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[SQUEAKING]

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JONATHAN GRUBER: So
today, we're going

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to continue our discussion
of equity and efficiency.

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We started last time talking
about the equity-efficiency

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trade-off.

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Well, first we
talked about why we

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think redistribution
might be necessary,

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and the striking facts
on inequality and poverty

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in the US.

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Then we talked
about the trade-off,

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the equity-efficiency
trade-off, and the fact

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that when you try to deal with
a problem like redistribution

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through taxation or
transfers, you're

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going to have a leaky bucket.

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That there's going to be
inefficiencies associated

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with both taxing individuals
to raise the money,

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and transferring to
individuals to spend the money,

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are both going to
cause deadweight loss.

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So what I want to
to today is take

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that abstract framework
from last time,

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put it in some real terms.

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By talking first about how
taxation works in the US,

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and the kind of issues we face
in taxing people, and then

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turning to
redistribution programs.

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And concluding with
a very positive story

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of what I call a patch
to the leaky bucket,

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and how we can redistribute
in a very efficient way.

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So let's start by talking
about taxation in the US.

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And when I talk
about taxation, I

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want to talk about
two topics primarily.

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The first topic is,
who bears taxes?

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Who bears taxes?

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Now, this is a
topic that we call--

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in public finance, the field
I specialize in-- the topic

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of tax incidence.

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Now, you might think
this is a silly question.

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If you pay tax,
you bear the tax.

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Why is this an
interesting question?

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And the answer is, it's
an interesting question

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because it's not true that
the person that bears the tax

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pays the tax.

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That in fact, when
you impose taxes,

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they have complicated effects
on multiple parties because

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of the operation of the market.

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So as a result, the party
that actually sends the check

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to the government may not
actually bear all that tax.

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And so that's the interesting
insight we'll start with today.

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So to think about that, let's go
to figure 22-1, and let's think

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about the market for gasoline.

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You've got demand and supply.

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You've got an initial 100
billion gallons of gas being

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sold at a price of $1.50.

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Those were the days,
back when gas was $1.50.

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Now, imagine the government
comes in and says,

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we're going to levy a $0.50
tax per gallon on the suppliers

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of gasoline.

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So the gas stations, or the
gas companies, or whatever.

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For every gallon they sell,
they will send us $0.50.

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You literally cut a
check to the government,

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$0.50 for every gallon you sell.

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What does that do--

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and you might stop
there and say, OK, well,

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then the incidence
of that tax is--

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that tax is borne by producers.

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That's great.

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I don't have to worry about it.

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I'm buying gas.

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It's those guys selling
gas who have to bear it.

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But you'd be wrong.

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And the reason you'd
be wrong is shown

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in the right-hand-side
diagram, which

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is to think through the market
effect of such intervention.

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What does intervention do?

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Well, it has no effect
on the demand for gas.

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The fundamental demand curve.

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The underlying utility of
the marginal gallon of gas

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hasn't changed.

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But it has changed
the supply curve,

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because essentially, we've
introduced a new marginal cost.

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The marginal cost of gas has
gone up by $0.50 a gallon.

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Every gallon of gas you produce
and sell now bears an extra

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$0.50 cost.

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So that's a shift upward
of the supply curve.

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Remember, the supply curve
is the marginal cost curve.

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So if I increase the marginal
cost of every gallon by $0.50,

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that's literally just a parallel
shift upwards in the supply

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curve.

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Supply curve shifts
from S1 to S2.

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That's the new supply curve.

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Well, at that new supply curve,
you cannot continue to charge

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the old price.

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If you can charge the
old price of $1.50,

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people would still want to buy
100 billion gallons of gas,

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but companies would only want
to sell 80 billion gallons.

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Why?

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Because the marginal
cost has gone up.

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And we have an
upward-sloping supply curve,

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so at a higher
marginal cost, they're

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going to want to
sell fewer gallons.

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So you have a disequilibrium.

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What happens is that the gas
company adjusts by sliding up

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the supply curve to the
new equilibrium point D,

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where they sell 90 billion
gallons at a new price

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of $1.80.

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This is all just standard
supply and demand stuff,

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we've seen that before.

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What's interesting
here is to note

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that what this means
is that part of the tax

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is borne by consumers.

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Part of the tax is
borne by consumers.

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What I mean by that?

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What I mean is consumers
used to pay $1.50 a gallon,

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and now they pay $1.80 a gallon.

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So the tax has increased what
they pay by $0.30 a gallon.

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Now, they're not sending
that check to the government,

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but it's the same thing.

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It's the same effect.

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The point is this tax has
increased the amount that

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consumers pay for gas
by $0.30 a gallon.

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So the incidence on
consumers is $0.30.

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The incidents on producers
is a little more complicated.

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They now get $1.80 per gallon.

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That's great.

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But for every gallon they sell,
they have to send a $0.50 check

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to the government.

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So their net price
per gallon is $1.30.

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So we can see that by taking
the new price at point D

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and subtracting off the
$0.50 tax they have to pay,

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which says that instead
of $1.80, they get $1.30.

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We call that the tax wedge.

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The tax wedge is the difference
between the tax including

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the price and the tax
after paying the price.

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So it's just a
wedge between what

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people get before
they pay the tax

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and what they get
after paying the tax.

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That's the tax wedge.

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We have a $0.50 tax wedge here.

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And so what is the burden
of the tax on producers?

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Well, they used to
get $1.50 a gallon.

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Now they get $1.80 but pay
$0.50 to the government.

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So the burden on the
producers is $0.20.

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So even though the producers
are sending the check

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to the government--
the gas stations,

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the gas companies sending
the check to the government,

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they actually pay less
than half the tax.

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Now, nominally,
they pay the $0.50,

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but we don't care about that.

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We just care about
where they end up

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after the market is adjusted.

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After the market is adjusted,
they are $0.20 per gallon worse

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off than they were before.

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And consumers are $0.30 per
gallon worse off than they were

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before.

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This is the fundamental
insight of tax incidence,

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that you can't just
look at the paper

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version of who pays the tax.

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You have to consider
who really bears

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the consequences of the tax.

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And that's why it
gets interesting.

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Because the party that bears the
consequences is not necessarily

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the party that actually sends
the check to the government.

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That's the fundamental
insight of tax incidence.

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Questions about
how that all works.

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OK.

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So bottom line is all you do is
you say, look, think about how

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the tax affects the market.

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In this case, it's an upward
shift in supply curve.

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Shift the supply curve up.

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Find the new equilibrium.

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That gives you the
new equilibrium price.

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And then the burden on the
party not paying the tax

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is the difference between the
new price and the old price.

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The burden on the
party paying the tax

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is the new price minus
the tax they have to pay.

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OK?

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Now, what's
interesting about this

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is that within this framework--

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so the first bold claim
I'm going to make is,

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actually, it doesn't
matter who sends the check

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to the government.

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The first bold claim--

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let me tell you about it.

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The first bold claim
I'm going to make

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is that the amount set on
the check to the government

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is not the amount you
actually bear of the tax.

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The amount you bear of the tax
comes out of this analysis.

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Here's the second bold
claim I'm going to make.

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It doesn't matter who sends
the check to the government.

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If you impose the same $0.50 tax
on consumers of gas in the same

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market, you get
the same outcome.

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How's that possible?

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Well, let's look at figure 22-2.

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Now we have a different tax.

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This tax is now every time
you buy a gallon of gas,

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you pay $0.50.

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Imagine the outcry.

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Imagine if the government had
a tax which made gas companies

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pay $0.50 of a gallon they sold,
and they said, you know what,

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we're just going to switch that
and make people pay the $0.50.

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Could you imagine the headlines?

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The outcry?

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Government screwing the little
guy to favor the oil companies.

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But in fact, those headlines
would all be wrong.

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Because in fact,
it doesn't matter.

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To see why, let's look
at the diagram 22-2.

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Now imagine we have a
$0.50 tax on consumers.

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Now the supply curve doesn't
shift because marginal cost

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hasn't changed.

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But the demand
curve shifts down.

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Because for every
gallon you buy,

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you have to send $0.50
to the government.

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Well, the demand curve
represents your willingness

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to pay.

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You are now willing to
pay $0.50 less per gallon.

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If you're willing to
pay before at point A,

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the 100 billionth gallon sold,
they're willing to pay exactly

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$1.50.

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Well, if they only pay
$1.50 and now you send $0.50

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to the government, well, now
they're only willing to pay $1

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for that gas.

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So what that means
is consumers now,

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with the shifting demand curve,
if the price stayed at $1.50,

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they would only want 80
billion gallons at point C.

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They would only want 80 billion
gallons at a price of $1.50.

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Why?

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Because the price to
them isn't $1.50 anymore.

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They pay the $1.50,
plus they pay the $0.20.

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They'd have to pay another
$0.50 check to the government.

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So they only want--

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so to them, they don't
want 80 billion gallons.

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So you have to move
to a new equilibrium.

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Once again, we know
about these adjustments.

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We talked about that.

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You're going to slide
down the supply curve,

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and you're going to end
up at a new point D.

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D is the new equilibrium
where the new demand

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curve, reflecting the much
lower willingness to pay,

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intersects the supply curve.

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That point, interestingly,
is at 90 billion gallons.

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Flip the page back to 22-1.

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That's the same
quantity we had before.

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So we get the same effect
on the amount of gas sold.

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What's the difference
is the market price.

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In 22-1, the market
price rose to $1.80.

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Now, the market
price falls to $1.30.

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But the burdens are the same.

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Think about the burden
on the consumer.

248
00:11:07,940 --> 00:11:11,530
The consumer used to pay $1.50.

249
00:11:11,530 --> 00:11:13,530
Now they pay $1.30.

250
00:11:13,530 --> 00:11:15,400
So they saved $0.20.

251
00:11:15,400 --> 00:11:18,840
But they have to send a $0.50
check to the government.

252
00:11:18,840 --> 00:11:22,421
So the burden on the
consumer is $0.30.

253
00:11:22,421 --> 00:11:25,400
They save $0.20 on the
price and send a $0.50 check

254
00:11:25,400 --> 00:11:27,350
to the government.

255
00:11:27,350 --> 00:11:29,360
What's the burden on producers?

256
00:11:29,360 --> 00:11:32,300
Well, the producers
used to get $1.50.

257
00:11:32,300 --> 00:11:34,430
Now they get $1.30.

258
00:11:34,430 --> 00:11:37,370
So what's the burden
on producers? $0.20.

259
00:11:37,370 --> 00:11:40,040
Same as before.

260
00:11:40,040 --> 00:11:42,230
The point is for
any given total tax

261
00:11:42,230 --> 00:11:46,050
wedge, for any given
total amount of tax,

262
00:11:46,050 --> 00:11:48,670
who bears it does not
depend on who sends

263
00:11:48,670 --> 00:11:50,250
the check into the government.

264
00:11:50,250 --> 00:11:51,540
That's irrelevant.

265
00:11:51,540 --> 00:11:53,732
The side of the
market's irrelevant.

266
00:11:53,732 --> 00:11:55,440
All that matters is
the underlying demand

267
00:11:55,440 --> 00:11:59,765
and supply curves and the
size of the tax wedge.

268
00:11:59,765 --> 00:12:01,140
As long as you
have an underlying

269
00:12:01,140 --> 00:12:03,630
set of supply and demand curves
and a given size tax wedge,

270
00:12:03,630 --> 00:12:06,060
you don't care
who actually pays.

271
00:12:06,060 --> 00:12:10,430
Because the market will
adjust to offset that.

272
00:12:10,430 --> 00:12:12,500
And so this is an
incredible insight

273
00:12:12,500 --> 00:12:14,990
of tax incidence, which
is that something--

274
00:12:14,990 --> 00:12:17,140
I'd imagine most of you
walk in this room today,

275
00:12:17,140 --> 00:12:19,680
and I quickly said to you, does
it matter if the gas company

276
00:12:19,680 --> 00:12:23,120
pays $0.50, you pay $0.50,
you'd say, yeah, it matters.

277
00:12:23,120 --> 00:12:25,410
But it turns out it doesn't.

278
00:12:25,410 --> 00:12:27,035
Turns out it doesn't.

279
00:12:27,035 --> 00:12:28,410
As long-- given
a given tax wedge

280
00:12:28,410 --> 00:12:30,243
and given a set of
supply and demand curves,

281
00:12:30,243 --> 00:12:32,503
it doesn't matter
who actually pays.

282
00:12:32,503 --> 00:12:34,920
And that's the fundamental--
it's another fundamental side

283
00:12:34,920 --> 00:12:36,090
of tax incidence.

284
00:12:36,090 --> 00:12:38,220
And that's why, when
you read articles

285
00:12:38,220 --> 00:12:40,800
in the paper about this tax
is bad because it's on people,

286
00:12:40,800 --> 00:12:42,840
this tax is good because
it's on corporations, that's

287
00:12:42,840 --> 00:12:44,090
not the way to think about it.

288
00:12:44,090 --> 00:12:47,010
The way to think about it is
what's the total tax wedge,

289
00:12:47,010 --> 00:12:49,600
and what does the
market look like?

290
00:12:49,600 --> 00:12:50,221
Yeah?

291
00:12:50,221 --> 00:12:52,870
AUDIENCE: [INAUDIBLE]

292
00:12:57,705 --> 00:12:59,080
JONATHAN GRUBER:
Excellent point.

293
00:12:59,080 --> 00:13:01,247
All of this, of course, is
within our standard 14.01

294
00:13:01,247 --> 00:13:02,440
framework.

295
00:13:02,440 --> 00:13:04,120
Once you depart from that--

296
00:13:04,120 --> 00:13:07,180
by the way, it's also true even
if there's monopoly and stuff.

297
00:13:07,180 --> 00:13:08,510
That's still true.

298
00:13:08,510 --> 00:13:12,670
So this does not depend on
perfectly competitive markets.

299
00:13:12,670 --> 00:13:14,680
This is also true in
non-perfectly competitive

300
00:13:14,680 --> 00:13:15,740
markets.

301
00:13:15,740 --> 00:13:19,210
So monopoly, oligopoly will
still feature these two rules.

302
00:13:19,210 --> 00:13:23,610
However, once you depart from
perfectly rational consumers,

303
00:13:23,610 --> 00:13:24,568
then things can change.

304
00:13:24,568 --> 00:13:26,777
So for example, there's a
lot of interesting research

305
00:13:26,777 --> 00:13:28,140
on what's called tax salience.

306
00:13:31,560 --> 00:13:33,653
And as I said, since
I won't have time

307
00:13:33,653 --> 00:13:35,820
for a lecture on behavioral
economics this semester,

308
00:13:35,820 --> 00:13:36,960
I'm going to throw some
behavioral economics

309
00:13:36,960 --> 00:13:37,725
nuggets at you.

310
00:13:37,725 --> 00:13:39,600
But if you find this
interesting, take 14.13.

311
00:13:39,600 --> 00:13:40,662
It's really exciting.

312
00:13:40,662 --> 00:13:42,120
And here's a kind
of insight, which

313
00:13:42,120 --> 00:13:45,750
is, what if people pay
attention to taxes when

314
00:13:45,750 --> 00:13:48,390
it's in the price, but not when
it's rung up at the register?

315
00:13:48,390 --> 00:13:51,270
So they ran a cool experiment
in supermarkets in California.

316
00:13:51,270 --> 00:13:54,390
They randomly, in some
cases, increased the price

317
00:13:54,390 --> 00:13:56,705
on the shelf by the sales tax.

318
00:13:56,705 --> 00:13:58,620
In other case, they
kept the price fixed,

319
00:13:58,620 --> 00:14:00,660
and the sales taxes
rang up at the counter,

320
00:14:00,660 --> 00:14:02,010
like we normally do.

321
00:14:02,010 --> 00:14:03,990
And they found that
affected demand.

322
00:14:03,990 --> 00:14:06,990
That affected how much
people wanted the good,

323
00:14:06,990 --> 00:14:09,180
even though the net price
was the same, because it

324
00:14:09,180 --> 00:14:11,670
was more salient when it
was built into the price

325
00:14:11,670 --> 00:14:13,470
than when it's like at the
end, when you just ring it up,

326
00:14:13,470 --> 00:14:14,740
you don't pay attention to it.

327
00:14:14,740 --> 00:14:15,332
Yeah.

328
00:14:15,332 --> 00:14:19,160
AUDIENCE: [INAUDIBLE]
research as to whether when

329
00:14:19,160 --> 00:14:21,800
the consumer knows that
they're being taxed rather

330
00:14:21,800 --> 00:14:25,620
than the producer, if that
changes how the demand function

331
00:14:25,620 --> 00:14:26,750
works [INAUDIBLE].

332
00:14:26,750 --> 00:14:28,833
JONATHAN GRUBER: Well,
that's exactly what I said.

333
00:14:28,833 --> 00:14:30,830
That's exactly what--
there's two questions.

334
00:14:30,830 --> 00:14:31,780
One is how this affects
the demand curve.

335
00:14:31,780 --> 00:14:32,822
That's what I was saying.

336
00:14:32,822 --> 00:14:35,672
That basically,
the demand curve--

337
00:14:35,672 --> 00:14:36,880
it's not quite your question.

338
00:14:36,880 --> 00:14:38,430
Your question's about
sort of a moral,

339
00:14:38,430 --> 00:14:40,847
like, do I feel differently
if one's being taxed another--

340
00:14:40,847 --> 00:14:43,990
or you're talking about
the salience point?

341
00:14:43,990 --> 00:14:45,950
AUDIENCE: Maybe like
a little bit of both,

342
00:14:45,950 --> 00:14:49,710
just how people react
when they know for a fact

343
00:14:49,710 --> 00:14:51,280
that they're paying the tax--

344
00:14:51,280 --> 00:14:54,000
JONATHAN GRUBER: Yeah.

345
00:14:54,000 --> 00:14:56,370
I think we don't know for
sure the moral aspect.

346
00:14:56,370 --> 00:14:59,220
But the salience aspect, we
do know for sure, which is,

347
00:14:59,220 --> 00:15:01,260
how the tax is presented
affect people's demand,

348
00:15:01,260 --> 00:15:02,562
even though it shouldn't.

349
00:15:02,562 --> 00:15:04,020
Now, there's another
question which

350
00:15:04,020 --> 00:15:05,603
I thought you were
going to ask, which

351
00:15:05,603 --> 00:15:07,560
is, how does the fact
that you can see a tax

352
00:15:07,560 --> 00:15:10,290
affect how people
feel about taxes?

353
00:15:10,290 --> 00:15:13,820
So here's a super cool study my
colleague Amy Finkelstein did.

354
00:15:13,820 --> 00:15:17,210
You guys know E-ZPass, the
thing on the highway where you--

355
00:15:17,210 --> 00:15:17,780
OK.

356
00:15:17,780 --> 00:15:20,360
So when states moved--

357
00:15:20,360 --> 00:15:22,280
when I was a kid,
you just wait in line

358
00:15:22,280 --> 00:15:24,560
and pay cash to get
through the tolls.

359
00:15:24,560 --> 00:15:26,960
Now you just drive
through with your E-ZPass.

360
00:15:26,960 --> 00:15:29,823
So what's happened is it
made the tax less salient.

361
00:15:29,823 --> 00:15:31,490
It used to be you'd
feel pain every time

362
00:15:31,490 --> 00:15:32,480
you go through the toll.

363
00:15:32,480 --> 00:15:34,430
Now it's just some bill you
get at the end of month.

364
00:15:34,430 --> 00:15:36,513
What she found is when
states switched to E-ZPass,

365
00:15:36,513 --> 00:15:38,660
they rapidly raised
their taxes on roads.

366
00:15:38,660 --> 00:15:41,190
They raised their tolls,
because people in mind as much,

367
00:15:41,190 --> 00:15:42,800
so they could raise them more.

368
00:15:42,800 --> 00:15:45,770
So there's an interesting
politics aspect to this

369
00:15:45,770 --> 00:15:46,950
as well.

370
00:15:46,950 --> 00:15:48,020
So this matters.

371
00:15:48,020 --> 00:15:49,850
Having said that, I'm
going to ignore it.

372
00:15:49,850 --> 00:15:51,433
But this stuff does
matter, and that's

373
00:15:51,433 --> 00:15:53,360
why behavioral economics
is fascinating.

374
00:15:53,360 --> 00:15:54,630
OK?

375
00:15:54,630 --> 00:15:57,480
Now, there's a third point
I want to make about taxes.

376
00:15:57,480 --> 00:15:59,000
So I talked about
who bears taxes.

377
00:15:59,000 --> 00:16:02,160
I talked about the
side of the market.

378
00:16:02,160 --> 00:16:04,265
Side of the market
is irrelevant.

379
00:16:07,910 --> 00:16:10,630
And then the third point
I want to make about taxes

380
00:16:10,630 --> 00:16:12,630
is it's all about
the elasticities.

381
00:16:16,930 --> 00:16:18,910
Which is, who bears a tax?

382
00:16:18,910 --> 00:16:21,290
For a given tax wedge,
who bears the tax

383
00:16:21,290 --> 00:16:23,680
is all determined
by the elasticities

384
00:16:23,680 --> 00:16:25,960
of supply and demand curve.

385
00:16:25,960 --> 00:16:30,490
And in particular, inelastic
parties get stuck with taxes,

386
00:16:30,490 --> 00:16:33,560
while elastic
parties avoid taxes.

387
00:16:33,560 --> 00:16:37,240
So inelastic agent, inelastic
firms, inelastic consumers,

388
00:16:37,240 --> 00:16:40,810
they get stuck with
taxes, while elastically

389
00:16:40,810 --> 00:16:42,850
supplied firms, or
elastically demanded goods,

390
00:16:42,850 --> 00:16:44,360
they avoid taxes.

391
00:16:44,360 --> 00:16:46,750
So to see that, let's
look at figure 22-3.

392
00:16:49,930 --> 00:16:53,980
Let's go back to our tax on
the suppliers of gasoline.

393
00:16:53,980 --> 00:16:55,420
Once again, I hope
you know by now

394
00:16:55,420 --> 00:16:57,253
it wouldn't matter if
demanders of gasoline.

395
00:16:57,253 --> 00:16:59,503
But it's a little easier to
see with suppliers of gas,

396
00:16:59,503 --> 00:17:01,840
so let's go back to our
tax suppliers of gasoline.

397
00:17:01,840 --> 00:17:04,810
So we have a supply curve
that's been shifted up by $0.50.

398
00:17:04,810 --> 00:17:07,480
Let's consider two markets,
one with perfectly inelastic

399
00:17:07,480 --> 00:17:11,349
demand, one with
perfectly elastic demand.

400
00:17:11,349 --> 00:17:13,930
In the market, it was
perfectly inelastic demand.

401
00:17:13,930 --> 00:17:17,530
We used to sell 100 billion
gallons at a price of $1.50.

402
00:17:17,530 --> 00:17:20,050
Now we levy a $0.50
tax on suppliers.

403
00:17:20,050 --> 00:17:21,069
Where do we end up?

404
00:17:21,069 --> 00:17:23,380
We end up still selling
100 billion gallons of gas.

405
00:17:23,380 --> 00:17:25,062
You have to, because inelastic.

406
00:17:25,062 --> 00:17:26,520
Well, if you're
going to still sell

407
00:17:26,520 --> 00:17:29,080
100 billion gallons of
gas, then the suppliers

408
00:17:29,080 --> 00:17:30,940
can't bear any of the tax.

409
00:17:30,940 --> 00:17:33,460
They have to be able to fully
pass the tax onto price.

410
00:17:33,460 --> 00:17:35,950
That is, they have to
be able to charge $2.

411
00:17:35,950 --> 00:17:37,540
Think of the logic.

412
00:17:37,540 --> 00:17:40,880
Suppliers have to be
on their supply curve.

413
00:17:40,880 --> 00:17:43,810
The supply curve has
just shifted up by $0.50.

414
00:17:43,810 --> 00:17:46,270
Therefore, if you're going
to sell the same quantity,

415
00:17:46,270 --> 00:17:49,080
the price must go up by $0.50.

416
00:17:49,080 --> 00:17:51,075
So in that case,
who bears the tax?

417
00:17:54,540 --> 00:17:57,130
Who bears this tax on gas?

418
00:17:57,130 --> 00:17:58,910
Someone raise their
hand and tell me.

419
00:17:58,910 --> 00:17:59,410
Yeah.

420
00:17:59,410 --> 00:18:00,310
AUDIENCE: Consumers.

421
00:18:00,310 --> 00:18:02,590
JONATHAN GRUBER:
Consumers bear all of it.

422
00:18:02,590 --> 00:18:05,296
Consumers bear all the
tax, suppliers bear none.

423
00:18:05,296 --> 00:18:06,450
The supplier, you sent--

424
00:18:06,450 --> 00:18:08,367
you just sent a $0.50
check to the government,

425
00:18:08,367 --> 00:18:12,580
but you're getting $0.50 higher
price, so you don't care.

426
00:18:12,580 --> 00:18:14,050
Insert 50 Cent joke here.

427
00:18:14,050 --> 00:18:14,780
In the gas?

428
00:18:14,780 --> 00:18:15,800
I don't know you
do a 50 Cent joke.

429
00:18:15,800 --> 00:18:16,340
Whatever.

430
00:18:16,340 --> 00:18:16,840
OK.

431
00:18:19,310 --> 00:18:21,080
So you don't care.

432
00:18:21,080 --> 00:18:22,880
Now let's flip the case.

433
00:18:22,880 --> 00:18:29,560
Let's imagine demand for
gas is perfectly elastic.

434
00:18:29,560 --> 00:18:35,020
Now, the supply curve
has shifted up by $0.50.

435
00:18:35,020 --> 00:18:37,300
Supply curve was
shifted up by $0.50.

436
00:18:37,300 --> 00:18:40,330
Now what happens is
consumers say, look,

437
00:18:40,330 --> 00:18:42,340
I don't care how you
feel, Mr. Supplier,

438
00:18:42,340 --> 00:18:44,930
I'm not paying more
than $1.50 for gas.

439
00:18:44,930 --> 00:18:47,060
I have perfectly elastic demand.

440
00:18:47,060 --> 00:18:51,560
Supplier has no choice, then,
but to eat the whole tax.

441
00:18:51,560 --> 00:18:54,590
Because if they try to pass
any of it onto the consumer,

442
00:18:54,590 --> 00:18:58,880
the consumer will bolt. So
the new equilibrium is that--

443
00:18:58,880 --> 00:19:01,440
where the price stays
the same of $1.50,

444
00:19:01,440 --> 00:19:03,390
and the quantity falls.

445
00:19:03,390 --> 00:19:07,290
In this case, the producer
bears the whole tax.

446
00:19:07,290 --> 00:19:09,790
The consumer pays no
more than it did before.

447
00:19:09,790 --> 00:19:12,990
The gas company gets the
same price it did before,

448
00:19:12,990 --> 00:19:15,360
but has to send a $0.50
check to the government.

449
00:19:15,360 --> 00:19:19,260
So the entire burden is
borne by the producer.

450
00:19:19,260 --> 00:19:22,260
What is going on?

451
00:19:22,260 --> 00:19:24,540
Why would inelastic demand--

452
00:19:24,540 --> 00:19:25,930
what's the intuition here?

453
00:19:25,930 --> 00:19:28,410
So with inelastic
demand, consumers end up

454
00:19:28,410 --> 00:19:29,787
getting stuck with the tax.

455
00:19:29,787 --> 00:19:31,620
And with elastic demand,
consumers avoid it.

456
00:19:31,620 --> 00:19:32,293
Yeah.

457
00:19:32,293 --> 00:19:33,960
AUDIENCE: With elastic
demand, consumers

458
00:19:33,960 --> 00:19:37,220
are willing to pay any price,
so if the producers want

459
00:19:37,220 --> 00:19:39,640
to put all of the tax on
them, they can, and consumers

460
00:19:39,640 --> 00:19:40,920
can't do anything about it.

461
00:19:40,920 --> 00:19:43,620
But if you [INAUDIBLE]
elastic demand,

462
00:19:43,620 --> 00:19:47,770
then they can go anywhere
else to get gas at $1.50.

463
00:19:47,770 --> 00:19:49,743
So if you raise your
price, then they're

464
00:19:49,743 --> 00:19:50,785
just not going to buy it.

465
00:19:50,785 --> 00:19:51,743
JONATHAN GRUBER: Right.

466
00:19:51,743 --> 00:19:52,410
Exactly.

467
00:19:52,410 --> 00:19:53,845
I like to think of this--
that's a very good explanation.

468
00:19:53,845 --> 00:19:56,420
I like to think in terms of
almost like negotiating power.

469
00:19:56,420 --> 00:19:57,540
It's not the right
way to think about it,

470
00:19:57,540 --> 00:19:58,830
but I think it's
useful intuition.

471
00:19:58,830 --> 00:20:00,413
That when you've got
inelastic demand,

472
00:20:00,413 --> 00:20:02,610
you've got no negotiating power.

473
00:20:02,610 --> 00:20:03,650
You just want insulin.

474
00:20:03,650 --> 00:20:05,740
You're going to pay
anything for insulin.

475
00:20:05,740 --> 00:20:07,210
So the supplier
knows that, so it's

476
00:20:07,210 --> 00:20:08,900
going to make you
pay the whole tax.

477
00:20:08,900 --> 00:20:10,140
It doesn't matter if you send
the check to the government

478
00:20:10,140 --> 00:20:11,200
or he sends the check
to the government,

479
00:20:11,200 --> 00:20:13,035
he's going to pass
the whole cost to you.

480
00:20:13,035 --> 00:20:14,410
But if you think
about fast food,

481
00:20:14,410 --> 00:20:16,035
if you think about
a tax on hamburgers,

482
00:20:16,035 --> 00:20:18,285
if you're going to charge a
penny more for hamburgers,

483
00:20:18,285 --> 00:20:20,620
I'm going to buy a hot
dog or a slice of pizza.

484
00:20:20,620 --> 00:20:22,540
Then the supplier
knows they're screwed.

485
00:20:22,540 --> 00:20:23,587
They have no leverage.

486
00:20:23,587 --> 00:20:24,670
You have all the leverage.

487
00:20:24,670 --> 00:20:26,045
You've all the
negotiating power.

488
00:20:26,045 --> 00:20:28,410
So they can't raise
the price on you.

489
00:20:28,410 --> 00:20:30,900
So the bottom line
is, inelastic factors

490
00:20:30,900 --> 00:20:36,200
get stuck with taxes and
elastic factors avoid taxes.

491
00:20:36,200 --> 00:20:38,280
And that's sort of the
other lesson we get here

492
00:20:38,280 --> 00:20:40,335
as we think about taxation.

493
00:20:42,880 --> 00:20:45,350
So at the end of the
day, all that matters--

494
00:20:45,350 --> 00:20:48,035
if you think about any tax
being imposed in the US,

495
00:20:48,035 --> 00:20:49,910
it's never as simple as
just a gas tax, often

496
00:20:49,910 --> 00:20:51,365
a complicated
giant set of taxes.

497
00:20:51,365 --> 00:20:52,370
You think about simple--

498
00:20:52,370 --> 00:20:53,983
a single tax, all
you need to know

499
00:20:53,983 --> 00:20:56,150
is the elasticities, supply
and demand, and the size

500
00:20:56,150 --> 00:20:57,317
of the tax, and you're done.

501
00:20:57,317 --> 00:20:59,268
You can figure out
who bears the tax.

502
00:20:59,268 --> 00:21:01,310
And the Congressional
Budget Office, for example,

503
00:21:01,310 --> 00:21:03,190
does these exercises
all the time,

504
00:21:03,190 --> 00:21:04,910
and has estimates
of how given tax

505
00:21:04,910 --> 00:21:10,100
changes will affect the income
distribution as a result.

506
00:21:10,100 --> 00:21:15,060
Now-- and actually, there's
a pretty cool study of this.

507
00:21:15,060 --> 00:21:16,710
Let me ask the question.

508
00:21:16,710 --> 00:21:19,020
We have hospital taxes.

509
00:21:19,020 --> 00:21:19,890
We have-- hospital.

510
00:21:19,890 --> 00:21:21,030
We have hotel taxes.

511
00:21:21,030 --> 00:21:23,370
I've got too much health
care on the brain.

512
00:21:23,370 --> 00:21:27,378
We've got hotel taxes
in many major cities.

513
00:21:27,378 --> 00:21:28,920
There's some instance
of a hotel tax.

514
00:21:28,920 --> 00:21:31,710
You can imagine a diagram,
we've got supply demand.

515
00:21:31,710 --> 00:21:34,050
How does the incidence
of the hotel tax

516
00:21:34,050 --> 00:21:38,105
change when Airbnb comes in?

517
00:21:38,105 --> 00:21:39,091
Yeah.

518
00:21:39,091 --> 00:21:44,490
AUDIENCE: The consumer is
suddenly much more able

519
00:21:44,490 --> 00:21:47,135
to switch around, and so
a lot more of the tax,

520
00:21:47,135 --> 00:21:49,268
or maybe all of it,
is borne by the hotel.

521
00:21:49,268 --> 00:21:50,310
JONATHAN GRUBER: Exactly.

522
00:21:50,310 --> 00:21:53,570
What you see-- and how
would you test that?

523
00:21:53,570 --> 00:21:54,570
How would you test that?

524
00:21:54,570 --> 00:21:56,082
Yeah.

525
00:21:56,082 --> 00:21:58,540
AUDIENCE: Comparing prices in
areas with different taxation

526
00:21:58,540 --> 00:21:58,980
rates?

527
00:21:58,980 --> 00:22:00,022
JONATHAN GRUBER: Exactly.

528
00:22:00,022 --> 00:22:04,350
What you find is
when Airbnb comes in,

529
00:22:04,350 --> 00:22:07,710
hotel taxes are passed
less onto price.

530
00:22:07,710 --> 00:22:09,658
Hotel owners are more
bearing the taxes

531
00:22:09,658 --> 00:22:12,075
compared to consumers, because
consumers are more elastic.

532
00:22:12,075 --> 00:22:14,810
So that's an example
of how this can matter.

533
00:22:14,810 --> 00:22:15,550
OK.

534
00:22:15,550 --> 00:22:20,410
So now, let me say one
other thing about taxes.

535
00:22:20,410 --> 00:22:27,205
The last thing I want to say
about taxes is what to tax.

536
00:22:30,970 --> 00:22:34,010
And this is a fundamental
debate that goes back

537
00:22:34,010 --> 00:22:37,340
to the 17th century,
which is essentially,

538
00:22:37,340 --> 00:22:40,910
should we tax people based
on what they produce?

539
00:22:40,910 --> 00:22:43,610
That is, their income.

540
00:22:43,610 --> 00:22:46,160
Or should we tax people
based on what they consume?

541
00:22:46,160 --> 00:22:48,410
Their consumption.

542
00:22:48,410 --> 00:22:51,517
The philosopher Thomas
Hobbs in, like, 17-whatever,

543
00:22:51,517 --> 00:22:53,100
talked about, why
should we tax people

544
00:22:53,100 --> 00:22:54,840
based on the fruits
of their labor?

545
00:22:54,840 --> 00:22:57,132
Let's tax them based on what
they take out of society--

546
00:22:57,132 --> 00:22:58,700
that is, what they consume.

547
00:22:58,700 --> 00:23:01,890
And this is a debate economists
have had for centuries.

548
00:23:01,890 --> 00:23:04,857
Should we tax
consumption or income?

549
00:23:04,857 --> 00:23:07,440
This debate, which shows in the
real world, because in Europe,

550
00:23:07,440 --> 00:23:10,140
they rely much more on
consumption taxes than we do.

551
00:23:10,140 --> 00:23:10,640
Yeah.

552
00:23:10,640 --> 00:23:12,990
AUDIENCE: Wait, would it matter?

553
00:23:12,990 --> 00:23:15,240
JONATHAN GRUBER: I'm going
to tell you why it matters.

554
00:23:15,240 --> 00:23:17,610
So in Europe, they rely much
more on consumption taxes

555
00:23:17,610 --> 00:23:18,312
than we do.

556
00:23:18,312 --> 00:23:20,520
So in the US, most of our
taxes come from income tax,

557
00:23:20,520 --> 00:23:22,440
and in Europe, a lot
of their tax revenue

558
00:23:22,440 --> 00:23:24,060
comes from what's called
the value added tax.

559
00:23:24,060 --> 00:23:25,110
And if you've
traveled in Europe,

560
00:23:25,110 --> 00:23:26,485
you'll know about
the value added

561
00:23:26,485 --> 00:23:28,550
tax, which is a form of
consumption taxation.

562
00:23:28,550 --> 00:23:31,050
So this is a debate that plays
at international-- in the US,

563
00:23:31,050 --> 00:23:32,880
we have sales taxes,
but they're quite

564
00:23:32,880 --> 00:23:36,902
small as a share of revenues
compared to European nations.

565
00:23:36,902 --> 00:23:40,400
Now, why do we care?

566
00:23:40,400 --> 00:23:43,120
Well, we care because
the following equation.

567
00:23:43,120 --> 00:23:47,170
y, your income, can either
be spent on stuff or saved.

568
00:23:49,447 --> 00:23:51,530
Your income can either be
spent on stuff or saved.

569
00:23:55,460 --> 00:23:57,960
And as I talked about
a few lectures ago,

570
00:23:57,960 --> 00:24:03,360
savings is a major engine
of growth in the economy.

571
00:24:03,360 --> 00:24:05,880
More savings means a
broader pool of capital.

572
00:24:15,660 --> 00:24:17,493
Means a broader pool
of capital, which

573
00:24:17,493 --> 00:24:19,160
means a lower interest
rate, which means

574
00:24:19,160 --> 00:24:20,960
firms can invest more.

575
00:24:20,960 --> 00:24:22,885
So we like promoting
savings in the long run.

576
00:24:22,885 --> 00:24:24,260
In the short run,
in a recession,

577
00:24:24,260 --> 00:24:24,890
we may feel differently.

578
00:24:24,890 --> 00:24:27,110
But in the long run, we
like having more savings.

579
00:24:27,110 --> 00:24:29,750
So in the long run, we
like having more savings.

580
00:24:29,750 --> 00:24:35,070
If you tax income, you tax both
my consumption and my savings.

581
00:24:35,070 --> 00:24:38,520
If you tax my consumption,
then you don't tax my savings.

582
00:24:38,520 --> 00:24:42,090
That is, you relatively favor
savings over consumption.

583
00:24:42,090 --> 00:24:47,650
You promote people to save
rather than consuming.

584
00:24:47,650 --> 00:24:49,760
So that's why many economists--

585
00:24:49,760 --> 00:24:51,835
I think probably if you
did a poll of economists

586
00:24:51,835 --> 00:24:53,920
and said, should be tax
income or consumption,

587
00:24:53,920 --> 00:24:56,080
the majority would
say consumption.

588
00:24:56,080 --> 00:24:57,970
And the reason
they would give is

589
00:24:57,970 --> 00:25:00,223
because we need more
savings in society,

590
00:25:00,223 --> 00:25:01,390
and we need to promote that.

591
00:25:01,390 --> 00:25:02,042
Yeah.

592
00:25:02,042 --> 00:25:05,205
AUDIENCE: Wouldn't it be
equivalent to taxing income

593
00:25:05,205 --> 00:25:06,970
and they're giving a
tax break for saving?

594
00:25:06,970 --> 00:25:09,220
JONATHAN GRUBER: That would
be identically equivalent.

595
00:25:09,220 --> 00:25:13,080
If you give a 100% tax credit
for all of your savings,

596
00:25:13,080 --> 00:25:14,080
that would be identical.

597
00:25:14,080 --> 00:25:15,913
Now, in the US, we have
some partial credits

598
00:25:15,913 --> 00:25:18,540
like that, but far from 100%.

599
00:25:18,540 --> 00:25:22,260
So the question is, what's
the counterargument?

600
00:25:22,260 --> 00:25:24,735
Well, the counterargument
is all about fairness.

601
00:25:28,480 --> 00:25:33,160
Which is that it turns out that
the rich save and nobody else

602
00:25:33,160 --> 00:25:34,910
does.

603
00:25:34,910 --> 00:25:37,100
Basically almost all
the savings in society

604
00:25:37,100 --> 00:25:42,620
is done by the top probably
10% of individuals in society.

605
00:25:42,620 --> 00:25:45,110
And the bottom 50% of
individuals in society

606
00:25:45,110 --> 00:25:47,700
have basically no savings.

607
00:25:47,700 --> 00:25:50,910
So essentially, what this
means is for most Americans,

608
00:25:50,910 --> 00:25:53,250
for the typical
American, this debate

609
00:25:53,250 --> 00:25:56,400
is irrelevant, because
they have no savings.

610
00:25:56,400 --> 00:25:58,400
You tax their income, you
tax their consumption,

611
00:25:58,400 --> 00:25:59,940
it's the same thing.

612
00:25:59,940 --> 00:26:02,400
For rich Americans, it'd
be a much better deal

613
00:26:02,400 --> 00:26:05,160
to tax consumption,
because they have savings

614
00:26:05,160 --> 00:26:07,520
that then wouldn't be taxed.

615
00:26:07,520 --> 00:26:09,500
So the problem with the
consumption tax base,

616
00:26:09,500 --> 00:26:14,640
it'll mean a massive
redistribution from the poor

617
00:26:14,640 --> 00:26:19,320
to the rich, because the
rich folks do the savings.

618
00:26:19,320 --> 00:26:21,390
Now, there would
be a simple answer

619
00:26:21,390 --> 00:26:23,478
to-- there would be
an answer to this.

620
00:26:23,478 --> 00:26:26,020
We could answer this, because
ultimately, the rich folks die.

621
00:26:26,020 --> 00:26:29,550
It doesn't matter how rich
they are, they die eventually.

622
00:26:29,550 --> 00:26:33,000
And if at that point, we
taxed all their savings,

623
00:26:33,000 --> 00:26:34,380
we could then equalize things.

624
00:26:34,380 --> 00:26:37,590
So in other words, if we took
all the money that was left--

625
00:26:37,590 --> 00:26:39,883
let's say we had
this consumption tax,

626
00:26:39,883 --> 00:26:41,550
but we counted its
consumption the money

627
00:26:41,550 --> 00:26:43,685
you left behind when you died.

628
00:26:43,685 --> 00:26:46,060
Then it would solve the problem,
because the rich would--

629
00:26:46,060 --> 00:26:47,540
during their life,
they'd pay less tax,

630
00:26:47,540 --> 00:26:48,915
but they'd pay it
all at the end.

631
00:26:51,400 --> 00:26:53,080
So that's why we have
a critical debate

632
00:26:53,080 --> 00:26:54,970
in this country
over the estate tax,

633
00:26:54,970 --> 00:26:58,150
or the so-called death tax.

634
00:26:58,150 --> 00:26:59,830
This notion of
whether you should

635
00:26:59,830 --> 00:27:01,660
be taxed on their
estates becomes

636
00:27:01,660 --> 00:27:03,430
very important for
thinking about this.

637
00:27:03,430 --> 00:27:05,850
If we had an estate
tax which was literally

638
00:27:05,850 --> 00:27:07,690
at the same rate
as all other taxes,

639
00:27:07,690 --> 00:27:09,850
then we could move to
taxing consumption.

640
00:27:09,850 --> 00:27:10,990
It would be the same.

641
00:27:10,990 --> 00:27:14,850
In fact, we'd essentially have
a consumption tax at that point.

642
00:27:14,850 --> 00:27:16,950
But in fact, we
have an estate tax

643
00:27:16,950 --> 00:27:21,770
that is paid only by
the top 0.04% of people

644
00:27:21,770 --> 00:27:24,000
who die each year.

645
00:27:24,000 --> 00:27:26,693
And it's paid on only a
fraction of their assets.

646
00:27:26,693 --> 00:27:27,610
So we don't have that.

647
00:27:27,610 --> 00:27:30,700
So that's why the
fairness debate comes in.

648
00:27:30,700 --> 00:27:32,610
So I just want to point
out, just another--

649
00:27:32,610 --> 00:27:35,520
these are all just topics I'm
hitting to whet your appetite.

650
00:27:35,520 --> 00:27:37,020
These are interesting
things we need

651
00:27:37,020 --> 00:27:39,353
to think about when we think
about how to set up our tax

652
00:27:39,353 --> 00:27:42,360
systems, is basically
things like,

653
00:27:42,360 --> 00:27:44,410
do we tax income or consumption?

654
00:27:44,410 --> 00:27:45,230
OK?

655
00:27:45,230 --> 00:27:47,700
Questions about that?

656
00:27:47,700 --> 00:27:48,450
OK.

657
00:27:48,450 --> 00:27:49,830
That's taxes.

658
00:27:49,830 --> 00:27:51,480
Now I want to turn to--

659
00:27:51,480 --> 00:27:53,860
so that's one side of the
equation, which is taxes.

660
00:27:53,860 --> 00:27:55,560
We know they cause
inefficiencies.

661
00:27:55,560 --> 00:27:57,102
We know they cause
deadweight losses.

662
00:27:59,500 --> 00:28:02,003
And we know that there's some
question about who bears them.

663
00:28:02,003 --> 00:28:03,670
But the bottom line
is taxes are putting

664
00:28:03,670 --> 00:28:06,350
some leak in the bucket,
and that's a problem.

665
00:28:06,350 --> 00:28:09,160
The other side of the leak
in the bucket is transfers.

666
00:28:13,410 --> 00:28:16,860
Which is, as we saw in
the diagram last time,

667
00:28:16,860 --> 00:28:20,460
if you essentially condition
my getting money on my working,

668
00:28:20,460 --> 00:28:21,660
I'll work less.

669
00:28:21,660 --> 00:28:25,590
If you say to me,
hey, John, you're

670
00:28:25,590 --> 00:28:28,230
currently making $5,000 a year.

671
00:28:28,230 --> 00:28:30,660
I'm going to give you $10,000
no matter what you do,

672
00:28:30,660 --> 00:28:32,160
but any money you
earn will come off

673
00:28:32,160 --> 00:28:36,260
that $10,000, I'll say
great, I'll just quit.

674
00:28:36,260 --> 00:28:40,790
So the problem with transfers
is they act like taxes.

675
00:28:40,790 --> 00:28:43,290
If you take the transfers and
phase them out, take them away

676
00:28:43,290 --> 00:28:44,957
from people, they
have a similar effect.

677
00:28:44,957 --> 00:28:46,890
In fact, we call
transfers an implicit tax.

678
00:28:46,890 --> 00:28:49,360
[INAUDIBLE] transfer
system from last time,

679
00:28:49,360 --> 00:28:54,780
which is the amount you got was
the max of 0, was the max of 0,

680
00:28:54,780 --> 00:28:58,080
or 10,000 minus your income.

681
00:28:58,080 --> 00:29:01,200
This is essentially 100% tax
rate on everybody's incomes

682
00:29:01,200 --> 00:29:03,533
below $10,000.

683
00:29:03,533 --> 00:29:04,950
Because for every
dollar you earn,

684
00:29:04,950 --> 00:29:08,740
we take it away, because you
get $10,000 no matter what.

685
00:29:08,740 --> 00:29:12,430
So this is a tax, basically.

686
00:29:12,430 --> 00:29:15,280
But in fact, this
tax is unavoidable

687
00:29:15,280 --> 00:29:17,080
if we want to target
money to poor people.

688
00:29:17,080 --> 00:29:23,080
If we just gave everyone
$10,000, it wouldn't be a tax.

689
00:29:23,080 --> 00:29:24,410
We just gave everyone $10,000.

690
00:29:24,410 --> 00:29:27,190
Now, it would impact
how hard people work.

691
00:29:27,190 --> 00:29:28,590
Why?

692
00:29:28,590 --> 00:29:30,090
Why would it impact
how people work?

693
00:29:30,090 --> 00:29:30,270
Yeah.

694
00:29:30,270 --> 00:29:32,366
AUDIENCE: [INAUDIBLE]
logarithmic [INAUDIBLE]..

695
00:29:32,366 --> 00:29:34,948
JONATHAN GRUBER: No, no, I'm
going to labor supply theory.

696
00:29:34,948 --> 00:29:36,490
What's the name of
the effect for why

697
00:29:36,490 --> 00:29:39,210
that would affect [INAUDIBLE]
if we gave everyone $10,000?

698
00:29:39,210 --> 00:29:40,650
The income effect.

699
00:29:40,650 --> 00:29:42,570
So it wouldn't affect
how our people work.

700
00:29:42,570 --> 00:29:44,730
But it wouldn't really
distort people's labors.

701
00:29:44,730 --> 00:29:46,980
We think of distortions that
arise in the substitution

702
00:29:46,980 --> 00:29:47,480
effect.

703
00:29:47,480 --> 00:29:50,405
People making different
decisions because of tax rates.

704
00:29:50,405 --> 00:29:52,780
The reason we get a problem,
the reason we get deadweight

705
00:29:52,780 --> 00:29:54,658
loss is because I'm ta--

706
00:29:54,658 --> 00:29:56,200
not that I'm giving
you $10,000, it's

707
00:29:56,200 --> 00:29:59,580
that I'm taking away
as you get richer.

708
00:29:59,580 --> 00:30:00,970
That's the problem.

709
00:30:00,970 --> 00:30:04,133
So then the question is,
what can we do about this?

710
00:30:04,133 --> 00:30:06,300
What can we do about the
fact that we're essentially

711
00:30:06,300 --> 00:30:10,480
imposing implicit taxes on poor
people by giving them money?

712
00:30:10,480 --> 00:30:12,120
So there are a couple answers.

713
00:30:12,120 --> 00:30:15,450
The first is
categorical transfers.

714
00:30:21,530 --> 00:30:24,800
That is, instead of giving
the money to everybody,

715
00:30:24,800 --> 00:30:29,420
just give it to
deserving populations.

716
00:30:29,420 --> 00:30:31,370
So for example, one of them--

717
00:30:31,370 --> 00:30:35,960
the largest single cash transfer
program, pure cash transfer

718
00:30:35,960 --> 00:30:40,330
program in the US, is to--

719
00:30:40,330 --> 00:30:44,090
that's literally giving cash is
what's called the SSI program,

720
00:30:44,090 --> 00:30:46,610
the Supplemental
Security Income program.

721
00:30:46,610 --> 00:30:48,900
It's about $80 billion a year.

722
00:30:48,900 --> 00:30:51,410
And what this does
is give cash grants

723
00:30:51,410 --> 00:30:54,960
to low income families that
have disabled children.

724
00:30:54,960 --> 00:30:57,390
So it's not just that
you're low income,

725
00:30:57,390 --> 00:31:01,570
but that you have a disabled
child in your house.

726
00:31:01,570 --> 00:31:04,120
Likewise, we have
something called

727
00:31:04,120 --> 00:31:08,260
the TANF program, which is
what is traditionally called--

728
00:31:08,260 --> 00:31:11,110
I've used the term "welfare" in
this course to mean well-being.

729
00:31:11,110 --> 00:31:13,040
Traditionally in America,
when you say welfare

730
00:31:13,040 --> 00:31:16,720
with a sneer on your face,
you're referring to TANF.

731
00:31:16,720 --> 00:31:20,530
TANF is cash grants to
low-income single-parent

732
00:31:20,530 --> 00:31:21,743
households.

733
00:31:21,743 --> 00:31:24,160
Essentially, if you're low
income and you're a single mom,

734
00:31:24,160 --> 00:31:29,090
typically, you get a
grant from the government.

735
00:31:29,090 --> 00:31:31,330
Now, the question
people have always asked

736
00:31:31,330 --> 00:31:33,740
is, why do we impose
these conditions?

737
00:31:33,740 --> 00:31:35,560
Why do we make people disabled?

738
00:31:35,560 --> 00:31:37,210
Why do we make them
be single moms?

739
00:31:37,210 --> 00:31:39,130
Why don't just give
them the money?

740
00:31:39,130 --> 00:31:39,940
Why not have this?

741
00:31:39,940 --> 00:31:42,400
Why have these other conditions?

742
00:31:42,400 --> 00:31:45,080
And the answer is because--

743
00:31:45,080 --> 00:31:48,170
that basically, we
think this is a way

744
00:31:48,170 --> 00:31:53,350
of reducing the distortion
that arises from transfers.

745
00:31:53,350 --> 00:31:54,620
Think of it this way.

746
00:31:54,620 --> 00:31:56,830
Imagine all of us
were born with,

747
00:31:56,830 --> 00:32:00,190
on our forehead, an
unremovable tattoo that

748
00:32:00,190 --> 00:32:03,870
said "hardworking and lazy."

749
00:32:03,870 --> 00:32:04,800
No, let's not do that.

750
00:32:04,800 --> 00:32:05,467
Different thing.

751
00:32:05,467 --> 00:32:09,760
Let's do "low skill
and high skill."

752
00:32:09,760 --> 00:32:11,793
So I know your
underlying ability.

753
00:32:11,793 --> 00:32:13,960
Then I would simply say,
look, if you're high skill,

754
00:32:13,960 --> 00:32:15,280
you don't get any money.

755
00:32:15,280 --> 00:32:16,030
I don't care if you're poor.

756
00:32:16,030 --> 00:32:17,780
If you're poor, it
just means you're lazy,

757
00:32:17,780 --> 00:32:19,708
because I know
you're high skill.

758
00:32:19,708 --> 00:32:21,750
If you're low skill, I'm
going to give you money.

759
00:32:21,750 --> 00:32:24,270
And that would not
distort behavior at all,

760
00:32:24,270 --> 00:32:26,870
because people couldn't
change what's on their head,

761
00:32:26,870 --> 00:32:29,287
so they would just continue
to work as hard as they always

762
00:32:29,287 --> 00:32:30,360
worked.

763
00:32:30,360 --> 00:32:32,820
This is the idea of trying
to find signals like that.

764
00:32:32,820 --> 00:32:34,680
You're trying to find
ways of identifying

765
00:32:34,680 --> 00:32:38,210
the people who need the help.

766
00:32:38,210 --> 00:32:40,220
And by doing so--
who need the help,

767
00:32:40,220 --> 00:32:41,990
but need the help
in a way that's

768
00:32:41,990 --> 00:32:45,570
not changed by their behavior.

769
00:32:45,570 --> 00:32:47,340
We think that a
kid being disabled,

770
00:32:47,340 --> 00:32:48,870
they didn't choose
to be disabled.

771
00:32:48,870 --> 00:32:50,580
Or mom being single
mom, she didn't

772
00:32:50,580 --> 00:32:51,720
choose to be a single mom.

773
00:32:51,720 --> 00:32:54,660
That starts to get a
little more interesting.

774
00:32:54,660 --> 00:32:57,090
So essentially, the idea
of categorical welfare

775
00:32:57,090 --> 00:33:01,470
is to basically say, can
we find things about people

776
00:33:01,470 --> 00:33:05,040
that they didn't choose on which
we can base giving them money?

777
00:33:07,710 --> 00:33:12,210
So blindness is a good
example, et cetera.

778
00:33:12,210 --> 00:33:14,670
Now, the question that then
raises, well, can people

779
00:33:14,670 --> 00:33:16,810
choose these things?

780
00:33:16,810 --> 00:33:18,513
Well, you might say,
well, of course,

781
00:33:18,513 --> 00:33:19,930
a kid can't choose
to be disabled,

782
00:33:19,930 --> 00:33:23,680
but people can choose
to be single moms.

783
00:33:23,680 --> 00:33:25,690
In fact, the evidence
is the opposite.

784
00:33:25,690 --> 00:33:27,780
Let me explain what I mean.

785
00:33:27,780 --> 00:33:32,250
If you give people money
tied to being a single mom,

786
00:33:32,250 --> 00:33:34,170
it doesn't cause them
to be a single mom.

787
00:33:34,170 --> 00:33:36,130
The evidence is
very clear on that.

788
00:33:36,130 --> 00:33:38,970
So there have been
hundreds of studies showing

789
00:33:38,970 --> 00:33:41,250
that paying women money
conditional on being

790
00:33:41,250 --> 00:33:43,542
a single mom doesn't cause
them to get divorced or have

791
00:33:43,542 --> 00:33:44,460
kids out of wedlock.

792
00:33:44,460 --> 00:33:45,820
That's been clear.

793
00:33:45,820 --> 00:33:49,590
But if you give family money
based on kids being disabled,

794
00:33:49,590 --> 00:33:52,440
more disabled kids show up.

795
00:33:52,440 --> 00:33:53,120
Why?

796
00:33:53,120 --> 00:33:55,460
Because disability is a
tough thing to assess.

797
00:33:55,460 --> 00:33:58,112
Most disabilities are
musculoskeletal or mental,

798
00:33:58,112 --> 00:33:59,570
and those are hard
things-- you can

799
00:33:59,570 --> 00:34:01,640
tell if a kid's missing
a limb, but it's

800
00:34:01,640 --> 00:34:04,220
hard to evaluate truly
musculoskeletal or mental

801
00:34:04,220 --> 00:34:05,840
disabilities.

802
00:34:05,840 --> 00:34:08,253
And interestingly,
despite your intuition

803
00:34:08,253 --> 00:34:09,920
what it might've been
a few minutes ago,

804
00:34:09,920 --> 00:34:14,000
the place where in subsets we
see the most people changing

805
00:34:14,000 --> 00:34:15,409
their behavior to qualify--

806
00:34:15,409 --> 00:34:17,840
at least changing behavior
meaning not becoming disabled,

807
00:34:17,840 --> 00:34:20,150
but claiming they're disabled--

808
00:34:20,150 --> 00:34:22,429
is here and not in
single motherhood.

809
00:34:22,429 --> 00:34:25,040
So categorical
transfers help, but not

810
00:34:25,040 --> 00:34:27,170
as much as you might think,
because the categories

811
00:34:27,170 --> 00:34:30,420
are hard to measure.

812
00:34:30,420 --> 00:34:33,150
And that's why
another tool we've

813
00:34:33,150 --> 00:34:38,280
used to try to get at
this is in-kind transfers.

814
00:34:45,510 --> 00:34:48,199
In-kind transfers.

815
00:34:48,199 --> 00:34:49,679
OK.

816
00:34:49,679 --> 00:34:50,900
Part of the problem--

817
00:34:50,900 --> 00:34:52,203
yeah, Manny.

818
00:34:52,203 --> 00:34:54,750
AUDIENCE: For the
TANF, does it account--

819
00:34:54,750 --> 00:34:57,583
when it says for
single parents, does it

820
00:34:57,583 --> 00:34:59,500
account for people that
live in the household?

821
00:34:59,500 --> 00:34:59,960
So like--

822
00:34:59,960 --> 00:35:01,585
JONATHAN GRUBER: It's
a great question.

823
00:35:01,585 --> 00:35:05,410
That's a tricky thing
to have to deal with,

824
00:35:05,410 --> 00:35:07,640
which is how do you deal
with co-residing people?

825
00:35:07,640 --> 00:35:10,981
And that's something they have a
complicated set of rules about.

826
00:35:10,981 --> 00:35:14,030
AUDIENCE: [INAUDIBLE] the
stuff you didn't choose thing,

827
00:35:14,030 --> 00:35:20,820
because they seem to try to
simplify the cons [INAUDIBLE]

828
00:35:20,820 --> 00:35:22,956
choose, whereas I
think in real life,

829
00:35:22,956 --> 00:35:26,170
it's probably related to the
circumstances of your birth--

830
00:35:26,170 --> 00:35:27,337
JONATHAN GRUBER: Absolutely.

831
00:35:27,337 --> 00:35:29,000
AUDIENCE: --and other
stuff like that.

832
00:35:29,000 --> 00:35:32,380
And so is it possible that these
indicators are making it worse

833
00:35:32,380 --> 00:35:35,500
for people who are in situations
where they couldn't have

834
00:35:35,500 --> 00:35:37,915
avoided being in
poverty, but they

835
00:35:37,915 --> 00:35:40,240
happen to not be a single
mom or not be disabled?

836
00:35:40,240 --> 00:35:41,657
JONATHAN GRUBER:
Awesome question.

837
00:35:41,657 --> 00:35:43,715
And so basically,
here's the trade-off.

838
00:35:43,715 --> 00:35:45,340
Okay, give me a better
way to teach it.

839
00:35:45,340 --> 00:35:46,290
Here's the trade-off.

840
00:35:46,290 --> 00:35:49,617
The trade-off is,
the more you target--

841
00:35:49,617 --> 00:35:51,950
let's say I said I'm going
to replace our entire welfare

842
00:35:51,950 --> 00:35:54,340
system in America with just
transfers to the blind.

843
00:35:54,340 --> 00:35:58,150
And let's assume people don't
blind themselves to get money.

844
00:35:58,150 --> 00:36:01,450
You laugh, but there
is a city in Florida

845
00:36:01,450 --> 00:36:05,950
where they found that over
a certain period of time,

846
00:36:05,950 --> 00:36:08,710
the vast majority of US
claim for lost limbs came

847
00:36:08,710 --> 00:36:10,450
from one city in Florida.

848
00:36:10,450 --> 00:36:12,242
And it turned out that
people were actually

849
00:36:12,242 --> 00:36:14,575
cutting off their limbs to
qualify for government money.

850
00:36:14,575 --> 00:36:16,180
They actually
called it Nub City.

851
00:36:16,180 --> 00:36:18,130
So you laugh.

852
00:36:18,130 --> 00:36:19,300
This stuff does happen.

853
00:36:19,300 --> 00:36:21,310
But by and large, we
assume it doesn't.

854
00:36:21,310 --> 00:36:23,710
OK, so let's say I want to
replace the entire US welfare

855
00:36:23,710 --> 00:36:27,070
system with one just for
people who are blind.

856
00:36:27,070 --> 00:36:28,810
On the one hand,
that'd be great,

857
00:36:28,810 --> 00:36:30,670
because you wouldn't
cause any distortion.

858
00:36:30,670 --> 00:36:32,440
People shouldn't work any
less hard because you can't

859
00:36:32,440 --> 00:36:33,550
change whether you're blind.

860
00:36:33,550 --> 00:36:34,690
On the other hand, you'd
leave all of these people

861
00:36:34,690 --> 00:36:36,378
out in the cold who need help.

862
00:36:36,378 --> 00:36:38,920
So that's the trade-off, which
is the broader you spread it--

863
00:36:38,920 --> 00:36:41,170
the more you move toward
a universal system,

864
00:36:41,170 --> 00:36:43,587
the more potential distortion
you cause in terms of people

865
00:36:43,587 --> 00:36:46,768
changing their work behavior,
but the broader set of people

866
00:36:46,768 --> 00:36:47,310
you can help.

867
00:36:47,310 --> 00:36:48,852
And that's why
there's a big move now

868
00:36:48,852 --> 00:36:52,120
for what's called universal
basic income, UBI.

869
00:36:52,120 --> 00:36:54,970
It's a big movement now
around the world to say, look,

870
00:36:54,970 --> 00:36:56,770
forget these things, SSI, TANF.

871
00:36:56,770 --> 00:36:58,330
They're all messy to measure.

872
00:36:58,330 --> 00:37:00,370
They're stigmatizing.

873
00:37:00,370 --> 00:37:01,780
People can change them anyway.

874
00:37:01,780 --> 00:37:04,080
Let's just give people money.

875
00:37:04,080 --> 00:37:07,550
And that's sort of one
motivation for that.

876
00:37:07,550 --> 00:37:10,340
Now, but the other way to get
at this that people come at

877
00:37:10,340 --> 00:37:13,860
is, look, the problem
all here is a simple one,

878
00:37:13,860 --> 00:37:15,500
which is everyone loves money.

879
00:37:15,500 --> 00:37:17,810
Rich or poor, we all love money.

880
00:37:17,810 --> 00:37:20,510
But what if what we gave
people was not money,

881
00:37:20,510 --> 00:37:24,630
but things that poor people
need and rich people don't?

882
00:37:24,630 --> 00:37:27,870
Like for example,
mediocre public housing.

883
00:37:27,870 --> 00:37:30,270
Not a mansion, but an apartment.

884
00:37:30,270 --> 00:37:31,830
A rich person isn't
going to pretend

885
00:37:31,830 --> 00:37:33,413
they're poor to get
a crappy apartment

886
00:37:33,413 --> 00:37:34,440
or a mediocre apartment.

887
00:37:34,440 --> 00:37:36,315
But a poor person who'd
be homeless otherwise

888
00:37:36,315 --> 00:37:38,640
will happily take it.

889
00:37:38,640 --> 00:37:39,710
What about medical care?

890
00:37:39,710 --> 00:37:41,460
Rich people have private
health insurance.

891
00:37:41,460 --> 00:37:43,170
They don't need
government medical care.

892
00:37:43,170 --> 00:37:45,650
Poor people need
government medical care.

893
00:37:45,650 --> 00:37:47,080
What about food stamps?

894
00:37:47,080 --> 00:37:50,380
Rich people can afford food.

895
00:37:50,380 --> 00:37:51,890
Poor people can't.

896
00:37:51,890 --> 00:37:54,970
So the idea is basically,
by giving in-kind transfers,

897
00:37:54,970 --> 00:37:58,270
like medical care,
or housing, or food,

898
00:37:58,270 --> 00:38:06,943
we get people to what we call
self-reveal that they're poor.

899
00:38:06,943 --> 00:38:08,610
Here the problem is
people might pretend

900
00:38:08,610 --> 00:38:09,860
they're poor to get the money.

901
00:38:09,860 --> 00:38:10,918
They might quit.

902
00:38:10,918 --> 00:38:12,960
Even if they can afford
to work, they might quit.

903
00:38:12,960 --> 00:38:15,377
Here we say, well, look, you're
not going to quit your job

904
00:38:15,377 --> 00:38:17,380
to get a mediocre--
you guys with your--

905
00:38:17,380 --> 00:38:19,363
make it 100 grand
a year at MIT, I'm

906
00:38:19,363 --> 00:38:21,780
going to quit your jobs to get
some mediocre public sector

907
00:38:21,780 --> 00:38:23,717
apartment.

908
00:38:23,717 --> 00:38:26,300
But if I said I'll give you 100
grand whether you work or not,

909
00:38:26,300 --> 00:38:27,370
you might quit your job.

910
00:38:27,370 --> 00:38:29,790
But say you live in a
mediocre apartment, you won't.

911
00:38:29,790 --> 00:38:31,790
So the idea, by giving
people in-kind benefits,

912
00:38:31,790 --> 00:38:37,400
is to get them to self-reveal
whether they're actually poor

913
00:38:37,400 --> 00:38:38,780
or not.

914
00:38:38,780 --> 00:38:41,412
Now, that's not the main reason
why giving in-kind transfers.

915
00:38:41,412 --> 00:38:42,620
This is the economist reason.

916
00:38:42,620 --> 00:38:45,230
The main reasons is
because politicians

917
00:38:45,230 --> 00:38:47,000
are what we call paternalistic.

918
00:38:49,760 --> 00:38:51,093
And this comes all the way back.

919
00:38:51,093 --> 00:38:53,093
You guys remember when
we discussed food stamps,

920
00:38:53,093 --> 00:38:55,130
and we did budget
constraints, and I said, well,

921
00:38:55,130 --> 00:38:56,240
we never want to give
people food stamps.

922
00:38:56,240 --> 00:38:57,520
We want to give them money.

923
00:38:57,520 --> 00:39:00,140
And they say, but what if the
[INAUDIBLE] labeled cocaine?

924
00:39:00,140 --> 00:39:01,370
Then we would want to
give them food stamps,

925
00:39:01,370 --> 00:39:03,745
because we don't want them to
spend the money on cocaine.

926
00:39:03,745 --> 00:39:06,390
Well, that's how politicians
feel about poor people.

927
00:39:06,390 --> 00:39:08,515
They feel that poor people,
if you give them money,

928
00:39:08,515 --> 00:39:09,380
will just waste it.

929
00:39:09,380 --> 00:39:13,550
And that's why the vast majority
of transfers we do in America

930
00:39:13,550 --> 00:39:14,100
are in-kind.

931
00:39:14,100 --> 00:39:15,850
If you add up all the
money we give people

932
00:39:15,850 --> 00:39:17,900
in cash versus the
money we give in-kind,

933
00:39:17,900 --> 00:39:20,750
particularly medical care,
the in-kind dollars vastly

934
00:39:20,750 --> 00:39:22,938
outweigh the cash dollars.

935
00:39:22,938 --> 00:39:24,980
And that's because
politicians are paternalistic.

936
00:39:24,980 --> 00:39:26,985
They're afraid-- no.

937
00:39:26,985 --> 00:39:28,610
The economics reason
is because there's

938
00:39:28,610 --> 00:39:30,027
all this model of
self-revelation,

939
00:39:30,027 --> 00:39:31,970
but that's not why
politicians do it.

940
00:39:31,970 --> 00:39:32,750
They do it because
they're worried

941
00:39:32,750 --> 00:39:34,800
people will waste the money
if you give them cash.

942
00:39:34,800 --> 00:39:35,720
And I think we
showed with the food

943
00:39:35,720 --> 00:39:38,053
stamps and the evidence,
that's not really the right way

944
00:39:38,053 --> 00:39:38,882
to think about it.

945
00:39:38,882 --> 00:39:40,770
OK?

946
00:39:40,770 --> 00:39:42,930
Questions about that.

947
00:39:42,930 --> 00:39:43,750
OK.

948
00:39:43,750 --> 00:39:48,360
Now, this is all kind of
negative and nebulous,

949
00:39:48,360 --> 00:39:51,823
so let me conclude with
a great example, which

950
00:39:51,823 --> 00:39:56,112
is an example of a public policy
which actually doesn't stop

951
00:39:56,112 --> 00:39:57,570
the leak in the
bucket, it actually

952
00:39:57,570 --> 00:39:59,400
puts a patch in the bucket.

953
00:39:59,400 --> 00:40:03,610
And that policy is called
the earned income tax credit.

954
00:40:03,610 --> 00:40:04,110
The EITC.

955
00:40:07,930 --> 00:40:11,935
This is what's known as
a conditional transfer.

956
00:40:18,200 --> 00:40:21,530
What that means is it's a
program where you get money,

957
00:40:21,530 --> 00:40:24,890
but the money you get is
a function of how much you

958
00:40:24,890 --> 00:40:28,740
make up to a point.

959
00:40:28,740 --> 00:40:30,522
So it's actually--
the other thing

960
00:40:30,522 --> 00:40:31,980
it's been called
is a wage subsidy.

961
00:40:38,410 --> 00:40:39,730
So here's how the EITC works.

962
00:40:39,730 --> 00:40:41,730
Let's go to figure 22-4.

963
00:40:41,730 --> 00:40:43,370
I'll show you how
the EITC works.

964
00:40:43,370 --> 00:40:46,100
Here's how the EITC works.

965
00:40:46,100 --> 00:40:49,830
For every dollar-- on the
x-axis is how much earned income

966
00:40:49,830 --> 00:40:50,720
you have.

967
00:40:50,720 --> 00:40:52,100
On the y-axis is
the check you're

968
00:40:52,100 --> 00:40:53,780
going to get from
the government.

969
00:40:53,780 --> 00:40:57,110
What this says is on
every dollar you earn,

970
00:40:57,110 --> 00:40:58,460
until you earn $13,870--

971
00:40:58,460 --> 00:40:59,960
these numbers are
a bit out of date.

972
00:40:59,960 --> 00:41:02,555
It's a little more now, but
roughly gives you the idea.

973
00:41:02,555 --> 00:41:06,010
Until you hit $13,870-- that
is roughly the poverty line.

974
00:41:06,010 --> 00:41:07,940
It's a little bit more
than the poverty line.

975
00:41:07,940 --> 00:41:10,490
For every dollar you earn,
the government gives you $0.40

976
00:41:10,490 --> 00:41:11,210
more.

977
00:41:11,210 --> 00:41:14,210
So if you're someone who
starts with $0 and you earn $1,

978
00:41:14,210 --> 00:41:15,770
you take home $1.40.

979
00:41:15,770 --> 00:41:17,630
It's a negative tax.

980
00:41:17,630 --> 00:41:19,460
It's a subsidy.

981
00:41:19,460 --> 00:41:21,320
So every dollar,
you take home $1.40.

982
00:41:21,320 --> 00:41:24,380
Until you reach
earnings of $13,870.

983
00:41:24,380 --> 00:41:28,310
At that point, you've
achieved a check of $5,548.

984
00:41:28,310 --> 00:41:30,403
That's 40% of 13,870.

985
00:41:30,403 --> 00:41:31,820
At that point, the
government says

986
00:41:31,820 --> 00:41:34,190
this is the biggest
check we're sending you,

987
00:41:34,190 --> 00:41:38,040
and we're to keep that flat
until you're at an 18,110.

988
00:41:38,040 --> 00:41:40,470
And then we'll start
to take it away.

989
00:41:40,470 --> 00:41:44,242
We're going to start to take
it away so that by the time--

990
00:41:44,242 --> 00:41:45,700
and what we're
going to do is we're

991
00:41:45,700 --> 00:41:48,697
going to take that 5,548
check down by $0.21 cents

992
00:41:48,697 --> 00:41:49,780
for every dollar you earn.

993
00:41:49,780 --> 00:41:51,363
It's going to flip
from a negative tax

994
00:41:51,363 --> 00:41:54,790
to a positive tax at a 21% rate.

995
00:41:54,790 --> 00:41:57,100
So instead of a negative
tax at a 40% rate,

996
00:41:57,100 --> 00:42:00,940
we switch to a positive tax at
a 21% rate, so that by the time

997
00:42:00,940 --> 00:42:08,210
you've earned $44,454,
you've zeroed out your EITC.

998
00:42:08,210 --> 00:42:11,360
So for most of you, the
EITC will be relevant.

999
00:42:11,360 --> 00:42:13,460
For most of your families,
the EITC is irrelevant.

1000
00:42:13,460 --> 00:42:15,950
So it's a targeted
transfer program.

1001
00:42:15,950 --> 00:42:16,830
Conditional transfer.

1002
00:42:16,830 --> 00:42:20,000
It's conditional
because basically, it's

1003
00:42:20,000 --> 00:42:21,560
conditional on working.

1004
00:42:21,560 --> 00:42:24,050
But it's targeted in the
sense that it phases out

1005
00:42:24,050 --> 00:42:27,860
such that middle class and
upper class people don't get it.

1006
00:42:27,860 --> 00:42:32,900
It's targeted to lower-income
people through this phase-out.

1007
00:42:32,900 --> 00:42:38,690
The problem is this makes
the EITC effect complicated.

1008
00:42:38,690 --> 00:42:40,940
So let's consider.

1009
00:42:40,940 --> 00:42:43,580
Let's consider the three
segments of this graph.

1010
00:42:43,580 --> 00:42:45,470
Let's start with
the first segment.

1011
00:42:45,470 --> 00:42:49,190
Let's say you were
earning zero, and I said,

1012
00:42:49,190 --> 00:42:54,920
for every dollar you earn,
I will give you $0.40 more.

1013
00:42:54,920 --> 00:42:58,340
What effect does that have on
your labor supply, starting

1014
00:42:58,340 --> 00:42:58,840
from zero?

1015
00:43:01,804 --> 00:43:02,792
Yeah.

1016
00:43:02,792 --> 00:43:09,573
AUDIENCE: [INAUDIBLE] more
because having a lot of leisure

1017
00:43:09,573 --> 00:43:10,406
can cost a lot more.

1018
00:43:10,406 --> 00:43:11,540
JONATHAN GRUBER: The
substitution effect

1019
00:43:11,540 --> 00:43:14,030
will make you work more, because
essentially, we've raised

1020
00:43:14,030 --> 00:43:16,670
the price of leisure by 40%.

1021
00:43:16,670 --> 00:43:18,911
What about the income effect?

1022
00:43:18,911 --> 00:43:20,700
AUDIENCE: [INAUDIBLE]

1023
00:43:20,700 --> 00:43:22,520
JONATHAN GRUBER: There
is no income effect.

1024
00:43:22,520 --> 00:43:23,978
So the point is,
for someone at $0,

1025
00:43:23,978 --> 00:43:27,100
this unambiguously increased
their labor supply.

1026
00:43:27,100 --> 00:43:29,700
So if you take guys who aren't
working, this definitely will--

1027
00:43:29,700 --> 00:43:30,900
I mean, it might
be a zero effect,

1028
00:43:30,900 --> 00:43:32,790
but it's non-negative
effect on labor supply.

1029
00:43:32,790 --> 00:43:35,147
Likewise, with low-income,
working low hours,

1030
00:43:35,147 --> 00:43:36,480
the income effect will be small.

1031
00:43:36,480 --> 00:43:38,070
Remember, the income effect's
proportional of how much you're

1032
00:43:38,070 --> 00:43:39,330
actually earning.

1033
00:43:39,330 --> 00:43:41,580
So for these people on
the left-hand segment,

1034
00:43:41,580 --> 00:43:43,802
upward-sloping, it should
cause them to work more,

1035
00:43:43,802 --> 00:43:45,510
because the substation
effect will be big

1036
00:43:45,510 --> 00:43:48,280
and the income
effect will be small.

1037
00:43:48,280 --> 00:43:51,040
So if you mark the people
on this left-hand segment,

1038
00:43:51,040 --> 00:43:52,700
you should mark
they'll work more.

1039
00:43:52,700 --> 00:43:54,450
Now what about people
in the flat segment?

1040
00:43:54,450 --> 00:43:56,190
Someone else raise
their hand and tell me.

1041
00:43:56,190 --> 00:43:58,398
What's this going to do to
the labor supply of people

1042
00:43:58,398 --> 00:44:00,632
on the flat segment?

1043
00:44:00,632 --> 00:44:02,090
They're going to
work more or less?

1044
00:44:02,090 --> 00:44:02,683
Yeah.

1045
00:44:02,683 --> 00:44:04,350
AUDIENCE: I think
they'll work the same,

1046
00:44:04,350 --> 00:44:07,290
because it's not like any
change in their earning.

1047
00:44:07,290 --> 00:44:09,900
JONATHAN GRUBER: Well,
their wage hasn't changed,

1048
00:44:09,900 --> 00:44:11,057
but something has changed.

1049
00:44:11,057 --> 00:44:12,640
AUDIENCE: If they're
on the flat part,

1050
00:44:12,640 --> 00:44:14,098
they'll work less
because they only

1051
00:44:14,098 --> 00:44:17,126
have to work until they make
$13,870 to get [INAUDIBLE]..

1052
00:44:17,126 --> 00:44:19,770
JONATHAN GRUBER: Well,
that's not quite-- that's

1053
00:44:19,770 --> 00:44:20,580
an extreme model.

1054
00:44:20,580 --> 00:44:23,130
More generally, it's
because of income effects.

1055
00:44:23,130 --> 00:44:26,490
More generally, the point is
I've taken someone and made

1056
00:44:26,490 --> 00:44:28,770
them $5,000 richer.

1057
00:44:28,770 --> 00:44:30,930
So compared to a world
without the EITC--

1058
00:44:30,930 --> 00:44:33,330
that's why I show-- compared
to a world without the EITC,

1059
00:44:33,330 --> 00:44:34,350
I will now work less.

1060
00:44:34,350 --> 00:44:36,960
There's no substitution
effect, only an income effect.

1061
00:44:36,960 --> 00:44:38,460
So now I'll work less.

1062
00:44:38,460 --> 00:44:40,690
So the first part [INAUDIBLE]
substitution effects.

1063
00:44:40,690 --> 00:44:42,820
The second part is
just an income effect.

1064
00:44:42,820 --> 00:44:44,840
Now what about
the third segment?

1065
00:44:44,840 --> 00:44:46,230
We're assuming
leisure is normal.

1066
00:44:46,230 --> 00:44:47,240
Do I work more or less?

1067
00:44:52,970 --> 00:44:56,670
Do I work more or less,
assuming leisure is normal?

1068
00:44:56,670 --> 00:44:57,230
Yeah.

1069
00:44:57,230 --> 00:44:57,520
AUDIENCE: Less?

1070
00:44:57,520 --> 00:44:59,016
JONATHAN GRUBER: Less because?

1071
00:44:59,016 --> 00:45:00,294
AUDIENCE: Substitution effect.

1072
00:45:00,294 --> 00:45:03,420
JONATHAN GRUBER: Substitution
effect and income effect,

1073
00:45:03,420 --> 00:45:08,580
because your income
is falling as--

1074
00:45:08,580 --> 00:45:11,042
because the point
is, as you work more,

1075
00:45:11,042 --> 00:45:12,000
your income is falling.

1076
00:45:12,000 --> 00:45:14,070
So here, both the
subsection and income effect

1077
00:45:14,070 --> 00:45:16,853
combine to make you
want to work less.

1078
00:45:16,853 --> 00:45:18,270
So if you look at
this graph, this

1079
00:45:18,270 --> 00:45:19,800
doesn't look very promising.

1080
00:45:19,800 --> 00:45:22,710
On the left, we've got a
bunch of guys working more.

1081
00:45:22,710 --> 00:45:24,720
In the middle, we got
guys working less.

1082
00:45:24,720 --> 00:45:26,340
And on the other
side, we got guys

1083
00:45:26,340 --> 00:45:28,230
working way less, because you
have a substitution and income

1084
00:45:28,230 --> 00:45:28,730
effect.

1085
00:45:31,230 --> 00:45:36,820
So the question then is, what
effect does the EITC have?

1086
00:45:36,820 --> 00:45:39,570
And the answer is it turns out
it has an enormously positive

1087
00:45:39,570 --> 00:45:41,630
effect on labor supply.

1088
00:45:41,630 --> 00:45:43,550
That it gets a lot of
guys who were working

1089
00:45:43,550 --> 00:45:46,283
zero to stop working zero.

1090
00:45:46,283 --> 00:45:48,700
But it doesn't seem to lower
the hours among those who are

1091
00:45:48,700 --> 00:45:51,320
working more than zero hours.

1092
00:45:51,320 --> 00:45:53,250
Now, why is that?

1093
00:45:53,250 --> 00:45:54,420
Unclear.

1094
00:45:54,420 --> 00:45:57,020
It could be because there's
different elasticities

1095
00:45:57,020 --> 00:45:59,550
along the income distribution.

1096
00:45:59,550 --> 00:46:01,175
Probably, it's because
of tax salience,

1097
00:46:01,175 --> 00:46:02,092
wherever I wrote that.

1098
00:46:02,092 --> 00:46:03,420
Wherever the hell I wrote that.

1099
00:46:03,420 --> 00:46:06,360
Tax salience, which is that
people understand, gee, if I

1100
00:46:06,360 --> 00:46:07,630
go to work, I get a big check.

1101
00:46:07,630 --> 00:46:09,047
They don't understand,
by the way,

1102
00:46:09,047 --> 00:46:12,125
the marginal hour I work is
being taxed at $0.21 more.

1103
00:46:12,125 --> 00:46:14,000
So probably, it's tax
salience, I don't know.

1104
00:46:14,000 --> 00:46:17,300
But the bottom line is the
studies show convincingly

1105
00:46:17,300 --> 00:46:19,190
that interest in
the EITC massively

1106
00:46:19,190 --> 00:46:22,820
increased labor supply and
distribute to the poorest

1107
00:46:22,820 --> 00:46:24,600
people in society.

1108
00:46:24,600 --> 00:46:26,810
This is a reverse leaky bucket.

1109
00:46:26,810 --> 00:46:30,080
Literally, we managed to take
money, give it to poor people,

1110
00:46:30,080 --> 00:46:32,770
and make the pie bigger.

1111
00:46:32,770 --> 00:46:36,660
So this is an enormous victory
for thinking about how we can--

1112
00:46:36,660 --> 00:46:38,620
for getting around
this problem of how

1113
00:46:38,620 --> 00:46:39,778
we can transfer to people.

1114
00:46:39,778 --> 00:46:41,320
Now, it didn't solve
all our problems

1115
00:46:41,320 --> 00:46:43,360
because, [INAUDIBLE]
up here, it doesn't

1116
00:46:43,360 --> 00:46:44,770
help people who don't work.

1117
00:46:44,770 --> 00:46:47,322
So there's still-- this isn't
the only solution we need,

1118
00:46:47,322 --> 00:46:49,030
because some people
literally can't work,

1119
00:46:49,030 --> 00:46:51,230
so they can't benefit
from a program like this.

1120
00:46:51,230 --> 00:46:54,773
But for workers, this is an
enormously successful program

1121
00:46:54,773 --> 00:46:57,190
that is really one of the great
government success stories

1122
00:46:57,190 --> 00:46:59,020
in terms of both
transfer to poor people

1123
00:46:59,020 --> 00:47:00,910
and increasing the
size of the pie.

1124
00:47:00,910 --> 00:47:01,500
All right?

1125
00:47:01,500 --> 00:47:05,410
I'm going to stop there,
and so we'll come back--

1126
00:47:05,410 --> 00:47:07,830
I'll see you guys on Wednesday.