Chapter 2-Tools of Positive Analysis Public economics
1 Chapter 2 – Tools of Positive Analysis Public Economics
Policy analysis is hard Why is it so hard to tell what's going on with government actions? Consider lowering income tax rates. Will lowering taxes increase work efort and labor supply? Unlike the physical and natural sciences, difficult to perform carefully controlled experiments on the economy Oftentimes, there is no control groupon comparison group" for a policy
2 Policy analysis is hard • Why is it so hard to tell what’s going on with government actions? – Consider lowering income tax rates. Will lowering taxes increase work effort and labor supply? • Unlike the physical and natural sciences, difficult to perform carefully controlled experiments on the economy. • Oftentimes, there is no “control group” or “comparison group” for a policy
Alternatives to an experiment Use of statistical tools to study impact of public policies Will use the debate over the effect of taxes on labor supply to illustrate how positive analysis is done in public finance
3 Alternatives to an experiment • Use of statistical tools to study impact of public policies. • Will use the debate over the effect of taxes on labor supply to illustrate how positive analysis is done in public finance
Role of economic theory Consider analyzing table 2. 1 As marginal tax rates have increased average weekly hours have decreased from 1955to2001 Can we conclusively say that taxes have depressed labor supply? No Nonlabor income rose(dividends, interest) Attitudes may have changed
4 Role of economic theory • Consider analyzing Table 2.1 – As marginal tax rates have increased, average weekly hours have decreased from 1955 to 2001. – Can we conclusively say that taxes have depressed labor supply? No. • Nonlabor income rose (dividends, interest) • Attitudes may have changed
Table 2.1 Table 2.1 Income tax rates and labor supply Marginal Federal Tax Rate Average Weekly (percent) Hours 1955 20.00 % 39.6 1960 20.00 38.6 1965 17.00 38. 1970 19.48 37.1 1975 22.00 36.1 35.3 1985 29.05 34.9 1990 34.5 34.5 2001 22.65 4.5 MTax Policy Center, Historical Combined Income and Employee Tax Rates for a Family of Four, " URI http://www.taxpolicycenter.org/taxfacts/overview/combined_family.cfmJanuary15.2003 TEconomic Report of the President, 2002.(Washington DC: US Government Printing Office. 2002), p. 376
Table 2.1