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2025 S2 ECOS 3997 (Stream 1: Data literacy) Week 1: Introduction Ellen Stuart School of Economics The University of Sydney 7 August 2025 Introduction Data literacy is key for judging the reliability of research in news stories (or any context for that matter) 1/62 Introduction Consider these headlines that appeared in the New York Times between 2017-2019: 2/62 Introduction Previous courses likely focused on economic theory Economic theory is an important tool for: • Disciplining our thinking • Developing hypotheses about social and economic phenomena • Helping us understand what empirical evidence is relevant Data analysis and visualization is a process of developing empirical evidence to test those hypotheses, distinguish competing theories, etc. These two skills—economic theory and data analysis—are most powerful when used together 3/62 Agenda for today 1. ECOS 3997 course logistics • What is ECOS 3997? • Teaching staff • Lecture and tutorial schedule • Effective Assessment structure • Some thoughts on communication 2. Stream 1: Data Literacy • Topics covered and the Big Picture • The research question and some economic theory 4/62 Course logistics: What is ECOS 3997? ECOS 3997: Interdisciplinary Impact in Economics • Primary goal: how do we effectively communicate economic concepts/economic research to an interdisciplinary audience? • There are several “streams” of ECOS 3997 • For each stream: different focus/topic, same assessment structure 5/62 Course logistics: Teaching staff The streams taking place this semester are: • Stream 1: Data literacy – Dr Ellen Stuart • Stream 2: Behavioral Economics of Gambling – Dr Stephen Cheung • Stream 3: Topics in Family Economics – Dr Chandana Maitra • Stream 4: Implications of Macroeconomic Policies – Dr Melissa Song I am also the course coordinator 6/62 Course logistics: Teaching staff Instructor for Stream 1: Me (Dr Ellen Stuart—you can call me Ellen) • Consultation hours: Fridays 9:15-10:15am, Office 560, SSB / A02 Tutor for Stream 1: Alex Berger • Consultation hours: Mondays 10:00-11:00am, Consult Room 220, SSB / A02 7/62 Course logistics: Teaching staff Some FAQ about me: • Where am I from? USA • Where in the USA? All over (but my family is from Wisconsin) • What am I doing in Australia? Family, lifestyle, coffee • What do I study? Behavioral reactions to taxes and tax enforcement (a subset of Public Economics) • Am I going to use American English? Yes (but I’m conversant in Australian English) 8/62 Course logistics: Lectures and tutorial schedule Lectures: • Weeks 1-11: Thursdays 10am-12pm in SSB Lecture Theater 200 – Lecture will start promptly at 10:05 – I will aim to end by 11:55am – 5-10 minute break about halfway through • Weeks 12-13: No lecture • Phone disclaimer Tutorials: • Weeks 2-12 (you must attend your assigned tutorial) • No tutorials in Weeks 1 and 13 9/62 Course logistics: Lectures and tutorial schedule Attendance disclaimer:• We will follow the FASS Student Attendance at Classes Provisions • In particular, students are expected to attend a minimum of 90% of timetabled activities for a unit of study • Bring your Student ID to tutorials so your tutor can note you as present 10/62 Course logistics: Assessment The assessment structure for ECOS3997 is the same for all streams: • In-tutorial writing exercises (40%) • Media project (30%) • Final exam (30%) 11/62 Course logistics If you have more questions about ECOS3997: • First: check the ECOS3997 FAQ page on Canvas • Second: check the ECOS3997 Ed discussion board If your question has not been answered, ask on Ed You should only email the teaching staff with queries that are confidential in nature 12/62 Some comments on effective communication This course is in part about communication What is the most effective way to communicate with an interdisciplinary audience? 13/62 Some comments on effective communication Stepping back: most jobs require some amount of communication You will spend a lot of time writing in order to communicate with your boss and colleagues Your boss and colleagues are busy—you will be competing for their attention How do you get people to pay attention to what you write? 14/62 Some comments on effective communication Think about writing that has drawn you in It probably used clear, direct language that let you be a part of the thought process Think about writing that has felt inaccessible It likely used lots of jargon and flowery language that you felt like you should understand, but had a hard time following. your fault—bad writing is hard to follow!) 15/62 Some comments on effective communication Some advice for writing from my friend and colleague, Ash Craig (ANU): 1. Don’t waste your first sentence: it alone should convince someone drowning in paper to pay attention 2. Your reader should be able to know and understand the argument you are making without having to deeply read (the “10 second rule”) 3. Be direct, not subtle or clever 4. Ruthlessly purge unnecessary words and simplify language 16/62 Some comments on effective communication And a piece of advice from me: conveying complicated thoughts with simple language is more impressive than conveying simple thoughts with complicated language. “If I’d had more time, I would’ve written you a shorter letter.” [Blaise Pascal, 17th century, modified from the original French] 17/62 Some comments on effective communication Dear Colleague A, I spent the last few days implementing the list of changes that we discussed last week. Some of the updates were a bit trickier to implement than I’d but anticipated they’re all done now. Figures 1-7 look about like what we anticipated. They’re attached to this email. Figure 8 on the other hand looks different. I’d like to meet to discuss this figure with you when possible. The trends are the opposite of what makes sense given the old results and the changes I made.I’ve gone over the code several times and looked at several case studies and it’s not obvious to me where the error is (if there is one). You know how helpful it is to have fresh eyes look at weird results in cases like this. Otherwise like I said everything seems just fine. Best, Colleague B Word count: 144 words Words before key request: 58 18/62 Some comments on effective communication Revised version: Dear Colleague A, Are you available to meet sometime soon? I’ve finished the updates to the analysis that we discussed at our last meeting. The most up-to-date figures are attached to this email. I don’t understand the patterns in Figure 8. It would be helpful to look at the figure together and discuss what might be going on. Teaching staff • Lecture and tutorial schedule • Assessment structure • Some thoughts on effective communication 2. Stream 1: Data Literacy • Topics covered and the Big Picture • The research question and some economic theory 20/62 Overview of Stream 1 This stream: Data literacy This stream will focus on (some of) the considerations of actually doing empirical economics research Another title for this stream could have been “how to consume research” 21/62 Overview of Stream 1 My specific goals in this stream are: • To think about the relationship modern empirical economics research, statistics, and data science • To demonstrate how some of the tools and ideas you may have learned in your other economics classes come together when undertaking empirical research • To headline encourage you become more critical of any you read that starts with “study shows…” 22/62 Overview of Stream 1 How will we do this? • Part 1 (Week 1): Introduce a research question in Economics • Part 2 (Weeks 2-6): Discuss data and data preparation • Part 3 (Weeks 7-11): Discuss different analysis strategies 23/62 Lifecycle of empirical work Ask a Question Obtain Data Understand the DataPrediction and Inference Conclusions 24/62 Research question What is the revenue-maximizing linear income tax rate? Before we discuss this question: • Some motivation (why should we care about this question?) • Some vocabulary (what does this question even mean?) 25/62 Motivation What are some services provided by the government? • Public education • Healthcare • Retirement and disability benefits • Unemployment benefits • Childcare subsidies • … 26/62 Motivation If we believe the government should provide these services, then we should also believe that the government should collect taxes. Taxes provide the funds that governments use to pay for those services (aka “transfers”)—in other words, taxes are the source of government revenue. 27/62 Motivation To what extent should the government use taxes and transfers to reduce inequality? Some people believe minimally/not at all,while others believe society should be totally equal. Of course, people also disagree about what “totally equal” means! • Equal opportunity? Equal outcomes? (All outcomes?) 28/62 Motivation In the classic book Equality and Efficiency: The Big Tradeoff, Arthur Okun posed this thought experiment: • A tax on the most affluent 5% of families finances a transfer to families in the lowest 20% of the income distribution. • BUT: the program has “an unsolved technological problem: the money must be carried from the rich to the poor in a leaky bucket…so the poor will not receive all the money that is taken from the rich.” 29/62 Motivation What did Okun mean by “a leaky bucket”? • There are administrative costs to collecting taxes and administering social services • People change their behavior in response to taxation This second piece—the behavioral changes in response to taxation—is what leads deadweight loss 30/62 Motivation Deadweight loss refresher: 0 Quantity, Q Price, PDSP* Q∗ 0 Quantity, Q Price, PDSP∗ Q∗ Consumer surplus Producer surplus 0 Quantity, Q Price, PD SS ′ 0 Quantity, Q Price, PD SS ′ Pc Q∗t 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗tt 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) Gov. revenue Deadweight loss 31/62 Motivation Your own personal tolerance for the leaks (while still supporting the program) is a rough measure of your willingness to trade off efficiency for equity Efficiency versus equity trade-off is at the core of Public Economics • Efficiency: minimize the leaks (ie, minimize deadweight loss) −→ make the pie as big as possible • Equity: minimize inequality −→ make the pieces of the pie as close in size as possible 32/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 Australia – WID – World Inequality Database http://wid.world/country/australia/ 1/20 Quantity, Q Price, PDSP∗ Q∗ 0 Quantity, Q Price, PDSP∗ Q∗ Consumer surplus Producer surplus 0 Quantity, Q Price, PD SS ′ 0 Quantity, Q Price, PD SS ′ Pc Q∗t 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗tt 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) Gov. revenue Deadweight loss 31/62 Motivation Your own personal tolerance for the leaks (while still supporting the program) is a rough measure of your willingness to trade off efficiency for equity Efficiency versus equity trade-off is at the core of Public Economics • Efficiency: minimize the leaks (ie, minimize deadweight loss) −→ make the pie as big as possible • Equity: minimize inequality −→ make the pieces of the pie as close in size as possible 32/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 Australia – WID – World Inequality Database http://wid.world/country/australia/ 1/20 Quantity, Q Price, PDSP∗ Q∗ 0 Quantity, Q Price, PDSP∗ Q∗ Consumer surplus Producer surplus 0 Quantity, Q Price, PD SS ′ 0 Quantity, Q Price, PD SS ′ Pc Q∗t 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗tt 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) 0 Quantity, Q Price, PD SS ′ Pc Pp Q∗t Cons. surplus (w tax) Prod. surplus (w tax) Gov. revenue Deadweight loss 31/62 Motivation Your own personal tolerance for the leaks (while still supporting the program) is a rough measure of your willingness to trade off efficiency for equity Efficiency versus equity trade-off is at the core of Public Economics • Efficiency: minimize the leaks (ie, minimize deadweight loss) −→ make the pie as big as possible • Equity: minimize inequality −→ make the pieces of the pie as close in size as possible 32/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 Australia – WID – World Inequality Database http://wid.world/country/australia/ 1/2

AUSTRALIA POPULATION 24 158 000 | PER ADULT NATIONAL INCOME 39 614€

METHODOLOGY & LIBRARY (HTTP://WID.WORLD/METHODOLOGY/#LIBRARY-BROWSE-BY-COUNTRY-AUSTRALIA)

FULL DATASET Per adult national income Per adult GDP Per adult national wealth Wealth-income ratio Top 10% share Middle 40% share Bottom 50% share Top 1% share Top 10% share Middle 40% share Bottom 50% share Top 1% share KEY INDICATORS AVERAGE INCOME AVERAGE WEALTH INCOME INEQUALITY WEALTH INEQUALITY MORE INDICATORS Search a concept… Per adult national income Per adult GDP Per adult national wealth Wealth-income ratio Top 10% share Middle 40% share Bottom 50% share Top 1% share Top 10% share Middle 40% share Bottom 50% share Top 1% share KEY INDICATORS AVERAGE INCOME AVERAGE WEALTH INCOME INEQUALITY WEALTH INEQUALITY MORE INDICATORS Search a concept… Top 1% national income share, Australia, 1921-2014 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1940 1960 1980 2000 4 6 8 10 12 14 16 Pre-tax national income Top 1% share ADULTS INDIVIDUAL Top 10% national income share, Australia, 1941-2014 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1950 1960 1970 1980 1990 2000 2010 25 27.5 30 32.5 35 37.5 Pre-tax national income Top 10% share ADULTS INDIVIDUAL

WORLD (HTTP://WID.WORLD/WORLD/) BY COUNTRY DATA (HTTP://WID.WORLD/DATA/)

METHODOLOGY ABOUT US NEWS EN WORLD INEQUALITY (HTTP://WID.WORLD/) DATA BASE 33/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 Australia – WID – World Inequality Database http://wid.world/country/australia/ 1/2

AUSTRALIA POPULATION 24 158 000 | PER ADULT NATIONAL INCOME 39 614€

METHODOLOGY & LIBRARY (HTTP://WID.WORLD/METHODOLOGY/#LIBRARY-BROWSE-BY-COUNTRY-AUSTRALIA)

to ta l ( %) 1940 1960 1980 2000 4 6 8 10 12 14 16 Pre-tax national income Top 1% share ADULTS INDIVIDUAL Top 10% national income share, Australia, 1941-2014 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1950 1960 1970 1980 1990 2000 2010 25 27.5 30 32.5 35 37.5 Pre-tax national income Top 10% share ADULTS INDIVIDUAL

WORLD (HTTP://WID.WORLD/WORLD/) BY COUNTRY DATA (HTTP://WID.WORLD/DATA/)

METHODOLOGY ABOUT US NEWS EN WORLD INEQUALITY (HTTP://WID.WORLD/) DATA BASE 34/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 USA – WID – World Inequality Database http://wid.world/country/usa/ 2/2

Per adult national income Per adult GDP Per adult national wealth Wealth-income ratio Top 10% share Middle 40% share Bottom 50% share Top 1% share Top 10% share Middle 40% share Bottom 50% share Top 1% share KEY INDICATORS AVERAGE INCOME AVERAGE WEALTH INCOME INEQUALITY WEALTH INEQUALITY MORE INDICATORS Search a concept… Per adult national income Per adult GDP Per adult national wealth Wealth-income ratio Top 10% share Middle 40% share Bottom 50% share Top 1% share Top 10% share Middle 40% share Bottom 50% share Top 1% share KEY INDICATORS AVERAGE INCOME AVERAGE WEALTH INCOME INEQUALITY WEALTH INEQUALITY MORE INDICATORS Search a concept… Top 1% ×scal income share, USA, 1913-2015 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1920 1940 1960 1980 2000 7.5 10 12.5 15 17.5 20 22.5 25 Fiscal income Top 1% share Top 10% ×scal income share, USA, 1913-2015 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1920 1940 1960 1980 2000 30 35 40 45 50 55 Fiscal income Top 10% share

BY COUNTRY DATA (HTTP://WID.WORLD/DATA/) METHODOLOGY ABOUT US NEWS 35/62 Motivation Income inequality has been a popular topic in the news as the share of national income held by top earners has been increasing. 4/24/2018 USA – WID – W rld Inequality Database http://wid.world/country/usa/ 2/2

to ta l ( %) 1920 1940 1960 1980 2000 7.5 10 12.5 15 17.5 20 22.5 25 Fiscal income Top 1% share Top 10% ×scal income share, USA, 1913-2015 Share (%) Share (%) More options Sh ar e

to ta l ( %) 1920 1940 1960 1980 2000 30 35 40 45 50 55 Fiscal income Top 10% share

36/62 Quick overview of taxation Our research question is: What is the revenue-maximizing linear income tax rate? Motivation: Understanding how to efficiently and equitably raise revenue to fund government services is important and highly relevant! Vocabulary: What is the specific type of tax our question is about? 37/62 Quick overview of taxation There are lots of things that the government could tax to raise the revenue it needs to provide its services What are some examples? • Income • Capital (savings) • Goods and services (consumption) • Property / land • Bequests and gifts • Windows • … 38/62 Quick overview of taxation 39/62 Quick overview of taxation Tax base: the activity or item on which a tax is levied (eg, income, property, consumption) Our research question is: what is the revenue-maximizing income tax rate? In our context, the tax base is income 40/62 Quick overview of taxation Our research question is: what is the revenue-maximizing linear tax rate? The “linear” part tells us the tax function we’re considering Tax function: a function where you plug in the relevant inputs and the result is how much tax is owed Example: T(income, consumption, kids) = (income · 30%) + (income2 · 5%) + (ln(consumption) · 18%) – (kids · $1,000) 41/62 Quick overview of taxation Average tax rate: ATR = total tax paid / total value of tax base • Ex: if the tax base is income and the average income tax rate is 10%, then 10% of income is owed to the government • Helps evaluate the equity of a tax system: – Proportional tax: ATR is proportional as income increases – Progressive tax: ATR rises with income – Regressive tax: ATR decreases with income 42/62 Quick overview of taxation Marginal tax rate: MTR = Δ tax paid / Δ value of tax base • Ex: if MTR = 20% and individual earns an additional $1, the individual owes an additional $0.20 impacts to the government • MTR incentives 43/62 Quick overview of taxation Most Western countries have a step-wise linear income tax function, where the marginal income tax rate increases at different incomes. For example, for the 2024-25 Australian fiscal year: • $0 – $18,200 : Nil • $18,201 – $45,000 : 16 cents for each $1 over $18,200 • $45,001 – $135,000 : $5,092 plus 30 cents for each $1 over $45,000 • $135,001 – $190,000 : $31,288 plus 37 cents for each $1 over $135,000 • $190,001 and over : $51,638 plus 45 cents for each $1 over $190,000 44/62 Quick overview of taxation 2024-25 Australian fiscal year: Note, this is a progressive tax system because the ATR rises with income 45/62 Quick overview of taxation Top marginal income tax rates have fluctuated wildly over the last century. 46/62 Quick overview of taxation Our research question is: what is the revenue-maximizing linear tax rate? Instead of a progressive step-wise linear income tax function, we will focus on a simple linear income tax function (ie, only one marginal tax rate):T (income) = τ · income 47/62 Quick overview of taxation What are some other objectives we might have as policy makers? Economists will often use the phrase “social welfare function” (SWF)—this is a mathematical representation of our policy objective that we as social planners are trying to optimize A popular social welfare function is a utilitarian SWF • The goal for a utilitarian is to maximize the sum of’s utility (ie, the size of the pie) . Another social welfare function that you might hear discussed is a Rawlsian SWF • A Rawlsian seeks to maximize the utility of the least-well-off person in society 49/62 What is the revenue-maximizing linear income tax rate? We’ve discussed every aspect of our research question. Now let’s answer it. Goal: Maximize revenue from a linear income tax rate How could we model this with basic economic theory? 50/62 What is the revenue-maximizing linear income tax rate? Set-up: • Linear tax τ • Individual i has pre-tax income zi = wi li • N taxpayers, where N is large • Average pre-tax income ≡ Z =∑i zi/N • Per-person tax revenue ≡ R = τ · Z = τ ·∑i zi/N – We assume this is immediately transferred back to the individuals • Individual i consumes their post-tax income: ci = (1− τ) · zi + R • Individual i chooses consumption ci and labor supply li to maximize utility: ui (ci , li ) = ui ( (1− τ) · wi li + R, li ) 51/62 What is the revenue-maximizing linear income tax rate? Assume: people work more when the tax rate is lowered ⇒ average pre-tax income Z increases with the net-of-tax rate (1− τ) – In other words, average pre-tax income Z is a function of the net-of-tax rate 1− τ and we write it as Z (1− τ) ⇒ per-person tax revenue R(τ) = τ · Z (1− τ) is inversely U-shaped – As τ goes up, Z (1− τ) goes down 52/62 What is the revenue-maximizing linear income tax rate? τ = 0⇒ R = 0 τ = 1⇒ R = 0 τ = τ ∗ −→ Rmax 53/62 What is the revenue-maximizing linear income tax rate? R ′(τ∗) = 0⇒ 0 = Z − τ∗ dZ d(1− τ) Z = τ∗ dZ d(1− τ) 1 = τ∗ Z dZ d(1− τ) 54/62 What is the revenue-maximizing linear income tax rate? Because we’re economists, we want to think about things in elasticities Define e ≡ dZ/Zd(1−τ)/(1−τ) = dZd(1−τ) 1−τZ What is the elasticity of taxable income, e? The answer to: “if I lower τ so you keep one percent more of your income, by what percentage do you increase the income you earn?” 55/62 What is the revenue-maximizing linear income tax rate? Solving for τ∗, continued:1 = τ∗ Z dZ d(1− τ) 1 = τ∗ Z dZ d(1− τ) · 1− τ∗ 1− τ∗ 1 = τ∗ Z dZ d(1− τ) · 1− τ∗ 1− τ∗ = τ∗ 1− τ∗ · dZ d(1− τ) 1− τ∗ Z︸︷︷︸ =e 1 = τ∗ 1− τ∗ · e τ∗ = 1 1 + e ⇒ If we know e, we know τ∗ This is something we can estimate empirically! 56/62 What is the revenue-maximizing linear tax rate? Some observations: 1. The revenue-maximizing linear tax rate is a function of a single empirically estimable parameter: the elasticity of taxable income (e) 2. The revenue-maximizing linear income tax rate an upper bound on the optimal linear tax rate • It is Pareto inefficient to have τ > τ∗ • Decreasing τ would make taxpayers better off: they pay less taxes AND would increase tax revenue for the government (which gets given back as R!) 57/62 What is the revenue-maximizing income linear tax rate? Where do we go from here? • Part 1 (Week 1): introduce a research question in Economics We just did this—and even know a (theoretical) answer! • Part 2 (Weeks 2-6): discuss data and data preparation • Part 3 (Weeks 7-11): discuss different analysis strategies For the rest of the course, we will think about how to answer our question empirically In other words, how could we use data to estimate e? 58/62 What is the revenue-maximizing linear income tax rate? Part 2: focus on the initial work needed to conduct an empirical analysis • Week 2: What is data? • Week 3: Summary and inferential statistics • Week 4: Data visualization • Week 5: Data cleaning and processing We will use our goal of estimating as motivation for this work, but it will take a backseat for these lectures 59/62 What is the revenue-maximizing linear income tax rate? Part 3: different analyzes strategies used in applied microeconomic research: • Week 6: Linear regression • Week 7: Instrumental variables (IV) • Week 8: Difference-in-differences (DND) • Week 9: Regression discontinuity (RD) • Week 10: Bunching analysis • Week 11: Catch-up For each strategy, we’ll cover the intuition and core underlying assumptions before discussing an academic paper that uses that technique to estimate the parameter we need for our research question: the elasticity of taxable income Our focus will be on how the research methodology was communicated 60/62 Wrapping up Today: Course logistics and the research question • Key take-away: if we can estimate e, we know τ∗ 61/62 Wrapping up Next week (Week 2): • Lecture: What is data? • Tutorial: (Unmarked) Prompt 0 (next slide) References: • UC Berkeley Data Science 100 (http://ds100.org/sp23/) 62/62 Prompt 0 (unmarked) Think about a time when you found the results of a research study very compelling. This could be something you read for an economics class, or in the newspaper, or elsewhere. What made you believe the results? Was the writing especially clear, or perhaps the visuals were impressive? What about the description of the research methodology? Did the results align with your priors? Similarly,think about a time when you were skeptical of the results of a research study. Why were you skeptical? Reminders: • Week 2 is the best time to practice

economic theory Economic theory is an important tool for: • Disciplining our thinking • Developing hypotheses about social and economic phenomena