reforming taxes and raising revenue part of the fiscal solution this paper reviews the fiscal outlook in the united states discusses why revenue increases are a critical aspect of any enduring fiscal solution and outlines constructive policies to reform the tax system and simultaneously raise revenues in particular this paper highlights the merits of curtailing income tax expenditures introducing a value added tax and imposing levies on consumption and production of non renewable energy copyright 2011 oxford university press

valuing lost home production of dual earner couples using a life cycle model in which women divide their time between home and market work we establish a link between retirement wealth and the value of forgone home production we use data from the health and retirement study to estimate the model s parameters and adjust the growth rate of gdp to reflect reductions in non market output we find that the value of forgone home production is modest about 25 percent of women s measured earnings

are local minimum wages absorbed by price increases estimates from internet based restaurant menus the authors analyze 884 internet based restaurant menus from inside and outside san jose california which they collected before and after the city implemented a 25 minimum wage increase in 2013

unfunded liabilities and uncertain fiscal financing we develop a rational expectations framework to study the consequences of alternative means to resolve the unfunded liabilities problem the projected exponential growth in federal social security medicare and medicaid spending with no known plan for financing the transfers resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century beliefs based on that distribution determine the existence of and the nature of equilibrium we consider policies that in expectation combine reaching a fiscal limit some distorting taxation modest inflation and some reneging on the government s promised transfers in the equilibrium inflation targeting monetary policy and debt targeting tax policy cannot anchor expectations on those target variables expectational effects are always present but need not have large impacts on inflation and interest rates in the short and medium runs in the economy s stationary distribution the capital stock may grow or shrink and substantial probability falls on little or no reneging

gradual tax reforms if you like it you can keep it abstract one of the key practical challenges facing by tax reforms are their short run welfare consequences in this paper i focus on a consumption based tax reform for which despite long run welfare gains it generates welfare for some groups such as retirees or the working poor falls during transition between steady states using a life cycle model with heterogeneous households i show how to devise a transition path from the current u s federal tax system to a consumption based tax system that improves the welfare of current as well as future generations in a nutshell all households alive at the time of the policy change can choose when they want to switch to the new tax system or whether they want to switch at all i find that implementing a tax reform with this feature improves the welfare of 95 of population in the short run compared to less than a quarter of population in the conventional case with no choice it takes about twenty years for half of the population to pay their taxes under the new tax code

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

taxation and household labor supply we evaluate reforms to the u s tax system in a life cycle setup with heterogeneous married and single households and with an operative extensive margin in labor supply we restrict our model with observations on gender and skill premia labor force participation of married females across skill groups children and the structure of marital sorting we concentrate on two revenue neutral tax reforms a proportional income tax and a reform in which married individuals flle taxes separately separate flling our flndings indicate that tax reforms are accompanied by large increases in labor supply that difier across demographic groups with the bulk of the increase coming from married females under a proportional income tax reform married females account for more than 50 of the changes in hours across steady states while under separate flling reform married females account for all the change in hours

tax policy and the financing of innovation we study tax policy in a schumpeterian growth model with asymmetric information in the financing of innovation investors cannot a priori distinguish between more or less talented entrepreneurs net worth allows talented entrepreneurs to self invest and avoid being pooled with less talented entrepreneurs in the credit market increasing net worth boosts innovation even when financed through higher profit taxes taxing consumption effectively raises net worth and subsidizes profits simultaneously sufficiently taxing consumption implements the social optimum free of adverse selection if forced to tax consumption less the government implements a second best allocation with adverse selection when boosting net worth enough to avoid adverse selection requires taxing profits excessively

tax progressivity and tax incidence of the rich and the poor with the labor supply being flexible a revenue neutral increase in the tax progressivity decreases the tax incidence of the rich and increases the tax incidence of the poor if the tax scheme is highly progressive

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

existence and uniqueness of steady state equilibrium in a two sector overlapping generations model abstract in his seminal paper galor a two sector overlapping generations model a global characterization of the dynamical system econometrica 60 1992 1351 1386 establishes conditions for the existence of equilibrium in the two sector overlapping generations olg model although appealing theoretically these conditions are implicit and not easy to apply this paper develops new theorems on the existence and uniqueness of steady state equilibrium in the two sector olg model we provide explicit conditions on the utility and production functions for the existence and uniqueness of equilibrium with which one only needs to check the derivatives of the production and utility functions and their interactions without requiring solving for the savings function and its derivatives we present detailed steps to check the existence and uniqueness of equilibrium and provide illustrative examples

marginal welfare costs of taxation with human and physical capital i introduction marginal welfare cost of taxation is the amount by which the social cost of an additional tax dollar differs from 1 because of distortionary taxation browning and johnson 1984 stuart 1984 browning 1987 ballard 1988 and allgood and snow 1998 use static models of the u s economy in which labor supplies adjust but the stocks of human and physical capital are fixed to calculate estimates of this welfare cost relevant to cost benefit analysis the studies by lucas 1990 and perroni 1995 incorporate human and physical capital into calculations of excess burden for the purpose of comparing alternative tax systems but do not address the welfare costs of marginal tax and spending reforms ballard et al 1985 and judd 1987 provide estimates of welfare cost using models that allow the stock of physical capital to change in response to marginal reforms but the stock of human capital is exogenous in these studies however judd 2001 argues that there is ample evidence indicating that human capital investment decisions have a significant effect on the cost of altering the tax system which suggests that these decisions could also have an important influence on marginal welfare cost in this article we present estimates of welfare costs for marginal reforms to government tax and spending policies when labor supply saving and education decisions are all endogenous we focus our analysis on marginal reforms because as skinner and slemrod 1985 observe most policy reforms enacted do not involve replacing one tax or spending system with another but instead typically entail marginal adjustments in tax laws and government appropriations using a perfect foresight overlapping generations model with a three period life cycle we derive analytical expressions for the changes in labor supply saving and education and use them to calculate marginal welfare cost as shown by auerbach et al 1983 in overlapping generations models steady state welfare comparisons of alternative tax policies are biased unless households are compensated for intergenerational redistribution along the transition path to arrive at our steady state estimates of welfare costs we adapt the compensation method introduced by gravelle 1991 for analyzing fundamental tax reforms to the context of incremental tax and spending reforms in a static one consumer model triest 1990 has shown that marginal welfare cost mwc is positive solely because of tax leakage the decline in tax revenue caused by reductions in the tax base we extend this insight to an intertemporal context that incorporates tax leakage arising from changes in both human and physical capital investment we evaluate three sets of reforms first a revenue neutral reduction in the tax on capital income funded by a higher tax on labor income second spending on a public good financed by either a higher tax on labor or interest income third a per capita lump sum transfer or demogrant also funded by either a higher tax on labor or interest income we find that marginal welfare costs are uniformly lower in the dynamic model where investment decisions are endogenous than in the static model where investment decisions are fixed and that the majority of the difference between the dynamic and static estimates is attributable to human capital decisions the principal reason is that a reallocation of time between labor hours and human capital investment has opposing and potentially offsetting effects on effective labor supply as a result labor supply responds less elastically in the dynamic model and changes in labor supply are the main source of tax leakage because wage taxation is the main source of tax revenue we also find that shifting marginal financing from capital to labor results in a lower welfare cost the reason being that such a change encourages saving which increases wage rates and stimulates labor supply leading to a reduction in marginal welfare costs

earnings test non actuarial adjustments and flexible retirement abstract in response to the challenges of increasing longevity many countries have introduced flexibility reforms for their public pension systems a key measure of these reforms is the abolishment of earnings tests it is claimed that these reforms increase labor supply and therefore the financial sustainability of pension systems we build a simulation model to show that abolishing an earnings test may indeed create more labor supply but simultaneously reduce the average claiming age when adjustments remain less than actuarial as is the case in most european pension systems flexibility reforms may therefore worsen rather than improve the sustainability of public pension systems

growth effects of flat rate taxes recent estimates of the potential growth effects of tax reform vary wildly ranging from zero to eight percentage points using an endogenous growth model we assess which model features and parameter values are important for determining the quantitative impact of tax reform we find that the critical parameters are factor shares depreciation rates the elasticity of intertemporal substitution and the elasticity of labor supply the elasticities of substitution in production on the other hand are relatively unimportant the quantitative estimates in several recent papers are compared with each other and with some of the evidence from u s experience we find that robert lucas s conclusion that tax reform would have little or no effect on the u s growth rate is theoretically robust and consistent with the evidence

economic effects of fundamental tax reform brookings institution the tax system profoundly affects countless aspects of private behavior it is a powerful policy influence on the distribution of income and it is the one aspect of government that almost every citizen cannot avoid with tax reform high on the political agenda this book brings together studies of leading tax economists and lawyers to assess the various reform proposals and examine the effects of tax reform in several distinct areas together these studies and comments on them present a balanced evaluation of professional opinion on the issues that will be critical in the tax reform debate the book addresses annual and lifetime distributional effects saving investment transitional problems simplification home ownership and housing prices charitable groups international taxation financial intermediaries and insurance labor supply and health insurance

the effects of progressive taxation on labor supply when hours and wages are jointly determined this paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked we show that these two factors can have implications for both estimating labor supply elasticities as well as for using these elasticities in tax analysis failure to account for wage hours ties and progressive taxation may cause the hours response to marginal tax rate changes to be understated by 5 to 30 percent for men

social security and individual welfare precautionary saving borrowing constraints and the payroll tax this paper examines the impact of social security on national saving and individual welfare in the presence of realistic capital market imperfections market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages the introduction of social security increases lifetime welfare and reduces national saving if borrowing restrictions are absent however the increase in individual welfare is reduced and in some cases eliminated when borrowing constraints are taken into consideration the substantial difference suggests the importance of reexamining the proportional payroll tax finance of social security copyright 1987 by american economic association

public education reform community or national funding of education abstract i use a political economy model of public funding of education to evaluate the welfare implications of a move from a community to a nation wide funding policy broadening the scope of education finance has intragenerational redistribution effects as well as intergenerational effects previous studies have emphasized the intragenerational redistribution effects of moving from local to state financed systems while holding factor prices fixed the model in this paper includes a social security system and allows factor prices to vary endogenously i examine the welfare effects of broadening the scope of financing from a community to a nation wide system and find that there are very large welfare gains as voters internalize the effect of the education policy on both factor prices and social security benefits i also focus on the intergenerational distributional effects finding that significant welfare gains occur despite the displacement of the median voter to an older agent that cares less about children s well being

marginal tax rates and income inequality in a life cycle model in this paper we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income our methodology builds on previous simulation models developed by auerbach and kotlikoff and fullerton and rogers and uses an algorithm that allows us to examine marginal tax rate structures in their literal form we find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life cycle setting in our baseline experiments the change in steady state income inequality under 1989 u s income tax rates vis a vis 1984 rates is about half as large as the change actually seen in the data over those two years when measured in terms of a monetary metric derived from gini coefficients

deadweight costs and the size of government abstract we provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare an improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending we demonstrate the similarity of the political responses to revenue shocks spending shocks changes in tax efficiency and changes in spending program efficiency empirical analysis of oil shocks intergovernmental grants and other autonomous changes in taxes or spending indicates that cause and effect is not only from spending to tax structures

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

social security reform and intertemporal smoothing abstract this paper examines the welfare and distributional impact of switching from a defined benefit pension system like social security to a defined contribution system of personal retirement accounts pras while such a switch would do away with the transfers that low wage workers receive through social security it would have the benefit of reducing labor supply distortions moreover a particular kind of pra suggested in this paper one that has very low or zero contribution rates early in life substantially enhances life cycle patterns of consumption and labor supply by making more resources available to credit constrained young workers simulations of a life cycle model show that in welfare terms these pras significantly outperform conventional pras because of this enhanced intertemporal smoothing

wealth inequality and altruistic bequests this paper examines the role of bequests and inter vivos gifts in the u s economy considering their importance in determining i the economy s aggregate capital stock ii the distribution of private net worth and iii public policy outcomes and options it focuses on several recent calibrated simulations this abstract was borrowed from another version of this item

intergenerational policy and the measurement of tax incidence we evaluate the ability of generational accounting to assess the potential welfare implications of policy reforms in an intergenerational context policy reforms usually have redistributive efficiency and general equilibrium implications our analysis shows that when the policy reform implies changes in economic efficiency generational accounts can be misleading not only about the magnitude of welfare changes but also about the identity of who wins and who losses in contrast the generational accounts correctly identify welfare changes when the policy reform has only a pure intergenerational redistribution component we illustrate and quantify this issue in the context of widely considered policy reforms substitution of consumption for labor taxation and the increase of retirement age and in a more general context of optimal policy

retirement pensions and ageing we study the effects of demographic shocks and changes in the pension system on the macroeconomic performance of an advanced small open economy facing a given world interest rate we construct an overlapping generations model which includes a realistic description of the mortality process individual agents choose their optimal retirement age taking into account the time and age profiles of wages taxes and the public pension system the early retirement provision in most pension systems acts as a trap inducing most workers to retire well before the normal retirement age simulations show that pension reform must be drastic for it to have any effects on the retirement behaviour of workers

simulating fundamental tax reform in the united states this paper uses a new large scale dynamic life cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the u s federal income tax including a proportional consumption tax and a flat tax the model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems simulation results project significant long run increases in output for some reforms for other reforms namely those that seek to insulate the poor and initial older generations from adverse welfare changes long run output gains are modest

altruism incomplete markets and tax reform abstract we compute the welfare effects of different revenue neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the u s economy in our dynastic model the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35 75 of the population alive at the time of the reform benefit from it individuals use intervivos transfers and bequests to redistribute the long run benefits in a pure life cycle economy that lacks this redistribution technology we find that the same reform would benefit only 9 of the population

tax reform and adjustment costs the impact on investment and market value this paper provides an effective tax rate measure that is valid in the presence of adjustment costs and anticipated tax changes and a measure of the impact of tax changes on market value that may be decomposed into the effects on discounted pure profits and normal returns to capital changes in the value of capital may in turn be decomposed further into changes in the marginal value of new capital and changes in the relative value of new and existing capital these new measures are used to evaluate tax changes similar to those introduced by the recent u s tax reform copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

consumption retirement and social security evaluating the efficiency of reform that encourages longer careers abstract this paper proposes and analyzes a social security reform in which individuals no longer face the oasi payroll tax after say age 54 or a career of 34 years and their subsequent earnings have no bearing on their benefits we first estimate parameters of a life cycle model our specification includes non separable preferences and possible disability it predicts a consumption expenditure change at retirement we use the magnitude of the expenditure change together with households retirement age decisions to identify key structural parameters the estimated magnitude of the change in consumption expenditure depends importantly on the treatment of consumption by adult children of the household simulations indicate that the reform could increase retirement ages one year or more equivalent variations could average more than 4000 per household and income tax revenues per household could increase by more than 14 000

reviews of the 2006 economic report of the president the u s tax system in international perspective a review of the 2006 economic report of the president s tax chapter 1 alan j auerbach university of california berkeley and nber april 12 2006 what can you say about a tax reform proposal that died this was the challenge facing the writers of the chapter on taxation for the 2006 economic report of the president hereafter erp one year ago the erp included a chapter entitled options for tax reform that began with the section heading why do we need tax reform and proceeded to lay out the available options that it suggested could make the u s tax system simpler more equitable and efficient in making the case for tax reform that chapter set the stage for the impending work of the president s advisory panel on tax reform while being careful to leave the president s options open until the panel reported the 2005 chapter twice included the phrase the president has not endorsed any specific proposal and this chapter does not advocate the adoption of any particular prototype for reform in case the reader didn t get the message the first two times the chapter concluded with a reminder that the president has not endorsed any specific proposal 2 that was then in november 2005 the tax reform panel issued its report so one might have anticipated a follow up chapter in this year s erp evaluating the panel s i am grateful to rosanne altshuler bill gale kevin hassett and joel slemrod for comments on an earlier draft slemrod 2005 provides a critical evaluation of the 2005 chapter

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

growth effects of shifting from a graduated rate tax system to a flat tax i introduction recently the debate concerning fundamental u s tax reform has led to a number of proposals that involve a shift toward a consumption based system 1 one such proposal is the so called flat tax of hall and rabushka 1995 the flat tax would apply a single tax rate to all labor income above a given threshold and to all capital income after fully expensing investment expenditures hall and rabushka 1995 argue that the adoption of their proposal would provide an enormous boost to the u s economy by dramatically improving incentives to engage in productive activities and would save taxpayers hundreds of billions of dollars in compliance and administration costs 2 in this article we develop a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by hall and rabushka 1995 the model captures many of the features of the current u s tax code such as graduated personal tax rates a standard personal deduction separate tax rates applied to personal and business income double taxation of business income and differential tax treatment of physical and human capital under appropriate parameter settings the model can exhibit either endogenous or exogenous long run growth our choice of functional forms facilitates a closed form solution to the model this allows us to characterize explicitly the economy s transition path following the reform a central issue in the debate over fundamental tax reform is the effect that such a reform would have on economic growth the present analysis builds on the work of stokey and rebelo 1995 who use an endogenous growth framework to identify the key model features and parameters that are important for determining the quantitative impacts of distortionary taxes on long run growth 3 our study differs from theirs and the bulk of the dynamic tax literature in one fundamental respect here we evaluate the growth effects of shifting from a graduatedrate tax system to a flat rate system stokey and rebelo 1995 consider only flat rate systems in which the marginal tax rate is equal to the average tax rate we approximate the graduated rate tax system in the u s economy by an empirical tax rate function that allows the personal tax rate to depend positively on household taxable income in equilibrium household decisions are influenced by both the level and slope of the tax schedule to implement the flat tax reform we shift the parameters of the tax rate function to flatten the marginal tax schedule while maintaining revenue neutrality our methodology treats the hall rabushka proposal as one that in effect moves a representative household from one tax rate schedule to another we view this setup as a reasonable approximation to gauge the growth effects of tax reform at the macro level a more elaborate setup would of course allow for household heterogeneity at a given point in time in this regard we note that caucutt et al 2003 have recently examined the growth effects of graduated rate taxes in a two period overlapping generations model that includes both skilled and unskilled agents in their model a flatter tax schedule increases the fraction of skilled agents in the economy the share of total output devoted to education rises accordingly and the economy s long run growth rate is observed to increase the quantitative implications of their model are difficult to compare to ours however because their two period framework implies a very long time horizon between household decisions about 30 years moreover their model abstracts from many of the features of the u s tax code that we include here in addition to examining the consequences of flattening the marginal tax schedule we investigate the growth effects attributable to other parts of the flat tax proposal such as allowing full investment expensing eliminating the double taxation of business income and increasing the standard personal deduction

consumption vs wage taxation and the capital levy abstract based on a representative consumer framework it has been argued that wage taxation is inferior to consumption taxation this note shows that the opposite result may emerge in a model where households are heterogeneous and where a uniform poll tax or subsidy is available

regulation market structure and hospital costs during the past decade a host of studies of hospital costs have appeared in the literature these papers have led to several fundamental advances in our understanding of the nature of hospital costs yet despite these advances considerable controversy remains about the impacts of regulation and market structure on hospital costs for instance proponents of certificate of need con regulation have argued that the effects of regulating hospital capital expansion programs will be to reduce if not eliminate what is seen as a chronic tendency on the part of hospitals to over build others for example sloan and steinwald 14 have argued that con regulation has generally not reduced costs and may have actually increased hospital costs in cases where con regulation has been designed primarily to control bed expansion the purpose of this paper then is to shed light on some of these unresolved issues surrounding the impacts of regulation and market structure on hospital costs with the benefit of a more general theoretical approach and a novel data set we determine that in recent years con regulation has acted to constrain hospital bed growth and hospital costs while market concentration acts ceteris paribus to increase firm costs

nit picking the macroeconomic effects of a negative income tax i study a revenue neutral reform of the u s income tax and welfare system that involves the adoption of a negative income tax nit the reform is undertaken in a life cycle economy with individual heterogeneity and uninsurable idiosyncratic labor risk the optimal nit consists of a 22 rate and a transfer equivalent to 11 of per capita gdp the ex ante average welfare gain is a 2 1 annual increase of individual consumption i show that a nit outperforms a flat tax reform income tax plus deduction by a considerable margin the key consequence of the reform is that high productivity agents increase their relative importance in the labor supply at the expense of low productivity agents