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The 40 errors of the professional image - Opinion - CNNExpansion.com

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distributional impact of VAT: how regressive? (1)

Apart from resource allocation issues, one of the most interest to when assessing fiscal policy is the distributional dimension. Both the expenditures made by the public and the resources it gets through taxes affect the level of life of individuals in an economy. For such an impact analysis necessary, be taken into account all the constituent elements of the budget. However, given the numerous challenges that this is common for incidence analysis proposed more modest goals, making assessments "partial" incidence (both differential and absolute).

In this sequence of posts will try to make an assessment exercise absolute incidence of VAT from a purely theoretical and deliberately simplified, comparing the two main approaches in the literature (incidence and impact on the annual life cycle) under a range of different specifications of consumption patterns, ranging from a macro function "ad-hoc Keynesian" to more sophisticated theoretical models as the hypothesis of consumption smoothing and liquidity constraints . (In a future post, the idea will add more realistic extensions on the same subject, exemptions, grants, inflation, etc.. The purpose of the exercise, if such a thing exists, is to identify the determinants of the regressivity of VAT.)

distributive impact and approaches

The determination of the approach is not trivial, as the incidence results depend largely on the definition of welfare proxies (eg income / consumption current / permanent, etc.). and tax burdens employed. In this regard, Metcalf (1992) makes a brief but interesting description of the arguments made in the '80s about the distributional effects of introducing a value added tax in the United States, a country that taxes consumption by taxing sales ( sales tax). By then, the practice common to assess the progressivity or regressivity of a tax meant to calculate what proportion of income goes to pay this tax, all in annual terms. Thus, if we assume without loss of generality that the income of the period t is exclusively for consumption and savings (equation 1), we conclude that the tax burden associated with a consumption tax aliquot k is determined by Equation 2:

From Equation 2 it is obvious why the VAT is a regressive timely perspective : VAT taxes consumption and is almost a stylized fact that it has greater share of income of individuals in lower income levels (which are those with less ability to save), so the tax burden in these areas is higher and is decreasing as income increases.

On the other hand, life cycle approach emphasizes other aspects are not minor. From more intuitive side, we know that saving some extent this is a demand for future consumption, so resources are not taxed in this period it will be revealed as the real intention of consuming.

In this sense, from a safe definition of wealth W as equation 3 (along the life cycle, the individual will consume their entire revenue stream, all This present value), quickly reached the present value of taxes paid to consume is defined by equation 4, which shows that in this world simplified the tax burden VAT is constant for all individuals regardless of their level of consumption or savings, and in this case is equivalent to the average tax rate k . Whereupon, according to the intertemporal approach VAT is neutral.

Exercise naive

The simplest simulation is to assess the impact of a consumption tax with an average tax rate of 21%, modeling consumption so as to capture the stylized fact described in the previous section. Thus, we use the values \u200b\u200bof average household income per capita by decile (borrowed from here ) as a variable of "welfare." Then, for each decile consumption poses a linear function of income, allowing for heterogeneity in the marginal propensity to consume. Thus, for a given period consumption decile i is defined by

For the definition of the parameters in (5) was taken into account own estimates of the marginal propensity to consume from aggregate data on consumer spending and output in Argentina, while the constant adjusted so that the poorest decile consume their entire income (without loss of generality, so the rest of the deciles consume a smaller proportion of income). Table 1 presents the results of the exercise.

Thus, we see that the average tax rate is decreasing each decile. This is the conventional argument when considering the regressivity of VAT.

But what happens if we extend the exercise to more periods? The result obtained in this framework is simplified to the point that maintaining this structure, after a few periods the regressivity of the VAT reduced considerably if we calculate the tax burden in present value terms. Non so dizzy table presented in the following graph the results to assess the cumulative tax burden (defined as the ratio of present value of tax income to present value) to different time periods.

And here appears a very interesting result: expanding the horizon of analysis 'mitigate' the regressivity of the VAT, even in a context in which the richest deciles do not end up consuming all their wealth (for example, if we omit the constant in each time decile 10 consumed 68% of their income). Thus, if we consider the present and the two nearest future periods, the tax burden rises decile 10 14.3% to 18%. Therefore, although the neutrality of VAT in this case occurs as a result 'asymptotic', the main conclusion is that the strong regressive view initially decreases rapidly taking a few periods ahead.

Of course, this exercise is somewhat naive in that does not involve any decision-making by the agents, nor why the agents explicitly save (or in what form). In the next post, we will investigate the matter.

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Prediction and factum in Microeconomics I: rationality and Operating

In this sequence of posts I will (try to) make a review of some of the paradoxes 'famous' of microeconomic theory. That is, cases in which the predictions arising from it are inconsistent with those observed empirically. In this post, it's the turn of the ultimatum game.

Prelude

At the risk of oversimplify important issues of epistemological status, can be certain that the economy-as-discipline studies human behavior in a broad sense: much of the research in this area seek to define, identify and verify (empirically or experimentally) the logical implications derived from certain basic tenets or axioms used as a starting point. This exercise serves, among other things, to verify the validity of the axioms or assumptions (that is, how relevant to determine or explain the behavior of the phenomenon under study).

Undoubtedly, the axioms of rationality of the agents belong to the hard core of decision theory modern, becoming the ultimate reference frame (either by difficulties in modeling 'irrationality 'or the convenience of thinking in terms of deviations from a common denominator). However, reporting requirements and capacity calculation involving the "rational" are "in the best-a stylized characterization of the decision-making framework under which economic agents operate, so there are several arguments for doubting the importance or relevance of the course.

In this sense, models of bargaining or bilateral negotiations are an excellent theoretical scenario to test the rationality of agents, because through a simple game can compare the predictions of theory the actual interaction of those who lend themselves to this type of experiments (as a footnote, note that curiously tend to be students of economics).

(To motivate a little post, let me note that several real-life situations can be represented as a bargaining model, for example the interaction of actors in decentralized markets, the housing market The market for lemons the work, etc.-or explicit resolution / institutional conflict, with specific applications in labor economics and what is known as political economy .)

Prediction

The most natural example to illustrate the late-exposure is the game the Ultimatum , the sequence describe below

• Two players (1 and 2) must be allocated a sum of money D;
• First, player 1 must make an offer (s , 1 - s ) to player 2, where s is the fraction of the sum D which is player 1;
• Once the offer, player 2 can accept (in which case the money is distributed as agreed) or reject (in which case both players are left without any money).

The classical result of game (Rubinstein, 1982 ) shows that the equilibrium strategy is more robust that player 1 is left with all the money (s = 1 - 'epsilon') and Player 2 accepts. And at this point, there are two key assumptions are: first, all players looking to maximize their own pay (baptize this "homo-economicus "), also have rational preferences and know that the other players known to follow this type of behavior. latter is called common knowledge of rationality .

balance Intuition proposed is simple: if player 2 rejects the offer runs out of money, therefore a "homo-economicus " will not reject offers that will leave a positive sum, however small it may be. Note that in this context can not be made credible threats . So player 1 can comfortably provide s = 1 - 'epsilon' .

Factum

Without

But this is not the way the negotiations are resolved in reality. Güth, Schmittberger, Schwarze (1983 ) conducted the first experimental study of this simple game, and found that the average supply of players 1 was about 37%! of the total, which is clearly in short with our prediction of about 100%. Moreover, almost half of the "Players 2" rejected offers of less than 30%.

Naturally, this paradox drew the attention of the researchers, who tested several assumptions in order to reconcile the prediction the factum. A first online attacks the paradigm of rationality, adding restrictions to the computing power of the agents (bounded rationality). Even in a simple game like this, it may be possible that there is "gotcha" on the bid predicted. In this vein, one could argue that trying different repetitions of the same game, players 1 end up "learning" that can enhance their offerings to reach equilibrium, although this is not a recurring pattern in experimental studies.

Another solution to this paradox defends the traditional concept of rationality, but relaxes the notion of " homo-economicus "incorporating preferences for equality / inequality in the distribution. That is, the "objective function" of the agents is not only its own output, but also incorporates the results of the other players. So when a player 2 rejects an offer as insufficient is "punishing" the player 1 for his selfishness. In this vein, Levine (1997 ) inferred distributions of altruism and selfishness from the experimental results of this type of game. Surprisingly, these distributions fit quite well the results of other games (for example, funding a public good).

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Life Act

Legend C = F = Franz
Cuyin

F. - Good evening, friend Cuyin.

C. - I see something crestfallen Did something unfortunate has happened to you?

F. - Yes. Today I had a very unpleasant and bitter.

C. - What is it?

F. - I met a former employee of the company. A serious and responsible man, a hard worker but retired.

C. - What was wrong?

F. - The aim was that all children have a higher education, so enabling them to earn their living in much better shape than he was.

C. - Do not you get it?

F. - On the contrary. Currently they all have a profession and work in positions far in excess of that achievement.

C. - So far I do not see anything dramatic in your case. Rather it is a comforting human example.

F. - The conduct of him it is, but the behavior of their children.

C. - How? Explain

F. "The man is old, tired and sick. But children have virtually abandoned. Do not help, showing a total lack of consideration and appreciation.

C. - Now I understand your mood friend. The truth is reprehensible behavior of these children.

F. - I agree with you ... However, I get the impression that this is a law of life. Do not think the same?

C. - Of course not.

F. - Well that's the law of Cuyin, be always disagree with me.

C. - not always, not always. But here I am.

F. - What do you disagree?

C. - that you call the law of life.

F. - "But is not what I'm telling?

C. - What you've told me is just a violation of the law of life.

F. - I frankly do not think so. Unfortunately the situation of the man that I have mentioned is not an isolated example. I've seen in many other cases, though perhaps less pronounced.

C. - I understand however, I think you're making a mistake. 're Probably confusing the law of life with the law of men.

F. - I do not see the difference.

C. - It is the law of life applies to all living organisms exist. In contrast, the law of man is made for themselves and, therefore, applicable only to them.

F. - You're saying that animals behave differently?

C. - Certainly. We comply with the law of life as stipulated.

F. - Sure?

C. - Of course. Watch the elephants. When they are too old to fend for themselves, the younger the help and guide. As for the lions, the head usually is no longer the strongest, because of their age. However, no young lion questioned its authority to direct the clan. In the case of us guinea pigs, if one is old is also blind, clan members are ready to guide him, causing him to bite their tails. And there are many more examples.

F. - But man ...

C. - Even the man in his early days, when I lived in a less evolved culture. He also did the same. And that is logical, because like any creature is subjected to the law of life.

F. - It seems, however, no longer does.

C. - I would not be so definitive. I think in many parts is maintained. For example, rural families ...

F. - Why them?

C. - Probably because there are so immersed in our culture today, that which occurs in large cities. In other words, in those villages where the artificial evolution that created the man is not so exaggerated, maintaining the natural laws of life, with all his wisdom. Excellent

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Clamor ultimatum: EconUNLP reloaded Adding more input

And yes, as it should be ...


After thousands of letters and emails begging periodicity in the blog posts (¿?), finally staff UNLP Economists took the decision to relaunch the blog. It was not easy, because maintaining a blog is a task that takes time (if any scarce resource!) Which also requires a certain level of commitment. We are therefore with great enthusiasm, and as always eager to have fun. And to learn, of course.


soon be added to the shiny new computer bloggers, economists platenses them and, of course.


So you are warned. In the course of next week we return to the ring ... Au revoir!

PD. before I run out, and doubts, clarify that the one with the shovel on the poster not me.

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Competency Peruvian writer Mario Vargas Llosa received the Nobel Prize for Literature in 2010

Great is our country among Peruvians have this wonderful writer, is a national pride recognition.
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The Peruvian writer Mario Vargas Llosa received the Nobel Prize for Literature in 2010