Public Economics Lectures Part 1: Introduction

Chetty (2009) Formula
With both transfer cost z(e) and resource cost g(e) of evasion:
dW
dt
= t dLI
dt − g ′ (e) de
dt
= t{µ dTI
dt
+ (1 − µ)dLI
dt }
= − t
1 − t {µTI ε TI + (1 − µ)wlε LI }
EB depends on weighted average of taxable income (ε TI ) and total
earned income elasticities (ε LI )
Practical importance: even though reported taxable income is highly
sensitive to tax rates for rich, effi ciency cost may not be large!
Most diffi cult parameter to identify: weight µ, which depends on
marginal resource cost of sheltering, g ′ (e)
Public Economics Lectures () Part 3: Effi ciency 68 / 105