Public finance and public policy jonathan gruber

this page left intentionally blank Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM Public Finance and Public Policy Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM this page left intentionally blank Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM Public Finance and Public Policy fourth edition Jonathan Gruber Massachusetts Institute of Technology Worth Publishers A Macmillan Higher Education Company Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM To Andrea, Sam, Jack, and Ava Senior Vice President, Editorial and Production: Catherine Woods Publisher: Charles Linsmeier Executive Marketing Manager: Scott Guile Marketing Assistant: Julie Tompkins Developmental Editor: Jane E Tufts Digital Solutions Coordinator: Tom Acox Associate Media Editor: Stevenson Curry Assistant Editor: Mary Melis Director of Print and Digital Development: Tracey Kuehn Associate Managing Editor: Lisa Kinne Photo Research Manager: Ted Szczepanski Photo Editor: Cecilia Varas Art Director: Babs Reingold Cover and Text Designer: Kevin Kall Production Manager: Barbara Seixas Supplements Production Manager: Stacey Alexander Supplements Project Editor: Edgar Bonilla Composition: MPS Ltd Printing and Binding: Quad/Graphics Cover Art: ©Tim McGuire/Corbis Library of Congress Control Number: 2012951469 ISBN-13: 978-1-4292-7845-4 ISBN-10: 1-4292-7845-5 ©2013, 2011, 2007, 2005 by Worth Publishers All rights reserved Printed in the United States of America First printing Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM About the Author Dr Jonathan Gruber is a Professor of Economics at the Massachusetts Institute of  Technology (MIT), where he has taught since 1992 He is also the Director of the Health Care Program at the National Bureau of Economic Research, where he is a Research Associate He is an Associate Editor of both the Journal of Public Economics and the Journal of Health Economics In 2009, he was elected to the Executive Committee of the American Economic Association He is also a member of the Institute of Medicine, the American Academy of Arts and Sciences, and the National Academy of Social Insurance Dr Gruber received his B.S in Economics from MIT, and his Ph.D in Economics from Harvard University Dr Gruber’s research focuses on the areas of public finance and health economics He has published more than 140 research articles, has edited six research volumes, and is the author of Health Care Reform, a graphic novel In 2006, he received the American Society of Health Economists Inaugural Medal for the best health economist in the nation aged 40 and under During the 1997–1998 academic year, Dr Gruber was on leave as Deputy Assistant Secretary for Economic Policy at the Treasury Department From 2003 to 2006, he was a key architect of the ambitious health reform effort in Massachusetts, and in 2006 became an inaugural member of the Health Connector Board, the main implementing body for that effort During the 2008 election, he was a consultant to the Clinton, Edwards, and Obama Presidential campaigns In 2009–2010, he served as a technical consultant to the Obama Administration and worked with both the Administration and Congress to help craft the Patient Protection and Affordable Care Act In 2011, he was named “One of the Top 25 Most Innovative and Practical Thinkers of Our Time” by the online magazine Slate In both 2006 and 2012, he was rated one of the top 100 most powerful people in health care in the United States by Modern Healthcare magazine Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM Brief Contents Contents vii Preface xxvii PART I Introduction and Background Why Study Public Finance? Theoretical Tools of Public Finance 25 Empirical Tools of Public Finance 63 Budget Analysis and Deficit Financing 91 PART II Externalities and Public Goods Externalities: Problems and Solutions 121 Externalities in Action: Environmental and Health Externalities 149 Public Goods 183 Cost-Benefit Analysis 207 Political Economy 229 10 State and Local Government Expenditures 263 11 Education 291 PART III Social Insurance and Redistribution 12 Social Insurance: The New Function of Government 321 13 Social Security 355 14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation 391 15 Health Insurance I: Health Economics and Private Health Insurance 419 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform 453 17 Income Distribution and Welfare Programs 489 PART IV Taxation in Theory and Practice 18 19 20 21 22 23 24 25 Taxation in the United States and Around the World 523 The Equity Implications of Taxation: Tax Incidence 557 Tax Inefficiencies and Their Implications for Optimal Taxation 589 Taxes on Labor Supply 623 Taxes on Savings 647 Taxes on Risk Taking and Wealth 675 Corporate Taxation 703 Fundamental Tax Reform 739 Glossary G-1 References R-1 Index I-1 vi Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM Contents Contents vii Preface xxvii PART I Introduction and Background CHAPTER 1  Why Study Public Finance? 1.1  The Four Questions of Public Finance When Should the Government Intervene in the Economy?  Application: The Measles Epidemic of 1989–1991  How Might the Government Intervene?  What Are the Effects of Alternative Interventions?  Application: The CBO: Government Scorekeepers  Why Do Governments Do What They Do?  1.2  Why Study Public Finance? Facts on Government in the United States and Around the World 10 The Size and Growth of Government  10 Decentralization  12 Spending, Taxes, Deficits, and Debts  13 Distribution of Spending  16 Distribution of Revenue Sources  17 Regulatory Role of the Government  19 1.3  Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education 20 Social Security  20 Health Care  21 Education  21 1.4  Conclusion 22 Highlights 22 Questions and Problems 23 Advanced Questions 24 vii Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM CHAPTER 2  Theoretical Tools of Public Finance 25 2.1  Constrained Utility Maximization 26 Preferences and Indifference Curves  27 Utility Mapping of Preferences  29 Budget Constraints  31 Putting It All Together: Constrained Choice  33 The Effects of Price Changes: Substitution and Income Effects  35 2.2  Putting the Tools to Work: TANF and Labor Supply Among Single Mothers 37 Identifying the Budget Constraint  38 The Effect of TANF on the Budget Constraint  39 2.3  Equilibrium and Social Welfare 43 Demand Curves  44 Supply Curves  46 Equilibrium  48 Social Efficiency  49 Competitive Equilibrium Maximizes Social Efficiency  50 From Social Efficiency to Social Welfare: The Role of Equity  52 Choosing an Equity Criterion  54 2.4  Welfare Implications of Benefit Reductions: The TANF Example Continued 55 2.5  Conclusion 57 Highlights 57 Questions and Problems 58 Advanced Questions 59 Appendix to Chapter 2  The Mathematics of Utility Maximization 60 CHAPTER 3  Empirical Tools of Public Finance 63 3.1  The Important Distinction Between Correlation and Causality 64 The Problem  65 3.2  Measuring Causation with Data We’d Like to Have: Randomized Trials 66 Randomized Trials as a Solution  67 The Problem of Bias  67 Randomized Trials of ERT  69 viii Gruber4e_01_FM_i-xxxviii.indd 15/11/12 5:22 PM I-16    I n d e x New York City business improvement districts in, 193 charter schools in, 307 New Yorker magazine, 436–438 New York Times, 249, 263, 535, 543 New York Times Interactive Deficit Calculator, 118 New Zealand, farm subsidies in, 248 Nichols, Albert L., 509n Nickels, Greg, 207 Nilson, J Peter, 176n “9-9-9 Tax Plan,” 739 Niskanen, William, 251, 255 Nitrogen oxides (NOX), 150–155 Nixon, Richard, 91, 453, 531 No Child Left Behind Act, 263–265, 308–309 No-fault insurance, workers’ compensation and, 397 Nominal interest, 654–656 Nominal prices, 98–100 Noncompetitive bidding, privatization and, 253–255 Noncontributors of public goods, 198 Non-excludable public goods, 184–185 Nongroup insurance market health insurance, 426–427 private health insurance and, 423–427 Nonlinear regression analysis, 75n Non-rival public goods, 184–185 Non-satiation, preferences and, 27–29 Nordhaus, William D., 156, 159n, 161n, 162–163 Normal goods, 36–37 Normal Retirement Age, 360n Norquist, Grover, 676 North Korea, economic growth and, 260 Norway marriage subsidies in, 554 tax system in, 527 Notowidigdo, Matthew, 399n Nuclear family, welfare and, 507–509 Numeraire good, 185–187 Nutritional programs, 500 Nyman, John A., 444 O Obama, Barack, 1–2, 92, 113, 149, 165, 257, 264, 291–293, 356, 438, 453, 480–481, 532, 647–648, 672, 683, 703–704 Obesity, public policy concerning, 178–180 O’Brien, Timothy L., 254 Observational data, 71–84 cross-sectional regression analysis, 74–79 TANF example, 87–89 Gruber4e_28_Index_ I1-I26.indd 16 defined, 71 quasi-experimental variation, 79–82 structural modeling, 82–84 time series analysis, 71–74 Occidental Petroleum, 722–723 Occupational Safety and Health Administration (OSHA), 19 Oclander, Jorge, 270n OECD See Organization for Economic Cooperation and Development (OECD) nations Office of Management and Budget (OMB), 8n, 11, 13–15, 96n, 266n, 279n, 321n, 378n, 489n, 513n, 549n, 672n cost-benefit analysis, 212 Office of the Federal Register, 468n Oil exploration market positive production externality, 128–129 subsidies in, 135–137 Okun, Arthur, 500–501 Old Age Security and Disability Income (OASDI) program, 395–396 taxation base for, 535 Oligopoly markets, tax incidence in, 573 Olshansky, S Jay, 179n Olson, Pamela, 647 OMB See Office of Management and Budget Operation Safe Road, 256 Opportunity cost, 32–33 cost-benefit analysis, 210–212 intertemporal constraints, 651 profits, corporate taxation and, 711 Optimal commodity taxation, 601–607 equity implications, 603–607 inverse elasticity rule, 602–603 mathematics of, 619–622 Ramsay rule of, 601–602 Optimal fiscal federalism, 264–265, 275–276 Optimal income taxation, 607–611 mathematics of, 619–622 tax evasion and, 742–746 Optimality condition, 187–188 health insurance, 440–441 income taxes, 607–611 insurance and, 326–327 private goods, 186–188 private provision of public goods, 190 provision of public goods, 184, 187–189 social insurance and, 348–349 taxation, 589–622 tax-benefit linkages, 612–616 Ordeal mechanisms in welfare programs, 509–511 Oregon, health insurance in, 461 Oreopoulos, Philip, 312 Oreskes, Michael, 524n Organization for Economic Cooperation and Development (OECD) nations, 11–12, 15 capital gains taxes in, 683 consumption taxation in, 756–757 fiscal federalism and, 268–269 marriage tax comparisons, 554 relative income inequality comparisons, 492–496 tax systems in, 527, 539 transfer taxes in, 690–691 O’Rourke, Lawrence M., 553n Orshansky, Molly, 494 Orszag, Peter, 117, 384n, 545, 548n OSHA See Occupational Safety and Health Administration Outliers, cross-sectional regression analysis, 77n Overinsurance, in health insurance, 444–445 Overtime pay, labor supply taxation constraints, 627–628 Ozone layer, 158 P Pakistan, price reforms in, 604–607 “Paper losses” in tax shelters, 752–755 Parsons, Donald O., 396, 404–405 Partial equilibrium tax incidence, 574–759 property taxes, 696–699 Partial experience ratings cash effects of, 410–411 social insurance program reform and, 413–414 unemployment insurance layoffs and, 408–411 payroll taxes, 393 workers’ compensation, 411–412 Partially funded system, Social Security as, 362 Partial policy reform, acid rain regulations, 153–155 Particulate emissions, 150–155 trends in, 153 Paternalism in government-run insurance, 336 Social Security and, 368 uninsured patients and, 430–431 Patient-Centered Outcomes Research Institute (PCORI), 484 Patient Protection and Affordable Care Act (ACA) cost controls in, 481–485 passage of, 1–2, 21, 4530454 15/11/12 4:54 PM Index     political history of, 480–481 smoking-related costs, 168–169 subsidies in, Patient-side moral hazard, 433–435 Paul, Ron, Pay-as-you-go (PAYGO) process, 96–97 Icelandic taxation system, 623–624 Social Security and, 361–362 Payne, A Abigail, 286, 306n Payne, Abigail, 201 Payroll taxes, 524–525 deadweight loss in, 597–601 growth of, 18–19 increases in, 379–380, 387 Social Security financing and, 357–358 state and local tax revenues from, 527 tax-benefit linkages with social insurance programs and, 612–616 tax incidence in, 569–571 unemployment insurance and, 393–394 U.S revenue from, 526 PCORI See Patient-Centered Outcomes Research Institute (PCORI) Pearson, Rick, 257n Pell Grants, 314, 316 Pelosi, Nancy, 1–2 Peltzman, Sam, 297 Pension plans defined benefit pension plans, 659–661 defined contribution pension plans, 659–661 employer-provided pensions, tax subsidies for, 659–661 private plans, Social Security vs., 361–362 simplified employee pension IRA (SEP-IRA), 661 Perciasepe, Robert T., 154n Perfectly elastic demand, tax burden and, 565–567 Perfectly inelastic demand, tax burden and, 564–567 Permits, regulation through, 142–143 Perot, H Ross, 523–524 Perot, Ross, 245 Perry, Rick, 355–356 Personal computers, economic depreciation of, 713–714 Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA), 489, 517–519 effects of, 518–519 Persson, Torsten, 255, 258 Gruber4e_28_Index_ I1-I26.indd 17 Petermann Glacier, 156 Physical externalities, 168–169 PIA See Primary Insurance Amount (PIA) Pigou, A C., 135–137 PMB See Private marginal benefit PMC See Private marginal cost Political competition, 255 Political economy, 229–260 Arrow’s impossibility theorem, 238–241 direct democracy and, 233–235 farm policy and, 247–248 government failure and, 252–259 Leviathan theory and, 255 majority voting and, 235–238 median voter theory, 241–242 national health insurance and, 478–480 preference aggregation mechanisms, 234–242 public choice theory and, 251–259 public finance and, 10 public goods and, 184 representative democracy, 242–250 taxation and, 523–524 tax fairness and, 534–537 tax reform and, 750–756 unanimous consent on levels of public good, 231–234 Pollack, Andrew, 70n Pollak, Robert A., 171n Poll taxes, 532 Pollution reduction, 137–146 cost uncertainties in, 143–146 international emissions trading and, 159–163 multiple firms model, 140–141 Pooling equilibrium in health insurance, 333–334 insurance and, 332 Popular referenda, 235 Population growth effect, Social Security income redistribution and, 363–367 Portugal, marriage subsidies in, 554 Positive externalities, 128–129 financial externalities, 170 homeownership as, 544–546 optimal fiscal federalism and, 275 subsidies, 135–137 Poterba, James, 368n, 584, 670n, 690 Poverty level/poverty line income inequality and, 494–496 means-tested welfare, moral hazard and, 501–502 measurement difficulties, 495–496 Medicaid coverage and, 455–456 Social Security and, 369 I-17 Poverty rate evolution in U.S of, 494–496 single-female-headed families, 507–509 Social Security and, 369 Pozen, Robert C., 381 PPOs See Preferred provider organizations (PPOs) PPS See Prospective payment system (PPS) for Medicare Precautionary savings model, 656–659, 668–669 Predictability of events, consumption smoothing of social insurance and, 343 Preexisting distortions, tax efficiency and, 596–601 Preference aggregation cost-benefit analysis, 200 Lindahl pricing, 233–234 mechanisms for, 234–242 Arrow’s impossibility theorem, 238–239 direct democracy, 234–235 majority voting, 235–238 median voter theory, 241–242 preference restrictions, 239–241 Tiebout model of fiscal federalism and, 269–274 Preference knowledge cost-benefit analysis, 200 Lindahl pricing and, 233 Preference revelation cost-benefit analysis and, 199–201 Lindahl pricing and, 233 Tiebout model of fiscal federalism and, 269–274 Preference(s) Arrow’s impossibility theorem and restriction of, 239–241 government-revealed preferences, 221–222 indifference curves and, 27–29 for public goods, 199–201 revealed preference, 215–216, 220–222 single-peakded preferences, 239–241 utility mapping of, 29–30 Preferred provider organizations (PPOs), reimbursement in, 446–449 Pregnancy Discrimination Act, 616 Premium support systems, in Medicare, 472–474 Prescription drugs, Medicare coverage of, 463–466 Present discounted value (PDV), 104 cost-benefit analysis, 211–212 15/11/12 4:54 PM I-18    I n d e x depreciation allowances, corporate taxes, 719–720 expense investments, 713–714 foreign tax credit, 733 generational accounting and, 105–107 intertemporal budget constraints, 105 long-run fiscal imbalance and, 108–109 savings tax subsidies, 661–662, 758–759 Social Security Wealth and, 364–367 Price, Joshua A., 180 Price-discriminating monopolies, 572 Price mechanisms in education, 296–305 government intervention and, Lindahl pricing, 231–234 transfer pricing, international corporate taxation and, 735–736 Price ratios, private goods optimization, 187–188 Prices asymmetric information concerning, 329–331 changes, substitution and income effects, 35–37 elasticity, supply, 50 externalities and, 137–146 gross and after-tax prices, 563–564 Pakistan reform of, 604–607 real vs nominal, 98–100 taxation and economic efficiency, 590–601 taxes vs quantity regulation, 139–140 tax incidence and, 567–568 time series analysis of, 73–74 uncertainties of intervention in, 144–146 Price supports, farm policy and, 247–248 Primary earners child care and, 639–643 labor supply taxation constraints, 628–631 Primary Insurance Amount (PIA) disability insurance and, 395–396 increase in retirement age and, 380 Social Security financing and, 359–361 Social Security reforms and, 387 Private benefits and costs cost-benefit analysis, 211–212 negative production externality, 124–129 pension plans, 361–362 private education, 297–299 Private goods community revenue redistribution and, 278–287 optimization of, 185–187 Gruber4e_28_Index_ I1-I26.indd 18 Private health insurance, 420–421, 423–427, 458–459 prescription drug coverage and, 463–465 problems with, 478–480 Private marginal benefit (PMB), 125–129 Coase Theorem and, 130–134 corrective taxation, 134–135 pollution reduction, 138–146 subsidies and, 136–137 Private marginal cost (PMC), 124–129 Coase Theorem and, 130–134 corrective taxation, 134–135 pollution reduction, 138–146 subsidies and, 136–137 Private savings national savings vs., 669–671 Social Security and, 368–369 Private schools enrollment in, 307 higher educational institutions as, 314–317 Private sector charitable giving tax deductions and, 540–543 corrective taxation of goods in, 134–135 free rider problem and, 192 government intervention in, income redistribution and, 490–491 insurance in, 322–323 lives saved valuations, 218–222 negative externality solutions in, 130–134 acid rain and, 50–155 public goods provision by, 189–196, 204–206, 252 cost-benefit analysis, 211–212 restrictions on, tax-benefit linkages in social insurance programs and, 614–616 underprovision in, 189–190 Privatization government failure and, 252–255 of Social Security, 383–385 Problem negotiation, negative externalities, 134 Producers surplus, 50–51 taxation and economic efficiency for, 590–592 tax burden on, 561 Production complementarities, labor supply taxation constraints, 627–628 Production externalities corrective taxation, 134–135 negative externalities, 124–126 acid rain, 150–155 positive externalities, 128–129 subsidies, 135–137 Production function economic growth and, 114–115 supply curves, 46–48 Productivity in education, 294, 309–310, 312 job lock phenomenon and, 430–431 labor force taxes and, 623–624 moral hazard of disability insurance, 405 smoking and loss of, 168–169 Product markets, tax incidence in, 579 Profit maximization marginal productivity and costs and, 47–48 supply curves, 46–48 Progressive political movement, 235 Progressive price indexing, 381 Progressive tax systems, 534–537 estate taxes and, 675–676 inefficiencies in, 597–601 marriage tax, 550–554 Project STAR, 313 Property damage acid rain and, 151–152 flood insurance, 336–339 insurance for, 324 tax equity issues and, 537–539 Property rights, negative externalities and, 130 Property taxes, 19, 695–699 capitalization and, 276, 753–754 compliance with, 742 defined, 695 land vs improvements, 699 Proposition 13 tax revolt and, 235, 276–277 redistribution through, 276–287 residential vs business property, 697–698 as revenue source, 267 school financing equalization and, 284–287 state and local tax revenues from, 527 Tiebout model of fiscal federalism and, 272–274 as wealth taxes, 525, 676 Proportional tax systems, 534–537 Prospective capital gains tax reduction, 686 Prospective payment system (PPS) for Medicare, 466–469 PRWORA See Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) 15/11/12 4:54 PM Index     Psychological motivations for health insurance, 445 Public choice theory, 251–259 corruption and, 258–259 Public finance defined, dominance of, 10 empirical public finance, four questions of, 3–10 effects of government intervention, 8–9 grounds for government intervention, 3–7 process of government intervention, reasons for government intervention, 8–9 goals of, 2–3 for goods and services, of private provisions, reasons for, 9–10 theoretical tools in, 25–58 Public goods, 16, 183–206 business improvement districts, 192–193 community revenue redistribution and, 276–287 contributors vs noncontributors of, 198 cost-benefit analysis of, 184, 199–201, 207–225 defined, 183–184 free public education as, 297–299 free rider problem and, 189–192 health insurance as, 476–477 impure public goods, 184–185 mathematics of provision of, 204–206 optimal provision of, 184–189 preferences for, 199–201 private provision of, 189–196, 252 property tax reductions and, 276–277 public provision of, 196–201, 252 pure public goods, 184–185 taxation for, 540–550 Tiebout model of fiscal federalism and, 269–274 unanimous consent on levels of, 231–234 underprovision of, 189–190, 206–207 Public housing, 500 Public opinion, on taxes, 523–524 Public projects benefits of, 212–222 costs of, 208–212 Public radio as public good, 200 Public school choice programs, 306–307 Public school incentives programs, 308 Gruber4e_28_Index_ I1-I26.indd 19 Public sector externality remedies in, 134–137 insurance provision and adverse selection avoidance through, 334 public goods provision by, 196–201, 252 unemployment insurance provision from, 392–393 Pure profits taxation, 710–711 Pure public goods, 184–185 Q Quality assessment health care cost controls and, 482–485 health care provider reimbursement and, 448 school quality, 312–313 Quantity approach to externalities, 137–146 in education, 296–305 external permits, quantity regulation through, 142–143 international emissions trading and, 160–163 prices vs quantity regulation, 139–140 quantity regulation model, 140–141 uncertainties in, 144–146 Quasi-experimental research advanced techniques for social insurance, 417–418 empirical research as, 79–82 flypaper effect of block grants, 285 health effects of particulates, 152 labor supply taxation, 629 moral hazard analysis disability insurance, 405–407 unemployment insurance, 400–404 returns on education estimations, 311–313 school quality, 313 social insurance programs, 417–418 Social Security effect on savings, 370 tax-benefit linkages in social insurance and, 616 time savings valuation, 216 Quayle, Dan, 507 Quigley, John, 252–253 R Rabushka, Alvin, 765–766 Race educational vouchers and segregation by, 302–303 median voter model and, 250 Race to the Top educational initiative, 293 Ramsay, Frank, 601–602 I-19 Ramsay rule of optimal commodity taxation basic principles, 601–602 consumption taxation, 760 equity implications, 603–607 inverse elasticity rule, 602–603 mathematics of, 620–622 RAND Health Insurance Experiment, 438–440, 461 Randomized trials empirical public finance research, 63–64 empirical research in public finance, 66–71 attrition in, 70–71 bias problems, 67–68 control and treatment groups, 67 estrogen replacement therapy example, 66–69 TANF policies example, 69–70 labor supply taxation, 629 unemployment insurance duration and, 403–404 of welfare programs, 512–517 Rangel, Charles, 647 Rawls, John, 54n Rawlsian social welfare function, 54, 490 Raymond, Margaret E., 308n Reagan, Ronald, 91, 419, 523, 538 Real interest rate, 654–656 Realization, taxation on, 681–682 Real prices, 98–100 Real-world data cross-sectional regression analysis, 76–79 private provision of public goods, 195–196 risk taking taxation, 678–680 smoking effects, 168–169 Reber, Sarah J., 333 Redistribution in education, 296 fiscal federalism and, 276–287 government intervention and, 6–7 in government-run insurance programs, 335–336 iron triangle of welfare programs and, 505 of past earnings, Social Security financing and, 359–360 risk taking taxation, 679–680 Social Security income, 362–367 welfare reform and, 490–491 Redistricting, median voter model and, 250 Reduced form estimates, empirical public finance, 83–84 15/11/12 4:54 PM I-20    I n d e x Reemployment earnings insurance, 414 Referendums, 235 Refundable taxes, 547–549 Registered Home Ownership Savings Plan (RHOSP), 670–671 Regression analysis cross-sectional regression analysis, 74–75 of public goods, 200 returns on education and, 311–313 Regression discontinuity analysis, 176 Regression line, cross-sectional regression analysis, 77 Regressive tax systems, 534–537 Regulation of acid rain, 152–155 of alcohol consumption, 174–175 costs per life saved of, 221–222 externalities and, 137 quantity approach and, 137–146 government role in, 19 illicit drugs, 175–178 instrument choice in, 145–146 legal drinking age, 176–177 obesity policies and, 178–180 prices vs quantity regulation, 139–140 quantity regulation through external permits, 142–143 uncertainty in, 143–146 zoning regulations, 272–274 Reid, T R., 539n Reimbursement for health care providers, 445–449 Relative deprivation, 496–497 Relative income inequality, 491–496 Rents, cost-benefit analysis and, 210–211 Repatriation, corporate taxation and, 733 Repetto, Andrea, 657n Replacement rate in social insurance programs, 359–360 unemployment insurance, 394–395 Reporting effect, tax efficiency and, 748 Representative democracy farm policy and, 247–248 median voter model and, 249–250 political economy and, 230, 242–250 Resident similarity, Tiebout model of fiscal federalism and, 273–724 Restaurant taxes, general equilibrium in, 574–577 Retained earnings, corporate financing and, 710–711 Retirement hazard rate, 372–376 Retirement planning retirement age increases, 380 savings tax incentives and, 659–672 Gruber4e_28_Index_ I1-I26.indd 20 pension plan subsidies, 659–661 Social Security and, 368, 370–376 taxes on savings and, 647–648 Retirement Savings Accounts, 647 Retrospective reimbursement, health care providers, 445–449 Returns to education, measurement of, 309–313 Reuters, 675n Revealed preference in lives saved valuation, 219–222 in time valuation, 215–216 Revenue Act of 1962, 538 Revenues corporate tax structure, 712 distribution of, 17–19 government spending and, 13–15 property taxes, 267 state/local governments, 17–19, 266–269 tax cuts and loss of, 112–113 value of additional government revenues, 602 Revkin, Andrew C., 156 RHOSP See Registered Home Ownership Savings Plan Ricardian equivalence, 117 Rich, Jeffrey, 708 Risk adjustment, in Medicare, 474 Risk aversion health insurance, 432–433 insurance and, 327 Risk pool, private health insurance, 424–425 Risk premiums in insurance, 332 Risk taking, taxation of, 676–681 financial investment model, 677–678 labor investment, 680–681 less-than-full tax offset, 679 real-world complications, 678–680 redistributive taxation, 679–680 Robins, Philip K., 513, 519n Robinson, James A., 260 Rohwedder, Susann, 368, 370n Romney, Mitt, 355–356, 687–688 Rosen, Harvey S., 276–277, 544n Rosenbaum, Dan T., 636 Rossi, Rosalind, 270n Rossotti, Charles O., 745 Roth, William, 744–746 Roth IRAs, 666–668 Rothstein, Jesse, 316 Rothstein, Kevin, 301n, 345n Rouse, Cecilia E., 307, 316 Royer, Heather, 312n Rubinfeld, Daniel L., 274 Rubio, Marco, 97 Ryan, George, 256–257 S Saez, Emmanuel, 492, 691, 729n, 731, 747n, 760–761 Safety externalities, 128 cost-benefit analysis of, 216–222 costs per life saved for regulations, 221–222 moral hazard and, 346–348 Sales taxes, 19, 525 Salvanos, Kjell, 312n Samaritan’s dilemma, flood insurance, 336–339 Same indifference curve, 36–37 Sample size, randomized trials, 68–69 Samuelson, Paul, 192 Samwick, Andrew, 387 San Jose, California, 277 Santorum, Rick, 150 Saver’s tax credit, 660–661 Savings alternative models, 656–659 consumption taxation and, 758–765 defined, 649 economic growth and, 114–115 expectations and, 117 Individual Development Accounts, 545 intertemporal budget constraint, 650–651 intertemporal choice model, 649 liquidity constraints, 656–659 national savings plans, 378–379 precautionary savings model, 656–659, 668–669 private vs national savings, 669–671 Ricardian equivalence and, 117 self-control models of, 657–658, 669 social insurance and personal savings, 658 Social Security and, 368–370 taxes on, 647–672 alternative models, 656–659, 668–669 inflation and, 654–656 interest rate effects, 653–654 low savers vs high savers, 664–666 retirement savings incentives, 659–672 subsidies and return on, 661–672 substitution and income effects, 651–653 traditional theory, 649–656 Schiller, Robert E., 278n Scholz, John Karl, 70 School accountability, 308 School funding See also Education educational vouchers and inequities in, 303–304 15/11/12 4:54 PM Index     equalization of, 284–287 majority voting concerning, 236–238 School Lunch and Breakfast Programs, 500 School segregation, educational vouchers and, 302–303 Schwab, Robert M., 286 S-corporations, 706 Scott-Morton, Fiona, 465 Screening, education as tool for, 309–310 Seattle, Washington, 207–208 Secondary benefits, 224 Secondary earners child care and, 639–643 labor supply taxation constraints, 628–631 Second Fundamental Theorem of Welfare Economics, 53 Secondhand smoke, 170–171 Selective, median voter theory and, 245–246 Self-control savings models, 657–658, 669 smoking policies and, 172–174 Self-insurance social insurance vs., 339–344 worker’s compensation and, 411, 413–414 Self-Sufficiency Project (SSP) (Canada), 514 Senyek, Christopher, 734 Separating equilibrium in health insurance, 334 insurance and, 332–333 September 11, 2001 terrorist attacks, 111 Sequestration requirement, budget deficits and, 96–97 Serrano v Priest, 287 Severson, Kim, 180n Shaheen, Jeanne, 391 Shakespeare, William, 344 Shapiro, Jesse M., 544 Shareholders, corporate taxation and, 705–706 Sharer, Kevin, 707 Shea, Dennis, 672 Sheepskin effect of education, 311n Shelby, Richard, 767 Sherwood, Rocky, 345 Shopping, Tiebout model of fiscal federalism and, 269–274 Shore, Dinah, 539 Short-run stabilization, 113–114 Short-run tax incidence, 577–579 Shoven, John, 379 Simon, Kosali, 458n, 459n Simonsen, Marianne, 514n Gruber4e_28_Index_ I1-I26.indd 21 Simplified Employee Pension IRA (SEP-IRA), 661 Simpson, Alan, 356 Single-dimensional voting, median voter model, 244 Single mother labor supply See also Women workers child care costs and, 640–643 child care subsidies and labor force participation, 514–515 cross-sectional regression analysis, 74–79 Earned Income Tax Credit effects on, 636 efforts to limit, 517–519 moral hazard of welfare and, 507–509 quasi-experimental variation, 79–82 TANF program, labor force participation and, 37–43, 72–77 Single-payer health insurance, 454 history of, 476–477 Single-peaked preferences, 239–241 Sixteenth Amendment to U.S Constitution, 265–266 Skinner, Jonathan, 658n Slemrod, Joel, 532n, 691–692, 695n, 744, 746, 749n, 762, 764n, 767n Smalhout, James, 384n SMB See Social marginal benefit SMC See Social marginal cost Smetters, Kent, 105, 108 Smith, Robert S., 406n Smoking cigarette prices and, 73–74 education levels and rates of, 312 externalities of, 167–171 health costs of, 167–169 as health externality, 165–174 internalities related to, 171–174 physical and financial effects, 167–169 youth smoking rate, 73–74, 171–174 Social benefits and costs in education, 294 homeownership, 545 negative production externality, 124–129 public health insurance, 476–477 Social capital, 196 Social discount rate, cost-benefit analysis, 211–212 Social efficiency, 49 moral hazard and, 347–348 optimization of public goods, 189 social welfare and, 52–54 total social surplus, 50–52 Social insurance programs See also Insurance; Social Security administrative costs, 335 I-21 asymmetric information and, 328–331 comparisons of UI, DI, and WC, 397–399 consumption smoothing benefits of, 399–400 cost-benefit analysis, 397–399, 408–411 defined, 322 externalities in, 335 firm costs and benefits of, 408–411 global duration of, 398–399 government role in, 321–349, 352–353 moral hazard and, 344–348, 400–408 optimality in, 348–349 paternalism in, 336 personal savings and, 658 redistribution through, 335–336 reform initiatives, 412–414 replacement rate, 359–360 self-insurance vs., 339–344 spending on, 16 tax-benefit linkages and financing of, 612–616 Social marginal benefit (SMB), 125–129 median voter theory, 241–242 pollution reduction, 138–146 private goods optimization, 186–188 public goods optimization, 186–188 Social marginal cost (SMC), 124–129 cost-benefit analysis, 210 pollution reduction, 138–146 private goods optimization, 186–188 taxation and economic efficiency, 591–592 Social optimality, of public goods, 205–206 Social Security, 355–387 averaging period for, 358–361 benefits calculations, 358 benefits decreases in, 380–381 benefits payment system for, 360 consumption smoothing benefits, 367–370 crowd-out effects of, 368–370 current issues facing, 355–357 earnings test for, 360 elderly living standards and, 369–370 eligibility requirements for, 357–358 family member benefits, 360–361 financing for, 357 generational accounting and, 106–107 government spending on, 321–322 income redistribution through, 362–367 international comparisons with, 373–376 long-run fiscal imbalance in, 108–109 15/11/12 4:54 PM I-22    I n d e x moral hazard and, 345–348 operation over time, 361–362 payroll tax financing of, 569–571 present discounted value and obligations to, 105 private savings and, 368–369 privatization of, 383–385 projected growth of, 19 rationales for, 367–368 reform of, 376–387 fundamental reforms, 382–387 Greenspan commission proposals, 378 incremental reforms, 379–382 mixed proposals for, 386–387 proposals for, 355–357 Social Security Trust Fund and national savings, 378–379 retirement and, 370–376 smoking-related costs, 169–170 spending on, 16 stock investment proposal for, 382–383 structure and function of, 357–367 taxable wages bas for, 379–380 tax increases for funding of, 379 Social Security Administration, 321n, 344n, 357n, 359n, 428n, 499n Social Security Trustees, 20n, 355n, 360n, 377n Social Security Trust Fund, 378–379 investment in stocks of, 382–383 Social Security Wealth (SSW), 364–367 crowd-out effect on savings and, 370 Social surplus, 50–52 Social welfare function (SWF), 53–54 efficiency-equity trade-off, 500–501 equilibrium and, 43–55 competitive equilibrium, 50–52 demand curves, 44–46 equity issues, 52–55 market equilibrium, 48 social efficiency, 49–50 supply curves, 46–48 optimal income taxation, 607–611 mathematical model, 622 Rawlsian social welfare function, 54 Second Fundamental Theorem of Welfare Economics, 53 social efficiency and, 52–54 utilitarian social welfare function, 53–54 welfare reform and, 490 Soft-drink consumption, obesity management and, 180 Sonstelie, Jon, 216 Sood, Neeraj, 469 Soros, George, 675 Sorrel, Amy Lynn, 179n Gruber4e_28_Index_ I1-I26.indd 22 South Korea, economic growth and, 260 Special education, costs of, 305 Special flood hazard areas (SFHAs), 337–339 Special Supplemental Nutrition Program for Women, Infants, and Children (WIC), 500 Spending conditional block grant impact on, 282–284 discretionary spending, 95 distribution of, 16–17 entitlement spending, 95 government patterns of, 13–15 on social insurance programs, 321–322 tax expenditures, 549–550 tax subsidies crowd-out vs crowd-in mechanisms, 541–543 Spiegelman, Robert G., 403n Spillovers, Tiebout model of fiscal federalism and, 273 Stabenow, Debbie, 391 Stabilization policies, macroeconomic effects, 113–114 Staff model for HMOs, 447–449 Stamler, Bernard, 543n Standard error, cross-sectional regression analysis, 88–89 Starr, Paul, 476, 480n State-dependent utility function, 327n State/local governments budget policies and deficits, 98 expenditures by, 16–17, 263–288 redistribution across communities, 276–287 higher education and role of, 314–317 Medicaid expansions, 460 mobility and health insurance coverage, 431 public projects cost-benefit analysis, 209–222 revenue distribution, 17–19, 266–269 spending by, 12–13, 15, 266–269 taxation by, 527, 537–539 welfare programs in, 512–519 States of the world, insurance and, 324–325 Static scoring, 102–103 means-tested welfare, moral hazard and, 503–504 Statistical significance, cross-sectional regression analysis, 88–89 Statutory incidence, tax burden, 559–561 Stecher, Brian M., 313 Steel market corrective taxation in, 134–135 negative production externalities in, 124–126, 130–131 Steiner, Janet, 278n Stock options executive compensation and, 708 family shares invested in, 694–695 Social Security Trust Fund investment in, 382–383 Stocks, John, 291–292 Stolberg, Sheryl Gay, 97n Stratmann, Thomas, 250 Structural estimates, empirical public finance, 83–84 Structural modeling, empirical public finance, 82–84 Sturm, Daniel, 255 Subsidiaries, international corporate income taxation, 732–736 Subsidies child care subsidies, 514, 639–643 defined, 136 direct subsidies, 247–248 employer subsidies for health insurance coverage, 425–427 externalities and, 135–137 health insurance, 441–445 labor market, welfare reduction and, 513–517 of layoffs, partial experience ratings and, 408–409 Pakistani taxes and, 604–607 partial experience rating in layoffs, 408–411 for prices, tax subsidies crowd-out vs crowd-in mechanisms, 541–543 direct spending vs., 542–543 employer-provided pensions, 659–661 home ownership, 543–546 intertemporal consumption trade-off, 663 marginal vs inframarginal effects, 541–543 retirement savings, 659–672 return on savings from, 661–672 wage subsidies, 73–74 Substitution effect benefit guarantees and, 41 health insurance and, 444–445 of interest rates, 115n labor supply taxation, 626–628 price changes and, 35–37 taxes on savings and, 651–653 Sulfur dioxide emissions acid rain and, 150–155 allowance system and emissions trading, 154–155 as negative externality, 137–138 15/11/12 4:54 PM Index     Sullivan, James X., 496n, 518n, 519n Summers, Lawrence K., 612, 676 Sunset provision in tax cuts, 112–113 Supplemental Security Income (SSI), 497, 499 Supply curve, 46–48 international emissions trading and, 160–163 labor supply taxation, 625–627 TANF benefits efficiency, 56–57 tax-benefit linkages in social insurance programs and, 613–616 Supply elasticity price elasticity, 50 tax burden and, 564–567 Supply-side economics, labor force taxes and, 623–624 Surpluses budget analysis and, 102, 110–111 cash flow, 13 consumer, 49–50 producer, 50–51 social, 50–52 Survey-based measurements, cost-benefit analysis, 214–216 SUVs, negative externalities of, 127–128 Swagel, Philip L., 734 Swardson, Anne, 539n, 753n Sweden, 12 SWF See Social welfare function (SWF) Switzerland, marriage subsidies in, 554 T Tabellini, G., 258 Taiwan, National Health Insurance in, 658 TANF See Temporary Assistance for Needy Families (TANF) program Targeted benefits health care cost controls and, 482–485 labor market subsidies, 513–517 moral hazard of welfare and, 507 ordeal mechanisms in welfare as, 509–511 social insurance program reform and, 412–413 Tax-benefit linkages optimal fiscal federalism and, 275 social insurance program financing and, 612–616 Taxes and taxation, 523–554 See also Corporate taxation; Income taxes; Property taxes; Revenues ability to pay approaches, 534n on accrual, 681–682 ad valorem taxes, 559 Alternative Minimum Tax, 530–532 avoidance of taxes, 593–594, 741–746 Gruber4e_28_Index_ I1-I26.indd 23 benefits approach to, 534n benefit taxation, 232–234 business tax breaks, 698–699 capital gains, 676, 681–689 basis at death, 682 “carried interest” and, 688–689 entrepreneurship fostered by, 685–686 housing exclusion, 682 inflation protection from, 684 limitations of, 688–689 performance history of, 682–683 support for, 684–688 transaction efficiency, 684–685 capital income, 94, 648 cascading taxation, 762–763 cash-flow taxation, 765 child care and, 639–643 on cigarettes, 173–174 consumption, 525–526, 561 compliance issues, 762 design of, 762–765 economic efficiency and, 591–592 reform of, 756–765 on consumption, 525 consumption taxation, 756–765 corrective taxation, 134–135 cost-benefit analysis and, 208 deadweight loss and system design, 596–601 deductions vs credits, 545–549 direct taxes, 525 double taxation, 692–693 on earnings, 524–525 economic efficiency and, 590–601 elasticities and inefficiency determination, 592–601 graphical approach, 590–592 effective tax rates, 581–584 efficient tax system design, deadweight loss and, 596–601 employer subsidies for health insurance coverage, 425–427 estate taxes, 675–676, 690 administrative difficulties with, 693–694 benefits of, 691–695 charitable giving and, 675–676 compliance and fairness in, 694–695 criticism of, 692–695 cruelty of, 692 defined, 690 as double taxation, 692–693 excise taxes, 525 as revenue source, 19 tax incidence and, 559, 580–584 exemptions, 528 expenditure tax, 760, 764–765 I-23 externality/public goods rationales, 539–550 fairness issues in, 532–535 consumption taxation, 758–759 estate taxes, 694–695 flat tax proposals, 765–768 generational accounting and, 106–107 gift taxes, 690 global comparisons of, 525–527, 554 government spending and, 13–15 health care cost controls and, 483–485 health insurance subsidies and, 441–445 higher education tax breaks, 315–316 income tax base and, 536–539 income tax structure in U.S., 527–532 inefficiencies in, 589–622 labor supply taxation, 623–643 basic theory, 625–627 child care costs and, 639–643 Earned Income Tax Credit, 631–639 elasticity estimations, 629 hours worked and overtime constraints, 627–628 married couples, EITC effect on, 637 primary and secondary earners, 628–630 single-mother labor supply, EITC and, 636–637 tax wedges issues and, 641–642 lump-sum taxes, 272–274 marriage tax, 550–554 obesity management and, 178–180 optimality of, 589–622 commodity taxation, 601–607 mathematical models, 619–622 payroll, 18–19 poll taxes, 532 price regulation through, 139–140 on private sales or purchases, progressive tax systems, 534–537 proportional tax systems, 534–537 Proposition 13 tax revolt and, 235 on realization, 681–682 reform proposals for, 739–769 compliance improvement, 741–746 refundability debate over, 547–549 regressive tax systems, 534–537 restaurant taxes, 574–577 retirement planning and, 371–376 revenue distribution and, 17–19, 93–94 on risk taking, 677–681 financial investment model, 677–678 labor investment, 680–681 less-than-full tax offset, 679 real-world complications, 678–680 redistributive taxation, 679–680 15/11/12 4:54 PM I-24    I n d e x sales taxes, 19, 525 on savings, 647–672 alternative models, 656–659 incentives for, impact of, 670–671 inflation and, 654–656 interest rate effects, 653–654 low savers vs high savers, 664–666 retirement savings incentives, 659–672 Roth IRAs, 666–668 substitution and income effects, 651–653 traditional theory, 649–656 smoothing of, 600–601 on Social Security benefits, 381–382 Social Security financing and, 357 Social Security reform and increases in, 379 statutory burden of, 559–561 subsidies consumer sovereignty vs imperfect information, 543 crowd-out vs crowd-in mechanisms, 541–543 direct spending vs., 542–543 employer-provided pensions, 659–661 home ownership and, 543–546 intertemporal consumption trade-off, 663 marginal vs inframarginal effects, 541–542 retirement savings, 659–672 taxable income computation, 529 taxation units, 550–554 tax base computations, 527–528, 749 broadened base, pressures against, 751–752 consumption taxes, 757–765 tax base definition, 536–539 tax burden distribution, 561–564 product market spillover, 579 tax capitalization, 276, 753–754 tax credits, 530–532 corporate tax credits, 715 deductions vs., 545–549 saver’s tax credit, 660–661 tax cuts, 112–113, 534–537, 548–549 dividend tax cut, 730–731 Laffer curve and, 609–611 tax evasion, 741–746 tax expenditures, 549–550 tax incidence, 557–588 balanced budgets, 573–574 consumer/producer tax burden, 561 corporate taxes, 715–716 current vs lifetime incidence, 583–584 Gruber4e_28_Index_ I1-I26.indd 24 distribution of tax burden, 561–564 extensions, 568–574 factor markets, 568–571 general equilibrium, 574–579 imperfectly competitive markets, 571–573 mathematics of, 587–588 monopoly markets, 572–573 oligopolies, 573 prices and, 567–568 product market spillover, 579 property taxes, 697–699 rules of, 558–568 tax scope in, 578–579 time period effect, 577–579 in U.S., 579–584 wage adjustment impediments, 570–571 tax rates average and marginal tax rates, 532–533 corporate tax rate, 714–715, 720–721 effective corporate tax rate, 720–721 effective tax rates, 581–584 government smoothing of, 600–601 growth effect, Social Security income redistribution and, 365–367 marginal deadweight loss and, 594–595 negative effect tax rates, 721 revenue consequences of increase in, 749–750 revenue increase with reduction of, 609–611 tax base changes and, 749 taxes paid and, 529–532 tax reforms code simplification, 746–747 corporate taxation, 722–723 efficiency improvements, 747–750 grandfather clauses, 754–755 politics and economics of, 750–756 President’s Advisory Panel on, 768–769 tax code simplification and, 746–747, 751 tax scope, 578–579 tax shelters, 752–756 tax wedge, 561, 569–571 broadest definition, 641 capital gains taxes and, 687–688 child care costs, 641–643 transfer taxation, 690–695 types of, 524–527 value-added tax, 762–764 vertical and horizontal equity in, 533–537 on wealth, 525, 534–535, 676–700 welfare financing, 501 wireless communications taxation example, 600–601 withholding in, 530 Tax force logarithm, retirement hazard and, 375n Tax loss offset, risk taking taxation, 679–680 Taxpayer Bill of Rights, 745 Tax Policy Center, 531n, 535, 549, 632n tax incidence analysis, 580–584 Tax price, school financing equalization and, 286–287 Tax rate growth effect, Social Security income redistribution and, 365–367 Tax Reform Acts, 629, 683 politics of, 750–751 tax compliance and, 740, 742 corporate taxes, 722–723 tax shelters and, 755–756 Tax Relief Act, 693–694 TechAmerica, 704 Temporary Assistance for Needy Families (TANF) program, 25 administrative costs of, 501 benefit guarantee changes, 39–40 benefit reductions, 55–57 budget constraints, 39–43 as cash welfare program, 497–498 child support collection and, 515 cross-sectional regression analysis in, 74–79 labor supply and, 41–43 quasi-experimental variation, 79–82 randomized trials in, 69–70 single mother labor supply, 37–43 structural and reduced estimates in, 83–84 time limits and work requirements in, 498, 509–511 time series analysis of, 71–74 utility maximization mathematics, 60–61 Tennessee, school quality assessment in, 313 Territorial tax system, international corporate income taxation, 732–736 Thailand generational imbalance in, 107 tax avoidance in, 593–594 Thaler, Richard, 285, 658 Thatcher, Margaret, 272, 532 Theoretical tools, 25–58 constrained utility maximization, 26–37 15/11/12 4:54 PM Index     Tiebout, Charles, 269–274 Tiebout model for fiscal federalism, 269–274 community revenue redistribution and, 276–287 educational vouchers and, 301 property taxes, 697–699 Time limits in welfare TANF program, 498, 509–511 welfare reform and, 517–519 Time periods in tax incidence, 577–579 Time savings valuation, public projects cost-benefit analysis, 213–216 Time series analysis observational data, 71–74 Social Security Wealth, 370 welfare reform, 518–519 welfare system, 507–509 Tobacman, Jeremy, 657n Toder, Eric, 703 Tollman, Stanley S., 741–742 Topel, Robert H., 410 Total social surplus, 50 Total suspended particulates (TSPs), 152 Town meeting, as direct democracy, 234–235 Training requirements welfare programs, 509–511 in welfare programs, 512–517 Train Protection and Warning System (TPWS), 218 Transaction costs capital gains taxation and, 684–685 negative externalities, 134 Trans-fats, regulation of, 180 Transfer pricing, international corporate taxation and, 735–736 Transfer taxes, 676, 690–695 Transitional inequities in consumption taxes, 761–762 in tax shelters, 753–755 Transitivity, in majority voting, 236–238 Treaster, Joseph B., 337n, 338n Treasury Inspector General for Tax Administration, 745 Treatment groups cross-sectional regression analysis, 79 randomized trials, 67, 69 returns on education and, 311–313 school quality assessment, 313 Tribune Company, 257 TRICARE health insurance program, 428 Trigger provisions, deficit control and, 96–97 Trogdon, J G., 179n Truman, Harry S., 453 Gruber4e_28_Index_ I1-I26.indd 25 Trusts, estate taxes and, 694–695 TSP See Total suspended particulates Tullock, Gordon, 251 Two candidates, in median voter model, 244–245 Two-period model, Social Security and, 361–362 Tyler, John H., 311n U Uncertainty in cost-benefit analysis, 225 in regulation, 143–146 Social Security investments and, 385–386 Uncompensated care, 479–480 implicit insurance as, 429 Unconditional block grants, 280–284 Unemployment Compensation Extension Act, 392–393 Unemployment insurance, 322 benefits generosity in, 412 comparisons with other programs, 397–399 consumption smoothing, 399–400 global comparisons of, 398–399 institutional features, 393–395 moral hazard effects, 400–404 normative implications of duration of, 401–404 partial experience effects in layoffs, 408–411 politics of, 391–393 reemployment earnings insurance, 414 reformation of, 413–414 replacement rate, 340–342 social insurance vs self-insurance and, 339–343 Unfunded pension plans, Social Security as, 361–362 Uninsured patients free health care for, increase in, 21 in Massachusetts incremental universal health care, 480 Medicaid and utilization of health care services, 459–460 profile of, 428–431 United Kingdom Social Security administrative costs in, 384–385 Social Security effect on savings in, 370 tax fairness in, 532 United States carbon dioxide emissions from, 157 consumption taxation in, 756 I-25 direct democracy in, 234–235 education spending in, 291–292 farm policy in, 247–248 fiscal federalism in, 265–269 generational imbalance in, 107 global warming legislation in, 163–165 health care in, 421–431 health insurance benefits in, 441–445 income distribution in, 491–497 income taxes in, 527–538 Kyoto treaty and, 159–163 legal drinking age, 176–178 mortality rates in, 420–421 obesity in, 178–180 state and local government in, 264–265 state and local tax revenues in, 527 tax incidence in, 579–584 tax revenues in, 525–526 marriage tax, 552–554 welfare policy in, 497–500 Units of taxation, 550–554 Urguiola, Miguel, 306n U.S Bureau of the Census, 20n, 56n, 245n, 366n, 502n, 639n U.S Department of Agriculture, 500n U.S Department of Education, 301n, 313n, 315n U.S Department of Health and Human Services, 17n, 489n U.S Department of Housing and Urban Development, 500n U.S Department of Labor, 396n U.S Department of the Interior, 123 U.S Department of Transportation, 574n Utilitarian social welfare function, 53–54 Utility function constrained utility maximization, 26, 29–30 cross-sectional regression analysis, 77 insurance and, 324–327 private provision of public good, 204–206 self-control problem and, 172–174 Utility mapping, preferences, 29–30 Utility maximization education and failure of, 295–296 labor supply and, 41–43 mathematics of, 60–61 V Vaccines, measles epidemic and, 5–7 Value-added tax (VAT), 762–764 Value of additional government revenues, Ramsay rule of optimal commodity taxation, 602 VanDerhei, Jack, 385n 15/11/12 4:54 PM I-26    I n d e x Van Ours, Jan, 404n VAT See Value-added tax (VAT) Venti, Steven, 670n Vermont, town meetings in, 234–235 Vertical equity consumption taxation, 759–760 flat tax and, 767–769 Haig-Simons comprehensive income definition, 536–540 optimal income taxation, 610–611 tax evasion and, 746 tax fairness and, 533–537 Violence, alcohol consumption and, 174–175 Virginia, tax grandfathering in, 754–755 Viscusi, Kip, 219–220 Visibility reduction, acid rain and, 151 Vittas, Dimitri, 384n Vodopivec, Milan, 404n Vote-maximization politicians, median voter and, 243–244 Voter initiatives, 235 W Wackenhut Corporation, 254 Wages in cost-benefit analysis of public projects, 210–212, 213–216 education and, 309–313 of government bureaucrats, 259 growth effect, Social Security income redistribution and, 363–367 labor force taxes and, 623–624 means-tested welfare, moral hazard and, 502–504 optimal income taxation and, 608–611 payroll tax effects on, 597–601 saved life valuations, 218–219 subsidies for, 73–74, 513–517 taxable base for, 379–380 tax-benefit linkages in social insurance programs and, 612–616 tax incidence and adjustment of, 570–571 unemployment benefits and, 404n Wald, Matthew L., 254 Wales, Terence J., 171n Wall Street Journal, 691n, 708 Walsh, Bryan, 165n Walsh, Mary Williams, 356n Ward Hunt ice shelf, 156 Warm glow model of public goods provision, 196 public provision of public goods, 198 Warner, Kenneth E., 580n Warner, Larry, 256 Gruber4e_28_Index_ I1-I26.indd 26 Warner, Mark, 754–755 Washington, Ebonya L., 250 Washington Post, 149–150, 647 Water acidification, acid rain and, 151 Watson, Tara, 176 Waxman, Henry, 163 Wealth estate taxes and reconcentration of, 692 Social Security benefits based on, 381–382 Social Security income redistribution and, 364–367 taxes on, 525, 534–535, 676–700, 691–695 Weber, Andrea, 404n Weber, Guglielmo, 653 Welfare administrative costs of, 501 benefit reductions, 55–57, 498 caseload statistics, 489–490 cash welfare, 37–38, 497–499 categorical welfare, 497 moral hazard reduction and, 506–509 child care subsidies and, 514 child support and, 515 economics of, 44 expenditures, 489–490 First Fundamental Theorem, 50–52 in-kind welfare, 497, 499–500 iron triangle of redistribution and, 505 labor market subsidies and reduction of, 513–517 matching grants and, 489 means-tested welfare, 497 moral hazard costs of, 500–517 benefit reduction rate and, 504–505 means-tested transfer system, 501–504 outside options for reduction of, 511–517 reduction of, 506–517 ordeal mechanisms in, 509–511 quasi-experimental variation in benefits, 79–82 reform of, 517–519 benefits capping proposals, 518–519 Second Fundamental Theorem of, 53 self-selection out of, 509–511 training programs and, 512–517 U.S policies for, 497–500 welfare-lock effect, 515–516 welfare reform and, 489 West, James, 177 Whitmore, Diane M., 313 Willett, John B., 311n Winter-Ebmer, Rudolf, 553n Wireless communications taxation and, 600–601 Wise, David A., 371, 375, 670n Withholding process, income taxes, 530 WNYC public radio, 191–192 Women workers child care costs and, 640–643 Earned Income Tax Credit effects on, 636–637 labor supply taxation and, 628–631 Wood, David L., 5n Woodbury, Stephen A., 403n Woodward, Bob, 524n Workers’ compensation, 322 benefits changes and injury duration, 407–408 benefits generosity in, 412 comparisons with other programs, 397–399 consumption smoothing, 399–400 firm behavior and, 411–412 global comparisons of, 398–399 institutional features of, 396–397 moral hazard in, 344–348, 405–408 partial experience rating and, 411 self-insurance and, 411, 413–414 tax-benefit linkages in, 612–616 Work Opportunity Credit, 530 Workplace productivity, smoking and, 169 Work requirements in welfare programs, 498, 509–511, 517–519 Works Progress (Work Projects) Administration (WPA), 266 World Health Organization (WHO), 178–180 X Xtreme Alternative Defense Systems, 254 Y Yang, John E., 524n Yelowitz, Aaron, 658 Yin, Wesley, 659 Young, Don, 229–230 Youth smoking rate internalities related to, 171–174 time series analysis of, 73–74 Z Zeckhauser, Richard J., 509n Zeldes, Stephen P., 384, 658n Zoega, Gylfi, 623 Zoning regulations, 272–274 Zupan, Mark A., 250n 15/11/12 4:54 PM Public Finance and Public Policy: A Tour Through the Book Part I  Introduction and Background Why Study Public Finance? The goal of studying public finance is to understand the proper role of the government in the economy The changing role of government and exciting current policy debates motivate the study of this field Theoretical Tools of Public Finance We review the microeconomic tools necessary to understand the effects of government intervention in the economy Empirical Tools of Public Finance We review the main issues in empirical public finance, the use of data and statistical methods to measure the impact of government policy on individuals and markets Budget Analysis and Deficit Financing We delve into the complexity of budgetary issues that arise as governments consider their revenue and expenditure policies Part II  Externalities and Public Goods A major role of government is to address market failures caused by goods that have external costs and benefits or public benefits In this part we discuss when the private market can and cannot solve these problems and the prospects for government success in addressing the problems Externalities: Problems and Solutions When externalities cause private markets to fail, and what tools does government have to combat this failure? Externalities in Action: Environmental and Health Externalities We use theoretical tools to examine examples of environmental and health externalities (acid rain, global warming, cigarette smoking) Public Goods Cost – Benefit Analysis Political Economy Goods with public benefits may be underprovided by the private market, under conditions discussed in Chapter 7, but the public sector faces two key problems in providing those goods: measuring their costs and benefits (Chapter 8) and effectively translating voters’ preferences for public projects into public policy (Chapter 9) 10 State and Local Government Expenditures We discuss the local provision of public goods and the question of whether competition across localities can solve the problem of underprovision of public goods 11 Education We review the public finance issues involved in providing education, one of the most important public goods in the United States Part III  Social Insurance and Redistribution The increased nature and scope of government spending on social insurance programs is one of the most fundamental changes in U.S public policy over the past fifty years Gruber4e_FrontEndpapers.indd 15/11/12 4:56 PM 12 Social Insurance: The New Function of Government We examine the general theory of social insurance, highlighting the benefits (consumption smoothing) and costs (moral hazard) of insurance 13 Social Security 14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation We apply the principles of social insurance from Chapter 12 to the study of the nation’s largest social insurance programs We discuss the institutional features of these programs, their benefits and costs, and prospects for program reform 15 Health Insurance I: Health Economics and Private Health Insurance 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform The largest and most rapidly growing government expenditure is on health care We discuss the nature of health economics and the functioning of private health insurance markets, the role of the nation’s two largest public health insurance programs, and the impacts of U.S health care reform on insurance coverage and costs 17 Income Distribution and Welfare Programs We review the facts on income distribution in the United States, the theoretical and empirical effects of welfare policy, and the impacts of fundamental welfare reform PART IV Taxation in Theory and Practice In this part we move from the study of government expenditures to the study of how the government raises revenue through taxation 18 Taxation in the United States and Around the World We provide the institutional and theoretical bases for understanding tax policy and its effects, focusing in particular on the appropriate base for individual income taxation 19 The Equity Implications of Taxation: Tax Incidence 20 Tax Inefficiencies and Their Implications for Optimal Taxation Markets not take taxes lying down In these chapters, we discuss how market reactions affect both the equity implications of tax (tax incidence) and the efficiency costs of taxation We use this theory to model the optimal design of taxes on goods and on income, and discuss evidence on the distribution of tax burdens 21 Taxes on Labor Supply 22 Taxes on Savings 23 Taxes on Risk Taking and Wealth In these chapters we explore the effect of income taxation on individual behavior and the resulting implications for tax policy How taxes affect labor supply, and what has been the effect of the Earned Income Tax Credit? How taxes affect savings, and what has been the effect of tax-subsidized retirement savings? How taxes affect the distribution of asset holdings, and what has been the effect of the capital gains, estate, and property taxes? 24 Corporate Taxation We discuss the structure of the corporate income tax and its implications for a firm’s investment and financing decisions 25 Fundamental Tax Reform Fundamental tax reform in the United States focuses on moving to a low-rate, broad-based tax system We discuss the benefits of this reform, the political and economic barriers it faces, and possible reforms such as a consumption or flat tax Gruber4e_FrontEndpapers.indd 15/11/12 4:56 PM Federal Revenues and Expenditures, Surplus or Deficit, 1930-2011 Revenue and spending (% of GDP) (a) 50 40 Expenditures 30 20 10 Revenues 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Surplus/ Deficit (% of GDP) (b) –5 –10 Surplus/Deficit –15 –20 –25 –30 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 Source: Office of Management and Budget (2011), Tables 1.2 and 7.1 (Debt figures for 1930–1939 come from the U.S Department of the Treasury’s Bureau of the Public Debt.) Gruber4e_BackEndpapers.indd 15/11/12 4:55 PM The Distribution of Federal Expenditures (% of total spending), 1960 and 2010 1960 Health (including Medicare), 2.9% 2010 Other, 12.1% Other, 12.0% Net interest, 9.7% National defense, 49.4% Health (including Medicare), 25.2% Unemployment, disability, 8.6% Social Security, 13.4% Education, welfare, housing, 4.0% Net interest, 7.6% National defense, 19.1% Education, welfare, housing, 11.0% Social Security, 15.9% Unemployment, disability, 9.1% Source: Bureau of Economic Analysis, NIPA Table 3.16 The Distribution of Federal Revenues (% of total revenue), 1960 and 2011 1960 Income taxes 44% Other 3% Excise taxes 13% Corporate taxes 23% 2011 Social insurance contributions 17% Income taxes 42% Other 7% Excise taxes 3% Social insurance contributions 35% Corporate taxes 13% Source: Bureau of Economic Analysis, NIPA Tables 3.2 and 3.3 Gruber4e_BackEndpapers.indd 15/11/12 4:55 PM ... Questions of Public Finance Why Study Public Finance? O 1.2 Why Study Public Finance? Facts on Government in the United States and Around the World 1.3 Why Study Public Finance Now? Policy Debates... 15/11/12 5:22 PM Public Finance and Public Policy fourth edition Jonathan Gruber Massachusetts Institute of Technology Worth Publishers A Macmillan Higher Education Company Gruber4 e_01_FM_i-xxxviii.indd... I Introduction and Background Why Study Public Finance? Theoretical Tools of Public Finance 25 Empirical Tools of Public Finance 63 Budget Analysis and Deficit Financing