This
post from Greg Mankiw doesn't necessarily related directly to our material in class, but it's an interesting analysis of what matters when we set taxes. One question is which of his four goals of tax policy you find most important? Which is the least important to you?
3 comments:
oivThis article is talking about the four goals of Tax Policy. Greg Mankiw talks about how to design a tax system and evauluating tax proposals. There should be at least four goals in mind:
1. Efficiency
2. Intergenerational equity
3. Egalitarianism
4. Stabilization
The four goals meanings are as followed:
Efficiency - the tax system should distort incentives as little as possible
Intergenerational equity - the tax system should raise enough reveune so current generations do not unduly burden future generations.
Egalitarianism - the tax system should try to achieve a more equal distribution of after-tax-incomes.
Stabilization - the tax system should help maintain the economy at full employment.
The tax rebate that is given out to reduce recession is based on achieving goal 4, but it does so at the cost of sacrificing goals 1 and 2 to some degree, states Mankiw.
In the text it talks about how a budget deficit or surplus can be used to reduce the distortion of incentives caused by the tax system. High tax rates impose a cost on society by discouraging economic activity. A tax on labor earnings reduces the incentive that people have to work long hours. Because this disincentive becomes particualarly large at very high tax rates, the total social cost of taxes is minimized by keeping tax rats relatively stable rather than making them high in some years and low in others. Economists call this policy tax smoothing. To keep tax rates smooth, a deficit is necessary in years of unusually low income (recessions) or unusaully high expenditure (wars).
There seems to many different opinions to the fiscal stimulas. The article says that advocats of the stimulas put a large weight on goal 4. Critics of the fiscal stimulas discount goal 4 entirely because they are skeptics of Keynesian theories that underlie this goal. And a second type of critic beleives that fiscal policy should focus on goals 1 and 2.
I think I would have to go with some of the critics on this one and say fiscal policy should focus on goals 1 and 2. Although full employment is a key goal in achieving the economy's potential because employed workers lose income and can find their future job prospects limited. This could decrese the ecomony's potential GDP and future growth rate. I just think it would be very hard to get full employment going on all the time.
In his post Gregory Mankiw states four goals that policy analysts should keep in mind while designing a tax system:
1. Efficiency
2. Intergenerational equity
3. Egalitarianism
4. Stabilization
The first goal is efficiency, this meaning that the tax system should distort incentives as little as possible.
The next one is intergenerational equity: the tax system should raise enough revenue so current generations do not unduly burden future generations.
The third one is egalitarianism: the tax system should try to achieve a more equal distribution of after-tax incomes.
The final one is stabilization: the tax system should help maintain the economy at full employment.
In order to achieve these goals there must be a tradeoff, for example to achieve stabilization Mankiw conveys that to a certain extent efficiency must be given up in the process. This article correlates with the subject of budget control.
Our text mentioned about how it is possible to manipulate incentives by using budget deficits and budget surpluses. By using these to we can reduce the distortions on incentive rate caused by the tax system, and also manage to keep to it stable as well. Putting a higher tax on certain items will make the buyer less incline to buy it whereas if that certain item has a lower tax.
Personally, I believe that fiscal policy should focus more on achieving the first and second goals and the latter to should be left for monetary policy. This way it might be easier to create stabilization and be able to maintain. Overall, to me stabilization of the tax system should be the main focus for policy makers.
-hang nguyen
In his post to the public, Mankiw notes that there are four primary goals that policy analysts have in mind when designing a tax system and evaluating tax proposals. The first of these goals is a high level of efficiency, meaning that the imposed system should distort or alter incentives little and when dealing with public good and externalities correct the incentives to maximize surplus. The second goal is to prevent government from becoming a pyramid scheme where the old are only supported by the young—create a government that keeps the current generation from burdening the next. The third goal is egalitarianism, that a goal of taxes is to achieve a more uniform distribution of income after taxes. The final goal is stability and maintenance of the economy at full employment.
Unfortunately, the pursuit of some of these goals costs a slight sacrifice in the pursuit of others of these. One example of this is that in order to ensure stabilization and thereby reduce risk to the nation, there must by a slight reduction in efficiency. Such is the case regarding the implementation of the current stimulus package. It aims to increase stability, but does so at the cost of burdening future generations and in efficiency. It does this because the phase out causes an increase in marginal tax rates and because higher taxes in the future will be necessary to combat future debt. Also, the phase out exists in order to be egalitarian, defining the often-debated trade off between equality and efficiency. Mankiw then goes on to explain that differences in opinion generally arise from the individual placing different weights on each of the 4 goals.
My reaction to this post is that it is very useful in explaining the vehemence and regularity with which economists disagree. I appreciate Mankiw’s ability to indicate how the different weightings cause differing opinions even when he acknowledges that he too is part of this process. I feel that I am close in opinion to Mankiw in that I believe stabilization is a legitimate issue, but feel that efficiency and intergenerational equity are better left to the Fed because we’re in an open market. Additionally, I place very little weight on egalitarianism.
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