Condliffe Memorial Lecture - Economics and Finance - University of Canterbury - New Zealand

2008 Condliffe Memorial Lecture

Joel Slemrod: Tax policy in the real world

Tuesday, 15 July 2008

Economic theories of optimal taxation work well on the blackboard, where we can abstract away from tax avoidance and policy implementability concerns. In the real world, taxes are of course rather important determinants of how individuals and businesses structure their affairs. If tax policy doesn't account for these practical considerations, results may vary considerably from what the blackboard might have led us to believe. Professor Joel Slemrod explains how in this year's Condliffe Memorial Lecture.

The Condliffe Memorial Lecture was established by the Department of Economics at the University of Canterbury in 2005 to honour John Bell Condliffe, who became the first Professor of Economics at Canterbury University College in 1921. The Lecture series brings leading economists to Canterbury to provide a public lecture highlighting their recent work and its relevance to the broader business and policy community.

Joel Slemrod is one of the world's leading experts in tax policy. The University of Michigan's Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, Professor Slemrod has served as consultant to the World Bank, the OECD, the President's Council of Economic Advisors, the U.S. Department of Treasury and the Canadian Ministry of Finance, and is a member of the Congressional Budget Office Panel of Economic Advisors. This real-world tax policy experience has shaped Professor Slemrod's academic work in taxation. He shows that individual behavioural responses to taxation are rather important. Not only will people change how they report different types of income in response to tax changes, they also will substantially shift their real consumption, work and leisure choices. Indeed, in addition to his many prestigious honours, grants and fellowships, Professor Slemrod's c.v. boasts an IgNobel prize for his work showing that changes in the American estate tax had a slight effect on reported deaths: individuals who could save a lot of money by surviving just a bit longer to take advantage of a favourable estate tax change were more likely to do so. Whether individuals actually were able to hold on a little longer because of estate tax changes or instead were able to find a doctor willing to nudge the reported date of death slightly, that tax regimes can affect so fundamental and so seemingly immutable a condition highlights the importance of accounting for behavioural responses to taxation. Professor Slemrod's more recent work addresses this problem directly: economists' blackboard renderings of optimal tax theory need to be modified when we take seriously individuals' very real responses to any tax regime.

In this year's Condliffe Lecture, Professor Slemrod will discuss recent developments linking traditional economic reasoning with how policy can be implemented. The insights gained then are applied to current tax policy issues such as the proper design of consumption taxes, business taxes, and how to "draw lines" in tax law. Melding practical and academic insights on tax policy, Professor Slemrod argues that taxation ought to be simple, ought to avoid attempts at economic "fine-tuning" via targeted tax incentives, and ought to avoid providing strong incentives to distort behaviour in response to tax policy.