: concentration of 18, 30; inequality 18–19; personal wealth/ personal income ratio 34, 35, 84; private/public wealth 12; see also inherited wealth; taxing the rich Weitzman, Martin 77 welfare 17, 22–23, 64, 74; see also social welfare function Williamson, Oliver 27 youth 14–16, 83; see also inter-generational issues Taylor & Francis eBooks FOR g *** YOUR LIBRARIES O ver 23,000 eBook titles in the Hum anities, Social Sciences, STM and Law fro m some o f the w orld's leading im prints Choose fro m a range o f subject packages or create your own! ► Free MARC records ► COUNTER-compliant usage statistics ► Flexible purchase and pricing options ► Off-site, anytime access via Athens or referring URL ► Print or copy pages o r chapters ► Full content search ► Bookmark, h ighlight and annotate text ► Access to thousands o f pages o f quality research at the click o f a button For m ore in fo rm a tio n , p ricin g e n q uirie s o r to o rd e r a free trial, contact yo u r local o n lin e sales team UK and Rest o f W o rld : online.sales@tandf.co.uk US, Canada and Latin Am erica: 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British Library Library of Congress Cataloging in Publication Data Public economics in an age of austerity / A B Atkinson pages cm – (The Graz Schumpeter lectures) Finance, Public Taxation Social... Distribution and Innovations Understanding Their Interrelations Amit Bhaduri www.ebook3000.com 10.Complex Economics Individual and Collective Rationality Alan Kirman 11 .Public Economics in an Age of Austerity. .. Human Development and Capabilities (Atkinson, 2012a) In January 2012, I gave the fifth Sandmo Lecture, with the title Public economics in an age of austerity , at the Norwegian School of Economics