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Jonathan Gruber’s market-leading__Public Finance and Public Policy__was the first textbook to truly reflect the way public policy is created, implemented, and researched. Like no other text available, it integrated real-world empirical work and coverage of transfer programs and social insurance into the traditional topics of public finance. By augmenting the traditional approach of public finance texts with a true integration of theory, application, and evidence,__Public Finance and Public Policy__engages students like no other public finance text. Thoroughly updated, this timely new edition gives students the basic tools they need to understand the driving issues of public policy today, including healthcare, education, global climate change, entitlements, and more. Cover 1 Inside Cover 2 Title 6 Copyright 7 About the Author 8 Brief Contents 9 Contents 10 Preface 20 PART I: Introduction and Background 32 CHAPTER 1 Why Study Public Finance? 32 1.1 The Four Questions of Public Finance 34 When Should the Government Intervene in the Economy? 35 APPLICATION Modern Measles Epidemics 36 How Might the Government Intervene? 39 What Are the Effects of Alternative Interventions? 40 APPLICATION The CBO: Government Scorekeepers 41 Why Do Governments Do What They Do? 42 1.2 Why Study Public Finance? Facts on Government in the United States and Around the World 42 The Size and Growth of Government 43 Decentralization 44 Spending, Taxes, Deficits, and Debts 45 Distribution of Spending 47 Distribution of Revenue Sources 50 Regulatory Role of the Government 50 1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education 52 Social Security 52 Health Care 53 Education 54 1.4 Conclusion 55 Highlights 55 Questions and Problems 56 Advanced Questions 56 CHAPTER 2 Theoretical Tools of Public Finance 58 2.1 Constrained Utility Maximization 59 Preferences and Indifference Curves 60 Utility Mapping of Preferences 62 Budget Constraints 64 Putting It All Together: Constrained Choice 66 The Effects of Price Changes: Substitution and Income Effects 68 2.2 Putting the Tools to Work: TANF and Labor Supply Among Single Mothers 70 Identifying the Budget Constraint 71 The Effect of TANF on the Budget Constraint 72 2.3 Equilibrium and Social Welfare 76 Demand Curves 77 Supply Curves 79 Equilibrium 80 Social Efficiency 81 Competitive Equilibrium Maximizes Social Efficiency 84 From Social Efficiency to Social Welfare: The Role of Equity 85 Choosing an Equity Criterion 87 2.4 Welfare Implications of Benefit Reductions: The TANF Example Continued 87 2.5 Conclusion 89 Highlights 90 Questions and Problems 90 Advanced Questions 91 APPENDIX The Mathematics of Utility Maximization 93 CHAPTER 3 Empirical Tools of Public Finance 96 3.1 The Important Distinction Between Correlation and Causality 97 The Problem 98 3.2 Measuring Causation with Data We'd Like to Have: Randomized Trials 99 Randomized Trials as a Solution 100 The Problem of Bias 101 Randomized Trials of ERT 102 Randomized Trials in the TANF Context 102 Why We Need to Go Beyond Randomized Trials 103 3.3 Estimating Causation with Data We Actually Get: Observational Data 104 Time Series Analysis 104 Cross-Sectional Regression Analysis 108 Quasi-Experiments 112 Structural Modeling 116 3.4 Conclusion 117 Highlights 118 Questions and Problems 118 Advanced Questions 119 APPENDIX Cross-Sectional Regression Analysis 120 CHAPTER 4 Budget Analysis and Deficit Financing 124 4.1 Government Budgeting 126 The Budget Deficit in Recent Years 126 The Budget Process 128 APPLICATION Efforts to Control the Deficit 129 Budget Policies and Deficits at the State Level 131 4.2 Measuring the Budgetary Position of the Government: Alternative Approaches 132 Real Versus Nominal 132 Economic Conditions 133 Cash Versus Capital Accounting 134 Static Versus Dynamic Scoring 136 4.3 Do Current Debts and Deficits Mean Anything? A Long-Run Perspective 137 Background: Present Discounted Value 138 APPLICATION Present Discounted Value and Interpreting Sports Contracts 138 Why Current Labels May Be Meaningless 139 Measuring Long-Run Government Budgets 140 What Does the U.S. Government Do? 142 APPLICATION The Financial Shenanigans of 2001 144 4.4 Why Do We Care About the Government's Fiscal Position? 145 Short-Run Versus Long-Run Effects of the Government on the Macroeconomy 146 Background: Savings and Economic Growth 146 The Federal Budget, Interest Rates, and Economic Growth 148 Intergenerational Equity 150 4.5 Conclusion 151 Highlights 151 Questions and Problems 152 Advanced Questions 152 PART II: Externalities and Public Goods 154 CHAPTER 5 Externalities: Problems and Solutions 154 5.1 Externality Theory 156 Economics of Negative Production Externalities 156 Negative Consumption Externalities 159 APPLICATION The Externality of SUVs 160 Positive Externalities 161 5.2 Private-Sector Solutions to Negative Externalities 163 The Solution 163 The Problems with Coasian Solutions 165 5.3 Public-Sector Remedies for Externalities 167 Corrective Taxation 167 Subsidies 168 Regulation 170 5.4 Distinctions Between Price and Quantity Approaches to Addressing Externalities 170 Basic Model 171 Price Regulation (Taxes) Versus Quantity Regulation in This Model 172 Multiple Plants with Different Reduction Costs 173 Uncertainty About Costs of Reduction 176 5.5 Conclusion 179 Highlights 179 Questions and Problems 180 Advanced Questions 181 CHAPTER 6 Externalities in Action: Environmental and Health Externalities 184 6.1 The Role of Economics in Environmental Regulation: The Case of Acid Rain 186 The Damage of Acid Rain 187 History of Acid Rain Regulation 188 EMPIRICAL EVIDENCE Estimating the Adverse Health Effects of Particulates 189 Has the CAA Been a Success? 191 6.2 Global Warming 192 APPLICATION The Montreal Protocol 194 The Kyoto Treaty 195 Can Trading Make Environmental Agreements More Cost-Effective? 195 What Does the Future Hold? 198 APPLICATION Congress Takes on Global Warming 200 6.3 The Economics of Smoking 202 The Externalities of Smoking 204 Should We Care Only About Externalities, or Do "Internalities" Matter Also? 207 6.4 The Economics of Other Addictive Behaviors 211 Drinking 211 Illicit Drugs 212 EMPIRICAL EVIDENCE The Effect of Legal Drinking at Age 21 213 APPLICATION Public Policy Toward Obesity 215 Summary 218 6.5 Conclusion 219 Highlights 219 Questions and Problems 219 Advanced Questions 220 CHAPTER 7 Public Goods 222 7.1 Optimal Provision of Public Goods 223 Optimal Provision of Private Goods 224 Optimal Provision of Public Goods 226 7.2 Private Provision of Public Goods 228 Private-Sector Underprovision 229 APPLICATION The Free Rider Problem in Practice 230 Can Private Providers Overcome the Free Rider Problem? 231 APPLICATION Business Improvement Districts 231 When Is Private Provision Likely to Overcome the Free Rider Problem? 232 7.3 Public Provision of Public Goods 235 Private Responses to Public Provision: The Problem of Crowd-Out 236 EMPIRICAL EVIDENCE Measuring Crowd-Out 237 The Right Mix of Public and Private 239 APPLICATION The Good and Bad Sides of Contracting Out 239 Measuring the Costs and Benefits of Public Goods 242 How Can We Measure Preferences for Public Goods? 242 7.4 Conclusion 243 Highlights 243 Questions and Problems 244 Advanced Questions 244 APPENDIX The Mathematics of Public Goods Provision 246 CHAPTER 8 Cost-Benefit Analysis 250 8.1 Measuring the Costs of Public Projects 251 The Example 252 Measuring Current Costs 252 8.2 Measuring the Benefits of Public Projects 255 Valuing Driving Time Saved 255 APPLICATION The Problems of Contingent Valuation 257 Valuing Saved Lives 258 EMPIRICAL EVIDENCE Valuing Time Savings 259 APPLICATION Valuing Life 260 EMPIRICAL EVIDENCE How Much Does It Cost to Avoid a Traffic Fatality? 265 Discounting Future Benefits 265 Cost-Effectiveness Analysis 266 8.3 Putting It All Together 266 Other Issues in Cost-Benefit Analysis 267 8.4 Conclusion 268 Highlights 269 Questions and Problems 269 Advanced Questions 270 CHAPTER 9 Political Economy 272 9.1 Unanimous Consent on Public Goods Levels 274 Lindahl Pricing 274 Problems with Lindahl Pricing 276 9.2 Mechanisms for Aggregating Individual Preferences 277 APPLICATION Direct Democracy in the United States 277 Majority Voting: When It Works 279 Majority Voting: When It Doesn't Work 281 Arrow's Impossibility Theorem 282 Restricting Preferences to Solve the Impossibility Problem 282 Median Voter Theory 284 The Potential Inefficiency of the Median Voter Outcome 284 Summary 285 9.3 Representative Democracy 286 Vote-Maximizing Politicians Represent the Median Voter 286 Assumptions of the Median Voter Model 287 Lobbying 289 APPLICATION Farm Policy in the United States 290 Evidence on the Median Voter Model for Representative Democracy 292 EMPIRICAL EVIDENCE Testing the Median Voter Model 293 9.4 Public Choice Theory: The Foundations of Government Failure 295 Size-Maximizing Bureaucracy 296 Leviathan Theory 296 Corruption 297 APPLICATION Government Corruption 297 The Implications of Government Failure 300 9.5 Conclusion 300 EMPIRICAL EVIDENCE Government Failures and Economic Growth 301 Highlights 302 Questions and Problems 303 Advanced Questions 304 CHAPTER 10 State and Local Government Expenditures 306 10.1 Fiscal Federalism in the United States and Abroad 308 Spending and Revenue of State and Local Governments 310 Fiscal Federalism Abroad 311 10.2 Optimal Fiscal Federalism 312 The Tiebout Model 312 Problems with the Tiebout Model 314 Evidence on the Tiebout Model 317 Optimal Fiscal Federalism 318 EMPIRICAL EVIDENCE Evidence for Capitalization from California's Proposition 13 319 10.3 Redistribution Across Communities 321 Should We Care? 321 Tools of Redistribution: Grants 322 Redistribution in Action: School Finance Equalization 327 EMPIRICAL EVIDENCE The Flypaper Effect 329 APPLICATION School Finance Equalization and Property Tax Limitations in California 330 10.4 Conclusion 331 Highlights 331 Questions and Problems 332 Advanced Questions 333 CHAPTER 11 Education 336 11.1 Why Should the Government Be Involved in Education? 339 Productivity 339 Citizenship 340 Credit Market Failures 340 Failure to Maximize Family Utility 341 Redistribution 341 11.2 How Is the Government Involved in Education? 341 Free Public Education and Crowding Out 342 Solving the Crowd-Out Problem: Vouchers 344 Problems with Educational Vouchers 346 11.3 Evidence on Competition in Education Markets 351 Direct Experience with Vouchers 351 Experience with Public School Choice 351 EMPIRICAL EVIDENCE Estimating the Effects of Voucher Programs 352 Experience with Public School Incentives 353 Bottom Line on Vouchers and School Choice 354 11.4 Measuring the Returns to Education 354 Effects of Education Levels on Productivity 354 Effect of Education Levels on Other Outcomes 356 The Impact of School Quality 356 EMPIRICAL EVIDENCE Estimating the Return to Education 357 11.5 The Role of the Government in Higher Education 358 EMPIRICAL EVIDENCE Estimating the Effects of School Quality 359 Current Government Role 359 What Is the Market Failure, and How Should It Be Addressed? 361 11.6 Conclusion 362 Highlights 363 Questions and Problems 363 Advanced Questions 364 PART III: Social Insurance and Redistribution 366 CHAPTER 12 Social Insurance: The New Function of Government 366 12.1 What Is Insurance and Why Do Individuals Value It? 368 What Is Insurance? 369 Why Do Individuals Value Insurance? 369 Formalizing This Intuition: Expected Utility Model 370 12.2 Why Have Social Insurance? Asymmetric Information and Adverse Selection 373 Asymmetric Information 373 Example with Full Information 374 Example with Asymmetric Information 375 The Problem of Adverse Selection 376 Does Asymmetric Information Necessarily Lead to Market Failure? 377 APPLICATION Adverse Selection and Health Insurance "Death Spirals" 378 How Does the Government Address Adverse Selection? 379 12.3 Other Reasons for Government Intervention in Insurance Markets 380 Externalities 380 Administrative Costs 380 Redistribution 380 Paternalism 381 APPLICATION Flood Insurance and the Samaritan's Dilemma 381 12.4 Social Insurance Versus Self-Insurance: How Much Consumption Smoothing? 383 Example: Unemployment Insurance 384 Lessons for Consumption-Smoothing Role of Social Insurance 386 12.5 The Problem with Insurance: Moral Hazard 386 APPLICATION The Problems with Assessing Workers' Compensation Injuries 387 What Determines Moral Hazard? 388 Moral Hazard Is Multidimensional 389 The Consequences of Moral Hazard 389 12.6 Putting It All Together: Optimal Social Insurance 390 12.7 Conclusion 391 Highlights 392 Questions and Problems 392 Advanced Questions 393 APPENDIX Mathematical Models of Expected Utility 395 CHAPTER 13 Social Security 398 13.1 What Is Social Security, and How Does It Work? 400 Program Details 400 APPLICATION Why Choose 35 Years? 402 How Does Social Security Work over Time? 404 APPLICATION Ida May Fuller 406 How Does Social Security Redistribute in Practice? 407 13.2 Consumption-Smoothing Benefits of Social Security 410 Rationales for Social Security 410 Does Social Security Smooth Consumption? 411 Social Security and Private Savings 412 Living Standards of the Elderly 412 EMPIRICAL EVIDENCE Measuring the Crowd-Out Effect of Social Security on Savings 413 13.3 Social Security and Retirement 414 Theory 414 Evidence 415 APPLICATION Implicit Social Security Taxes and Retirement Behavior 418 Implications 420 13.4 Social Security Reform 420 Reform Round I: The Greenspan Commission 421 APPLICATION The Social Security Trust Fund and National Savings 422 Incremental Reforms 422 Fundamental Reform: Privatization 426 APPLICATION Company Stock in 401(k) Plans 428 APPLICATION Mixed Proposals for Social Security Reform 430 13.5 Conclusion 431 Highlights 431 Questions and Problems 431 Advanced Questions 432 CHAPTER 14 Unemployment Insurance, Disability Insurance, and Workers' Compensation 434 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers' Compensation 436 Institutional Features of Unemployment Insurance 436 Institutional Features of Disability Insurance 438 Institutional Features of Workers' Compensation 439 Comparison of the Features of UI, DI, and WC 441 APPLICATION The Duration of Social Insurance Benefits Around the World 441 14.2 Consumption-Smoothing Benefits of Social Insurance Programs 443 14.3 Moral Hazard Effects of Social Insurance Programs 444 Moral Hazard Effects of Unemployment Insurance 444 EMPIRICAL EVIDENCE Moral Hazard Effects of Unemployment Insurance 445 Evidence for Moral Hazard in DI 447 EMPIRICAL EVIDENCE Disability Insurance Screening and Labor Supply 449 Evidence for Moral Hazard in WC 451 EMPIRICAL EVIDENCE Moral Hazard Effects of Workers' Compensation 452 14.4 The Costs and Benefits of Social Insurance to Firms 452 The Effects of Partial Experience Rating in UI on Layoffs 453 The "Benefits" of Partial Experience Rating 454 APPLICATION The "Cash Cow" of Partial Experience Rating 455 Workers' Compensation and Firms 456 14.5 Implications for Program Reform 456 Benefits Generosity 456 Targeting 457 Experience Rating 458 Worker Self-Insurance? 458 APPLICATION Reforming UI 458 14.6 Conclusion 459 Highlights 460 Questions and Problems 460 Advanced Questions 461 APPENDIX Advanced Quasi-Experimental Analysis 462 CHAPTER 15 Health Insurance I: Health Economics and Private Health Insurance 464 15.1 An Overview of Health Care in the United States 466 APPLICATION Finding the Inefficiency in U.S. Health Care 468 How Health Insurance Works: The Basics 472 Private Insurance 473 Medicare 477 Medicaid 477 TRICARE/CHAMPVA 478 The Uninsured 478 EMPIRICAL EVIDENCE Health Insurance and Mobility 481 15.2 How Generous Should Insurance Be to Patients? 481 Consumption-Smoothing Benefits of Health Insurance for Patients 482 Moral Hazard Costs of Health Insurance for Patients 483 How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment 486 EMPIRICAL EVIDENCE Estimating the Elasticity of Demand for Medical Care 487 Optimal Health Insurance 489 Why Is Insurance So Generous in the United States? 490 APPLICATION Health Savings Accounts 491 15.3 How Generous Should Insurance Be to Medical Providers? 494 Managed Care and Prospective Reimbursement 494 The Impacts of Managed Care 496 How Should Providers Be Reimbursed? 497 15.4 Conclusion 497 Highlights 498 Questions and Problems 498 Advanced Questions 499 CHAPTER 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform 502 16.1 The Medicaid Program for Low-Income Families 504 How Medicaid Works 504 Who Is Eligible for Medicaid? 504 What Health Services Does Medicaid Cover? 505 How Do Providers Get Paid? 506 16.2 What Are the Benefits of the Medicaid Program? 506 Does Medicaid Provide Financial Protection? 506 Does Medicaid Improve Health? 507 How Does Medicaid Affect Health? Evidence 508 EMPIRICAL EVIDENCE Using State Medicaid Expansions to Estimate Program Effects 510 16.3 The Medicare Program 511 How Medicare Works 511 APPLICATION The Medicare Prescription Drug Debate 513 16.4 What Are the Effects of the Medicare Program? 515 The Prospective Payment System 516 Empirical Evidence on the Move to the PPS 516 Problems with PPS 517 EMPIRICAL EVIDENCE Short Stays in Long-Term Care Hospitals 519 Lesson: The Difficulty of Partial Reform 519 Medicare Managed Care 521 Should Medicare Move to a Full Choice Plan? Premium Support 523 APPLICATION A Premium Support System for Medicare 524 Gaps in Medicare Coverage 526 16.5 Long-Term Care 526 Financing Long-Term Care 527 16.6 Health Care Reform in the United States 528 The Historical Impasse 528 The Massachusetts Experiment with Incremental Universalism 530 The Affordable Care Act 531 APPLICATION Rising Health Care Costs and Cost Control Efforts in the ACA 533 Projected Impacts of the ACA and Early Evidence on Its Effects 536 16.7 Conclusion 537 Highlights 538 Questions and Problems 538 Advanced Questions 539 CHAPTER 17 Income Distribution and Welfare Programs 542 17.1 Facts on Income Distribution in the United States 545 Relative Income Inequality 545 Absolute Deprivation and Poverty Rates 547 APPLICATION Problems in Poverty Line Measurement 549 What Matters—Relative or Absolute Deprivation? 550 17.2 Welfare Policy in the United States 551 Cash Welfare Programs 552 In-Kind Programs 553 17.3 The Moral Hazard Costs of Welfare Policy 554 Moral Hazard Effects of a Means-Tested Transfer System 555 Solving Moral Hazard by Lowering the Benefit Reduction Rate 558 The "Iron Triangle" of Redistributive Programs 559 17.4 Reducing the Moral Hazard of Welfare 560 Moving to Categorical Welfare Payments 560 Using "Ordeal Mechanisms" 563 APPLICATION An Example of Ordeal Mechanisms 565 Increasing Outside Options 565 EMPIRICAL EVIDENCE The Canadian Self-Sufficiency Project 568 EMPIRICAL EVIDENCE Child Care, Preschool, and Child Outcomes 569 APPLICATION Evaluating the 1996 Welfare Reform 572 17.5 Conclusion 575 Highlights 576 Questions and Problems 576 Advanced Questions 577 PART IV: Taxation in Theory and Practice 580 CHAPTER 18 Taxation: How It Works and What It Means 580 18.1 Types of Taxation 582 Taxes on Earnings 582 Taxes on Individual Income 582 Taxes on Corporate Income 582 Taxes on Wealth 582 Taxes on Consumption 583 Taxation Around the World 583 18.2 Structure of the Individual Income Tax in the United States 584 Computing the Tax Base 585 Tax Rates and Taxes Paid 586 APPLICATION Fixing the AMT 588 18.3 Measuring the Fairness of Tax Systems 589 Average and Marginal Tax Rates 590 Vertical and Horizontal Equity 591 Measuring Vertical Equity 592 APPLICATION The Political Process of Measuring Tax Fairness 592 18.4 Defining the Income Tax Base 593 The Haig-Simons Comprehensive Income Definition 594 Deviations due to Ability-to-Pay Considerations 595 Deviations due to Costs of Earning Income 595 APPLICATION What Are Appropriate Business Deductions? 596 18.5 Externality/Public Goods Rationales for Deviating from Haig-Simons 597 Charitable Giving 597 Spending Crowd-Out Versus Tax Subsidy Crowd-In 598 Consumer Sovereignty Versus Imperfect Information 600 Housing 601 EMPIRICAL EVIDENCE The Social Benefits of Homeownership 603 Tax Deductions Versus Tax Credits 604 APPLICATION The Refundability Debate 605 Bottom Line: Tax Expenditures 607 18.6 The Appropriate Unit of Taxation 608 The Problem of the "Marriage Tax" 608 Marriage Taxes in Practice 610 18.7 Conclusion 612 Highlights 612 Questions and Problems 612 Advanced Questions 613 CHAPTER 19 The Equity Implications of Taxation: Tax Incidence 616 19.1 The Three Rules of Tax Incidence 618 The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax 618 The Side of the Market on Which the Tax Is Imposed Is Irrelevant to the Distribution of the Tax Burdens 620 Parties with Inelastic Supply or Demand Bear Taxes; Parties with Elastic Supply or Demand Avoid Them 623 Reminder: Tax Incidence Is About Prices, Not Quantities 626 19.2 Tax Incidence Extensions 627 Tax Incidence in Factor Markets 627 Tax Incidence in Imperfectly Competitive Markets 630 Balanced Budget Tax Incidence 632 19.3 General Equilibrium Tax Incidence 633 Effects of a Restaurant Tax: A General Equilibrium Example 633 Issues to Consider in General Equilibrium Incidence Analysis 636 19.4 The Incidence of Taxation in the United States 638 EMPIRICAL EVIDENCE The Incidence of Taxation: Real-World Complications 639 CBO/TPC Incidence Assumptions 639 Results of CBO/TPC Incidence Analysis 641 Current Versus Lifetime Income Incidence 643 19.5 Conclusion 644 Highlights 644 Questions and Problems 645 Advanced Questions 645 APPENDIX The Mathematics of Tax Incidence 647 CHAPTER 20 Tax Inefficiencies and Their Implications for Optimal Taxation 650 20.1 Taxation and Economic Efficiency 651 Graphical Approach 651 Elasticities Determine Tax Inefficiency 653 EMPIRICAL EVIDENCE The Window Tax 654 APPLICATION Tax Avoidance in Practice 657 Determinants of Deadweight Loss 657 Deadweight Loss and the Design of Efficient Tax Systems 659 APPLICATION The Deadweight Loss of Taxing Wireless Communications 664 20.2 Optimal Commodity Taxation 664 Ramsey Taxation: The Theory of Optimal Commodity Taxation 665 Inverse Elasticity Rule 666 Equity Implications of the Ramsey Model 666 APPLICATION Price Reform in Pakistan 667 20.3 Optimal Income Taxes 670 A Simple Example 671 General Model with Behavioral Effects 671 An Example 674 20.4 Tax-Benefit Linkages and the Financing of Social Insurance Programs 675 The Model 675 Issues Raised by Tax-Benefit Linkage Analysis 678 EMPIRICAL EVIDENCE A Group-Specific Employer Mandate 679 20.5 Conclusion 680 Highlights 680 Questions and Problems 680 Advanced Questions 681 APPENDIX The Mathematics of Optimal Taxation 683 CHAPTER 21 Taxes on Labor Supply 688 21.1 Taxation and Labor Supply—Theory 690 Basic Theory 690 Limitations of the Theory: Constraints on Hours Worked and Overtime Pay Rules 693 21.2 Taxation and Labor Supply—Evidence 693 Limitations of Existing Studies 694 EMPIRICAL EVIDENCE Estimating the Elasticity of Labor Supply 694 21.3 Tax Policy to Promote Labor Supply: The Earned Income Tax Credit 697 Background on the EITC 698 Impact of EITC on Labor Supply: Theory 699 Impact of EITC on Labor Supply: Evidence 701 EMPIRICAL EVIDENCE The Effect of the EITC on Single-Mother Labor Supply 703 Summary of the Evidence 704 APPLICATION EITC Reform 704 21.4 The Tax Treatment of Child Care and Its Impact on Labor Supply 706 The Tax Treatment of Child Care 706 EMPIRICAL EVIDENCE The Effect of Child Care Costs on Maternal Labor Supply 707 Options for Resolving Tax Wedges 709 Comparing the Options 709 21.5 Conclusion 710 Highlights 711 Questions and Problems 711 Advanced Questions 712 CHAPTER 22 Taxes on Savings 714 22.1 Taxation and Savings—Theory and Evidence 716 Traditional Theory 716 Evidence: How Does the After-Tax Interest Rate Affect Savings? 719 Inflation and the Taxation of Savings 721 22.2 Alternative Models of Savings 723 Precautionary Savings Models 723 Self-Control Models 724 EMPIRICAL EVIDENCE Social Insurance and Personal Savings 725 22.3 Tax Incentives for Retirement Savings 726 Available Tax Subsidies for Retirement Savings 726 Why Do Tax Subsidies Raise the Return to Savings? 728 Theoretical Effects of Tax-Subsidized Retirement Savings 730 APPLICATION The Roth IRA 734 Implications of Alternative Models 736 Private Versus National Savings 737 EMPIRICAL EVIDENCE Estimating the Impact of Tax Incentives for Savings on Savings Behavior 739 Evidence on Tax Incentives and Savings 738 22.4 Conclusion 741 Highlights 741 Questions and Problems 741 Advanced Questions 742 CHAPTER 23 Taxes on Risk Taking and Wealth 744 23.1 Taxation and Risk Taking 746 Basic Financial Investment Model 746 Real-World Complications 747 Evidence on Taxation and Risk Taking 749 Labor Investment Applications 749 23.2 Capital Gains Taxation 750 Current Tax Treatment of Capital Gains 750 What Are the Arguments for Tax Preferences for Capital Gains? 752 What Are the Arguments Against Tax Preferences for Capital Gains? 757 APPLICATION Capital Gains Taxation of "Carried Interest" 757 23.3 Transfer Taxation 758 Why Tax Wealth? Arguments for the Estate Tax 760 Arguments Against the Estate Tax 761 23.4 Property Taxation 763 Who Bears the Property Tax? 764 Types of Property Taxation 765 APPLICATION Property Tax Breaks to Businesses 766 23.5 Conclusion 768 Highlights 768 Questions and Problems 768 Advanced Questions 769 CHAPTER 24 Taxation of Business Income 770 24.1 What Are Corporations, and Why Do We Tax Them? 772 Ownership Versus Control 773 APPLICATION Executive Compensation and the Agency Problem 773 Firm Financing 776 Why Do We Have a Corporate Tax? 777 24.2 The Structure of the Corporate Tax 778 Revenues 778 Expenses 778 APPLICATION What Is Economic Depreciation? The Case of Personal Computers 780 Corporate Tax Rate 781 Tax Credits 781 24.3 The Incidence of the Corporate Tax 782 24.4 The Consequences of the Corporate Tax for Investment 783 Theoretical Analysis of Corporate Tax and Investment Decisions 783 Negative Effective Tax Rates 788 Policy Implications of the Impact of the Corporate Tax on Investment 788 Evidence on Taxes and Investment 789 24.5 The Consequences of the Corporate Tax for Financing 789 The Impact of Taxes on Financing 789 Why Not All Debt? 791 EMPIRICAL EVIDENCE How Do Corporate Taxes Affect a Firm's Financial Structure? 794 The Dividend Paradox 794 How Should Dividends Be Taxed? 795 APPLICATION The 2003 Dividend Tax Cut 796 Corporate Tax Integration 797 24.6 Treatment of International Corporate Income 798 How to Tax International Income 798 APPLICATION A Tax Holiday for Foreign Profits 799 APPLICATION The A(pple) B(urger King) C(aterpillar)s of Avoiding Corporate Taxes in a Global System 802 24.7 Conclusion 804 Highlights 804 Questions and Problems 805 Advanced Problems 806 CHAPTER 25 Fundamental Tax Reform and Consumption Taxation 808 25.1 Why Fundamental Tax Reform? 810 Improving Tax Compliance 810 APPLICATION Tax Evasion 810 APPLICATION The 1997 IRS Hearings and Their Fallout for Tax Collection 814 Making the Tax Code Simpler 815 Improving Tax Efficiency 817 Summary: The Benefits of Fundamental Tax Reform 820 25.2 The Politics and Economics of Tax Reform 820 Political Pressures for a Complicated Tax Code 821 Economic Pressures Against Broadening the Tax Base 821 APPLICATION Grandfathering in Virginia 824 The Conundrum 825 APPLICATION TRA 86 and Tax Shelters 825 25.3 Consumption Taxation 826 Why Might Consumption Make a Better Tax Base? 826 Why Might Consumption Be a Worse Tax Base? 829 Designing a Consumption Tax 832 Backing into Consumption Taxation: Cash-Flow Taxation 834 25.4 The Flat Tax 835 Advantages of a Flat Tax 836 Problems with the Flat Tax 836 APPLICATION The Camp Tax Reform Proposal 838 25.5 Conclusion 839 Highlights 840 Questions and Problems 840 Advanced Questions 841 Glossary 842 A 842 B 842 C 843 D 844 E 844 F 845 G 845 H 846 I 846 J 847 L 847 M 847 N 848 O 848 P 848 Q 849 R 849 S 850 T 851 U 852 V 852 W 852 Z 852 References 854 Index 880 A 880 B 880 C 881 D 883 E 883 F 884 G 885 H 886 I 886 J 887 K 887 L 887 M 888 N 889 O 889 P 889 Q 891 R 891 S 892 T 893 U 894 V 895 W 895 X 895 Z 895 Inside Back Cover 896 Back Cover 898 "Jonathan Gruber's market-leading Public Finance and Public Policy was the first textbook to truly reflect the way public policy is created, implemented, and researched. Like no other text available, it integrated real-world empirical work and coverage of transfer programs and social insurance into the traditional topics of public finance. By augmenting the traditional approach of public finance texts with a true integration of theory, application, and evidence, Public Finance and Public Policy engages students like no other public finance text. Thoroughly updated, this timely new edition gives students the basic tools they need to understand the driving issues of public policy today, including healthcare, education, global climate change, entitlements, and more."-- Provided by publisher