Econ 28

Where does the money come from?

42.3% comes from payroll tax 43.5% income tax 6.6% corporate income tax (for corporations and on stocks) 4.7% other 3% excise taxes

Uninsured

46.3 million

Accountable Care Organization (ACO)

Accountable Care Organizations (ACOs) are groups of doctors, hospitals, and other health care providers, who come together voluntarily to give coordinated high quality care to their Medicare patients. The goal of coordinated care is to ensure that patients, especially the chronically ill, get the right care at the right time, while avoiding unnecessary duplication of services and preventing medical errors. When an ACO succeeds both in both delivering high-quality care and spending health care dollars more wisely, it will share in the savings it achieves for the Medicare program.

"You Get What You Pay For," The Economist, July 21, 2008

Americans have the best chance of survival for two of the five cancers considered: breast cancer in women and prostate cancer Money appears to be an important factor. America spends a greater proportion of national income on health than other countries.

Higher education trends

Bubble: more and more expensive to attend, but not producing any more value. Cost versus outcomes. Number of people attending college is diminishing in US relative to other countries. From 1st to 12th. Online learning will be a major disruption. Completion rate But education does pay.

Four deficits

Budget deficit, trade deficit, savings deficit, and leadership deficit

Amitabh Chandra, Anupam B. Jena, and Jonathan Skinner. "The Pragmatist's Guide to Comparative Effectiveness Research," Journal of Economic Perspectives, vol. 25, no. 2, Spring 2011.

Comparative effectiveness research compares the efficacy of two or more diagnostic tests, treatments, or health care delivery methods without any explicit consideration of costs. Goal: choose option with best health outcome. Demonstrates superiority of treatment over another on average. Adds to the public knowledge about what works.

Why do we need a health care system?

Consumption shocks. Health care costs so high that people can't save for it. Urge to share that risk. Problem in risk sharing--if you can opt in or opt you, there will be serious adverse selection problems.

Excise tax

Consumption tax paid on sales of particular goods

Sabrina Tavernise. "Emergency Visits Seen Increasing With Health Law," New York Times, January 3, 2014.

Core support of ACA was that fewer people would go to the emergency room, but more people actually went.

Current versus lifetime tax incidence

Current tax incidence: incidence of a tax in relation to an individual's current resources Lifetime tax incidence: incidence of a tax in relation to an individual's lifetime resources

From Shadow Council of Economic Advisers to Barack Obama: Entitlements in America

Deficit projections are falling thanks to cyclical recovery of economy, expiry of stimulus programs, slowdown in health care costs, and 3 deficit reduction packages Debt still too high. Principles for a long-term plan that will stabilize entitlement spending -No steep cuts in the next five years -Any reforms should boost the economy's supply side. Too many entitlements give workers incentive to leave. -Rich should bear the lion's share of the adjustment, because their income has grown faster -Don't be deterred by the political difficulty. Action is necessary Only a bipartisan effort can forge a lasting solution. How to repair third rail -Start with social security by raising the retirement age, put up payroll taxes, and reform social security's disability-insurance program Tackle health inflation -Private and public costs slowed. Medicaid spending flat since 2009. Why? Changes to insurance design, Obamacare and insurers testing contracts to spur doctors to provide better, cheaper services. But much of this is transitory. Workers have lost jobs and insurance. Improved economy means private spending will pick up, and public spending will surge too because of aging population, new insurance subsidies, and huge expansion of Medicaid. If private health costs rise, more people will push into public programs. Help patients act like customers -Replace tax deduction for health insurance -Require hospitals and doctors to disclose and post prices Keep Medicaid on a tight leash Give states more freedom to experiment and make it easier fo them to get waivers from programme rules. Study found Medicaid improved financial security, but not health. Suggests it might be better to give less generous health insurance and spend the money fighting poverty. Cut back Medicare -Raise eligibility age -Make richer elderly pay more for their care -Reward hospitals and doctors for providing good care, rather than lots of it. Not clear if ACOs save money, but if they do, should expand them -Make Medicare less generous and recommend what treatments Medicare will cover.

"Where Do All the Dollars Go?" The Economist, January 10, 2008.

Despite being a top spender, the US lags behind other wealthy countries in overall performance Worst record of all countries studied in "amenable mortality". Avoidable deaths.

Trade deficit

Difference between the amount of goods and services Americans buy from abroad and the amount we supply to the ROW

Fee for service (private insurance)

Doctor do something on you, they get paid. All a function of what they do. This seems normal, but if doctors get paid fee for service. Doctor has an incentive to do more, but also to do it well because of the threat of malpractice.

Deadweight loss

Does not increase in proportion of your tax (See paper) Want broader tax at lower rate, because deadweight loss goes up significantly greater with a higher tax, because the triangle gets much bigger due to the supply and demand curve. Better to spread the tax at lower amounts to more people. Taxing inelastic activities doesn't make as much DWL

Want 3 factors to a tax code

Flat, simple, fair

Why do people save?

For a lack of safety net in China—precautionary saving and consumption saving.

Where does the money not go?

Foreign aid, parks, space program, welfare, national endowment for the arts, etc. People point to cut these programs, but they're not very expensive.

The three categories of government money gone wrong

Fraud and abuse: stealing Waste: crop subsidies, no more purpose Pork: politically motivated spending designed to keep an officeholder's supporters and constituents happy. The government bribing you with your own money. Waste is a problem but it is not THE problem.

How is the government involved in education?

Free public education (may crowd out private)

Full shifting

Full shifting: when one party in a transaction bears all of the tax burden

Gordon, Kane, and Staiger. "Identifying Effective Teachers Using Performance on the Job," The Hamilton Project, April 2006.

Get rid of certification of teachers, which have little relationship to effectiveness, and increase increase new teachers and requiring minimum demonstrated competency on the job. Also alter distribution of quality by making high performing teachers go to high poverty schools.

Inverse elasticity rule

Government should tax inealstically demanded goods more highly, but should tax other goods as well. • When elasticity of demand for a good is high, it should be taxed at a low rate • Better to tax a wide variety of goods at a moderate rate than to tax very few goods at a high rate because MDWL from tax rises with the tax rate Not equitable

Single-payer system (pros and cons)

Government, rather than private insurers, pay for health careo Politically is a non-starter. Ultimate ACO, but have 50-60 years built around private insurance. Nearly impossible to see how we can turn that into a single payer system. o Doctors could all work for the government, or government writes the check.

Gross price versus after-tax price

Gross price: the price in the market After-tax price: gross minus the amount of the tax (if producers pay the tax) or plus the amount of the tax (if consumers pay the tax)

Health maintenance organization (HMO)

Health care organization that integrates insurance and delivery of care by, for example, paying its own doctors and hospitals a salary independent of the amount of care they deliver. Ex: Insurer is also the provider. Kaiser is your insurer, but if you're sick, you go to a Kaiser hospital. You pay them a certain amount of money, and if you get sick they send you to one of their doctors.

Teacher certification

Hindrance to getting teachers into the system. No one knows anything about the certification and its effectiveness. Most productive people have the highest opportunity cost.

Problem with test scores

If test scores are highly correlated with utility, then that's good. If not, then bad. Future earnings. Can teach for the test, which is good if the test is good, but bad if the test is bad. Teachers can also go back and cheat or change the scores. PE, art and music gets cut out because tests test on math, English, and science. Narrow curriculum. Florida doesn't count for special education students scores, so everyone gets put in special education. Most of what test scores will pick up are quality of the students. Bypassed the value inside the black box. Don't know the mix of inputs that cause good results, or the value added that comes through. Test scores only picks up who walks in the door. • Disadvantaged schools tend to have high dropout rates. If you're testing 1000 8th graders and 400 college seniors, you could put the people in a closet for 4 years and average test score will be very high. Problem with looking at preimposed tests.

Dylan Matthews. "Brookings Wants to Revamp the Federal Budget: Here Are Its 11 Best Ideas," Washington Post, February 25, 2013.

Lots of ideas to reduce the debt

Prospective payment system (PPS)

Medicare's system for reimbursing hospitals based on nationally standardized payments for specific diagnoses

Measuring moral hazard

Moral hazard is measured only by the substitution effect of social insurance programs. The income effect of social insurance programs is not moral hazard

Intragovernmental debt

Not just debt held by the public, but also borrowing the government has done from social security and Medicare trust funds. Once this debt stops being a bookkeeping maneuver and becomes a real bill, we have to pay for it.

"Not Only Politicians Fudge the Issues," The Economist, April 24, 2010.

People are often unclear about what they actually want. Voters will agree with a proposition until they hear about the downsides to the policy. Everyone wants to trim the deficit, but doesn't want to cut programs that affect them directly.

How does MAD apply to US China relationship and what could potentially go wrong?

Push big button. The fact that we both wipe each other out is good, because both countries had second strike capability, so if one country struck, the other would also strike, so neither would strike. China could destabilize us, but understand that they hold a lot of our assets. If they take out our bonds, our bonds will lose value, and Chinese would be holding our devalued bonds. China could take the hit. Even if they really don't have our interests at stake, we're both better off if we're both doing really well. But there's always a possible accident. One country thinks the other country made a launch.

What are Romney and Obama's plans to reform entitlement programs?

...

"House Rules," This American Life," November 22, 2013.

Redlining based on race for home ownership. Can't force people into communities where people hate them. Forced integration isn't the best idea.

Simple tax code

Related to transparency • Start with ones with no or adverse economic impacts • Move on to does simplification outweigh whatever benefit comes from inducing some kind of activity. Education up to a certain point is a good thing. Positive externality. Does complexity in the tax code outweigh benefit of particular tax expenditure?

Regressive taxes

Sales tax, payroll taxes (cap)

Proportional tax code arguments

Same circumstances, same services People all work for their money. Expropriation. This is my labor.

Revenue neutral tax change

Same revenues coming in but collecting in a way that is less distorting, educing more productivity, etc. Tax reform without tax cuts.

Why should we care about the debt?

Some enormous expense would kick us out. Start going into more and more debt. We could pay the entitlement bills and it's so expensive that we have to raise taxes and it cripples the economy. Or we go into even more debt, driving up interest rates when public borrowing crowds out private borrowing. And as we continue to rely on foreign investment in our bonds, if they decide they don't trust us anymore, or even domestic lenders, and then interest rates will rise. For 31/35 years, country has been in a deficit. Once baby boombers retire, the country will have even more additional expenses.

How does adverse selection work in teacher contracts?

Successful teachers wouldn't get more compensation for being more successful, and these successful teachers will select out of a profession where everyone gets paid the same. The rest of the world is going through systems that are more connected for pay for performance. And if you can't get fired from this job, then it will appeal to a wide variety of people for the job too.

Arguments for progressive tax code

They get more benefits, so they should pay more. Legal system, contracts, law enforcement, intellectual property, all mean more to rich people than homeless people. Diminishing marginal utility of income. Most people subscribe to some belief that there's diminishing marginal utility of income. But can't prove this Self interest. Raulsian argument: with our system of income tax and capital gains. Veil of ignorance: if you didn't know where you'd be born tomorrow, what tax system would you design?

"The Great Schools Revolution," The Economist, September 17, 2011.

Three great excuss: Good schooling is about spending money Social class makes a difference Culture makes a difference Four important themes: decentralization (handing power back to schools), focus on underachieving pupils, choice of different sorts of schools, high standards for teachers All reforms have in common: better teacher quality. Better teacher quality needs to be the priority.

Fair

Three kinds of equity that we traditionally discuss: horizontal, vertical, intergenerational

Is there a risk that the US would default on this debt?

We could default, but no one would ever loan us again. US citizens are huge holders of treasuries, so it's unlikely. There's no limit on the number of dollars we can print, theoretically. One way to not default while still making debts go away is to devalue currency and pay back in devalued currency.

Medicare

a federal program that provides health insurance to all people over age 65 and disabled persons under age 65

Taxable income

amount of income left after subtracting exemptions and deductions from AGI

Law of large numbers

as the size of the pool grows, the odds that the insurer will be unable to predict the average health outcome of the pool falls

Haig-Simons Comprehensive income definition

defines taxable resources as the change in an individuals' power to consume during the year Improves vertical equity because those who have more resources pay more tax, even though they get those resources through non-taxed channels (people with more valuable employer health insurance pay more) Also improves horizontal equity (ensures people who are the same in terms of underlying resources pay the same amount of tax regardless of the form n which they choose to receive or spend their resources. People who earn more in wages and people who earn more in value of health insurance pay equally) But challenging to implement because (1) hard to define a person's power to consume/ability to pay, and (2) hard to deal with expenditures that are associated with earning a living and not personal consumption -Deduct property and casualty losses and medical expenditures and state and local tax payments?

Tax Refund

difference between amount withheld from a worker's earnings and the taxes owed if the former is higher

Tax wedge

difference between what consumers and what producers receive (net of tax) from a transaction

Tax-benefit linkages

direct ties between taxes paid and benefits received Workers' compensation program financed by payroll tax: workers bear them, and they fully valued the benefit of the compensation insurance. No deadweight loss. Replaces workers' wages with this insurance benefit. Tax-benefit linkage strongest when taxes paid are linked directly to a benefit for workers

Capital gains tax

earnings from selling capital assets, such as stocks, paintings, and houses. Type of income tax.

Educational credit market failure

failure of credit market to make loans that would raise total social surplus by financing productive education (because of lack of collateral)

Medicaid

federal and state program that provides health care for the poor

Exemption

fixed amount taxpayer can subtract from AGI for each dependent member of the household. Can choose between: • Standard deduction: fixed amount taxpayer can deduct from taxable income • Itemized deductions: alternative to the standard deduction; taxpayer deducts total amount of money spent on various expenses

Tax credits

flat amounts that are subtracted from taxes owed such as childcare

Long-term care

health care delivered to the disabled and elderly for their long-term rather than acute needs either in an institutional setting (a nursing home) or in their homes • Financed by private payers mostly

Preferred provider organization (PPO)

health care organization that lowers care costs by shopping for health care providers on behalf of the insured

Difficulty of partial reform

if policy makers don't address systemwide incentives for overtreatment due to retrospective reimbursement, then partial solutions are like squeezing one corner of a pillow: the costs just move to the other corners • Trade off: retrospective doesn't provide sufficient incentives to control medical costs, but prospective system might lead providers to cut care too much

Returns to education

benefits that accrue to society when students get more schooling or when they get schooling from a higher-quality environment

Marginal DWL

increase in deadweight loss per unit increase in the tax, rises with the tax rate

Adjusted Gross income (AGI)

individual's gross income minus certain deductions, for example contributions to individual retirement accounts • Exemptions: IRA contributions, alimony paid to former spouse, health insurance premiums paid by self-employed, ½ of payroll taxes paid by self employed, educator expenses, contributions to health savings accounts, expenses for job-related moves, interst paid on student loans

Deductibles

individuals face full cost of care up to some limit

Copayment

individuals make fixed payment when they get a medical good/service

Flat of the curve (healthcare)

initially, health spending is very productive in terms of improving health status, because there are a series of very cost-effective medical interventions, but then the curve of marginal benefits falls dramatically with more spending, eventually flatting out

Treatment

intervention we care about

Preexisting distortions

market failures, such as externalities or imperfect competition, that are in place before any government intervention

Nongroup insurance market

market through which individuals or families buy insurance directly rather than through a group, such as the workplace

Screening

model that suggests that education provides only a means of separating high from low ability individuals and does not actually improve skills

Natural experiment

more economical alternative to exploit a natural experiment, which happen when random circumstances somehow create something approximating a randomized, controlled experiment.

First dollar-coverage

most generous, insurance plans that cover all medical spending, with little or no patient payment

Randomized, controlled experiments

most straightforward to create a treatment and control group. Optimal way to create any treatment and control group is to distribute the study participants randomly across two groups. Randomization will make this more or less equal. Double-blind: neither patient nor physician knows who is receiving the treatment and who is getting a placebo.

Differences in differences

one of the best ways to observe cause and effect is to do something and then see what happens. Helps identify the effects of some intervention by examining the before and after data for whatever group received the treatment. Second, compare the data with the unemployment figures over the same time period for a similar county that did not implement such any such program. Important assumption is that the two groups used for the analysis are largely comparable except for the treatment; as a result, any significant difference in outcomes between the two groups can be attributed to the program or policy being evaluated.

Human capital

person's stock of skills, which may be increased by further education

Prospective reimbursement

practice of paying providers based on what treating patients should cost, not on what the provider spends This changes incentives

Vertical equity

principle that groups with more resources should pay higher taxes than groups with fewer resources

Horizontal equity

principle that similar individuals who make different economic choices should be treated similarly by the tax system. Such as 5% sales tax on all goods.

Program evaluation

process by which we seek to measure the casual effect of some intervention

Children's Health Insurance Program (CHIP)

program introduced in 1997 to expand eligibility of children for public health insurance beyond the existing limits of the Medicaid program, generally up to 200% of the poverty line

Retrospective reimbursement

reimbursing physicians for the costs they have already incurred Removes incentive to treat patients cost-effectively

Charter schools

schools financed with public funds that are not usually under the direct supervision of local school boards or subject to all state regulations for schools—small, independent public schools

Withholding

subtractions of estimated taxes owed directly from a worker's earnings

National health insurance (pros and cons)

system whereby the government provides insurance to all its citizens, as in Canada, without the involvement of a private insurance industry Pros: • No uninsured • Reduces admin costs • Control costs because comprehensive • Solve inequities and inefficiencies Cons: • Require massive expenditures • Might not allow doctors to use expensive new technology worth its high cost • Faces political hurdles

3 arguments for fundamental tax reform

tax compliance making the tax code simpler improving tax efficiency

Balanced budget incidence

tax incidence analysis that accounts for both the tax and the benefits it brings

Corporate income tax

tax levied on the earnings of corporations

Consumption tax

tax paid on individual or household consumption of goods (and sometimes services) - most common around the world

value of additional government revenues

the value of having another dollar in the government's hand relative to its next best use in the private sector

Gross income

total of an individual's various sources of income. Includes wages and salaries, capital income such as interest, dividends, or rental income, and other business income

Job lock

unwillingness to move to a better job for fear of losing health insurance

Counterfactual

what would have happened in the absence of that treatment

Indexing for inflation/bracket creep

with inflation, people make a little more, and might go into other income brackets. Have to pay more taxes even though they're not really increasing purchasing power. If brackets aren't indexed for inflation, no richer in terms of purchasing power than they were, but paying more.

Tax subsidy to employer-provided health insurance

workers are taxed on their wage compensation but not on compensation in the form of health insurance, leading to a subsidy to health insurance provided

Actuarially fair insurance

• Actuarially fair insurance o $500,000 cost o 1/1000 chance o Should cost more than $500. Should charge more than expected loss associated with this behavior. If the premium is $600 a year, is it stupid to buy the insurance? No, because you're paying against a contingency that you can't stand. If losing $500,000 will wipe you out, you have to smooth your consumption. o Go to Best Buy and buy $99 printer. Do you want insurance on that? • The cost of the printer is so low, that by the time you insure it, you can just buy a new one. They know that whatever they'll charge you on the printer are more than the expected loss. Otherwise they wouldn't be selling it to you.

How does screening confound education?

• Does going to a highly competitive school actually matter? There are so many confounding variables. People who don't go to highly competitive schools are way different.

Cost of health care

• Entitlements • Small business/self-employed • U.S. Corporations • Administrative Costs • Litigation • Cost growth appears to have slowed. Why? Health care expenditures as a fraction of GDP Level of growth: higher, and trajectory is rising for U.S. But costs for all top countries are rising, but our growth is out of sync. 18% of GDP and growing.

Does human capital equal education?

• If exactly equal/iron clad relationship, that would be easier. • This makes everything more difficult, because people like Bill Gates didn't go to college

When should you insure?

• Insure things you can't afford to lose, and it doesn't make a lot of sense to insure things where the loss is inconsequential • If you think your risk is worse than average, then you should take on the insurance.

Simplifying tax code

• May come at the cost of sacrificing other goals of tax reform, such as no employer health insurance spending

Decentralized nature of US education system

• Most other countries have far more centralized systems with centralized financing. In US, starts at local system. Run locally. Financed with local property taxes, with some state, and then federal funding. • Get a lot of local control. Have enormous disparities in spending on communities themselves, because highly segregated by income, etc. o Choice.

U.S. several different health care systems

• Out of picket/ad hoc charity • Fee for service (private insurance) • Not-for-profit, integrated care (Mayo Clinic) • HMOs (Kaiser) • Government $$, private provision (Medicare) • Government $$, government run (VA)

Optimal commodity taxation and the Ramsey rule

choosing the tax rates across goods to minimize deadweight loss for a given government revenue requirement The government should set taxes across commodities so that the ratio of marginal deadweight loss to marginal revenue raised is equal across commodities Ramsey rule: the min dwl, while raising a fixed amount of revenue, taxes should be set across commodities so that the ratio of the marginal deadweight loss to marginal revenue raised is equal across commodities

Discontinuity analysis

comparing the outcomes for some group that barely qualified for an intervention or treatment with the outcomes for a group that just missed the cutoff for eligibility and did not receive the treatment. These two groups of individuals will be nearly identical

Expenditure tax

consumption tax levied on yearly consumption rather than specific sales o Like income tax but on expenditures instead o Difficult to track

Nonequivalent control

creating nonrandomized treatment and control groups, hoping that the two groups are broadly similar even though circumstances have not allowed the statistical luxury of randomizing. Have a treatment and a control group, but any nonrandom assignment creates at least the potential for bias. There may be unobserved differences between the treatment and control groups related to how participants are assigned to one group or the other, hence 'nonequivalent control' Ex. Harvard and Dartmouth students

Debt

$9 trillion Explicit money we've contracted to pay back. Stuff we explicitly own. Not to be confused with entitlement costs, which we expect to owe but have not yet borrowed to fund. What government owes once deficits add up over time.

How are most public school teacher contracts structured?

Between teacher union and district hiring them. Starting pay is not based on experience outside education or what subject you teach. Once you're hired, you get increases based on the increased years of experience. But years of experience does not correlate with quality. Hard to fire teachers.

Quality of health care

Are we getting our money's worth? • We're not doing too well, but not bad. • We're not doing well with avoidable deaths. • Life expectancy at birth and health spending per capita, 2003: rising, but diminishing returns for the world. Would love to be along the curve, but don't want to be an outlier where you spend the most and have less quality. We're way under the curve. What are the caveats? o Obesity o Violence: every time someone gets shot at age 25, it brings down life expectancy, but has nothing to do with health care • Health care costs in the US growing relatively faster than in other countries, but survival gains in other countries are increasing linearly and ours is flattening off • Health expenditures and health status o Adult smoking is better in US than other places o Obseity is the worst problem here • Cardiovascular surgical rates: selected countries 2003 o US way higher than other countries • The U.S. is the Carlos Zambrano of health care (Amenable mortality) o On a good day, we're the best in the world. When it's bad, it's bad. Inconsistency. Hospital infections are a matter of washing your hands. • King Hussein, Shah of Iran • Hospital infections • Slow adoption of best practices o It takes a long time to push out best practices and adopt them • Little incentive for prevention • Extraordinary variance in costs and outcomes • Per capita Medicare spending by hospital referral region, 2006 o Negative association between quality of care and U.S. Medicare expenditures

Differences between entitlements and discretionary spending

Entitlement: congress doesn't have to approve. In auto-pilot. Can change eligibility requirements or trim payments, but can't completely cut program. If congress doesn't pass a budget, discretionary spending will go away.

Consumption tax versus income tax

Income tax disincentives saving. Taxing interest earned distorts current vs. future consumption. Punishes people who want to consume in period 2. Everyone started out w/ same income. Now some people consume less than they would otherwise.

Could immigration help?

Increasing umber of younger workers to pay into Social Security System, even if illegal immigrants have fake SS numbers, they still pay but can't claim benefits. Deporting illegal immigrants would take ghost SS taxpayers out, and legalization would allow more beneficiaries in.

How medicaid works

Like UI is a program federally mandated by administered by states. Financed on shared basis between states and federal government out of general revenues rather than a pay-roll tax. People qualify on the basis of income. • States cover major services, but not required to pay for optional services such as prescription drugs and dental care, but states have still chosen to cover the most expensive optional benefits • More generous than any private insurance plan • Medicaid reimburses physicians at a much lower level than does the private sector, which often leads physicians to be unwilling to serve Medicaid patients

Mitchell Hartman. "Study Reveals Gap Between Education and Jobs," Marketplace Morning Report, December 5, 2012.

More educators think graduates are ready for job market than employers and young people. Gap between educational choices people think will get them ahead and actual conditions Employers should fund more on-the-job training Decline in employer commitment to training, workforce development, and apprenticeship programs.

Can we fix the debt problem with spending cuts or tax increases alone?

No

Partial versus general equilibrium tax incidence

Partial equilibrium tax incidence: analysis that considers the impact of a tax impact on a market in isolation General equilibrium tax incidence: analysis that considers the effects on related markets of a tax imposed on one market

Steven Brill. "The Teachers' Unions' Last Stand: How Obama's Race to the Top Could Revolutionize Public Education," New York Times Magazine, May 23, 2010.

Obama is different in Democrats because he's against teacher's unions. Need teacher accountability. Investors and legislators that give students who otherwise have no chance a revitalized change.

Progressive, proportional, regressive

Progressive: tax systems in which effective average tax rates rise with income Proportional: tax systems in which effective average tax rates do not change with income, so that all taxpayers pay he same proportion of their income in taxes Regressive: tax systems in which effective average tax rates fall with income

Rob Stein. "Pricey Prostate Cancer Therapy Raises Questions about Safety, Cost," National Public Radio, October 29, 2012.

Proton therapy doesn't look more effective than any other options, but health care system is investing a lot in it.

Consumption-smoothing benefits of health insurance

Smooth consumption of health benefits to cost of medical event

Role og government in higher education

State provision Pell grants: subsidy to higher education administered by federal government providing grants to low-income families Direct student loans: loans taken from DOE Guaranteed student loans: loans from private banks for which the banks are guaranteed repayment by the government Tax relief for college-goers and their families

3 rules of tax incidence

Statutory burden of a tax does not describe who really bears the tax. The side of the market on which the tax is imposed is irrelevant to the distribution of tax burdens. Parties with inelastic supply or demand bear taxes; parties with elastic supply or demand avoid them.

Beauty of a carbon tax (derive)

Supply and demand conventional. Doesn't matter if we levy tax on consumers or suppliers, but in this case it's easier to impose on consumers. Shift demand curve down. Less consumption, and lower market price, but price consumers pay is new market price plus tax. Consumers see a higher price, suppliers get a lower price, and difference goes to the tax. Consumers and producers bear about the same incident of tax. A lot of the production is out of the country, so the beauty of this is that part of the incidence of tax is borne by people not in this country. You always want to tax people who can't vote for you, politically. Incidence is important because you want to see who actually pays it.

David Goldhill. "What Washington Doesn't Get about Health Care: Here's How to Fix It," The Atlantic, September 2009.

US health care system has built in incentives that generate terrible and perverse results—emphasize health care over any other aspect of health and well-being. But focusing on consumers will do a better job at controlling prices, allocating resources, expanding access, and safeguarding quality. And will do a better job than government-driven approach to spread technologies and knowledge. Customers are better than bureaucracies to encourage better medicine over time.

Under normal circumstances, how would these trade imbalances fix themselves?

Typically, would balance imports and exports. What are you trying to do with your profits from selling abroad? You would have their dollar and convert and your currency appreciates, making your exports more expensive and imports cheaper, rebalancing stuff. The problem with China is "pegging down the currency"

Savings deficit

US don't save and invest as much, so need to borrow money from abroad to keep the whole consumption thing glued together.

Akerlof's lemon problem

o Half worth $10,000; half worth $4,000 but person selling knows which are high/low quality, and buyer does not know o Expected value: $7,000; but if it's sold at $7,000, no one with high quality cars will sell on the market, so you get all the lemons. o We've prevented this in the used car market with warrantees—bring it back if you don't like it

How is health care not like other goods and services?

o Information asymmetry o Spillover costs o Shared costs o Perception that health care is essential

Medicare A, B, D

o Medicare Part A: covers inpatient hospital costs and some costs of long-term care; financed from a payroll tax o Medicare Part B: part of the Medicare program that covers physician expenditures, outpatients hospital expenditures, and other services; financed from enrollee premiums and general revenues o Medicare Part D: part of the Medicare program that covers prescription drug expenditures

Flat tax pros and cons

o Pros o Expands set of tax sources and removes ways for people to reduce tax base as tax rates rise o Savings excluded, so more capital accumulation→more efficient o Enormous benefits in terms of simplicity o Cons o Can be made fairly progressive, but much less progressive for high-income earners than current system o Difficult transition issues. Horizontal inequities.

Health savings accounts plus catastrophic coverage (pros and cons)

o Put pre-taxed money aside to pay for cheap things, and have insurance against catastrophic events o Pros: insurance is protection against unexpected, adverse outcomes. Why does my insurance pay for the delivery of my children? Child birth should be like lasick, we pay for it. But treat it like food stamps for people who can't afford it. o Cons: Equity issue. But can do vouchers. Politically.

Risk appetite

o Risk neutral: indifferent between the two bets. Will take any fair bet. o Risk averse: will only take it if it's in your favor o Risk loving: just like to take risks When the stakes get higher, you'll become more risk averse.

Affordable Care Act

• Spending growth down in recent years • Mandate o If fine for the mandate is too low, it still might be rational for too few health people o buy in. What happens when too few young, healthy people are in? Adverse selection. • Outcomes research institute • Bundled payments • Accountable Care Organizations? o DHMC created one. Either insurance company or employer o How to get from current fee for service system to ACOs? ACOs need dermatologists, cancer, heart surgeons, everything. Has to have collaboration among many providers. • Reduced payments for low quality outcomes • Pilots, demonstrations, and HHS o Wellness programs, prevention programs, etc. • "We think the bill aims to chip away at the traditional fee-for-service platform" o Changing incentives • How does this change the business of medicine?

Difference between tax cuts and tax reform

• Tax cuts: keeps existing system and reduces money collected • Tax reform: revisions concept of tax. o Can have a revenue neutral tax change. Same revenues coming in but collecting in a way that is less distorting, educing more productivity, etc. o $800 party tax example

Tax efficiency

• The more you load taxes on one source, the faster deadweight loss rise. So the most efficient tax systems are those that spread the burden of taxation the most broadly, so that the tax rate, driver of deadweight loss, can be minimized→ broad and level playing field would be most efficient tax. • Implies government efficiency is maximized by tax smoothing, by having a relatively constant tax rate over time rather than high taxes in some periods and low taxes in others

Magnet schools

special public schools set up to attract talented students or students interested in a particular subject or teaching style

improving tax efficiency

• Changing tax rate changes tax revenue through 5 channels o Direct effects: higher tax rate raises revenues on a fixed base of taxation o Indirect effects: higher tax rate lowers size of the revenue base on which taxes are levied • Gross income effect: reduce gross income generated • Reporting effect • Income exclusion effect • Compliance effect • Direct effect is offset by indirect effects to a significant degree—implies significant DWL from income taxation

The 'black box' production function of education

• Education inputs into the black box and outputs go out • Inputs: students, teachers (wage, training, other quality measurers), building, curriculum, books, money • Outputs: Utility (happy, self actualized people) but can't measure this. Earnings. Test scores. Bypassed the value inside the black box. Don't know the mix of inputs that cause good results, or the value added that comes through. Test scores only picks up who walks in the door.

Why is public education provided?

• Equity • Hard to have a credit market for education. Can't give collateralize it with investment you're making. A house = collateral, but if you stop making payments on your education, they can't repossess your education. • Civics: want educated society, less criminally inclined citizens • Positive externality: we all benefit from the education of people we may never meet. When people are educated, they get over some basic literacy threshold. More likely to be an informed voter. On the high end, smart people who reach their potential make society better off because people like Bill Gates create jobs. Failures of family utility maximization redistribution

Access to health care

• Health insurance isn't health • Preexisting conditions • Genetic testing • Middle class anxiety: going back to Clinton, who first tried to overhaul healthcare, there was a creeping sense over people who weren't anywhere near poor, that if someone got a disease, they wouldn't be able to cover it. o COBRA: If you get fired or laid off, you get to keep your employer's health insurance for 18 months but you have the pay for it. But then you can't get back in. o Insurance roulette: I'm young and don't need insurance. You get cancer, and you can't get insurance o Pregnancy is a preexisting condition—can't get back in the insurance pool. Childbirth is expensive, but not life changing.

Diagnosis for health care problems

• Our whole system is an historical accident • Longevity • Health care is a luxury good • Baumol's disease o Cost disease: as certain industries become more productive, they can pay workers more. But in other industries, it's not being more productive, but to get people to do things, we still need to increase their wages. It's been the case in health care and higher education. • Third party payer (moral hazard) • Adverse selection • Little cost/quality feedback or accountability • Remarkably poor public and private attention to prevention and wellness

Big 5 areas the money goes

20.7% Social Security (easy to fix) 19.7% National Defense (discretionary spending) 12.4% Medicare (hard, because less control over healthcare spending. Trust fund depleting) 6.8% Medicaid (Entitlement) 8.5% Interest on money already borrowed (off limits, if don't pay banks, banks won't lend the government money) Growth ranking: Healthcare, Social Security, interest, defense/commerce

3 symptoms/problems of health care

Access, cost, quality

How Medicare works

Administered at federal level. Like a private insurance plan. Government reimbursing providers for their costs and patients responsible for coinsurance • Fairly high copayments and deductibles and relatively lean benefits package. Doesn't cover private-sector insurance plans, including dental and vision care.

Reed Abelson and Gardiner Harris. "Critics Question Study Cited in Health Debate," New York Times, June 2, 2010.

Article Dartmouth of saying that cheaper care is better care. No proven link between greater spending and worse health outcomes. The nation's best hospitals are not among the least expensive.

Skills gap

Can't find employees with skills you want Pockets of excellence in the US community system, but it's not clear that high skilled jobs such as welding etc are getting done. Job skills mismatch is important in the long run.

Chartable giving example/significance

Charitable giving: Private market likely to underprovide, so making charitable giving tax deductible is good. Why doesn't the government just provide this good itself? Government provision may crowd out private contributions. But when government tax subsidizes charitable giving, it 'crowds in' or increases private contributions, because price of contributions relatively lowers. But also giving a tax break to people who would have contributed regardless. This is horizontally equitable, but is wasteful. marginal impacts outweigh inframarginal impacts.

Who is the biggest foreign holder of US debt and explain a deeply symbiotic and dangerous relationship.

China: we are buying a lot of their exports and they're pegging currency so it's cheap for us. It's like a drug dealer and a drug addict. If they at any point decide we're not worth investing in and do it elsewhere, we're in big trouble. It can't work in the long run for either country, but stopping is a big problem. Are they keeping exchange rate artificially low? China needs to cultivate next phase of development: getting own consumers bigger share of GDP and make more goods geared toward domestic market and export less. Problem with switching from export focused economy to domestic, because they're way underconsuming right now. Creative destruction on a scale we've never seen before. Huge export oriented economy changing into domestic oriented economy might not come from the same factories or employment. Overconsumption in US is also unsustainable. We're paying for the difference with borrowed money. Budget deficit facilitated by extensive borrowing from abroad.

"An Incurable Disease," The Economist, September 29, 2012.

Cost disease: expenditure growing a lot. Medicine (education, and the arts) are resistant to productivity gains. Employers need to raise wages faster than inflation, but productivity isn't improving. Cost disease isn't the problem; knee-jerk reactions is the problem. Rationing will slow development in the long run.

Marc Fisher. "Gun Deaths, Violent Crime Overall Are Down in District and U.S., But Reasons Are Elusive," Washington Post, March 3, 2013.

Crime and economic health are not organically connected. Tough times should drive up crime, but that didn't happen after the 2008 financial collapse and resulting recession. Steven Levitt, an economist at U Chicago, argued that four key factors explain the decline of violent crime: more police, more criminals in prison, the ebbing of crack's popularity, and the legalization of abortion Residents name 2 reasons: cast of characters changed and police cleaned out the place Most studies agree that increases in incarceration explain part of the decline in violent crime. Increases in officers on the streets showed no correlation with decreased violent crime, he found.

What would happen with a 73% tax?

D&S assumes elasticity of tax is 0.25. Very low behavioral response, especially long term behavioral response too. If we increase the tax, we don't think the quantity of taxable income will fall very sharply. Less taxable activity. Second earners drop out of the market. Do less of whatever is taxed. More tax avoidance. -Big long term behavioral changes. Over time, people will choose different consumptions, etc. -Lower value to transferring income These views come together to see what tax rate should be.

David Leonhardt. "The China Puzzle," New York Times Magazine, May 17, 2009.

Dangerous and symbiotic relationship between China and the US. China: huge, cheap exports and lots of savings that they invested in US Treasury Bonds, making interest rates fall and making it even easier for Americans to consume US: import and spending oriented, and can consume even more than before now. Concern: Chinese could decide they no longer want Treasuries. Inflation may go up. Sustainability means US needs to consume less and China consume more. China's citizens could use some more consuming. China might be pegging down the value of its currency. When exports rise, currency should also rise, making exports more expensive and decline. It's a self-correcting system, but China has frequently intervened in foreign exchange market to hold down the value of its renminbi and keep exports cheap. Global savings glut and overconsumption are both problems.

Early childhood education

Differences that show up for students at a very early age compounds later. Noncognitive and cognitive development.

David Leonhardt. "Making Health Care Better," New York Times Magazine, November 3, 2009.

Doctors have done more cost than good. Patients have too much faith in doctors. Intuition versus empiricism. Record of decision-making approaches based mostly on intuition is far weaker than record of decisions based mostly on data. It's possible to rely too heavily on numbers and patterns, but the bigger risk is relying too heavily on intuition. Should move medicine away from fee-for-service system and toward something like a fee-for-health system.

Does workers' compensation programs reduce employment?

Existing literature suggests the cost of social insurance financing is borne by workers in the form of lower wages and not lower employment. The taxes that fund social insurance programs do not appear to cause significant deadweight loss.

Madrick, Jeff. "Alan Greenspan notwithstanding, a new book insists that social spending does not stunt growth," New York Times, April 15, 2004.

Greenspan says country should cut domestic spending to balance the budget, because higher spending or higher taxes would deter economic growth. Lindhart argues that higher taxes doesn't reduce productivity. High spending on programs creates no measurable deterrent to growth or productivity or to GDP. Why? -Tax systems of countries with high social spending are less antigrowth than realized because Europe gets a lot of revenue from regressive consumption taxes -Social programs in high welfare states usually include everyone -Public spending on high welfare countries is conducive to economic growth, such as spending on education and health Government spending, if administered wisely, can have great value for everyone, including but not limited to the especially disadvantaged

Aparna Mathur, Sita Slavov, and Michael R. Strain. "Should the Top Marginal Income Tax Rate Be 73 Percent," Tax Notes, November 19, 2012.

Issues that prevent the argument from being usable for a real-world policy o Long run behavioral response: D&S only assumes short run. High school kids might not want to work much if they see a 73cent tax rate. Distorts incentives. D&S assume long run effects are zero. o Value of behavioral elasticity: when tax rates go up, people can change their behavior. They can work less and shift income. o Right social welfare function? Not everyone accepts the 'more equality is better' criterion. Most tax dollars do not fund government programs targeted at low-income individuals. They fund entitlement programs, so it's not really equality. D&S's social welfare function is too simplistic. Utility is a subjective concept Optimal tax code should be less than 73%. Optimal tax rate should be determined by taking the status quo seriously and deciding how to deviate from it in a way that will be welcomed by society and implantable by the president and Congress.

Why does the social security trust fund make the debt look better than it is?

It moves money from one pocket into another. Social security has taken in more in taxes than paid out in benefits, and put money in a trust fund to buy treasuries for the government. Have $1000 in T bills and $800 in income, for a $200 deficit, and fund that with $500 from social security.

Japan has a bigger debt problem, but it gets much less attention for it. Why?

Japan's bonds is held almost exclusively by Japan. So existing savers to continue funding the debt looks pretty likely.

Trip Gabriel. "Many Charter Schools, Varied Grades," New York Times, May 2, 2010.

Majority of charter schools appear no better than local public schools in achievement Ideology of charter schools: leftist, educating minorities. Philanthropists look for expensive charters to fund. Heavily subsidized. Mediocrity is widely tolerated. Lots of mediocre and very bad charters.

Inframarginal versus marginal impacts

Marginal impacts: changes in behavior the government hopes to encourage through a given tax incentive Inframarginal impacts: tax breaks the government gives to those whose behavior is not changed by new tax policy. No effect on behavior. Throwing money at them in the form of interest deductions. Crowd in > crowd out What determines the efficiency of a tax break designed to encourage behavior is the share of the tax break that goes to those who are changing their behavior versus the share going to those whose behavior is unaffected.

Marginal versus average tax rate

Marginal tax rate: the percentage that is paid in taxes of the next dollar earned Average tax rate: percentage of total income paid in taxes, computed as ratio of total tax payments to total income.

Atul Gawande. "The Cost Conundrum," The New Yorker, June 1 2009.

McAllen--most expensive town for health care, but no evidence that its treatments are better. The primary cause of McAllen's extreme costs were the across-the-board overuse of medicine. Won't make health care better and cheaper by changing who pays the doctor. Lesson: someone has to be accountable for the cost of care. Need to address the underlying issues related to 'overuse of medical care.' Teamwork and coordination/cooperation/sharing expertise also helps to reduce wastefulness.

No Child Left Behind (Bush) versus Race to the Top (Obama)

No child left behind was a top down approach where federal government told states to do stuff, and if they didn't do it, they got punished, but it was very coersive. National standards with local tests. Local tests lowers standards. Federal government defines certain progress each year. States write their own exams, and tend to achieve what nation wants them to achieve. If you're going to punish people based on performance and you can write your own assessment, you're going to avoid the punishment. Race to the Top, Obama's marquee education program, was designed to get around some clinical opposition from the unions. Pay for performance experience, etc. and states get to choose how to do it. Race to the top is just a contest. You don't have to do anything. Here's a big pile of money/carrots. You can ignore them if you want, but if you make a bunch of changes at the state level consistent with what we want, we'll choose the two states w/ the most progress at the end and reward them. Even the states that didn't win made significant contributions. This outside lever that can be used to change the entrenched thinking at the state level. It's not unique to education. You can use it to do a lot of other things at the federal level.

Taxing externalities

No deadweight loss or can reduce deadweight loss when taxing an externality, because tax will move it back to socially optimal point

Does the US have to get debt down to 0?

No, as long as it seems like we can have a limit that we can pay back. Debt to GDP ratio is what matters.

Why do we try to convince China to improve its social saving net and why did China want Tim Geithner to walk through the ACA? Do they actually care?

No, just want China to have more money for domestic consumption and increase purchase of imports from US and other countries, to narrow that gap. Using micro, domestic things to see how they affect international issues. Want to know if it will cost a lot in the long run, and see if China needs to worry about fiscal aspects of US long term.

"Taxing the Poor to Pay the Poor," The Economist, April 3, 2004.

Nordic countries' high tax rates lags Europe's economic performance behind America's, but European countries are still rich because their tax systems are more efficient. One reason might be their consumption tax, because taxing what is spent rather than what is earned does less damage to incentives to saved. If wages are taxed, then interest on savings is taxed also, so anything saved out of wages is in effect taxed twice. Good sand services most sensitive to price should be taxed the lease. Europe leans on labor rather than capital, because capitalists are more elastic to investing than workers are to laboring. American can get away with an inefficient tax code because its tax burden is quite low. Bigger welfare states have to be smarter because the stakes are so much higher.

Health care vouchers for private insurance

Paul Ryan floated a version of this. Keep costs down by having competition for insurance market by Medicare. Problem: some private insurers might not accept the voucher. Some 65 year olds are healthier than others.

What's the most efficient tax we can envision?

Poll tax Poll tax: lump sum tax that everyone pays. (not to be confused with a proportional/flat tax) Same amount for every single person. Bill Gates and homeless people both pay $5000. This is completely efficient because it does not distort incentives and no marginal change in behavior. There's no way to avoid it, which means there's no deadweight loss from avoiding activities that would otherwise be your first choice. Margaret Thatcher tried this, and it worked out very poorly. Riots in the street. This violates a lot of vertical equity.

Tax incidence in factor markets

Same, but consumers of the factors are the firms (they demand factors such as labor) And producers of the factors are individuals (who supply factors such as labor) Minimum wage: legally mandated minimum amount that workers must be paid for each hour of work. • Rigid because firm must bear all of the burden. This rigidity is not present in output markets, so for this reason, the party on whom the tax is levied may matter more in input than in output markets.

How to make a consumption tax progressive?

Send a check of certain amount to people. Income $1M. Consumption is whatever you don't have left. Original income - savings Consumption will be higher at 65. Income = 0. Take $1M out of savings vehicle. Consumption is $1M. Is violation of horizontal equity because we tax consumption and income instead.

Carried interest

Share of profits received as compensation/commission despite not putting in your own capital. No downside, only upside.

Sarah D. Sparks. "Research Traces Impacts of Childhood Adversity," Education Week, November 20, 2012.

Some stress is good, but toxic stress from poverty damages students' long term leaning and health. Children are more vulnerable to damage from toxic stressors when they are young. Affects children's ability to delay gratification.

Tax deductions versus tax credits

Tax deductions versus tax credits Tax deductions: amount which taxpayers are allowed to reduce their taxable income through spending on items such as charitable donations or home mortgage interest. (1-T) Tax credits: reduce amount of tax they owe after they've contributed a certain amount • On vertical equity grounds, tax credits are more equitable than deductions. Tax deduction rise with one's tax rate and one's income, making deductions regressive. Credits are progressive because credit amounts are lower as a share of income for higher-income payers. • Unclear on efficiency grounds

Tax incidence (statutory versus economic)

Tax incidence: assessing which party (consumers or producers) bears the true burden of a tax • Statutory incidence: burden of tax borne by the party that sends check to the government • Economic incidence: burden of taxation measured by the change in resources available to any economy agent as a result of taxation

Tax subsidies to home mortgage

Tax subsidies to home mortgage Mortgage: agreement to use a certain property, usually a home, as security for a loan Not as much evidence on positive externality grounds, but still in place because of organized interests Justification: home ownership has positive externalities

What are the anticipated behavioral responses even if we don't know exactly what to expect on the empirical front?

Taxing negative externalities is good But bad for people in the short run and will decrease overproduction. Might have to cut jobs. • Original tax deduction created a distortion in the economy that induced very productive people to do things that were not the most productive use of their resources. In the process there is destruction. Getting to a better place involves short term pain and short term pain has a political price.

Inputs to health care costs 18% of GDP

Technology + info asymmetry + third party payer + physician incentives + malpractice (real or perceived) + consumer preferences + limited data on outcomes/effectiveness Technology will push the frontier. Would expect it to increase efficiency, but the system is still fragmented.

David Denby. "Public Defender: Diane Ravitch Takes on a Movement," The New Yorker, November 19, 2012.

Testing teachers takes away their voice and blames teachers for things beyond their control. Turning public schools over to non-union charter schools is bad because it robs public schools of resources and intellectual strength. When charter schools open, money and students flow away. Calls for greater federal investment in prenatal and infant nutrition.

Tax inefficiency

The inefficiency of any tax is determined by the extent to which consumers and producers change their behavior to avoid the tax; deadweight loss is caused by individuals and firms making inefficient consumption and production choices in order to avoid taxation. The more elastic the demand or supply of a good, the larger the change in quantity induced by the tax, and the larger the inefficiency and deadweight loss of the tax. Because more opportunities to produce substitutes.

What solves the adverse selection problem?

The personal mandate. If you don't sign up for insurance program, you get a tax penalty. Adverse selection will be a problem for any plan that does not force people into the club.

Steven Rattner. "Beyond Obamacare," New York Times, September 16, 2012.

Third rail: acknowledging that elderly Americans are not entitled to every conceivable medical procedure or pharmaceutical ACA includes restrictions on any reduction in Medicare services. No one wants to lose an aging parent. With price out of the question, they'll try everything, but that imposes an enormous societal cost that few other nations have been willing to bear. Should ration care.

Peter Diamond and Emmanuel Saez. "The Case for a Progressive Tax: From Basic Research to Policy Recommendations," Journal of Economics Perspectives, vol. 25, no. 4, Fall 2011.

Two key concepts to keep in mind: o Social welfare function is the aggregation of all individual utility functions in a society. Important because a substantial increase in the top marginal income tax rate produces both winners and losers at the individual level. o Law of diminishing marginal utility: wealthy person values an additional dollar of consumption than less than a poor person does Want to maximize utility for society as a whole Three policy recommendations 1. Very high earners should be subject to high and rising marginal tax rates on earnings 2. Earnings of low-income families should be subsidized and those subsidies should then be phased out with high implicit marginal tax rates 3. Capital income should be taxed Two effects: mechanical and behavioral o Mechanical: higher tax rate lowers taxable income which reduces revenue flowing to the government o Behavioral: wealthy people may work less or substitute earnings or tax evasion; decreases revenue the government collects o If behavioral outweighs mechanical, then middle and low income people are also worse off because less redistribution. But if mechanical offsets behavioral, raising taxes on rich makes non-rich better off o Loss to rich so small relative to non-rich gain that we might as well assume it's zero o So government should take as much money as possible form the rich and redistribute it to the poor → 73 cents

Educational quality and attainment

Unemployment rate by education level is decreasing by education level High school graduation rate People who drop out of high school are probably less motivated: confounding factors

Kenneth F. Sheve and Matthew Slaughter. "A New Deal for Globalization," Foreign Affairs, July/August 2007.

US policy more protectionist because public is more protectionist, and shift in attitude is a result of stagnant or falling incomes. This brings economic dangers because globalization delivers tremendous benefits to US economy as a whole. Need to institute a New Deal for globalization. Adopting a fundamentally more progressive federal tax system. Benefits of globalization have gone to a small set of highly skilled, highly compensated workers. New deal for globalization: combine further trade and investment liberalization with eliminating the full payroll tax for all workers earnings below the national median to make payroll tax for social insurance more progressive. Currently, payroll tax is a flat-rate tax on a largely capped base, which is highly regressive.

"Not What It Used to Be," The Economist, December 1, 2012.

Universities should lower costs and reduce time to earn degree. Universities spend beyond their means but do little to improve costs. States have cut back on financial aid given to universities. Quality of students and graduates are declining. Degrees worth less now. MOOCs (massive open online courses) are increasing to offer free college-level course

Why don't economists like tax exemptions for providing employees with healthcare?

Violates horizontal equity and vertical equity No exemption: make 100K in 50% bracket. Have $50 left. Your preference for health insurance is $5000. When there are no incentives one way or another, you'll buy $5000 in insurance and have $45 K in other consumption. Exemption: employer pay $98K, but will give you $90K in cash and $8K in insurance. This is more than you would otherwise buy, but now you're only taxed on $90K. Get $45K in other consumption, so same money, but you get a higher health package. This is pareto efficient for employer. But what don't we like about this? What's different between the $5000 and $8000 plans? They didn't want the $8000 in the first place. More health care costs that aren't necessary. This is the government changing your preferences

"Back to School," This American Life, September 13, 2012.

What matters in a kid's success is not just cognitive skills, but character/on-cognitive skills—conduct, deportment, self-regulation, self-control, conscientiousness, ability to delay gratification and resist impulse. Secure-attachment relationship between parents and children in first year is important. Helps kids when they're stressed out by comforting them. Leadership principles—ambition, professionalism, resourcefulness, resilience. Teaching kids these non-cognitive skills are useful.

Budget deficit

When the government spends more money in a year than it collects in taxes and fees. When negative, makes the debt bigger. Sometimes sensible to run a deficit. Whether government has balanced the budget in any year.

Premium support

a system of full choice among health care plans for Medicare enrollees, whereby they receive a voucher for a certain amount that they can apply to a range of health insurance options (either paying or receiving the difference between plan premiums and the voucher amount)

Managed care

approach to controlling medical costs using supply-side restrictions such as limited choice of medical provider Consensus: no impact on care quality, but lower costs

Value added tax (VAT)

cascading consumption tax. Tax goods at each stage of production on the value added to the good at that production stage, rather than only at the point of sale on the final retail value of the good o Participants will ensure that the tax reporting is accurate o Taxing firms only on the value they add, allowing them to deduct from taxation the price they pay for inputs o Sounds simple, but very complicated in practice

Optimal income taxation

choosing the tax rates across income groups to maximize social welfare subject to a government revenue requirement Optimally would leave everyone with the same level of post-tax-income, but this implies that individuals won't work less if they face a 100% marginal tax rate.

Value added model in education

control for other confounding factors as best as they can. Proxy for inherent test taking ability. Can build econometric model that also takes into account income etc. Spits out value added year to year over time.

Tax compliance

efforts to reduce the evasion of taxes

Educational vouchers

fixed amount of money given by government to families with school-age children, who can spend it on any type of school, public or private Pros • Consumer sovereignty • Competition makes private markets function efficiently • Tiebout mechanism: if local schools are inefficient, families will move to other towns where property tax is spent more efficiently to produce better education for their children. But vouchers unbundle this mechanism because kids can go to any school they like. Cons • Excessive school specialization • Segregation • Inefficient use of public resources: public sector costs would rise • Education market may be a natural monopoly—not competitive enough • Special education costs a lot and schools would have incentive to avoid

Estate taxes

form of wealth tax based on the value of the estate left behind when one dies

Property taxes

form of wealth tax based on value of real estate, including value of the land and any structures built on the land

Tax expenditures

government revenue losses attributable to tax law provisions that allow special exclusions, exemptions, or deductions from gross income, or that provide a special credit, preferential tax rate, or liability/deferral • Single largest tax expenditure is the exclusion of employer-provided health insurance premium from taxable income

Tax evasion

illegal nonpayment of taxation (not to be confused with tax avoidance which is legal) o Benefit: avoided tax payments; costs: risk of getting caught and penalty paid o Why care? Tax evasion is inefficient, has no positive externalities so efficiency will fall if we raise the tax. Vertical equity—difficult to offset inequality with higher rates on the rich because this will increase cheating. Also violation of horizontal equity.

Goal of program evaluation

isolate the effect of that single factor; want to know how the group receiving a treatment fares compared with some other group whose members are identical in all other respects but for the treatment

TRICARE/CHAMPVA

insurance for those currently and formerly in the military and their dependents

Optimal health insurance

one which individuals bear a large share of medical costs within some affordable range, and are only fully insured when costs become unaffordable

Coinsurance

patient pays a percentage of each medical bill (the coinsurance rate) rather than a flat dollar amount (copayment)

Marriage tax

rise in the joint tax burden on two individuals from becoming married Some pay higher, some pay lower, some none. Evens out.

Payroll tax

tax levied on income earned on one's job=-primary way of financing social insurance

Individual income tax

tax paid on individual income accrued during the year

Laffer curve

tax revenues on y axis and tax rate on horizontal axis. When tax rate is 0 or 100%, the tax raises no revenues. When we are on the wrong (right hand) side of the Laffer curve, we can actually raise revenues by cutting the tax rate Marginal inefficiency of a tax rises with the tax rate, and the rich are the most productive elements of society, so the reduction in output will be the greatest Offsetting impact. If we double tax rate, there won't be double revenue because of deadweight loss. If we cut the tax rate in half, we'll get more than half the revenue because people will work more.

Alternative minimum tax

tax schedule applied to taxpayers with high ratio of deductions and exemptions to total income. Whichever method leads to higher taxes is the one that is used.

Cash flow tax

taxes individuals on the difference between cash income and savings. Require the least change to our current system of taxation. Only major difficulty would be in verifying people's claims about how much they saved during the year

Sales tax

taxes paid by consumers to vendors at the point of sale. Type of consumption tax Doesn't change depending on what your income is, so regressive

Wealth taxes

taxes paid on the value of the assets, such as real estate or stocks, held by a person or family

Consumption taxing pros and cons

taxing individuals based not on what they earn but on what they consume (such as through a sales tax) o Pros o Improved efficiency: end holes and unlevel playing field problems o Fairer treatment of savers and less distortion to savings decision o Simplicity o Cons o Vertical equity o Asymmetric information o Transition issues o Compliance o Cascading: businesses pay sales tax on inputs and then again when they sell their outputs

Uncompensated care

the costs of delivering health care for which providers are not reimburased Poses financial externality on insured

Risk Pool

the group of individuals who enroll in an insurance plan

Does it need to be public provision, or can it be publicly financed and privately provided?

• Paternalism? Whether we think parents will make informed choices. Patronizing view to not allow poor people to choose schools because they might make poor choices. A lot of philosophy lurking in whether or not there's actually choice, but in theory, there's no reason why you can't go after public finance and private provision. • Creaming: offer choice. Assume some parents have incentive, some parents don't, so with choice, the best students will leave and poor students will stay. o Counter: Why shouldn't best students be allowed to leave just because someone else won't exercise that choice?

Politics of tax reform

• Political pressure for complicated tax code. Relabeling a spending program as a tax cut, despite its cost in terms of tax efficiency has enormous political appeal • Conundrum: political forces pushing for use of tax code to deliver benefits to particular groups, at the cost of potentially inefficient and inequitable holes in the tax base. Once these tax breaks are in place, it is very hard to remove them because they create horizontal inequities for those who made decisions based on the existence of these tax breaks. Republicans and democrats never say they're going to spend more money on etc. They say "tax credits for this, tax exemptions for that" because talking about this sounds cheaper, but of course there is no way to spend less and get more because it violates free lunch. These two options are the same. So people will comment on tax spending.