Economics 251A (Theory and Policy of Taxation)
Dear Undergraduate Economics Students:
If you would like to take a graduate course in Taxation, Professor Harberger will be allowing a few undergraduates to enroll in the course in Winter Quarter. Econ 251A will be offered Monday, Tuesday and Thursday from 5:00 to 7:00 p.m., in 2249 Bunche Hall. The reason for this extended time slot is to allow for interruptions when the instructor has to be out of town. You can expect the course to actually meet for some 18 to 20 two-hour sessions.
If you meet ALL of the following criteria, please contact Julie Plotkin at ug-counselor@econ.ucla.edu with your name and UCLA ID number for more information. This course will count as an economics elective toward your major.
1) Officially in a Department of Economics major (Math-Econ is okay as well)
2) Completion of Econ. 11, 101, and 102
3) Completion of a finance course through the Department of Economics
3) 3.5 min. GPA in your major and cumulative at UCLA
Course Description
Economics 251A is a course that has roots both in applied welfare economics and in the field of public finance itself. The applied welfare economics aspect is essential for the policy orientation of the course. It aims at giving students the tools for choosing among alternative policies, even when none of the available choices is optimal in a formal sense. In this respect it introduces students to the types of choices that policy economists actually encounter in real-world decision making.
The first section of the course is devoted to showing the power of simple applied welfare economics. We explore how to measure the efficiency costs of taxes and subsidies, as well as quotas and other “quantity distortions”, and what are the conditions that make these costs larger or smaller. There follows a segment dealing with the costs of monopoly and monopsony. From there we move to a discussion of taxes and subsidies affecting imports and exports. This part includes an analysis of so-called “optimum tariffs” and “optimum export taxes”, which in effect apply monopoly/monopsony analysis to international trade.
After this introduction we move quickly to the analysis of taxes and subsidies in a general-equilibrium setting. The most important point here is to show how the effects of a given tax are different, depending on the presence or absence of pre-existing taxes (or other distortions). This leads to an exploration of the “economics of second best”, or, more broadly, of the “nth best”. Here we deal with consumption taxes (which distort the labor-leisure choice), and with personal income taxes (which distort both the labor-leisure and the consumption-saving choices). We also deal with Ramsey taxation, which focuses on how best to tax k commodities, while leaving (n-k) others untaxed. We also cover the interesting linkages between the public finance problem of Ramsey taxation and the industrial organization problem of discriminating monopoly in k different markets. Another excursion into international trade taxes reveals the interesting case of “super-substitutes”, where increasing the tariff on a specified subset of imports can lead (surprisingly) to increased total trade and improved welfare.
The second section of the course is devoted to the problem of tax incidence. The incidence of simple commodity taxes is dealt with quickly, as it is a very simple problem. Most attention is given to partial factor taxes, which fall on a factor of production in a given sector but not outside it. Examples are the corporation income tax striking the income from capital in the corporate sector but not outside it, and certain payroll taxes which apply only within a limited “covered” sector.
The basic modeling for the analysis of incidence is general equilibrium, in the tradition of international trade. Perhaps the most interesting aspect is how the results change dramatically if one frames the analysis in an open economy setting rather than a closed economy one.
The third section of the course is devoted to specific problems, all of them drawn from the real world. If a government wants to provide incentives for investments of a particular type, or in particular activities or regions, how should it proceed? It turns out that many of the incentives actually employed in real-world cases have grave economic weaknesses — weaknesses that can be overcome by choosing from among a class of incentives with far better design characteristics. We go on to investigate how to create a system of business income taxation that is fully indexed against inflation. Attention is also given to the special situation of mineral industries, characterized by the depletion of exhaustible resources.
A major topic in this segment is value added taxation, which, though non-existent 50 years ago, has come to rival income taxation as the world’s biggest source of public revenues. Various types of VAT are examined, along with various methods of administration, including the extremely important role played by border tax adjustments.
In the final segment we revisit the topic of consumption versus income taxation, this time in a practical context. How are such taxes designed and administered? Where do existing tax systems fit in this picture (nearly all are hybrids of the two)? What are the most sensible directions of tax reform in this area? How does the so-called negative income tax fit into the picture? Finally, what can be said concerning the special tax treatments often accorded to capital gains?
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Before closing, I would like to report on some of the successes of recent UCLA graduates. In Costa Rica, Edgar Robles (1996) has served as Vice Minister of Finance. In Argentina, Daniel Artana (1986) was named Secretary of the Treasury and Javier Ortiz (1993) has served two separate Presidents as Undersecretary of Finance. In Mexico three separate UCLA Ph.Ds — Abraham Vela (1994), Mario Gabriel (1992) and Moises Schwartz (1992) have served as Chief Economic Advisers to the Minister of Finance of Mexico, Moises Schwartz (1992) served as director general in the Ministry of Finance, and is now Executive Director (for Mexico and several other countries) of the International Monetary Fund.
All of these people have in common the fact that they took at least one, and most of them more than one course in our public finance sequence. One of my own objectives in all the courses I teach is to prepare students to deal with the types of policy problems one actually finds as one works in government ministries and agencies, in central banks, and in international organizations. My students from the University of Chicago have excelled in those roles, and I have always been very proud of their achievements. My greatest ambition, here at UCLA, has been to create a group of students who would rise to similar heights. The UCLA group is much younger, so I have had to wait some time for them to reach the top. But I believe we can now see that they too are making great achievements.
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