Short Research Pitch

My research analyzes how a change in the tax rate effect consumption spending.  This question is interesting to economists because it will show how or if the tax rate can be utilized to stimulate spending.  This is also useful for the government when evaluating new tax policies and could potentially limit the bickering in Washington.  The debate over the effectiveness of a tax increase or reduction in the United States inspired my topic.  I look at the years since the Great Depression that the federal income tax rate was changed.  Several key variables will be analyzed to determine the significance of a change in the tax rate whether it is an increase or a decrease.  The main focus of my data is on the correlation between a change in the tax rate and consumption, however, I also evaluate government spending and gross domestic product variables.  Additionally, the variables will be examined for any change in the tax rate, a positive change in the tax rate, and a reduction in the tax rate.  The results should be of interest to illustrate whether a tax increase or reduction has a greater impact on consumption, government spending, and gross domestic product.

Writing Assignment #8

Chapter 5 of Poor Economics addresses key issues with relationships between developing countries and population growth.  The standard perception is that poor countries tend to have higher population growth rates as a means for parents to provide their own social security from the aid of the children as they age.  A key factor that plays into the population growth in developing countries is the availability and use of modern contraception.  

Providing access to modern contraception methods to fill demand could result in a 27% drop in maternal deaths each year by reducing the annual number of unintended pregnancies from 75 million to 22 million.

YunintendedPregnancies= A + B1wealth+B2education+B3contraception+Ei

 

Variables to measure impact on the number of unintended pregnancies :

B1 = Level of wealth

B2 = Years of education

B3 = Use of contraception

Absence or presence of sufficient modern contraception – dummy variable

The sufficient modern contraception variable is one that takes the values 0 or 1 to indicate the absence or presence of  contraception to the female and the effect that may be expected to shift the outcome of unintended pregnancies.

Article Post

This paper compares the dynamic impact of fiscal policy on macroeconomic variables implied by a large class of general equilibrium models with the empirical results from an identified vector auto-regression. The data indicates that positive innovations in government spending are followed by strong and persistent increases in consumption and employment. The effects are particularly pronounced when government wage expenditures increase. These Findings are then compared to several variations of a standard real business cycle model and find that the positive conditional correlation in the responses of employment and consumption cannot be matched by the model under plausible assumptions for the values of the calibration parameters.

This paper brings to my attention the correlation between consumption and employment.  Consumers respond positively when they are confident in the government and the future economic outlook.  There real income is only one of many factors and when testing the impact of the tax rate I will need to keep these other variables in mind.  Also,  business cycles must be accounted for over the course of my data which goes from the Great Depression to 2010.

 

Fatas, A., & Mihov, I. (n.d.). The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. INSEAD and CEPR.

http://faculty.insead.edu/mihov/files/FPandConsumptionAug2001.pdf

Income level on Consumption

The article starts out by referencing “income” as a deceptively simple term at the heart of much of the debate on taxation.  Additionally, the effective tax rate can be very hard to determine since their are many loopholes and tax exemptions that are utilized, especially by the wealthy.  The higher income earners do a good job of sheltering their taxable income. Taxable income is adjusted gross income minus personal and dependent exemptions and various deductions, such as for mortgage interest and state and local taxes.
Reading this article helped me think about my research paper by tuning me into the fact that consumption level is highly dependent on the income level of the individual.  I will need to account for income or disposable income in my term paper with a separate variable or break the income levels into several brackets and see how a change in the tax rate effects consumption in each income bracket.  I will also need good data to get the effective tax rate that the highest income earners pay after deductions.

Term Paper

For my term paper I will look at how the tax rate effects consumption spending in the United States.  I will evaluate consumption data since the Great Depression and look at any year when there was an increase or decrease in the effective tax rate and the result on consumption in the following year.  The amount of consumption spending should increase when there is a decrease in the effective tax rate and decrease for every year when there was an increase in the tax rate.

I will use the NIPA table and NIPA table – real dollars on the Moodle page which contain consumption data from 1929 to 2010.

I am interested in the current debate over tax increases and want to examine how a tax increase has effected consumption spending at an aggregate level.  I am hoping to get a better understanding of the impact that a change in taxes and therefore disposable income create on consumption.

There are a number of factors that may make estimating the effect of taxes difficult.  The reason for the tax increase will be a factor and the state of the economy when the tax is enacted.  Specific events and periods of time since the Great Depression may further skew the results.

Why do drug dealers still live with their mothers

The argument of this chapter is that statistics can be skewed to influence their intended audience.  Even credible sources may leave out information to have a greater impact on their audience.  As the main data of the chapter illustrates, drug dealers do not make as much money as they seem to.  Only the upper-echelon of drug dealers makes a substantial amount of money.  This can be said about the highest earners in any profession.  The majority of drug dealers according to Dubner and Levitt earn below minimum wage for the riskiest job in the world, however, they are allured into reaching the top of the field one day.  The statistics they use to build their case is quite influential.

On page 86, the author’s use the statistic, “in the early 1980s there were about 3 million homeless Americans”   to lead into the main focus of the chapter.  This statistic was according to Mitch Snyder, an advocate for the homeless, which the author’s use to prove the point that statistics may be skewed to influence action.  Mitch Snyder later admitted that the number was exaggerated. 

On page 99, “J.T.’s annual salary was about $100,000” and “Each of those 20 bosses stood to earn about $500,000 a year.”  Indicates the high earning potential that all younger foot soldiers aspire to make, but the odds are severely stacked against them.  In addition, the parenthesis right after state that a third of the 20 bosses at any given time are imprisoned.   This serves as part of the incentive why foot soldiers continue lining up to serve the gang leaders. 

On page 101, the chart shows the chance of being killed during the four years of documentation for the Black Disciples was 1 out of 4.  The risk of working under these conditions was not even well compensated with an hourly wage of $3.30 for the vast majority of the gang members.

On page 112, a statistic declares the correlation between the invention of crack cocaine during this period and the effect on young urban blacks.  “Within a five year period, the homicide rate among young urban blacks quadrupled.”  This is one of the last statistics to bring together how all of the factors surrounding drug and gangs result in lost lives especially among the high-risk groups.

Still cannot reach the low-hanging fruit

Chapter 3 of Poor Economics explains the disconnect between cheap preventative care and the decision making of the very poor.  The poor do not seem to trust in the cheap remedies to be effective and often avoid the so called “low-hanging fruit”. This concept is interesting because these same individuals are willing to spend twice or even more than that once a problem has been diagnosed. The authors make a very interesting point that links cheap cost and poor quality and use that logic as a possible explanation for the lack of faith in cheap, effective remedies.

The poor sometimes reject inexpensive sanitation and cheap easy ways to improve their health in favor of spending a lot of money on things that don’t help and might hurt them. This same problem occurs in the first world also and is a blatant problem in our own US healthcare dilemma. Human nature seems to be set on the small problems at hand and not overall future well-being at all levels of the wealth spectrum.  This preventive care could lower health care costs and in terms of illness of disease, also provides a positive externality for all those that may have been exposed.

There are many other factors that hinder the effectiveness of healthcare among the poor.  A lack of qualified doctors and high rate of absence among government provided facility employees both act as deterrents to trust in mainstream healthcare.  Doctors over prescribe so the patient trusts in the doctor to restore their health even if the treatment is not needed.  Additionally, the poor cannot afford to pay for major long term treatments and settle for continued short-treatments that have little overall impact.

At the end of the day, you cannot just force immunization or treatment on the people.  The government should focus on convincing them of the benefits and provide regulated healthcare the people can trust.

The authors introduce the statistic of the percentage of income distributed to healthcare by giving a percentage of time that people in Udaipur are stressed about their health or the health of a close relative.  The average extremely poor household spends 6 percent of their monthly income in rural India, and 3 percent to 5 percent in Pakistan, Panama, and Nicaragua.

They use the statistic to reinforce the thesis of the chapter that the poor are concerned about their health and there are many other factors that account for the reasons why the seemingly cheap, effective resources are not fully utilized.

The number did not originally strike me as very high, however,  the great lengths that these extremely poor go to when faced with a serious health issue proves the importance.  I would be interested to see the percent of monthly income allotted to healthcare in the United States.  This statistic builds the case for other reasons why the poor do not take the “low-hanging fruit for better healthcare”.  It is easy to see from an outside perspective how they could improve their health, but much more difficult to take the appropriate action when caught up in their environment.  In the first world we are often skeptical of cheap solutions that claim to be effective.   Also, we often do not take advantage of preventive care through diet and exercise even though we are fully aware of the possibly repercussions.