Spring 2023 Instructor: Prof.

Chul-In Lee
Department of Economics
Seoul National University

Studies in Public Economic Policies

(government revenues and new public economics issues)

Course Objectives

This course deals with fiscal policies from the micro and macro perspectives
using recent models and techniques developed in public economics. From the
microeconomic perspective, we cover both public expenditure policies and optimal
taxation/social insurance theories: (i) an in-depth review of modern government revenue
theories (taxation) and (ii) both theoretical and empirical analyses of major taxes and
welfare programs in terms of their effects and the equity and efficiency properties; major
taxes include the personal income tax, the corporate income tax, the consumption tax, the
capital gains tax, the inheritance/gifts taxes, the property tax and various social security
systems along with commonly proposed tax reforms. (iii) We also examine social
insurance programs, e.g., public pensions, unemployment insurance, and disability
insurance using proper public economics tools (e.g., OLG models combined with
generational accounting). (iv) We also cover the perspective of firms by studying
investment and labor demand behaviors in response to fiscal policies. (iv) Recent public
economics literatures draw more attention to rising income inequality, national debt, and
responses of tax and expenditure policies. We study the sources and measurement of
inequality and national debt, and the policy responses from both optimal and political
economy perspectives. (v) From the macroeconomic perspective, we cover dynamic
optimal taxation theories, public debts and applied macro issues using calibration and/or
VAR analysis. (If time permits, we will study some applied public economics issues:
local public finance and fiscal competition, political economy and endogenous public
policy determination processes, agglomeration as externality and migration/spatial
concentration/growth, and corruption issues in public finance.) The topics will be
discussed with both intuitive reasoning and analytical models.

While we cover public economics theories and models, the main focus of the course lies
in understanding and conducting quality empirical studies in the field of public
economics. To understand these tools, microeconomics at a graduate level and basic
macroeconomics or comparable courses are necessary. At the first few classes, we will
study normative tools and optimization as the basis of public economic studies. Then, we
move on to more empirical and applied research.

Course Materials

We will critically review a list of influential papers and book chapters in

public/labor economics and macro fiscal policies as the main course materials (the

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reading list will be assigned). While no single textbook can cover the topics of this course,
we can obtain useful information from the following sources. First, find the course
reading list and try to read suggested articles. Second, lecture notes will be given to cover
essential issues more efficiently. Third, the following textbooks for advanced
undergraduates may be helpful for gaining basic understanding of the materials. Lectures
on Public Economics by Anthony Atkinson and Joseph Stiglitz may be a graduate level
textbook although a bit outdated. Public Finance by Harvey S. Rosen (henceforth HR)
can serve as a basic textbook covering various issues kindly. Some students who want to
read more advanced undergraduate books may benefit from also consulting Public
Finance by Tresch, which gives a more rigorous treatment of the course topics, but is not
required. The course outline is listed below. Those who want to read a comparable
Korean textbook may want to consult a translated version of Public Finance by Y. Lee, Y.
Chun, J. Kim and C. Lee or “Joseron” by Teawon Kwack. However, note that those
textbooks should be used as a supplementary material, not the main one.

Responsibilities

Students are supposed to (i) skim through relevant course materials before
attending lectures held at 9:30~12:15, and (ii) solve homework problems, which will be
assigned at least four times. If time permits, (iii) they can present a research proposal,
ongoing research project or ideas. Please, do not be late on exams and projects. Usual
obligations as graduate students apply.

Grades
Midterm: 35%, Final: 40%, Project/homework: 15%, Attendance: 10% (project
and attendance portions can change in accordance with COVID-19 or other extenuating
circumstances)

Office Hours
- Usually after class; about 30 minutes or longer if necessary
- meeting at Room 638, Social Science Bld. (16 dong): recommended regardless of
COVID-19

Course Outline and Readings

Part 1. Developing a Framework for Public Policy Analysis: normative approach

I. Introduction

A. Motivation
- What makes this course unique?
B. Brief summary of main topics

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 C. Review of useful tools

II. Tax Effects and Measurement: basic tools

A. Tax incidence and income distribution

- Partial equilibrium analyses
- General equilibrium analyses
B. Efficiency aspects of taxation
- Excess burden
- Measurement of excess burden in various market situations

III. Optimal Taxation: balancing tax distortion and redistribution

A. Optimal commodity taxation

- Ramsey taxation
- Applications
B. Optimal income taxation
- Information asymmetry
- Social utility function
- Notable results
D. Dynamic public finance
- Basic framework
- Recent developments
- Capital taxation in general
E. Theory vs. Reality
- Political economy
- Horizontal equity
- Tax compliance

Part 2. Understanding the Effects of Usual Public Policies: positive approach

IV. Individual Taxes in the Tax System of Major Countries: empirical applications

A. Personal income tax

- Structure: definition of income, deductibility, rate structure
- Some controversies
- The effects of personal income tax
. Tax effects on factors of production
. Tax effects on other dimensions
B. Corporate income tax
- Rationale
- Structure
- Incidence
- The behavioral effects of corporate income tax
. Tax effects on investment: Q theory and other old theories

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 . Tax effects on corporate finance
C. Consumption tax
- Advantages
- Some variations of consumption taxes
D. Wealth taxes
- Rationale
- Some controversies
E. Taxable income elasticity: a “sufficient” statistic of a tax system
- Definition
- Issues
- Future research areas

V. Social Insurance and Taxation: tradeoffs between consumption smoothing and

behavioral distortion
A. The social insurance system
B. Financing structure
C. Interaction between expenditure and taxes
D. Unemployment insurance: applying a sufficient statistic approach
E. EITC, AFDC, TANF and empirical studies

VI. International Taxation

A. Possible regimes
B. Competition and coordination
C. Local public finance
- Motivation and key issues

Part 3. Further Issues in Public Economics

VII. Tax Evasion and Enforcement: understanding the real world and institutions
A. Motivations
B. Models of tax evasion and enforcement
C. Empirical studies

VIII. Tax and Labor Supply: reinterpreting labor supply from the public economics
perspective
D. Motivations
E. Labor supply models with tax and other fiscal policies
F. Empirical studies

IX. Inter-jurisdictional (local) Public Finance

G. Motivations
H. Models of tax and expenditure competition
I. Empirical studies

X. Agglomeration and Spatial migration

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 A. Agglomeration as externality
B. New economic geography models

XI. Political Economy and Public Finance

A. Rent-seeking activities
B. Basic voting models
C. Voting equilibrium
D. Empirical studies

XII. Income Inequality and Policy Responses

A. Sources of rising income inequality
B. Measurement of income inequality
C. Empirical studies and promising topics
D. Intergenerational Approach

XIII. Corruption in Regulatory Bureaucracy: illness in the public sector

A. Classic theories of corruption
B. Empirical literature on corruption
C. Externality and corruption

XIV. Tax Reform Issues

A. Flat tax
B. Expenditure tax
C. Others

XV. Micro Empirics and Techniques

A. Estimating Investment Behavior
B. Quasi-experimental Approach
C. Empirical Public Finance studies

XVI. Special Issues (if time permits)

A. Environmental taxes
B. Government debt
C. Suggestion welcome!

XVII. Presenting research output