evaluating fiscal policy with a dynamic simulation model those schooled in the shifting curves of static and steady state macro models may not fully appreciate the dynamic nature of fiscal policy simple blackboard models can convey neither the timing nor the magnitude of responses to shortand intermediate term fiscal policies nor can they isolate the impact of fiscal policies on transitional generations there is also a range of issues such as deficit finance and the relative efficiency of alternative tax structures that cannot be properly addressed without solving for the economy s transition path recent experience has provided several experiments in dynamic fiscal policy including the accumulation of large amounts of official government debt expected future changes in the level of social security benefits shifts in the tax structure and increases and then reductions in investment incentives each of these policies has important transitional as well as long term effects the analysis of these effects is possible using a dynamic general equilibrium numerical simulation model

generational accounting a meaningful way to evaluate fiscal policy this paper illustrates the technique of generational accounting a new way to evaluate fiscal policy that overcomes the inherent ambiguities of traditional deficit accounting the authors illustrate why there is no correct measure of the deficit and how generational accounting estimating the fiscal burdens current policy places on different generations provides a clearer picture of the intergenerational and macroeconomic effects of fiscal policy than any measure of the deficit their calculations suggest that despite recent changes u s fiscal policy is unsustainable in that it will ultimately require future generations to bear a much higher burden than those currently alive

social security liquidity constraints and pre retirement consumption one of the primary goals of the social security retirement program is the maintenance of consumption in old age in the past decade since the pioneering paper by feldstein 13 studies have examined the impact of the system on consumption over the entire life cycle and not just in old age empirical work has tested the impact on consumption of the individual wealth transfers accompanying the introduction of a pay as you go social security system extending this discussion of the impact of social security on pre retirement consumption hubbard 21 has shown in the context of lifetime uncertainty that even an actuarially fair fully funded social security system can raise lifetime consumption hence previous partial equilibrium estimates of the impact of social security on consumption drawn solely from consideration of the intergenerational wealth transfer at the introduction of the system are underestimates of the potential effect 2 an important assumption in the approaches cited above is that of perfect capital markets i e that individuals can borrow against prospective gains from participating in the social security system such an assumption is at variance with actual limitations on borrowing e g upward sloping interest rate schedules collateral requirements and quantity restrictions hayashi 18 found that approximately twenty percent of all consumption in the u s is accounted for by liquidity constrained consumers 3 flavin 16 found that the estimate of the marginal propensity to consume is affected dramatically by the inclusion of proxies for liquidity constraints suggesting that liquidity constraints are an important part of the observed excess sensitivity of consumption to current income since its inception in 1935 old age and survivors insurance oasi provided

estimating the elasticity of intertemporal substitution using mortgage notches using a novel source of quasi experimental variation in interest rates we develop a new approach to estimating the elasticity of intertemporal substitution eis in the u k the mortgage interest rate features discrete jumps notches at thresholds for the loan to value ltv ratio these notches generate large bunching below the critical ltv thresholds and missing mass above them we develop a dynamic model that links these empirical moments to the underlying structural eis the average eis is small around 0 1 and quite homogeneous in the population this finding is robust to structural assumptions and can allow for uncertainty a wide range of risk preferences portfolio reallocation liquidity constraints present bias and optimization frictions our findings have implications for the numerous calibration studies that rely on larger values of the eis

capital taxation and accumulation in a life cycle growth model almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path this paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model the results suggest that the elimination of capital income taxation would have very substantial economic effects for example a complete shift to consumption taxation might raise steady state output by as much as 18 percent and consumption by 16 percent the long run welfare gain from such a shift would for plausible parameter values exceed 150 billion annually stated somewhat differently shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years income in the new steady state these estimates dwarf estimates of the static welfare cost of taxation and significantly exceed even extreme previous estimates of the dynamic loss this study departs from earlier analyses of the effects of taxes on capital income in several respects probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving it is shown below that the common two period formulation of saving decisions yields quite misleading results a more realistic model of life cycle savings demonstrates that for a wide variety of plausible parameter values savings are very interest elastic this implies that shifting away from capital income taxation would significantly increase capital formation making possible long run increases in consumption many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation in an economy with life cycle savings there is no presumption that the undistorted growth path corresponds to any sort of social optimum as peter diamond has shown life cycle savings can lead to a steady state capital intensity either greater or less than the golden rule level more generally it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function a fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes the results presented in this paper take explicit account of the nonoptimal character of the no tax steady state this explains in large part why such a sizeable welfare effect of capital taxes is found in an economy far from the golden rule level of capital intensity there are substantial gains in steady state consumption achievable through increased capital formation section i of the paper examines the aggregate savings function in a continuous time life cycle framework the second section clarifies the differences between wage and consumption taxes an aggregate production function is added to complete the model in the third section the effects of changes in capital taxes on both steady state incidence and welfare are considered within a general equilibrium framework the final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study assistant professor of economics massachusetts institute of technology and research analyst national bureau of economic research i am grateful to alan auerbach martin feldstein laurence kotlikoff to the participants in the nber workshop on business taxation and to the harvard public finance seminar for useful discussions james poterba and james buchal performed the numerical calculations

wealth accumulation over the life cycle and precautionary savings this article constructs and simulates a life cycle model of wealth accumulation and estimates the parameters of the utility function the rate of time preference and the coefficient of risk aversion by matching the simulated median wealth profiles with those observed in the panel study of income dynamics and in the survey of consumer finances the estimates imply a low degree of patience and a high degree of risk aversion the results are used to study the importance of precautionary savings in explaining wealth accumulation they imply that wealth accumulation is driven mostly by precautionary motives at the beginning of the life cycle whereas savings for retirement purposes become significant only closer to retirement

efficiency wages and economic growth abstract this paper examines the positive and normative implications of introducing efficiency wages into a standard growth model a number of useful findings are obtained under the empirically justifiable assumption that the elasticity of substitution between capital and labor is less than unity it is shown that an increase in thrift shifts downward the whole path of equilibrium unemployment to leave it permanently lower in the new steady state a level increase in the measure of as well as an increase in the rate of harrod neutral technical progress are contractionary for equilibrium employment the market economy underinvests

international effects of tax reforms in an open economy with international capital flows there is an equivalence relation between income tax consumption tax international borrowing tax and an external interest earning tax this paper analyzes tax reform involving shifts between income and consumption taxes in this setting it is shown that the real effects of such revenue neutral tax reform depend critically on the country s current account position and the nature of the reform in particular whether the world interest rate rises or falls as a consequence of a budget deficit depends on the tax system in force the analysis provides a clear rationale for the international coordination of tax policies copyright 1989 by royal economic society

increasing the capital income tax may lead to faster growth this paper shows that under rather mild conditions higher capital income taxes lead to faster growth in an overlapping generations economy with endogenous growth government expenditures are financed with labor income taxes as well as capital income taxes since capital income accrues to the old taxing it reliefs the tax burden on the young and leaves them with more income out of which to save we argue that savings are sufficiently interest inelastic so that higher savings and therefore higher growth result the basic argument is not seriously challenged by a grandfather clause for initial capital or by the old receiving some labor income as well the reasoning is similar to feldstein 1978 auerbach 1979 and in particular jones and manuelli 1992 but in contrast to the conventional wisdom about the effect of capital income taxation as say in lucas 1990

social security and aggregate capital accumulation revisited dynamic simultaneous estimates in a wealth generation model this paper re examines feldstein s 1974 1982 results of the effect of social security on private capital accumulation in the context of a simultaneous equation model of capital accumulation the model incorporates dynamic feedback effects in capital accumulation and is estimated by fiml to incorporate theoretical restrictions that are tested against the data it is then simulated as a full dynamic model to analyze the long run effect of ssw on private capital accumulation the simulated effects are in the same direction as found by feldstein but are considerably weaker

estimating dynamic demand for cigarettes using panel data the effects of bootlegging taxation and advertising reconsidered abstracct a dynamic demand for cigarette consumption is estimated using pooled data of 46 states over the period 1963 to 1980 a price elasticity of 0 2 and an insignificant income elasticity is found using pooled estimation techniques the bootlegging effect is modeled explicitly using neighboring price the effect is found to be significant two major policy issues are analyzed in light of these new estimates 1 cigarette taxation is found to be an effective tool for generating revenues even though there may be spillover effects to neighboring states where bootlegging is significant 2 the effects of the fairness doctrine act and the advertising ban on cigarette consumption are re examined we find mild support for the effectiveness of subsidized anti smoking messages in reducing cigarette consumption and no support for the thesis that the ban on advertising helps to increase per capita consumption

trends in household saving don t justify tax incentives to boost saving despite diverse trends in household saving in oecd countries many governments are introducing tax incentives designed to boost saving by particular groups such schemes have been justified by many trends including increasing income inequality ageing populations and greater cross border competition it is dangerous however to base policy on what is happening to aggregate household saving alone first personal saving should be viewed within a lifecycle context saving may look inadequate today but households may already have made plans to redress this in future second data on aggregate saving conceal significant differences between different household groups only disaggregation yields reliable inferences on which policy can be based in particular it is impossible to assess the consequences of demographic changes without analysis that distinguishes between different generations we reassess household saving by computing the evolution of lifetime profiles of consumption income and saving of different cohorts over time and then analyse the effect of demographic and other changes we find little evidence for the assertion that tax incentives to promote national saving are needed now to stave off a future drought in household saving

the impact of tax deductible saving on dynamic efficiency abstract the simulations reported in this paper suggest that permitting unlimited tax deductivility for saving under a progressive personal income tax could have a more favourable impact on total personal saving and capital accumulation than even a switch to a progressive consumption tax

inflation capital taxation and housing the long run in a small open economy this paper deals with the consequences of inflation and capital income taxes for the accumulation of wealth in a small open economy with a housing sector particular attention is paid to the incentive and intergenerational redistribution effects stemming from the interaction of inflation and capital income taxation and to portfolio shifts between housing assets and other assets the authors find that the intergenerational distribution effects and the incentive effects on overall savings tend to offset and sometimes even to dominate several of the expected interasset substitution effects of a change in inflation and capital taxes

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

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

the transition from payroll to consumption receipts with endogenous human capital abstract the transition from payroll to consumption receipts is simulated in a life cycle growth model featuring adult human capital as in other studies savings are higher under the consumption base however unlike those studies much of the additional savings here take human form human capital production increases for all cohorts in or yet to join the labor market as of the tax change the additional human capital production tends to dampen physical capital accumulation when compared with otherwise identical simulations which hold human capital constant the implications for intergenerational incidence are similar to that found in other examinations of the transition to a consumption base

the variable rate of growth effect in the life cycle saving model the rate of growth in real gnp g affects the aggregate saving rate positively in life cycle saving models this rate of growth effect is invariably estimated as the coefficient of g in the saving function we show that other determinants of the saving rate influence the rate of growth effect in other words the rate of growth effect is not constant specifically the real rate of return on financial assets and the population dependency ratio determine the timing of saving over the life cycle and hence alter the rate of growth effect the dependency ratio also has an effect on the saving rate which is independent of g because it together with the foreign saving rate determines the level of saving over the life cycle

welfare effects of capital income taxation under variable and fixed labor supply not every model of economic behavior can allow for variable labor supply when attention is focused on other economic issues the effect on welfare change measurement of assuming labor to be in fixed supply becomes important the traditional view is that allowing labor supply to be variable will reduce the measured benefits of replacing an interest income tax with a payroll or consumption tax owing to the introduction or increase in a static distortion between consumption and leisure however this view ignores two mechanisms by which variable labor supply may actually increase the benefits of relaxing the capital income tax first an interest income tax distorts the intertemporal path of leisure and thus of labor supply second as explained below the interest elasticity of savings may be augmented by changes in the intertemporal labor supply path eliminating the labor supply path distortion and increasing capital accumulation can provide benefits which may potentially exceed the disadvantages of increased static distortion this paper tests which effects dominate by simulation in a life cycle growth model previous papers have not addressed these issues feldstein 3 discusses welfare measurement in a two period model in which an individual supplies labor in the first period and consumes in both periods feldstein s partial equilibrium efficiency measure incorporates the elasticity of labor supply with respect to the interest rate but his single period of labor supply may be misleading summers 8 demonstrates that in multi period models interest rate changes may have a large effect upon the present value of lifetime resources human wealth and consequently consumption that finding when applied to frameworks allowing for leisure consumption implies that both the compensated and uncompensated elasticities of labor supply with respect to the interest rate may be markedly different for multi period than for one period labor supply models summers exploits a multi period life cycle growth model to measure numerically the steady state efficiency gains following an elimination of interest income taxation he assumes labor to be fixed in supply at each moment consequently changes in human wealth cannot affect the leisure profile and the benefits of eliminating intertemporal leisure distortions are not captured summers concludes that steady state consumption and welfare would increase

the effectiveness of anti smoking legislation a review abstract this survey focuses on government efforts to curb the use of undesirable goods notably tobacco products we synthesize the economics literature and examine the effectiveness of government curbs on tobacco consumption through non price controls such as bans on cigarette advertising health warnings and workplace smoking bans and price measures or higher prices through higher taxes this literature review is unique in that we do not merely aim to provide a summary of the literature rather our main focus is to draw conclusions from the literature regarding the effectiveness of alternate policy measures across countries in checking smoking and to provide directions suggestions for extending the scope of government intervention to other tobacco products

the later you pay the higher the k this paper shows the importance of the age path life cycle timing of any tax for the accumulation of capital in the economy income consumption and wage taxes differ in their age paths as well as their incentive effects this paper studies how the differing age path of each tax affects the capital accumulation of the economy in an empirically calibrated life cycle model we investigate lump sum age taxes and find in every case that the later the person pays tax the higher the k of the economy to analyze the life cycle timing effect of conventional transactions based taxes income consumption and wage we replace each tax with a lump sum age tax that has the identical age path of tax payments over the life cycle we find that the timing effect is quantitatively important and often causes the impact of a tax on capital accumulation to be very different from what would be predicted from the incentive effect

generational accounting and intergenerational welfare we investigate the intergenerational welfare implications of generational accounting when it is used as the basis for intertemporal fiscal policy decisions in particular we consider an economy with a paygo social security system out of steady state due to a permanent fall in fertility in a highly stylized cge overlapping generations model we illustrate that policy recommendations based on a standard application of generational accounting may not be compatible with intertemporal welfare maximization our model provides an example where such policies are either time inconsistent or welfare decreasing

aggregate cigarette demand and regional differences in china national educational level final consumption expenditure average propensity to cigarette consumption apcc and cigarette price are adopted to research the regional and national aggregate cigarette demand of china under the condition that the effects of anti smoking education in the chinese current educational system are not remarkable the theoretical model shows that cigarette demand will increase with the increase of national educational level empirical analysis points out that cigarette demand increases with the increase of educational level estimates also suggest that cigarette price consumption expenditure and apcc will affect cigarette demand significantly and that there are great differences for cigarette demand by region

assessing the dynamic efficiency gains of tax reform when human capital is endogenous this paper develops a life cycle growth model with endogenous human capital accumulation and variable leisure which is employed to simulate dynamic equal yield changes from an income tax to a consumption tax although endogenizing human capital investment decisions raises partial equilibrium estimates of the efficiency costs of capital income taxation general equilibrium welfare impacts of unanticipated tax changes are little affected by the inclusion of endogenous human capital this finding cannot be fully explained by the presence of general equilibrium adjustments in factor prices and can be attributed in part to the existence of transitional rigidities in capital stocks copyright 1995 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

fiscal incidence in an overlapping generations model with a fixed asset abstract we analyze a model of overlapping generations with a fixed factor land malleable capital and labor we consider the dynamic effects of various fiscal policies including taxes on rent wages and creation of public debt on capital accumulation land prices and intergenerational welfare minimal assumptions uniqueness and stability imply that a land tax may initially raise land values but the upper bound is less than one half of the tax revenues assuming homothetic utility the ratio between the long run capital responses to a land tax and to a lump sum transfer of equivalent revenue from the young to the old depends solely on the share of labor

taxes in a life cycle growth model with bequests and inheritances in a recent paper lawrence summers 1981 analyzes alternative taxes in a life cycle growth model this paper extends his analysis to include bequests and inheritances this inclusion is worth undertaking for several reasons first several recent empirical studies have suggested that bequests may account for an important share of the capital stock laurence kotlikoff and summers 1981 second it is important to explore whether the comparison of taxes is significantly affected when a bequest motive is introduced third the treatment of bequests under a consumption tax is controversial the endowment rationale calls for treating a bequest as taxable consumption by the deceased peter mieszkowski 1980 the real wage rationale calls for exempting bequests if such exemption raises the steady state capital intensity and real wage my 1980 article this paper confines itself to positive analysis of steady states transition paths and normative implications are explored elsewhere see my 1982 paper

efficient tax reform in a dynamic model of general equilibrium the welfare gain of a shift from capital to a labor income tax is determined in a model of intertemporal optimization with infinite horizon and variable labor supply the welfare impact of small tax changes is computed by an approximation method around the steady state when the difference between the growth rate and the discount rate is small the welfare impact of tax reform depends mainly on the parameters of the production function

do positional goods inhibit saving evidence from a life cycle experiment abstract we investigate the effect of positional goods goods for which one s consumption relative to others matters on saving based on results from a life cycle consumption saving experiment in a group treatment we allow inter personal comparisons by assigning subjects to groups and displaying rankings based partly on consumption a baseline individual treatment is similar but without the additional information we find more under saving saving less than the optimal amount and lower money earnings for subjects in the group treatment both effects are economically relevant with magnitudes of roughly 6 7 of expected income and 7 8 of average earnings respectively additional analysis shows that the result is driven by those subjects who are not ranked in the top three in their group keeping up with the joneses and males in particular

dynamic efficiency in the gifts economy abstract in the standard analysis of overlapping generations economies with gifts from children to parents each generation takes the actions of other generations as given the resulting equilibrium is dynamically inefficient in reality however parents realize that children will respond to higher parental saving by reducing gifts for a broad class of gift economies this implicit tax on saving pushes the equilibrium to dynamic efficiency this result reestablishes the potential relevance of the gift model to the us economy renders moot an important part of the ricardian equivalence debate and provides a motivation for a type of social security system

the after tax rate of return affects private savings level of savings and the rate of capital formation are of central concern to both economists and policymakers although the welfare effects of tax reforms do not directly depend on their impact on savings the effects of taxes on savings is crucial to considerations of tax incidence and equity and to the issue of long run growth the impact of the rate of return on consumption and savings decisions also bears on questions regarding the appropriate government discount rate the short run crowding out effects of fiscal policy and the effects of public indebtedness on capital intensity the traditional view among economists is that changes in the rate of return are likely to have only a small effect on the savings rate this consensus is supported by theoretical arguments pointing to the opposing income and substitution effects associated with changes in the rate of return the ambiguous implications of theory are matched by empirical studies which yield conflicting estimates as to the size of the impact of changes in the rate of return the polar empirical estimate is michael boskin s 1978 suggestion that the interest elasticity of savings is 4 this estimate is widely regarded as too high

social security and intergenerational redistribution a generational accounting perspective this paper is concerned with the analysis of intergenerational redistribution in a pay as you go financed social security scheme instead of annual fiscal indicators we apply generational accounts to calculate the intertemporal effects arising from a projected aging process as a case study the institutional settings and the parameterization of our model refer to the conditions found in germany in 1989 additionally the intergenerational impacts of the german 1992 pension reform act are taken into account our findings suggest that the major reform measures affect the distribution of the demographic burden between future and presently living generations however the burden is shifted in favor of the generations currently alive thereby contradicting the explicit political intentions and aggravating the situation for future generations

the present value criterion and environmental taxation the suboptimality of first best decision rules this paper examines the links between environmental taxes and distortionary taxation in a dynamic model of climate change and economic growth under first best conditions labor and capital would remain untaxed and carbon dioxide emissions would be taxed at a rate equal to the present value marginal cost they impose on future society setting the discount rate equal to the marginal productivity of capital under secondbest conditions however this decision rule substantially understates optimal emissions taxes when the resulting revenues are used to provide targeted cuts in distortionary taxes conversely relatively low emissions taxes are economically justified given lump sum revenue recycling

eliminating interest taxation and tariffs the underpinnings for recent canadian policy blanchard s 1985 formulation of the overlapping generations model and the so cial welfare function advocated by calvo and obstfeld 1988 are used to analyse interest taxation and tariffs in a small open economy when the revenue lost from the elimination of these taxes is replaced by raising the tax on labour as in recent canadian experience a low social discount rate is required for the model to support lower interest income taxes while a high discount rate is needed to support the elimination of tariffs we illustrate the empirical importance of this simultaneous need for both a high and a low discount rate eliminer l imposition des revenus d interet et les droits de douane les soubassements de la politique canadienne re cente les auteurs utilisent la formulation blanchard du modele des generations qui se chevauchent et la fonction de bien etre social de calvo et obstfeld pour analyser les effets de l imposition des revenus d interet et des droits de douane dans une petite economie ouverte quand la perte de revenus attribuable a l elimination de ces taxes est comblee par un imp6t sur le travail comme ce fut le cas au canada il faut postuler un taux d escompte social bas pour qu on puisse endosser une politique de reduction de l imposition des revenus d interet alors qu il faut postuler un taux d escompte social eleve pour endosser une politique de reduction des droits de douane les auteurs montrent l importance empirique de cette necessite d avoir un taux d escompte a la fois bas et haut

financial development international capital flows and aggregate output abstract we develop a tractable two country overlapping generations model and show that cross country differences in financial development can explain three recent empirical patterns of international capital flows financial capital flows from relatively poor to relatively rich countries while foreign direct investment flows in the opposite direction net capital flows go from poor to rich countries despite its negative net international investment positions the united states receives a positive net investment income international capital mobility affects output in each country directly through the size of domestic investment and indirectly through the aggregate saving rate under certain conditions the indirect effect may dominate the direct effect so that international capital mobility raises output in the poor country and globally although net capital flows are in the direction to the rich country we also explore the welfare and distributional effects of international capital flows and show that the patterns of capital flows may reverse along the convergence process of a developing country our model adds to the understanding of the costs and the benefits of international capital mobility in the presence of domestic financial frictions

tax reform and land using sectors in the u s economy a general equilibrium analysis a computable general equilibrium model of the u s economy is used to assess the effects of the tax reform act of 1986 on land using sectors forestry and three classes of agriculture the model s components include twelve production sectors six consumer groups a balanced budget government sector and a zero surplus foreign sector in relative terms tax reform reduces total value added output in land using sectors to a greater extent than other sectors in the economy experiments are also performed comparing partial and general equilibrium specifications of the economy and the impact of choice of input substitution elasticities

measures of shortage and monetary overhang in the polish economy this paper attempts to cast light on the debate about the existence and size of a monetary overhang in household money balances in command economies four measures of shortage or price deformation are constructed for the polish economy and used to test for the existence of shortage money balances in poland 1965 1989 the approach involves estimating relationships for household money balances 1965 1993 a period that spans both central planning and the post 1990 period of liberalised prices the principal finding is that the evolution of household money balances in poland cannot be explained without invoking measures of shortage and an overhang during the planning period the estimates suggest an overhang with a maximum of just over 40 of money balances

interest rate management in ldc s the mckinnon argument that higher time deposit rates raise output and lower inflation in the short run and increase medium term growth by raising the savings rate are shown to depend crucially on the assumption that portfolio shifts into td s come out of an asset providing less intermediation than the banking system we show that if instead the shift is out of an asset providing more intermediation e g loans on a curbmarket raising td rates is contractionary in the short run may have negative impacts on growth and can lead to more rather than less inflation in the short run

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

is college financial aid equitable and efficient nk reed based financial aid is often defended both on grounds of equity and efficiency equity because it provides equality of opportunity and efficiency because it encourages the formation of productive human capital james 1988 however need is now determined in a way that is both inequitable and inefficient an informal survey of my colleagues who do not study financial aid revealed no one who named the financial aid system as a substantial tax on savings however once this interpretation was suggested they quickly revealed their unanimous and disturbing impression that savings are summarily confiscated from parents upon their first child s matriculation at university though exaggerated this impression is not without foundation two families with identical earnings paths pay dramatically different amounts for college if one saves more than the other thus while the financial aid system may contribute to vertical equity since the poor get more aid than the rich its horizontal inequities are substantial moreover the federal rules for financial aid raise significant efficiency concerns 1 they might conceivably distort many household decisions including family size and the spacing of children however this paper will focus upon the most important incentive distorted by present policies the incentive to save because saving leads to receiving less financial aid a family s return to saving is substantially below the social return this may lead to families making inefficient intertemporal choices and correspondingly to an inefficient loss of capital formation

cigarette demand health scares and education in turkey the purpose of this paper is to examine the demand characteristics of cigarettes in turkey aggregate time series date for the 1960 88 period are used in estimation income and price elasticities of cigarette demand are obtained the effect of health warning is estimated to reduce cigarette consumption by about 8 since the inception of warnings in 1982 imports of cigarettes have been allowed since 1984 in addition to advertising of cigarettes in the non electronic media the effect of health warnings are found to be stronger than the opposing effect of advertising the results also suggest that public education about adverse health effects of smoking may be more effective in reducing consumption and less regressive on consumer incomes than raising the price of cigarettes

the black market for foreign exchange an international comparison abstract the dornbusch et al 1983 model for the determination of the black market foreign exchange premium is modified and then estimated for 19 countries for various periods during 1970 1979 in which we identified the existence of a black market for foreign exchange the outstanding result is the almost total uniformity of the estimated coefficients of the explanatory variable expected profits from black market transactions and the small spread of the elasticities of the black market premium with respect to the expected profits and the real official exchange rate

measuring the welfare costs of inflation in a life cycle model abstract in a neoclassical growth model with life cycle households in which money is held to satisfy a cash in advance constraint the optimal steady state inflation rate is absurdly high in excess of 20 lump sum age independent money injections twist and flatten the lifetime profile of utility making this profile look more like the one that would be chosen by a planner the cost of monetary finance of lump sum payments is the distortion introduced to the labor leisure choice

optimal saving interest rates and endogenous growth the main point of this paper is that the apparent failure of economists thus far to establish a positive empirical link between interest rates and saving does not by itself discredit the hypothesis of a direct structural relationship between the two ceteris paribus because this structural relationship may be shifting about in response to changes in exogenous variables such as tastes and technology in a way that is consistent with any type of reduced form correlation between interest rates and saving in the data this point is demonstrated within a simple model of optimal saving interest rates and economic growth the different implications of endogenous versus exogenous growth are explored in this context

consumption and wage taxes when household size matters abstract standard life cycle models recommend consumption rather than wage taxes in order to limit the welfare losses incurred by taxation however as this note points out the superiority of consumption over wage taxes disappears if household size is considered

flat tax reform a quantitative exploration abstract this paper explores quantitatively the general equilibrium implications of a revenue neutral tax reform in which the current income and capital income tax structure in the u s is replaced by a flat tax as proposed by hall and rabushka 1995 the flat tax 2nd ed hoover the central aspects of such reform the impact of tax reform on capital accumulation and labor supply as well as its distributional consequences are analyzed in a dynamic general equilibrium model main results are that i the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation ii mean labor hours are relatively constant across tax systems but aggregate labor in efficiency units increases iii in all circumstances analyzed the distributions of earnings income and especially wealth become more concentrated

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

kalman filter and the demand for cigarettes kalman filter estimates of price income and advertising elasticities are presented an analysis of structural change in the demand for cigarettes in the us for the period 1929 86 is made estimated price and income elasticities are generally smaller and the advertising elasticity larger than estimates previously found cigarette demand is inelastic with respect to price and income and advertising elasticity is statistically insignificant for the most part furthermore both income and price elasticities decline over time while advertising elasticity tends to rise four time periods where structural change has occurred are identified the health scare reports and the fairness doctrine act have a significant impact on per capita cigarette consumption

optimal taxation in a growth model with public consumption and home production in a neoclassical growth model with public consumption we show the following pareto optimal tax rules the government should tax leisure and private consumption at the same rate and subsidize net investment at the same rate it taxes net capital income also it should tax capital income more heavily than labor income in an extension for home production the additional rule is to tax investment for home production at the same rate of the tax on private market consumption these tax and subsidy rates should be constant over time except the initial tax rate on capital income

the black market for dollars in brazil the model of the black market for dollars focuses on the interaction of portfolio decisions relevant to the holding of asset stocks and the determinants of net flows of dollars associated with tourism and smuggling a partial equilibrium model of the black market shows that the level of the premium is determined by the official real exchange rate and the official depreciation adjusted interest differential as well as seasonal factors associated with tourism expectations of future exchange rate changes under rational expectations are shown to affect the current level of the black market premium the empirical evidence provides ample support for the role of the key determinants of the premium as well as for an important seasonal pattern the magnitude of the seasonal variation is evidence of the imperfect substitutability between black dollars and cruzeiro assets in portfolios

optimal taxation and optimal tax systems the theory of optimal taxation has for the pas two decades been the reigning normative approach of taxation this paper argues that in its current state optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy it is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist the coercive nature of collection taxes implies that the resource cost of implementing a tax system have been and will continue to be a critical determinant of appropriate tax policy the paper first presents the three cornerstone propositions of optimal tax theory and then it discusses the influence of these propositions on recent tax policy developments it concludes by sketching an alternative to optimal taxation called the theory of optimal tax systems which embraces the insights of optimal taxation but also considers the technology of raising taxes and the constraints placed upon tax policy by that technology the optimal tax systems perspective is shown to shed light on the choice of tax instruments the problem of tax evasion and the appropriate tax treatment of capital income this abstract was borrowed from another version of this item

tax policy regulated interest rates and saving abstract the paper evaluates tax policy options designed to reduce distortions to savings behavior that occur when administered interest rates are set beneath market equilibrium levels while the removal of controls on interest rates might be the best option political legal or institutional circumstances might well preclude this solution it suggests that consumption or sales taxes can be designed so that in the short term the rate of return to saving can be changed to approximate the market determined interest rate the main advantage of the measure is that it can provide a time to develop appropriate legal and institutional structures for financial deregulation and b an additional policy instrument that allows the burden of adjustment in a stabilization policy setting to be distributed over more than one instrument

the economic effects of restrictions on government budget deficits abstract in overlapping generations economies with perfect financial markets and lump sum taxation restrictions on the government budget deficit do not limit the set of achievable allocations for economies in which the tax instruments are distortionary and limited in number this strong form of irrelevance does not hold even if markets are perfect we propose a weaker but natural definition of irrelevance in which only a finite but arbitrarily large number of restrictions near the baseline deficit are considered we show that if the government can use only anonymous consumption taxes there is weak irrelevance of the deficit restrictions if the number of tax instruments is large relative to the number of policy goals journal of economic literature classification numbers d51 d91 e32

generational accounts aggregate saving and intergenerational distribution are generational accounts informative about the effect of the budget on the intergenerational distribution of resources and on aggregate saving first the usefulness of generational accounts lives or dies with the strict life cycle model of household consumption second even if the life cycle model holds generational accounts ignore the intergenerational redistribution associated with the government s provision of public goods and services and with intergenerational externalities third generational accounting ignores the effect of the budget on tax and transfer bases and on before tax and transfer quantities and prices that is it does not handle incidence or general equilibrium repercussions

health scare excise taxes and advertising ban in the cigarette demand and supply the cigarette industry is a fascinating laboratory for industrial economists because of its concentrated market structure and history of conflicts over health and tax issues the industry has been the focal point of many economic studies most of the recent studies have concentrated on the demand side of the market for example bass schmalensee hamilton and fujii deal with the impact of advertising and the health scare on cigarette demand 4 15 10 8 barzel johnson and sumner ward assessed the importance of the excise tax or ad valorem tax on consumers cigarette demand 3 12 16 on the supply side vernon rives naylor developed an econometric model of the tobacco industry 20 which however is more concerned with the agricultural aspects of the product than the industry s market organization a careful review of the above studies suggests serious shortcomings which appear to limit their application to policy formulation or market analysis first the variables are introduced in an ad hoc fashion without reference to existing demand or supply theories second none of the above studies recognizes explicitly the interactions among the variables in the demand and the supply equations in the context of the determination of market equilibrium this paper has three objectives 1 to apply the standard neoclassical market theory to the cigarette industry 2 to identify the interactions between cigarette demand and supply using a simultaneous equations approach the first such attempt in a cigarette industry study and 3 to evaluate the effects of cigarette taxes advertising and health scare issues on the industry s output based on the empirical results obtained from the simultaneous equations analysis the judicious selection of explanatory variables careful data

sweden s laffer curve taxation and the unobserved economy recent research on the unobserved economy suggests that the phenomenon has important implications for both macroeconomic policy and public finance attention is focused on the public finance implications by developing a simple macromodel from which it is possible to derive a laffer curve the model reveals that the shape and position of the laffer curve depend upon the strength of supply side effects the progressivity of the tax system and the size of the unobserved economy using alternative parameterizations of each of these effects it is possible to obtain rough empirical estimates of the laffer curve for sweden i introduction supply side economics the laffer curve and the unobserved economy are subjects which have captured the interest of economists in their effort to understand and design cures for the growing macroeconomic and public finance malaise which appears to be affecting many of the world s most developed economies high rates of unemployment and inflation combined with slower rates of real growth and ever widening government deficits have focused economists attention on the interrelated issues of macroeconomic stabilization and public finance policy the questions raised by the supply side laffer curve and unobserved economy literature focus on the effects of tax rates on economic performance and the ability of governments to sustain the ambitious social welfare programs established in the past decade while there is much controversy about what the laffer curve looks like and where various economies are on their curves it is generally accepted that the dependence of tax revenues on tax rates is too oversimplified in

generational accounting a new approach for understanding the effects of fiscal policy on saving working pa er 9107 generational accounting a new approach for understanding the effects of fiscal policy on saving by alan j auerbach jagadeesh gokhale and laurence j kotlikoff alan j auerbach is a professor of economics at the university of pennsylvania and an associate of the national bureau of economic research jagadeesh gokhale is an economist at the federal reserve bank of cleveland and laurence j kotlikoff is a professor of economics at boston university and an asso ciate of the national bureau of economic research working papers of the federal reserve bank of cleveland are preliminary materials circu lated to stimulate discussion and critical comment the views stated herein are those of the authors and not necessarily those of the federal reserve bank of cleveland or of the board of governors of the federal reserve sys tem may 1991

savings and wealth in models with altruistic bequests during recent years much attention has been given to the role of bequests in explaining various aspects of economic behavior for example authors have studied the impact of bequests on physical wealth accumulation laurence kotlikoff and lawrence summers 1981 the interest elasticity of savings owen evans 1983 tax reform laurence seidman 1984 and the distribution of wealth alan blinder 1976a more recently economists have begun to distinguish between human and physical bequests gary becker and nigel tomes 1986 acknowledging the presence of bequest in human form is important in analyzing each of the issues mentioned above outlays on children affect the shape of the family s labor supply and expenditure profiles upon which the level of aggregate savings crucially depends if these outlays are interest sensitive substitutes for physical bequests they will also influence the interest elasticity of savings in the area of tax reform the neutrality of the consumption tax depends on the ability of the government to identify human capital bequests from general consumption raymond batina 1987 if this is not possible the portfolio choice of investment in human versus physical capital may be distorted at the margin finally the unequal transmission of wealth across generations may be explained by the lack of physical bequests and the inefficiently low levels of human bequests made by wealthconstrained households becker and tomes 1986 to distinguish clearly the behavior of constrained households from unconstrained households who make sizeable physical bequests both types of bequests must be recognized this paper introduces a model that makes explicit examination of these issues possible it extends lord s 1989 multiperiod model of life cycle savings and adult human capital investment by adding altruistically motivated human and physical bequests 2 the model is calibrated using microeconomic data on earnings time and goods expenditures on children s human capital and physical bequests we then use the model to examine the contribution of bequests to wealth accumulation and the level of savings this topic is the source of an important but yet unresolved debate between franco modigliani 1988 and kotlikoff 1988 kotlikoff maintains that u s wealth accumulation is primarily the consequence of bequests as opposed to life cycle savings for retirement one type of evidence cited by kotlikoff comes from simulation results demonstrating the failure of realistically calibrated life cycle models to generate sufficiently high saving rates and wealth income ratios alan auerbach and kotlikoff 1987 we show however that if a pure life cycle

introduction tax policy issues for the 1990s in recent years in the wake of fiscal crisis developing countries have increasingly begun to restructure their tax systems to seek higher revenues or to improve the revenue elasticity and buoyancy of the tax structure chhibber and khalilzadeh shirazi 1988 these reform movements have also aimed to eliminate the disincentive effects of onerous levels of taxation to reduce the economic inefficiencies induced by the distortionary taxation of assets and sectors to protect the poorest of the poor from the tax net and to provide partial relief from the unwelcome effects of inflation this introduction to the following articles on tax policy first gives an overview of tax reform in developing countries it then distills lessons for tax reform from past developing country experiences and reviews selected issues that are expected to dominate tax policy research and discussions in the 1990s the five other articles in this symposium provide an in depth review of applications of tax policy models in developing countries and analysis of tax policy toward foreign direct investment taxation of agricultural land and financial assets and the redistributive impacts of various taxes

the intertemporal allocation of expenditure on non durables services and durables this paper presents estimates of the parameters of a consumption function for u s quarterly seasonally unadjusted data on non durables services and durables the theoretical novelty in the approach we present is in the derivation of the consumption function from an underlying many goods allocation problem applying this model with an appropriate estimator to the data we find i the homogeneity restrictions suggested by theory are not rejected ii there is no evidence of excess sensitivity to income iii there is no evidence to suggest that agents cannot adjust their durable stocks as they would wish and iv the intertemporal substitution elasticity is not well determined

government debt in an overlapping generations model with bequests and gifts in 1974 robert barro argued that if individuals in successive generations were linked by bequests changes in the stock of government debt or in social security programs would have no effect on the steady state capital stock barro assumed that individuals held static expectations and that the size of the population was constant martin feldstein 1974 1977 had concluded that social security would reduce the capital labor ratio in models that did not admit a bequest motive and in his 1976 comment on barro argued that the introduction of government debt or social security into a perfect foresight dynamic growth model with bequests would still reduce the capital labor ratio barro replied that feldstein s criticisms were invalid if the steady state capital labor ratio were smaller than the golden rule level but would be correct if the opposite were true barro did suggest however that the latter possibility with overaccumulation of capital might be ruled out in his model as it was in miguel sidrauski 1967 but he was unable to demonstrate that the required behavior would be consistent with utility maximization by finite lived individuals 1976 p 345 although recent work by willem buiter 1979 jeffrey carmichael 1979 1982 truman bewley 1981 a b and others has helped to elucidate the nature of overlapping generations models with bequests and gifts and the issues in the barro feldstein debate they remain far from clear the purpose of this paper is to shed a little more light on the subject in what follows i contend that some of the authors cited above either have specified the individual s optimization problem in an asymmetric way or have failed to impose necessary conditions for a sensible optimization problem or both there is a natural specification of the barro model 1 that emphasizes the similarity between this model and optimal growth models see for example david cass 1965 peter diamond 1973 here in steady state equilibrium the aftertax interest rate r must equal the rate at which individuals discount the utility of their heirs p r p has become known as the modified golden rule and a meaningful individual optimization problem requires that p exceed n the natural growth rate of the economy my results confirm barro s hunch about his model in a barro model r must exceed n much of the barro feldstein 1976 interchange which assumed that r could have any relation to n is wrong headed barro and feldstein reach different conclusions about the effects of government debt and social security because they assume different individual utility functions also my results contrast sharply with those of buiter and carmichael for example carmichael concluded that with intergenerational transfers from parents to children bequests r must exceed n but with transfers in the opposite direction n must exceed r 1982 pp 205 06 indeed i believe that the buiter carmichael representation of the barro model is logically faulty see section ii in section i i outline an overlapping generations model with gifts and bequests and derive its steady state properties in the next section i discuss the shortand long run effects of introducing government debt into the model and contrast my results with those

the consumption tax in the presence of altruistic cash and human capital bequests with endogenous fertility decisions abstract we provide an analysis of the consumption tax policy in the presence of cash bequests human capital investments in children and endogenous fertility decisions it is shown that the consumption tax is no longer neutral if the tax rate is constant over the taxpayer s life cycle labor supply is exogenous and the parent expects the offspring to pay the same tax rate if the number of children is chosen optimally by the parent neutrality breaks down because the shadow prices of both bequests and fertility are interlinked it is more expensive to produce a child the larger either bequest is and it is more expensive to make a bequest of either type to each child the larger the number of children produced several examples are provided where imposing the consumption tax induces an increase in the number of children produced and a decrease in net capital formation

uncertain parameter values and the choice among policy options abstract we use a tax policy example to show how debate on the value of an elasticity parameter translates into a debate about policy choices to construct this example suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain for each reform we show how the size of this gain depends upon the elasticity of saving with respect to the net rate of return moreover within quite narrow and reasonable bounds for the elasticity parameter we find regions in which each of three different tax reforms turns out to dominate the others

a censored system of cigarette and alcohol consumption many previous studies of us cigarette and alcohol consumption have focused on single equations however the addictive nature of consumption suggests that it is more appropriate to model these products as a system we propose a two step estimation procedure and apply the procedure to a system of equations for cigarette beer and wine consumption results differ from those derived from an existing two step procedure findings suggest that consumption of cigarettes beer and wine is responsive to income changes but the elasticities are rather small personal physiques education age race ethnicity health gender employment status and regions also play significant roles in consumption

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

stagflationary effects of monetary stabilization policies a quantitative analysis of south korea this paper presents a macro model of the korean economy that focuses on short run macro economic adjustment and more in particular on the transmission channels of monetary policy between the financial and the real sector of the economy in addition to the usual link between monetary policy and aggregate demand via investment the link between monetary policy and the supply side of the economy via the financing of working capital with borrowed funds is incorporated this link can potentially reverse the short run impact of tight money on inflation and aggregate the impact on output both export prices and domestic prices show a significant sensitivity to cost of financing working capital this credit supply side link gives a stagflationary bias to restrictive credit policies the empirical relevance of this phenomenon is strongly supported by the simulation results derived with the model structurally section 2 of the paper focuses on the real sector part of the model section 3 discusses the financial sector in section 4 different monetary stabilization packages are simulated using the model presented in sections 2 and 3 and alternative policy measures are discussed the simulation runs show strong short run stagflationary effects of tight money policies

structural change in the demand for meat economists have long thought that shocks in the economy sometimes lead to permanent changes in behavioral relationships hence supply or demand elasticities estimated from econometric models may change over time the source of such structural change may be technological adoption a shift in consumer preferences or an institutional change one way to handle this problem in linear models is to allow the parameters to change as the situation changes so that the model provides a local approximation of the behavioral relationship this approach is an attractive way to deal with structural change problems econometricians have extended the classical

taxation and savings a neoclassical perspective this paper discusses recent neoclassical analyses of taxation and savings contrary to the popular view that fiscal policy has highly ambiguous impacts on savings neoclassical models admit a host of policies with clear and potentially quite powerful affects on the accumulation of wealth the paper considers four fundamental types of fiscal policies and compares their quantitative affect on savings the essential elements of these policies involve inter and intragenerational redistribution marginal and intra marginal taxation and the level of government consumption conventional accounting measures of taxes spending and deficits provide at best little guide to changes in underlying fiscal instruments and at worst precisely opposite indicators of the direction of such changes indeed the continued use of and concern with conventional fiscal measures is symptomatic of wide spread fiscal illusion these points are developed within the context of certainty models the paper also considers the role of fiscal policy in both mitigating and exacerbating economic risks facing the private sector since precaution is a major motivation for saving governments can greatly influence wealth accumulation either by using fiscal policy to pool private risks or by making fiscal policy itself highly uncertain this abstract was borrowed from another version of this item