interpreting economic time series this paper explores some of the implications for econometric practice of the principle that people s observed behavior will change when their constraints change in dynamic contexts a proper definition of people s constraints includes among them laws of motion that describe the evolution of the taxes they must pay and the prices of the goods that they buy and sell changes in agents perceptions of these laws of motion or constraints will in general produce changes in the schedules that describe the choices they make as a function of the information that they possess until very recently received dynamic econometric practice ignored this principle the practice of dynamic econometrics should be changed so that it is consistent with the principle that people s rules of choice are influenced by their constraints this is a substantial undertaking and involves major adjustments in the ways that we formulate estimate and simulate econometric models

the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

tax policy uncertainty and corporate investment abstract the anticipatory effects of a corporate tax reform of the tax cut cum base broadening variety are analyzed in a dynamic stochastic adjustment model of firm behavior focusing on the case where the firm is uncertain both about the timing and the contents of the expected reform the value of the firm is solved prior to and after the reform the existence of investment spurts prior to the implementation of the tax reform is established rigorous results are derived under constant returns and the effects of diminishing returns are explained the expectation of a future tax cut causes the firm to accelerate optimal investment while the expectation of a reduction in the tax base the rate of fiscal depreciation has the opposite effect for a firm which updates information timing uncertainty interacts with the expectation effect moreover increased timing uncertainty may accelerate or decelerate investment as an optimal response to an expected tax cut futhermore for reasonable assumptions it is shown that a rate cut cum base broadening tax reform of the type implemented in several oecd countries in the 1980s and 1990s cannot be revenue neutral

capital allocation how the us compares with other major industrialized nations data for the seven major industrialized nations spanning two decades provide evidence that capital formation as a percentage of gross domestic product differs significantly among the major industrialized nations comparatively the us ranks among the leaders in residential structures and among the lowest in commercial structures however us private sector allocation of capital to machinery and equipment appears to be in line with other major trading nations the rate of capital cost recovery appears to affect the amount of capital allocated to commercial structures but not to residential structures or machinery and equipment likewise changes in the capital cost recovery provisions under the economic recovery tax act of 1981 seem to have led to an increase in capital allocated to commercial structures and to a marginal increase in capital allocated to machinery and equipment

on measuring the nearness of near moneys revisited abstract in this paper we re examine the theoretical foundations and empirical estimation of models which incorporate a ces utility function to study the nearness of money substitutes we show that previous studies using these models have been subject to a number of theoretical and empirical flaws the result of these flaws has been to overestimate the degree of substitutability between money and near money assets we show that when these errors are corrected estimates of substitution elasticities are several times smaller than even those of the most recent studies and therefore are more in line with estimates from more traditional demand for money studies

currency substitution and western european monetary unification the recent history of european monetary affairs may be interpreted as a slow movement towards the establishment of a european currency union characterized by fixed exchange rates and perhaps eventually a common european currency until very recently the desirability of european monetary union was analysed in terms of the traditional optimum currency area framework in that analysis the incentive for currency union comes from the potential improvements in efficiency in resource allocation from the use of a single money in a trade area recently however the question of the independence of monetary policy under flexible exchange rates has spawned a growing literature on currency substitution which includes implications for currency 2 union the earlier work suggested that a major benefit of flexible rates would be the liberation of domestic monetary policy from external balance concerns so that policy could be aimed singularly at internal balance 3 the currency substitution cs literature has demonstrated that if the currencies of two countries are close substitutes to money demanders then the central banks of these countries cannot follow independent monetary policies even under flexible exchange rates 4 the degree of currency substitution is an important empirical question and the analysis that follows should prove informative in determining the incentive for european monetary union is the european monetary system ems goal of reducing exchange rate fluctuations necessarily indicative of a european sensitivity to disturbances with a substantial part of the problem coming from substitution between monies girton and roper 1980 p 157 or rather a result of the traditional drive towards integration as envisioned by optimum currency area theory the following sections will suggest an answer

business political power the case of taxation we examine contending views about the forms and mechanisms of business power in u s politics by estimating time series models explaining taxation and redistribution taxation and redistribution constitute strong cases for theories about business and class power since all firms have an interest in reducing taxation we find that changes in corporate taxation and in redistribution between capital gains income and earned income and between corporate taxation and individual taxation are strongly influenced by political partisanship with democratic administrations increasing the tax burden on firms and their owners how far corporations engage in electoral financing measured through the establishment of corporate political action committees is also influential the models show some evidence consistent with the understanding of class power conceptualized by bowles gordon and weisskopf and the presence of election cycle effects but inconsistent with implications arising from the structural dependence of the state on capital and asset concentration in the largest corporations as a mechanism of class power

tax asymmetries the cost of capital and investment some evidence from united kingdom panel data a measure of the cost of capital is developed that incorporates the dynamic effects of tax changes and tax asymmetries estimates of the cost of capital are made using an unbalanced panel of 1987 u k quoted companies over the period 1971 to 1984 there is wide cross sectional variation in the cost of capital the measure is used in estimating an equation where this cross sectional variation is found to be a significant determinant of the level of company investment copyright 1989 by royal economic society

an introduction to the law and economics of intellectual property although economists have written on topics of intellectual property for a long time the impact of economics on public policy in this area has been slight especially as compared to the influence of professional writings in areas such as antitrust and taxation we believe that too few of the profession s resources have been devoted to these issues and that of those resources that have been employed too few have been devoted to empirical analyses we hope that this introductory essay and the three papers that follow will stimulate interest in this subject this introductory essay first describes some of the basic economic tradeoffs involved in intellectual property law and then describes the framework of the law in the six areas described above patent copyright semiconductor protection trademark trade secret and misappropriation it is intended both to provide thumbnail descriptions of the various intellectual property regimes to economists working in this area and to indicate where additional economic research might be useful

taxes inflation and the durability of capital the choice of capital durability is affected by the rate of inflation because nominal depreciation deductions are based on historical cost rather than replacement cost this paper analyzes a model with competitive firms and demonstrates that an increase in the rate of inflation will lead to an increase in the durability of capital if the ratio of the nominal discount rate to the rate of depreciation exceeds a critical value however if this ratio is less than the crucial value this effect is reversed the effect of costs of adjustments on the crucial value is analyzed

money demand in open economies a currency substitution model for venezuela abstract this paper investigates the extent to which domestic money balances in venezuela are influenced by foreign exchange considerations to this end individuals are assumed to choose the levels of foreign and domestic money that minimize the borrowing costs associated with a given level of monetary services the solution to this optimization problem yields a closed form demand function for domestic money that allows for foreign exchange considerations this specification is estimated and the results point to an elasticity of currency substitution in excess of one conditioned on these estimates the paper estimates the risk premium for the period 1981 82 prior to the collapse of the exchange rate system in 1983

how effective are fiscal incentives for r d a review of the evidence this paper surveys the econometric evidence on the effectiveness of fiscal incentives for r d we describe the effects of tax systems in oecd countries on the user cost of r d the current position changes over time and across different firms in different countries we describe and criticize the methodologies used to evaluate the effect of the tax system on

the vanishing harberger triangle this paper shows that the double taxation of corporate dividends or profit repatriations implies a nucleus theory of the corporation after the firm is set up with a small stock of original capital it enters a phase of purely internal growth during which no dividends are paid and no shares are issued the phase terminates when an efficient stock of capital has been accumulated and dividends are paid during the growth phases the tax distortion is inversely related to the tax burden and it is larger than conventional formulae for the cost of internal and external equity finance suggest

variation in the real exchange rate as a source of currency substitution abstract this paper presents a shopping cost money service model in which it is shown that the real exchange rate influences the desired ratio of domestic to foreign currency bank deposits empirically it is found that if the real exchange rate value of the canadian dollar falls then us dollar deposits of canadians rise relative to canadian m2 this relationship is found to be cointegrated dynamic adjustment analyzed using an error correction model indicates a cyclical adjustment the results provide evidence that variation in the real exchange rate is a source of currency substitution and reinforces the argument that demand side factors influence the money stock jel e41

protecting intellectual property rights are small firms handicapped this paper studies the determinants of patent suits and settlements during 1978 99 by linking information from the u s patent office the federal courts and industry sources we find that litigation risk is much higher for patents that are owned by individuals and firms with small patent portfolios patentees with a large portfolio of patents to trade or other characteristics that facilitate cooperative resolution of disputes are much less likely to prosecute infringement suits however postsuit outcomes do not depend on these characteristics these findings show that small patentees are at a significant disadvantage in protecting their patent rights because their greater litigation risk is not offset by more rapid resolution of their suits our empirical estimates of the heterogeneity in litigation risk can help in developing private patent litigation insurance to mitigate the adverse affects of high enforcement costs

self employment the role of intellectual property right laws little is known about the impact of intellectual property rights iprs on typically imitative self employment ipr laws have contrasting dual innovation creation and access effects on self employment activity the first effect is positive where strong ipr laws promote innovation and so create new opportunities for self employment the second effect is negative where strong ipr laws restrict access to innovation and technology used as inputs to self employed businesses using a 33 country dataset over the period 1995 2000 we estimate the impact of ipr laws on self employment helping to fill the vacuum of empirical evidence that has plagued policy decision making in this area we find that patent activity has a negative effect on self employment however overall we find that more extensive and strong ipr laws have a net positive effect on self employment activity

measuring marginal income tax rates for individuals in canada averages and distributions over time average marginal tax rates amtrs and the dispersion of marginal tax rates across income groups for canada over 1947 91 are reported federal amtrs fluctuated with little trend from 1947 to the mid 1960s rose to the mid 1970s fell and then rose from the early 1980s through to 1991 federal plus provincial amtrs trended upward after 1949 increasing fastest from the mid 1960s to the mid 1970s relative dispersion of mtrs shows a strong downward trend over the sample period this compression has been due partly to a decline in top mtrs but the main influence has been the steady increase in the portion of the population and of income subject to tax the amtr time series is quite volatile difference stationarity is not rejected

growth effect of taxes in an endogenous growth model to what extent do taxes affect economic growth abstract this paper presents an endogenous growth model comprising of financial human and physical capital and incorporating major features of a general tax system technology and preference parameter values in the model are chosen to fit the actual growth experiences of the united states and a rapidly growing east asian nic using the calibrated model i assess the role of differences in taxes and other variables in explaining the difference in growth rates the main findings are i the difference in tax systems across countries explains a significant proportion around 30 of the difference in growth rates ii the difference in preferences explains at most 4 and iii differences in labor income tax debt equity ratio and inflation can be important in explaining the growth difference further i evaluate the contribution of the monetary factor to the growth rate gap and the growth effect of us tax reforms e g revenue neutral changes in relative tax structure

simulating currency substitution bias the sign and size of estimates of the elasticity of currency substitution critically depend on the definition of the oppurtunity costs of holding money we investigate possible biases by means of monte carlo experiments as sufficient real data are not available

an alternative approach to monetary aggregation in dea this paper proposes a set of alternative dea based money indices that are proved to be both theoretically and empirically competing monetary aggregates since they perform as good as the divisia aggregates based on all the results concerning causality forecasting and money demand we conclude that dea money aggregates prove to be at least competing alternatives to the divisia aggregates and hence suggest that these new aggregates may be considered along with the existing weighted monetary aggregates like the divisia ones given the inherent benefit of the doubt weighting mechanism underlying the dea models where the optimal weight assigned by dea to each monetary asset reflects the ongoing financial innovation and the reserve bank of india s policy priority in the distribution of total liquidity we feel that the dea money indices can truly capture the liquidity better with ongoing financial innovations in the economy

evaluating the minimum asset tax on corporations an option pricing approach abstract king fullerton methodology cannot assess the minimum asset tax because it cannot handle uncertainty we present an alternative based on option pricing and show how carryover rules depreciation conventions and uncertainty affect the mat burden using brazilian data we show a because of the high intersectoral variance of returns on capital the mat does not reduce sectoral distortions b while high variance raises the mat burden high risk firms are not hit harder by the mat high risk firms also have a high rate of return which reduces the impact of the mat

welfare and optimum dynamic taxation of consumption and income abstract this paper estimates that the us could attain large welfare gains by implementing an optimal ramsey tax policy that taxes consumption and income it is also found that the welfare implications associated with taxing consumption are quantitatively more important than those associated with dynamically taxing income indeed replacing income taxes with a constant consumption tax leads to a welfare gain that is only slightly lower than that attained by a dynamic policy that taxes consumption and income in computing these welfare gains careful attention is given to the dynamic path of tax rates and the transitional dynamics associated with how the economy responds to a new tax policy

the taxation of corporate investment income in canada an analysis of marginal effective tax rates this paper reports estimates of marginal effective tax rates on corporate investment income in canada taking into account sales taxes as well as corporation personal and business property taxes marginal effective tax rates are found to vary widely depending upon the type of asset acquired the industry in which the asset is used the manner in which the investment is financed and the tax status of the investor supplying the funds an examination of the sensitivity of these estimates to various tax arbitrage assumptions reveals the pattern of marginal effective tax rates to be similar irrespective of the arbitrage assumption used l imposition des revenus dinvestissement des societes au canada une analyse des taux marginaux effectifs ce memoire evalue les taux marginaux effectifs d imposition des revenus d investissement des societes au canada en tenant compte des taxes de vente aussi bien que des impots personnels et des impots sur les profits et sur les actifs des societes i1 appert que les taux marginaux effectifs d imposition varient grandement selon le type d actif acquis l industrie dans laquelle cet actif est utilise la faqon dont cet

uk stock relief legislation and the short run tax elasticity of inventory investment abstract this paper analyzes the effects of uk stock relief legislation on the cost of capital for inventory investment taking account of the tax position of individual companies a sample of large uk companies representative of the uk non oil non financial corporate sector is used to make calculations of the cost of capital both for aggregate corporate inventory investment and for various industrial sectors stock relief legislation reduces the cost of capital by between 4 and 8 per annum the tax position of individual companies generally makes only a small difference to the aggregate cost of capital stock relief legislation induces a pronounced seasonality in the cost of capital due to the uneven distribution of the end date of company accounting years this seasonality is exploited in time series estimates of the short run elasticity on the pre tax and post tax cost of capital for six manufacturing subsectors there is some evidence of a significant effect from the pre tax cost of capital on inventory investment but no evidence of any response to the tax incentives created by the stock relief legislation

the social opportunity cost of capital in the presence of labour market distortions this paper examines the conditions under which the social opportunity cost of capital in a tax distorted economy is equal to the gross of tax return to capital plus the excess of the market over the shadow wage bill whenever public investment serves as an unpriced or underpriced input in the private sector s production process only part of the excess of the market over the shadow wage bill should be attributed to private sector capital in addition whenever some of the benefits of public investment are appropriated by owners of capital the gross of tax return to capital will tend to overstate the genuine marginal product of capital the overall implication is that the social discount rate may be less than the gross of tax rate of return to capital in the private sector even if public investment crowds out private investment dollar for dollar

marginal taxes and the asset portfolios of swedish households this paper focuses on the effects of marginal tax rates wealth income and a set of socioeconomic and demographic variables on the portfolio composition of households using detailed micro data on 2 000 swedish households in particular efforts are made to disentangle the effects of marginal tax rates on the portfolio behavior of households some econometric problems involved when estimating asset demand equations in the presence of incomplete portfolios are briefly discussed a final section examines the overall effect of marginal tax rates on asset demands by applying estimated discrete and continuous portfolio equations to compute different tax elasticities

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

tax incentives for business investment a primer for policy makers in developing countries abstract the use of tax incentives is widespread even though the available empirical evidence on the cost effectiveness of such incentives in stimulating investment is highly inconclusive this paper is primarily intended as a primer on the use of tax incentives for policy makers especially those in developing countries it discusses the objectives cost effectiveness and transparency of implementing tax incentives assesses the comparative merits of alternative forms of such incentives and provides a review of the empirical literature its main conclusions are that the justification for the use of tax incentives should be limited to the rectification of market failures and that the preferred form of tax incentives are those that provide for faster recovery of investment costs

money and its substitutes abstract measurement of the elasticity of substitution between financial assets is an important element in evaluating the role that those assets play in the economy this paper generalizes the model developed by chetty by relaxing the separability conditions while restoring homotheticity to the utility function the general model is found to produce empirical estimates that are statistically superior to the original while substantially reducing the estimated elasticities of substitution consequently the various types of savings accounts no longer appear to be very close substitutes for money balances

internationally mobile firms and tax policy abstract this paper analyses how the government should tax internationally mobile firms the analysis finds that if tax authorities are unable to observe firms true mobility and domestic and foreign profitability are uncorrelated then 1 information rents are acquired by immobile inefficient firms and 2 the optimal policy will stimulate investment in the immobile sector compared to the complete information case another result of the paper is that the optimal allocation is implementable within the framework of a corporate income tax system where mobile firms self select more unfavourable capital allowances than immobile firms

estimating the liquidity of m2 components in the post didmca era i introduction the depository institutions deregulation and monetary control act of 1980 didmca together with the garn st germain act and related federal reserve actions resulted in a thorough redefinition of the money stock measures as discussed in anderson and kavajecz 1994 and related writings the current components of m1 and m2 recognize the significant changes among existing assets that occurred throughout the 1970s examples include the rapid growth of money market mutual funds mmmfs and the breakdown of distinctions between deposits of commercial banks and thrift institutions the measures of money include assets introduced by legislation such as now accounts and money market deposit accounts mmdas the didmca also deregulated interest rates on bank deposits with january 1986 completing the phase out of regulation q this paper examines the liquidity of the assets within the restructured definitions of m1 and m2 we offer empirical evidence regarding the cost of decreasing these asset holdings as well as for other bank deposits such as individual retirement accounts iras the results can be used to assess how easily they can be converted into a medium of exchange section ii features the model formulation based upon a representative household s intertemporal optimization problem with liquidity costs our study provides estimates of both relative and absolute liquidity as lippman and mccall 1986 discuss liquidity represents a fundamental characteristic of assets yet remains elusive in its measurement to this extent research seeking to measure or estimate liquidity is sparse lippman and mccall s 1986 criterion consists of the optimal expected amount of time to transform an asset into money hooker and kohn 1994 define liquidity as the difference between the asset price at its optimal sale relative to its immediate sale adjustment cost serves as our measure for liquidity this criterion conforms to commonly used definitions found in economics textbooks particularly those that emphasize asset withdrawal for transactions mishkin 1995 55 for example defines liquidity as the relative ease and speed with which an asset can be converted into a medium of exchange the adjustment cost approach measures withdrawal costs in dollar units it regards liquidity as an inherent characteristic of the asset and captures the total cost involved with changing asset holdings the implicit inclusion of time costs within the formulation is consistent with lippman and mccall 1986 asymmetry in adjustment cost arises because liquidity explicitly involves the cost of reducing asset holdings while economic units incur costs due to increasing financial assets larger costs result from withdrawal we use a minor modification of pfann and verspagen s 1989 asymmetric adjustment cost function proposed by dutkowsky 1995 the function offers several attractive properties for estimating liquidity cost it allows for asymmetry in the direction of either increases or decreases within portfolio reallocation further the commonly used linear quadratic function is nested within this equation enabling straightforward testing for greater withdrawal cost the asymmetric adjustment cost specification has been utilized previously by pfann and palm 1993 within labor demand section iii reports empirical findings we estimate the structural parameters using generalized method of moments gmm and monthly data for the december 1983 march 1993 period the results reveal significant evidence of asymmetry in the direction of decreasing asset holdings for all components except demand deposits this finding supports the existence of greater cost for withdrawing as opposed to increasing holdings among interest bearing accounts further the evidence points to a definite ordering of liquidity among several assets within this group savings deposits rank as the most liquid followed by small time deposits mmmfs and individual retirement accounts

a dual approach to measuring the nearness of near monies increasing returns to scale rts is frequently po stulated as affecting productivity in surface coal mining however it is not cl ear whether increased capital intensity or increased output is the relevant phen omenon a ray homothetic production function that incorporates the capital labor mix and fixed site geology into the scale elasticity is presented and estimated with a micro mine level dataset the results indicate that higher capital int ensity contributes to higher rts for some types of capital equipment but not al l on the average increasing rts was found with few mines approaching optimal scale copyright 1987 by mit press

new findings on firm investment and monetary transmission in the euro area in this paper we present comparable results on the determinants of firms investment and their link to monetary policy the results have been obtained by the eurosystem monetary transmission network this network has produced a series of papers in which the use of micro data permits estimating and quantifying the relevance of two channels of monetary policy transmission the interest rate and the broad credit channel the research findings provide evidence of an operative interest rate channel in all countries examined moreover the results indicate that variables which proxy firms financial conditions play a role firms characterised by weaker balance sheets show higher liquidity sensitivity

taxation and inflation a new explanation for capital flows abstract in a world of mobile capital the current system of taxation implies that the after tax cost of capital and return to saving in each country are negatively correlated with the rate of inflation thus a country s net foreign asset position ought to be negatively correlated with its long run inflation rate the magnitude of these effects is shown to be potentially large for oecd countries cross section and time series regressions confirm that inflation rates are good predictors of net foreign assets the existing distribution of net foreign assets may therefore largely reflect tax distortions

welfare costs of inflation when interest bearing deposits are disregarded a calculation of the bias abstract most estimates of the welfare costs of inflation are devised considering only noninterest bearing assets ignoring that since the 1980s technological innovations and new regulations have increased the liquidity of interest bearing deposits we investigate the resulting bias sufficient and necessary conditions on its sign are presented along with closed form expressions for its magnitude two examples dealing with bidimensional bilogarithmic money demands show that disregarding interest bearing monies may lead to a non negligible overestimation of the welfare costs of inflation an intuitive explanation is that such assets may partially make up for the decreased demand of noninterest bearing assets due to higher inflation

tax policy and investment in major u s macroeconomic econometric models abstract in an analysis of six major u s quarterly models the predicted results of tax incentives for investment are found to vary widely differences are traced to critical specifications in investment equations when appropriately revised investment equations are reestimated the role of tax parameters is much reduced particularly among the high outliers and the variance among the models is narrowed decidedly full model simulations of revised equations suggest that current and proposed incentives such as the investment tax credit and accelerated depreciation are not cost effective increases in investment approximate only half of static tax losses and budget deficits widen