Chapters “(Dis)incentives of higher taxes”- tax issues “Bankrupt landlords, from sea to shining sea” Stephanie Goldman Alex Hankin Carolyn Herber

Reality vs. Fantasy: Demand Politicians-constant efforts to generate revenue through taxation – Believe all demand and supply curves are perfectly inelastic Proven wrong in tax increase on luxury items – Static Analysis: people’s behaviors don’t change with changing constraints Real World=Relative Prices – Supply and demand curves apply to everybody – Dynamic Analysis: consumers change their decisions

How Increasing Taxes Change Demand Example: 1991 Luxury Tax Changes in taxes cause changes in relative prices, leading to a change in demand $$ Q luxury items Politicians assumed the demand for luxury goods was completely inelastic. In reality, the demand was elastic and an increase in taxes decreased quantity demanded. D D 10% Q1Q1 Q2Q2 Quantity demanded does not change Q

Influences on supply o Shifts high income and low income willingness to work o Elasticity: impact of one rate on the next-compares percent changes in two variables between tax rate and tax revenue – Is supposedly low (according to politicians) – Hasn’t been the case o THE KEY IS! o Higher tax rates don’t always mean increased tax revenues, but instead lead to.. o Lower Output o Higher Unemployment o Increased efforts to evade taxes

TAX BRACKETS 2010

Santa Monica(1970s) New York City (1940’s) Rent control- local government tells building owners how much they can charge for rent – Poor maintenance, discourages production, housing gridlock, abandonment and homelessness, cumbersome bureaucracy enforcement Kept rent levels below those observed in freely competitive markets – Allocates existing scarce housing among competing claimants – Promotes efficient maintenance – Prevents waste of scarce housing Rent Control Ordinance: policy change resulted in immediate jump in rent – Changing ambiance and aroma of Santa Monica apartments

Influences Not confined to the US – Mumbai, India – Vietnam Thach(Foreign minister): rent control artificially encouraged demand and discourage supply All housing fell into disrepair as a result Big losers from rent control are low-income individuals, especially single mothers – Can’t assure payment to landlord each month – Eviction and residence in shelters