tax policy asset prices and growth a general equilibrium analysis abstract this paper presents a computable general equilibrium tax policy model that combines a consideration of disaggregate industry effects with an integrated treatment of short and long run adjustments to policy initiatives the model s explicit consideration of forward looking investment decisions and adjustment dynamics permits assessments of short run effects of tax policy on asset values as well as long term impacts on capital accumulation simulations reveal that effects on asset values and investment depend critically on whether policies are oriented toward new or old capital investment tax credits yield significant increases in investment without conferring windfall gains to corporate shareholders corporate tax cuts with the same revenue cost on the other hand yield large windfalls to shareholders while providing only a modest investment stimulus incidence and growth effects differ considerably across sectors particularly between business and housing

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

optimal taxation and finite horizon abstract within the blanchard blanchard o 1985 debt deficits and finite horizons journal of political economy 93 2 223 247 model we determine optimal capital and labor income taxation we discuss the conditions for non zero capital income taxation in the long term we make explicit the conditions for time consistent capital income taxation we clarify the role of finite horizon regarding second best optimal taxation

supply side interventions and redistribution we evaluate the eect on welfare of shifting the burden of capi tal income taxes to labor taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates we calibrate and simu late the economy we nd that lowering capital taxes has two eects i it increases e ciency in terms of aggregate production and ii it redistributes wealth in favor of those agents with a low wage wealth ratio when the parameters of the model are calibrated to match the distribution of income in terms of the wage wealth ratio the redis tributive eect dominates and agents with a high wage wealth ratio would experience a large loss in utility if capital income taxes were eliminated

are emissions permits regressive grandfathered emissions permits redistribute income to wealthy households by creating firm rents that ultimately accrue to shareholders consequently they can be highly regressive even if the poor do not have large budget shares for polluting goods using an analytical model this paper estimates the burden of emissions permits borne by different income groups under control of power plant emissions of carbon so2 and nox we also compare the burden borne by poor households under permits with that under emissions taxes performance standards technology mandates and input taxes and we show how the social costs of policies differ from efficiency costs when society has aversion to inequality

endogenous government spending and ricardian equivalence many analyses of debt policy assume exogenous government expenditures instead the author uses an optimizing model in which the government endogenously selects values of taxes spending and debt to maximize welfare if demand for publicly provided goods is elastic a debt financed tax cut increases consumption because individuals rationally expect some reduced government spending in the future even though future taxes rise they do not offset the expansionary effect of the current tax cut on consumption depending on preferences the marginal propensity to consume out of tax cuts can take any value between zero and the marginal propensity out of ordinary income copyright 1992 by royal economic society

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

fiscal interactions and the case for carbon taxes over grandfathered carbon permits this paper provides simple formulas for adjusting the costs of carbon taxes and tradable carbon permits to account for interactions with pre existing tax distortions in the labour market both policies reduce labour supply as they increase product prices and reduce real household wages the resulting efficiency losses in the labour market can be substantial relative to partial equilibrium abatement costs however much of this added cost can be offset and perhaps more than offset when additional distortions from the tax system are considered if revenues from carbon taxes or auctioned permits are used to reduce distortionary taxes consequently there can be a strong case on efficiency grounds for using carbon taxes or auctioned permits over grandfathered carbon permits copyright 2003 oxford university press

consumption path following a tax increase implications for the analysis of the welfare cost of taxation abstract the consumption path following a capital income tax increase is analyzed to demonstrate that short run increases in consumption dominate future declines in consumption for a considerable time it takes 25 years before a tax increase resutls in a loss of welfare

dynamic tax incidence and intergenerationally neutral reform the paper proposes a basic definition of intergenerational neutrality in the overlapping generations model when agents have a pure life cycle motive of savings the derivation of intergenerationally neutral tax effects provides a redistribution free benchmark case that isolates the relative price effects of taxes and the deadweight losses associated with them the paper clarifies the intergenerational incidence which has to be determined simultaneously with the substitution effects of taxes on savings a tax reform example demonstrates how taxes with diverging intergenerational incidence may be combined to achieve intergenerational neutrality finally the paper extends the analysis of generational tax incidence to the case of a small open economy

lumpy investment and corporate tax policy in the presence of both convex and nonconvex capital adjustment costs in a dynamic general equilibrium model corporate tax policy generates both intensive and extensive margin effects via the channel of marginal q i ts impact is determined largely by the strength of the extensive margin effect which in turn depends on the cross sectional distribution of firms depending on the initial distribution of firms the economy displays asymmetric responses to tax changes moreover an anticipated increase in the future investment tax credit reduces investment and adjustment rate initially

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

an equilibrium analysis of fiscal policy with uncertainty and incomplete markets insurance aspects of tax policies are studied in a simple intertemporal general equilibrium model in which agents are uncertain about both the future wage rates and the rate of return on capital taxation and lump sum subsidy policies generally reduce employment output and the capital stock but nonetheless they can be structured to provide pareto improvements on the incomplete market equilibrium these policies provide insurance against individual shocks not aggregate shocks examples of welfare maximizing tax schemes are provided using a simple computable general equilibrium model copyright 1993 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

on the possibility of an inverse relationship between tax rates and government revenues abstract when arthur laffer and other supply side advocates plot total tax revenue as a function of a particular tax rate they draw an upward sloping segment called the normal range followed by a downward sloping segment called the prohibitive range a brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates high elasticity parameters or both the labor tax rate which maximizes total revenue for example will depend on the assumed labor supply elasticity this paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues separating the normal area from the prohibitive area a general purpose empirical u s general equilibrium model is used to plot the laffer curve for several elasticities and to plot the newly introduced curve using the labor tax example results indicate that the u s could conceivably be operating in the prohibitive area but that the tax wedge or labor supply elasticity would have to be much higher than most estimates would suggest

tax disturbances and real economic activity in the postwar united states abstract this paper investigates the macroeconomic effects of cyclical fluctuations in marginal tax rates it finds that systematically including tax variables in a standard real business cycle model substantially improves the model s ability to reproduce basic facts about postwar u s business cycle fluctuations in particular modeling fluctuations in personal and corporate income tax rates increases the model s predicted relative variability of hours and decreases its predicted correlation between hours and average productivity fluctuations in tax rates produce large substitution effects that alter the leisure labor supply decision

measuring financial cycles in a model based analysis empirical evidence for the united states and the euro area we adopt an unobserved components time series model to extract financial cycles for the united states and the five largest euro area countries over the period 1970 2014 we find that financial cycles can parsimoniously be estimated by house prices and total credit or the credit to gdp ratio we show that these medium term cycles are longer and have larger amplitudes than business cycles and that their length and amplitude vary over time and across countries

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

the welfare effects of temporary tax cuts and subsidies theory estimation and applications this article presents a tractable and intuitive theory on the welfare effects of temporary tax cuts and subsidies fiscal policies that i generically term holidays the kaldor hicks efficiency effects are theoretically ambiguous with competing pro and anti efficiency effects on newly incentivized versus time shifted purchases to rectify this ambiguity i derive expressions for the welfare effects that are consistent with constant elasticity assumptions and depend only upon readily and reliably observed information to demonstrate the framework s broad applicability i analyze two different policies the 2009 cash for clunkers program and states sales tax holidays i estimate that both policies generated substantial deadweight loss jel h21 h30 d91

the nonequivalence between deficits and distortionary taxation abstract this paper examines how relaxing the assumption of lump sum taxation affects the ricardian equivalence theorem in a model with income taxation instead of lump sum taxation structural deficit finance causes keynesian like effects even though government bonds are not perceived as net wealth a temporary substitution of debt for taxation significantly increases consumption work and output initially the same effects as in the keynesian case where the implied future tax liability is not perceived but in contrast to the keynesian case investment also increases initially in the long run however deficit finance significantly reduces investment work output and consumption

fiscal policy and the term structure of interest rates abstract this paper examines the impact of fiscal policy in a non monetary one factor multi period neoclassical model with uncertainty it shows that a countercyclical change in fiscal policy tends to reduce the instability in the economy and in so doing lowers the premium of long term over short term interest rates the term structure premium when the policy goes into effect at the time of the initial shock if the policy does not go into effect until the period after the initial shock has occured however it will tend to raise the term structure premium

administrative costs and instrument choice for stochastic non point source pollutants this paper extends the empiricalanalysis of non point source pollution to thecase where the pollutant is stochastic andalternative regulatory instruments havedifferent administrative costs it also appliesa method of stochastic programming whereemissions are log normally distributed forthe kennet catchment in south west england werank a range of policies in terms of abatementcosts alone and total costs abatement andadministrative costs on the basis ofabatement costs alone a uniform emission taxis the cost minimising policy but on the basisof total cost a nitrogen input tax is theleast cost policy furthermore the policyranking based on total costs changes as thereliability standard increases

intertemporal substitution and λ constant comparative statics abstract this paper characterizes intertemporal substitution along intertemporal consumption profiles a precise definition of the intertemporal elasticity of substitution is presented and compared to intertemporal analogs of the hicks allen and direct elasticities of substitution and the marginal utility of wealth or constant own price elasticity of demand in a model with perfect foresight i establish that constant comparative statics accurately characterizes intertemporal substitution if and only if lifetime utility is intertemporally additive i also demonstrate the usefulness of constant comparative statics in characterizing intertemporal substitution in models without time separability or perfect foresight

scale congestion and growth this paper explores the relationship between aggregate and relative congestion returns to scale and economic growth aggregate congestion reduces the effective productivity of capital relative congestion reduces the effective productivity of labour both forms of congestion adversely affect the equilibrium growth rate although their relative effects depend upon aggre gate returns to scale the two forms of congestion have contrasting effects on the transitional dynamics relative congestion retards the rate of adjustment aggregate congestion accelerates it the externalities generated by congestion and non optimal expenditure can be fully cor rected both during the transition and in steady state by a time invariant income tax the role of public expenditure as an instrument of economic growth has been a major policy issue as governments throughout the world design stimulus packages as in japan and face difficult choices to meet the emu criteria in europe empirical research investigating the impact of public investment on the productivity of private capital and output was stimulated by aschauer 1989a b who found the effects to be strongly positive the nature of public investment is however diverse in general public goods vary extensively in terms of the nature of their services spanning the range between the polar cases of pure private and pure public goods but the treatment of public expenditures in formal growth models is limited barro 1990 and futagami et al 1993 treat government expenditure as a pure pub lic good and in so doing they fail to take account of the congestion typically associated with public goods however as barro and sala i martin 1992 have argued almost all public services are characterized by some degree of congestion so that the pure public good should be viewed as only a bench mark these considerations suggest that congestion is an important consider ation in assessing the effect of public expenditures on economic growth attempts to analyse the effects of congestion on economic growth have been limited in various dimensions drawing on the public goods literature edwards 1990 proposes a number of specifications of congestion two notions particularly relevant in a growth context are relative congestion and aggregate absolute congestion the former specifies the level of services derived by an individual from the provision of a public good in terms of the usage of his individual capital stock relative to the aggregate capital stock aggregate congestion sometimes called crowding indicates how aggregate usage of the service alone influences the services received by an individual 2 existing applications of congestion to growth theory introduce it into ak models see barro and sala i martin 1992 1995 glomm and ravikumar 1994 1997 and turnovsky 1996 1997 however the ak model features two limitations that restrict its flexibility to examine the relationship between congestion and growth first as solow 1994 pointed out sustained ongoing

the effect of taxation on human capital this study finds a significant negative effect of proportional income taxation on human capital of the few earlier studies to address this issue most suggested a negligible effect of taxation on investment in human capital this earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously

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

green expectations current effects of anticipated carbon pricing i report evidence that an anticipated strengthening of environmental policy increased emissions i find that the breakdown of the u s senate s 2010 climate effort generated positive excess returns

taxing capital in a large open economy abstract this paper analyzes capital taxation in a dynamic optimizing equilibrium model of a large open economy it is shown that the existence of current account imbalances may yield surprising results for example if a country has a current account deficit the tendency of an increased tax on investment to lower wages is dampened if the deficit is sufficiently large an increased investment tax may actually increase both wages and welfare in the long run a country with a current account surplus may find that temporary investment incentives improve its current account in all but the short run

capital subsidies versus labor subsidies a trade off between capital and employment this paper investigates regime switching in the response of u s output to a monetary policy action we find substantial statistically significant time variation in this response that corresponds to high response and low response regimes we then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as functions of state variables we find strong evidence that policy actions taken during recessions have larger effects than those taken during expansions we find less evidence of asymmetry related to the direction or size of the policy action

time consistent control in non linear models abstract the paper shows how to use optimal control to compute optimal time consistent markovian government policies in nonlinear dynamic general equilibrium models it extends cohen and michel s 1988 results for the linear quadratic case the method involves replacing private agents costate variables with flexible functions of current state variables in the government s maximization problem the functions hold in equilibrium to an arbitrarily close approximation they can be found numerically by perturbation or projection methods a stochastic model of optimal public spending illustrates the technique

the growth and welfare consequences of differential tariffs this paper analyzes the impact of differential tariffs on consumption and investment in a specific factors model of a small open economy in which capital is accumulated over time particular attention is devoted to the welfare aspects highlighting the cost of the intertemporal distortions produced by protective trade policies several specific welfare propositions are obtained first tariff protection is shown to create short run benefits but long run costs in welfare second the second best policy for the two tariffs is characterized finally several propositions summarizing the implications of our analysis for tariff reform are derived

behavior of the firm under regulatory constraint a recent article by akira takayama discusses an earlier paper by harvey averch and leland l johnson on fair rate of return regulation of public utilities although takayama p 255 agrees with averch and johnson s general conclusions that a firm will tend to increase its investment with the introduction of an active constraint on its rate of return he criticizes the a j argument as being confusing ambiguous and in error takayama then attempts a clarification and presents a new formulation which leads to the a j result quoted above this comment will discuss several of takayama s criticisms in addition to showing that the so called a j effect cannot be derived from the basic assumptions made by both averch and johnson and takayama 1 we will show that the very assumptions used to prove the a j effect by defining the region of x require an assumption that the a j effect exists in the first place

tax analysis in a real business cycle model on measuring harberger triangles and okun gaps abstract a tax distorted real business cycle model is parameterized calibrated and solved numerically in an attempt to measure the size of harberger triangles relative to okun gaps in particular the model constructed is used to study quantitatively the impact of various distortional government tax and subsidy schemes it is shown that the government can use tax policy to stabilize cyclical fluctuations and this is done for the economy being studied the benefits of implementing such a stabilization policy are calculated and compared with the size of the welfare gains realized from reducing various tax distortions

the macroeconomic effects of distortionary taxation abstract prescott 1986 estimates that technology shocks account for 75 of the fluctuations in the postwar u s economy this paper reestimates the contribution of technological change for a standard business cycle model that includes a public sector and fiscal disturbances i find that a significant fraction of the variance of aggregate consumption investment output capital stock and hours of work can be explained by disturbances in labor and capital tax rates and government consumption i also use the model to quantify the welfare costs of capital and labor taxation for both the time series and welfare calculations maximum likelihood estimates of taste technology and policy parameters are used

capital income taxation with imperfect competition a key feature of modern dynamic economies is imperfect competition some imperfect competition is due to institutions such as patents and copyrights that allow firms to exercise market power over the sale of products they invent some imperfect competition is due to various forms of increasing returns to scale and product differentiation since market power is an essential feature of innovation and growth in the new economy as it was in the old economy we need to know how imperfect competition affects the conventional wisdom on tax policy i argue that it has particularly striking implications for the taxation of capital the current consensus among economists is

government markets and the theory of the nth best abstract there is increasing interest in having the us government create markets in property rights to allocate various resources such as landing rights and environmental quality the purpose of this paper is to provide some general guidelines for the more efficient organization of such markets the analysis examines the problem of devising efficient government markets when there are multiple inputs to the production process subject to different taxes and regulations it develops some simple rules of thumb for the design of markets and examines how they can be applied to problems involving regulated utilities

anticipation learning and welfare the case of distortionary taxation we study the impact of anticipated fiscal policy changes in the ramsey economy when agents form expectations using adaptive learning we extend the existing framework by distortionary taxes as well as elastic labour supply which makes agents decisions non predetermined but more realistic we detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour moreover we demonstrate that this behaviour can have important implications for the welfare consequences of fiscal reforms

time consistent taxation in a dynastic family model with human and physical capital and a balanced government budget this paper analyzes optimal time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget when tax revenue is used for publicly provided consumption or lump sum transfers leisure would be higher than its social optimum pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax also it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax and hence it is not a practical guide to policy further a consumption tax or equivalently a uniform income tax with investment subsidies at the same rate can be improved on by taxing capital income more heavily than labour income ce memoire analyse la fiscalite optimale et consistante dans le temps dans un modele de famille dynastique avec capital humain et physique et un budget gouvernemental equilibre quand le revenu fiscal est utilise pour financer la consommation publique ou pour des transferts forfaitaires le niveau de loisir sera plus eleve que l optimum social la fiscalite optimale paretienne exige qu on taxe le revenu du capital plus fortement que celui du travail et qu on subventionne l investissement au meme taux que la taxe elle exige aussi soit qu on subventionne le travail au meme taux que la taxe a la comsommation soit qu on subventionne la consommation au meme taux que l impot sur le revenu du travail et donc ce n est pas un guide pratique pour la politique de plus un regime de taxe sur la consommation ou de maniere equivalente d impot uniforme sur le revenu avec subvention a l investissement au meme taux peut etre ameliore en taxant le revenu du capital plus fortement que celui du travail

social accounting and the public sector this article contributes to the theory of social accounting as such it tries to extend earlier literature on the welfare equivalence of the comprehensive net national product in two main directions both of which refer to the public sector one is by considering welfare measurement problems associated with public good provision and redistributive policy respectively when the public revenues are raised by distortionary taxes the other is by addressing the consequences of a federation like decision structure where independent tax and expenditure decisions are made both by the central government and by lower level governments

capital income taxation and international portfolio choice abstract distortionary proportional capital income taxation is shown to cause both static effects via portfolio re allocation and dynamic effects via changes in the value of a claim to future transfers as well as via perceived changes in the future investment opportunity set the stochastic structure of returns to investment is important for understanding the consequences of a unilateral increase in the domestic tax rate a government choosing optimal tax policy makes a tradeoff between the increase in the perceived value of future transfers and the distortion to portfolio allocation produced by taxation with corporate taxation the optimal tax rate is positive

on the optimal taxation of capital income abstract we show that in models in which labor services are supplied jointly with human capital the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale moreover for a class of widely used preferences consumption taxes are zero in the limit as well however we show by the construction of two examples that these results no longer hold for certains types of restrictions on tax rates or if there are profits generated journal of economic literatureclassification numbers e62 h21

econometric estimation of foresight tax policy and investment in the u s we develop a method for measuring the foresight agents have we first dichotomize an agent s information at current date t into knowledge up to date t 1 f and expectations after t 1 f we then form a residual based test statistic that allows us to compare prediction errors for econometric models based on different values of f we illustrate the method examining investment around tax reforms to measure the foresight firms have about tax policy in this illustration current investment appears to reflect currently available information but little foresight other than foresight of enacted policy changes

the fiscal state dependent effects of capital income tax cuts abstract using the post wwii data of u s federal corporate income tax changes within a smooth transition var this paper finds that the output effect of capital income tax cuts is government debt dependent it is less expansionary when debt is high than when it is low to explore the mechanisms that can drive this fiscal state dependent tax effect the paper uses a dsge model with regime switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment as government debt increases to a sufficiently high level the probability of future fiscal adjustments starts rising and the expansionary effects of a capital income tax cut can diminish substantially whether the expected adjustments are through a policy reversal or a consumption tax increase also a capital income tax cut need not always have large revenue feedback effects as suggested in the literature

on the credit to gdp gap and spurious medium term cycles abstract i provide empirical evidence suggesting that the credit to gdp gap is subject to spurious medium term cycles i e artificial boom bust cycles with a maximum duration of around 40 years

macroeconomic effects of factor taxation with endogenous human capital evolution theory and evidence the distortionary effect of factor income taxation has been one of the central issues in public finance theory for example see feldstein 4 boadway 3 homma 6 summers 14 and judd 8 a tax on capital income in contrast to a tax on labor income has been claimed to create an intertemporal distortion that affects the future paths of macro aggregates adversely through the decumulation of physical capital hence it is generally concluded in the aforementioned literature that capital taxation is more distortionary in the long run than labor taxation in this paper we revisit this issue by constructing a dynamic general equilibrium model with infinitely lived perfectly foresighted agents unlike most of the existing literature we develop a growth model in which both physical and human capital are endogenously accumulated 2 within this framework a tax on labor generates a distortionary effect on both human capital evolution and future dynamic paths of output and consumption analogous to the case of capital taxation in contrast to results in previous work labor income taxation in our economy can be more distortionary than capital income taxation even in the long run many studies for years have focused on welfare comparison of factor taxes in most cases calibration or simulation exercises are performed and there has been no empirical research to con

how large are the welfare costs of tax competition abstract competition among regional governments may lead to suboptimal levels of capital taxation as governments ignore the external benefits of capital flight to other regions however there have been few attempts to quantify the magnitude of the resulting efficiency losses this paper presents extensive calculations of the efficiency costs over a wide range of parameter scenarios and assumptions about government behavior using various generalizations of wildasin journal of urban economics 25 1989 193 213 the efficiency costs tend to be fairly moderate under most though not all scenarios and particularly when allowance is made for the possibility of leviathan and non competitive government behavior

market power and transferable property rights the appeal of using markets as a means of allocating scarce resources stems in large part from the assumption that a market will approximate the competitive ideal when competition is not a foregone conclusion the question naturally arises as to how a firm might manipulate the market to its own advantage this paper analyzes the issue of market power in the context of markets for transferable property rights first a model is developed that explains how a single firm with market power might exercise its influence this is followed by an examination of the model in the context of a particular policy problem the control of particulate sulfates in the los angeles region

optimal green tax reforms yielding double dividend in an stylized endogenous growth economy with a negative externality created by co2 emissions and in which abatement activities are made by private firms we find a wide range of dynamically feasible green tax reforms yielding the double dividend without any need to assume a complex production structure or tax system or a variety of externalities in production as a remarkable finding we obtain certain scenarios in which increasing the emissions tax up to the pigouvian level and removing completely the income tax is dynamically feasible and also it is the second best reform hence as a difference to previous literature in these scenarios the first best tax mix is implementable allowing for the elimination of both environmental and non environmental inefficiencies our result arises because of the consideration of public debt issuing and the management of the government budget balance with an intertemporal perspective the result is obtained for an intermediate range of environmental bearing in preferences the valid range being contingent on the pre existing income tax rate the type of tax reform that we propose could also be implemented for different energy taxes

planes ships and taxes charging for international aviation and maritime emissions international aviation and maritime transport account for a significant and growing share of global carbon emissions yet they are not only excluded from the kyoto agreement and all current carbon pricing schemes but do not even pay fuel excises of the type standard for other transport activities moreover each sector benefits from preferential tax treatment failure to charge vat on international aviation and the application of tonnage tax regimes rather than the normal corporate tax in maritime this paper considers the design of fuel charges in these sectors to address these distortions and quantifies their impact on emissions revenue and welfare showing amongst other things that the gain from offsetting the pre existing tax distortions may be as significant as those from reducing emissions it shows too how compensation schemes can be designed to protect the poorest countries a key ingredient in the politics of the issue given the practical need for wide applicability of such charges the real challenge is to amass the degree of international cooperation required especially strong for maritime failure of which to some degree explains their current under taxation and unsurprisingly to decide who gets the money technically these charges should if anything be rather easy to implement michael keen ian parry and jon strand

measuring the efficiency cost of taxing risky capital income this paper derives a measure of the efficiency cost of taxing risky capital income in an infinite horizon stochastic model the resulting expression differs from all those proposed in the existing literature the correct measure of efficiency cost will normally be smaller than any of those used in policy studies possibly dramatically so uncertainty changes the expression for efficiency cost through effects arising not only from stochastic capital gains on existing capital but also from stochastic costs of replacing existing capital the latter effect reduces efficiency costs and normally outweighs the first effect copyright 1989 by american economic association

the effects of taxes and dividend policy on capital accumulation and macroeconomic behavior abstract this paper analyzes the macrodynamic effects of changes in various tax rates in an intertemporal optimizing framework two aspects emphasized include the role of dividend policy and the behavior of the stock market both permanent and temporary tax changes are considered with the transitional adjustment paths being characterized in detail the contrast between the short run and long run effects is highlighted in particular an increase in any of the tax rates will cause short run employment to fall and with the capital stock fixed instantaneously the capital labor ratio immediately rises over time as the capital stock declines the capital labor ratio falls

taxing capital is a good idea the role of idiosyncratic risk in an olg model abstract we investigate an overlapping generations olg model in which agents who live for two periods receive idiosyncratic productivity shocks when they are old we show that around zero tax equilibria we can always construct a combination of a small capital tax and a lump sum transfer that are pareto improving as davila et al econometrica 2012 show a capital reduction in one period raises the welfare level of agents who are old in that period but lowers that of the young agents because it reduces their wages we show that the government can compensate for these wage losses by additionally taxing the old agents such that their welfare gains remain positive our result is unchanged when earnings are uncertain at young age

the marginal welfare cost of capital taxation discounting matters we interpret the marginal welfare cost of capital income taxes as the present discounted value of consumption distortions such an asset market interpretation emphasizes the importance of the interest rate used to value future distortions especially in the presence of uncertainty we find that the interest rate decreases as the tax rate increases thus increasing the welfare cost the variations in the interest rate are caused by amplified responses of consumption to exogenous shocks as a result of capital taxation the welfare cost may be underestimated if variations in interest rates are ignored especially when tax rates are high

the welfare cost of capital income taxation in a growing economy the welfare cost of capital income taxation is analyzed in a general equilibrium framework where the private sector is represented by a competitive household endowed with perfect foresight and an infinite life the value of the welfare cost depends essentially on the elasticity of substitution between capital and labor in the production function numerical estimates are presented for different values of the parameters of the model the welfare gain obtained by the abolition of the capital income tax is smaller when the private sector is not endowed with perfect foresight it is reduced by about 40 percent when expectations are myopic the allocation efficiency cost of the corporate tax dwarfs the intertemporal welfare cost

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

on the treatment of anticipated shocks in models of optimal control with rational expectations an economic interpretation we suggest a general heuristic method based on elementary notions of price theory for dealing with the question of anticipated changes in models of perfect foresight the method is illustrated for the case of anticipated shocks to the state variable in this context the standard shadow price continuity condition fails while the method presented here applies after presenting the general solution it is used to analyze various examples of preannounced changes jel 020 213 by modeling economic agents as explicitly maximizing some objective function and by assuming rational expectations perfect foresight in deterministic models one can treat a class of problems of wide applicability and considerable theoretical interest namely the effects of preannounced or anticipated changes such changes can be of course either in behavioral or policy parameters or in the level of endogenous variables which otherwise are given by past history the typ

robert m solow s neoclassical growth model an influential contribution to economics in 1956 robert solow s paper a contribution to the theory of economic growth 21 appeared in the quarterly jqurnal of economics the model this paper describes is a simple one it has a constant returns to scale aggregate production function with substitution between two inputs capital and labor the model is completed by assuming that a constant fraction of output is invested the discrete time version of the model is

supply side reforms and learning dynamics this paper studies the nature the magnitude and the length of the transition after a capital tax cut the transition is analysed with adaptive learning under which agents do not need to adjust instantaneously to the change as with rational expectations re impulse response analysis reveals that the transition with learning is asymmetrically sensitive to the nature of the exogenous technological shock at the time of the reform if the reform coincides with a negative shock the transition to the new steady state is slow whereas if it coincides with a positive shock it is approximately the same as the one predicted by re the results imply that cutting capital income taxes before or during a recession may not be an effective means for short run fiscal stimulus

measuring the average marginal tax rate from the individual income tax the economic effects of taxation depend on the configuration of marginal tax rates we consider here the appropriate measure of a marginal tax rate for the federal individual income tax which has a graduated rate structure and allows for numerous legal and illegal deductions from total income our conclusion is that the explicit marginal rate from the tax schedule is the right concept for many purposes hence we construct approximately weighted averages of these marginal tax rates for 1916 80 when weighted by adjusted gross income the arithmetic average of marginal tax rates is 5 in 1920 2 in 1930 6 in 1940 20 in 1950 23 in 1960 24 in 1970 and 30 in 1980 we also discuss the dispersion of marginal tax rates as well as the behavior of average tax rates and deductions from taxable income one noteworthy result concerns the fraction of adjusted gross income that accrues to families that face a marginal tax rate of at least 35 this fraction quadruples from 1964 to 1980 this abstract was borrowed from another version of this item

the dynamic efficiency cost of not taxing housing traditional welfare cost estimates of tax subsidies for owner occupied housing are less than 0 5 of gnp in the united states and canada this paper argues that these static measures understate the true cost of the tax subsidy increasing the capital income tax makes untaxed housing more valuable delivering a windfall bonus to existing homeowners at the expense of future generations this intergenerational transfer has real efficiency effects in the presence of pre existing tax distortions when housing is in fixed supply the dynamic efficiency cost of preferential tax treatment for housing is as much as 2 2 of gnp or 120 billion dollars in 1990

optimal departures from marginal cost pricing focuses on departures from marginal cost pricing optimal allocation or resources level of tax revenue that will be collected by the government theorems developed for resource allocation ebsco

taxation and uncertainty while taxes may be certain u s tax policy has certainly not been furthermore intrinsic economic risk makes investment decisions risky therefore a serious examination of the effects of tax policy on dynamic economic behavior should consider both sources of uncertainty this paper presents a simple theoretical and computational model that can analyze both intrinsic risk and uncertain taxation furthermore it will be clear that these techniques will be useful for examining general problems of taxation and risk when studying the impact of past and or proposed tax changes one of two extreme assumptions are usually made either agents are perfectly aware of future tax policy a perfect foresight assumption or they always believe that no change will ever occur a myopic foresight assumption these two assumptions yield substantially different views of recent tax experience as alan auerbach and james hines 1987 demonstrate in a partial equilibrium context both are clearly wrong the myopic specification assumes that individuals believe at each point in time that the current tax law will surely continue forever even after they have been hit repeatedly with tax changes on the other hand it is absurd to think that in say 1977 a significant number of individuals perfectly knew the various tax changes that would occur during the following decade this paper analyzes a dynamic general equilibrium model wherein taxpayers understand the uncertainty in tax policy when making their deci

altruism deficit policies and the wealth of future generations i introduction there is now a substantial body of evidence suggesting that altruistic financial bequests are zero for the vast majority of households 1 other studies seem to indicate that the financial bequests which are made are not likely to be altruistically motivated 2 while this evidence against the importance of altruistic financial bequests seems reasonably convincing it is by no means clear that the importance of altruism per se has been dismissed 3 for example the results reported in altonji hayashi and kotlikoff 1992 tables 14 17 indicate that extended family resources while not perfectly linked to own resources are important for explaining own consumption the authors do not reject the notion that substantial altruistically motivated transfers occur in the u s rather they suggest the altruistically motivated transfers which are made take the form of less than fully efficient human capital transfers to children if most altruistic transfers do take place via educational expenditures how does this affect the ricardian equivalence theorem robert barro 1974 1989 argues the presence of any altruistic transfer is sufficient to guarantee that intergenerational transfers caused by government policy are neutral other forms of intergenerational transfers such as inter vivos gifts to children support of children s education and so on can work in a similar manner therefore the ricardian results will hold even if many persons leave little in the way of formal bequests 1989 41 4 an alternative view however is expressed by allan drazen 1978 he argues if parents possess an insufficient mix of wealth and altruism intergenerational transfers could be exhausted before the efficient level of human capital investment is achieved if explicit or implicit loans between parents and children are not possible then the government may be able to improve welfare by generating intergenerational transfers from children to parents 5 a cut in the parents tax burden and an equal present value increase in the tax on the next generation is equivalent to a government enforced loan at the going market interest rate since educational expenditures are inefficiently low the return on human capital investment exceeds the loan rate therefore parents could put an amount less than the tax cut into their children s education and still leave the children with enough additional income to pay for the future tax increase thus a deficit policy serves to expand the consumption possibility set of the family viewed in this way drazen 1978 514 footnote 7 imagines an argument for a pareto optimal level of public debt issue 6 a third possibility was identified by nerlove razin and sadka 1988 who conduct the most explicit analysis of government transfers in an economy with altruistic but financial bequest constrained households they also find a transfer or implicit loan to parents from their children will make the parents unambiguously better off however they were the first to point out that a deficit policy may lower the welfare of the children although they fail to explain why thus even in the presence of altruistic transfers from parents to children the effect of deficits on the consumption of future generations is far from clear in this paper we wish to clarify the effect of intergenerational transfers on bequest constrained families the next section intuitively explains why a government loan or deficit policy generates an ambiguous effect on the children s consumption even though altruistic parents are fully capable of making both generations better off after the loan we also identify the key structural determinants of the change in the children s wealth due to the loan in section iii we extend the simple model of section ii to a more quantitatively realistic multi period life cycle simulation model of a bequest constrained household the simulation model is then used in section iv to examine how a government intergenerational transfer affects the consumption of each generation under various settings of the key structural determinants identified in section ii

dynamic scoring a back of the envelope guide abstract this paper uses the neoclassical growth model to examine the extent to which a tax cut pays for itself through higher economic growth the model yields simple expressions for the steady state feedback effect of a tax cut the feedback is surprisingly large for standard parameter values half of a capital tax cut is self financing the paper considers various generalizations of the basic model including elastic labor supply general production technologies departures from infinite horizons and non neoclassical production settings it also examines how the steady state results are modified when one considers the transition path to the steady state

optimal fiscal policy in a stochastic growth model although most neoclassical growth models focus on competitive equilibria which are pareto optimal and ignore the role of government recent works by romer 28 29 judd 20 baxter and king s and bizer and judd 7 have shown that government can be introduced into and suboptimal equilibria can be studied in these models as well their studies however are positive analyses of the effects of fiscal policy in competitive equilibria the purpose of this paper is to apply ramsey s 27 theory of optimal taxation to the normative study of fiscal policy in a stocastic growth model ramsey studied a static representative consumer economy with many goods in his formulation a government consumes a fixed amount of these goods which it purchases at market prices and finances by levying flat rate excise taxes prices and quantities are determined in a competitive equilibrium the government is benevolent and its objective is to choose the optimal tax rates to maximize the representative consumer s utility a number of economists among them kydland and prescott 23 barro 3 turnovsky and brock 31 and lucas and stockey 26 have noted that ramsey s formulation can be applied to dynamic economies with uncertainty if one reinterprets the goods in static problems as dated state contingent goods in this framework a fiscal policy is a rule which specifies state contingent tax rates and the amount of public debt issue in each date the optimal fiscal policy is defined as the one which leads to a quantity