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

taxes and capital structure understanding firms savings abstract the u s non financial corporate sector became a net lender to the rest of the economy in the early 2000s with close to half of all publicly traded firms holding financial assets in excess of their debt liabilities we develop a simple dynamic model of debt and equity financing where firms strive to accumulate financial assets even though debt is fiscally advantageous relative to equity moreover firms find it optimal to fund additional financial asset holdings through equity revenues the calibrated model matches well the distribution of public firms balance sheets during the 2000s and correctly predicts which firms are net savers

the relation between tax rates and pre tax returns direct evidence from the 1981 and 1986 tax rate reductions abstract this study documents one effect of the theory of implicit taxes providing evidence that a change in the tax rate results in a change in pre tax returns yield spreads of pairs of treasury bills maturing in the last week of december and the first week of january are examined year ends not affected by rate changes show a significant positive yield spread between these pairs of bills reflecting an upward sloping yield curve however for year ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills

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

the incidence and allocation effects of a tax on corporate distributions abstract to study the effects of double taxation first at the corporation level then at the shareholder level this paper analyzes a model with a tax on all corporate distributions to equity owners and no other taxes contrary to the common view the tax is shown to have no subtitution effect and in particular no effect on the corporate choice between debt and equity via retained earnings finance the analysis opens to question certain arguments commonly used to support integration of corporation and individual income taxes via dividend relief

firm dynamics and financial development abstract using comprehensive firm level datasets this paper studies the impact of cross country variation in financial market development on firms financing choices and growth in less financially developed economies small firms grow faster and have lower leverage than large firms as financial development improves the growth difference between small and large firms shrinks while the leverage difference rises the paper then develops a quantitative model where financial frictions drive firm growth and debt financing through the availability of credit and default risk the model explains the observed cross country variations in firm size leverage and growth in response to changes in financial frictions

debt and taxes in the theory of public finance if a specified amount of government spending must be financed how should that finance be divided between taxes and government borrowing in the case of a temporary increase in government spending it has been argued that debt finance is optimal because the small increments in all future tax rates to finance interest payments involves a smaller excess burden than the single large tax rate increase that would be required to avoid an initial increase in the national debt this argument ignores the excess burden of debt finance that results if the initial capital stock is smaller than optimal e g because of taxes or capital income the first section of the present paper shows how the debt finance advantage of a small increase in tax rates can be explicitly balanced against the disadvantage of the excess burden that arises from additional debt the analysis shows that with plausible parameter values the excess burden of debt finance is likely to outweigh the advantage of avoiding a large single tax change and therefore that financing a temporary increase in government spending by an immediate tax increase is likely to be preferable to debt financing the second section examines the appropriate response to a permanent increase in government spending and shows that such spending cannot be financed by a permanent increase in government debt moreover whenever the golden rule level of capital intensity is an optimality condition independent of the level of government spending any increase in government spending should be matched by an equal increase in tax revenue this abstract was borrowed from another version of this item

the intertemporal relation between the u s and japanese stock markets this paper finds a high correlation between the open to close returns for u s stocks in the previous trading day and the japanese equity market performance in the current period in contrast the japanese market has only a small impact on the u s return in the current period high correlations among open to close returns are a violation of the efflcient market hypothesis however in trading simulations the excess profits in japan vanish when transactions costs and transfer taxes are included the two largest stock markets in the world in terms of capitalization volume and shares listed are the tokyo stock exchange tse and the new york stock exchange nyse because tokyo is 14 hours ahead of new york there is an eight and one half hour difference between the close of the tse and open of the nyse since there is no overlap between the two markets traders or technical analysts may look to the tse as a predictor of market movement on the nyse and or examine changes on the nyse as indicators of tse performance as shown in figure 1 the tse opens at 7 00 p m eastern standard time est and closes at 1 00 a m est 1 the nyse opens at 11 30 p m japanese time 9 30 a m est and closes at 5 00 a m japanese time 4 00 p m est thus there is no common time interval in which both markets are open high correlations between the respective open to close returns are a violation of the efficient market hypothesis because public information about the performance in one market could be used to profitably trade in another market if the markets are efficient information about the open to close performance in one market for example the u s return in period t 1 will be fully reflected in the open price of the other market japan in period t for example since new information flows randomly into the market subsequent price changes should be random and the open to close returns in japan will be uncorrelated with the u s returns thus the u s performance should affect the open price in japan and the correlation between the open to close returns of the two markets will be zero early research on the synchronization among stock prices across countries grubel 1968 levy and sarnat 1970 agmon 1972 ripley 1973 lessard

regional policy incentives and the relative costs of capital in assisted areas in britain and germany bennett r j and krebs g 1989 regional policy incentives and the relative costs of capital in assisted areas in britain and germany reg studies 23 201 218 regional policies of various forms have been employed in most european countries both as means of stimulating investment in problem regions and as an attempt to limit the pace of industrial contraction this paper evaluates the resulting incentives to capital in britain and germany and compares the stimulus provided by the different packages of incentives over time and between the two countries it is demonstrated that pre tax real rates of return and fiscal wedges between pre and post tax real rates of return are affected very markedly by the incentive packages in britain fiscal wedges of 3 derive from regional policy up to the late 1970s but decline to 1 6 in the mid 1980s in germany fiscal wedges increase from 3 to 3 5 over the same period on a standardized basis of comparison thus declines in the significance of regional po

why does household investment lead business investment over the business cycle household investment leads nonresidential business fixed investment over the u s business cycle because real business cycle theory has not been able to account for this observation it represents a potent challenge to the view that transitory productivity disturbances are the main source of aggregate fluctuations this paper reconciles rbc theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production empirical evidence suggesting that household capital is a complementary input in market production is also presented

an empirical analysis of intergovernmental tax interaction the case of business income taxes in canada both federal and provincial governments in canada levy corporate taxes on busi nesses in their jurisdictions which potentially gives rise to horizontal and vertical tax exter nalities within the federation using a simple model of interdependent tax choices we estimate tax setting functions for the federal government ontario quebec and an aggregate of the remaining eight provinces we find evidence of significant vertical and horizontal tax inter actions provincial tax rates respond negatively to the federal tax rate while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces

money and output in latin america some tests of a rational expectations approach abstract this paper deals with the relationship between money and output in sixteen latin american countries making use of the framework of analysis elaborated by robert barro for the united states three closely interrelated hypotheses are tested 1 that the growth of the money supply is predictable in that it differs from a random walk with trend 2 that only the part of money growth which is not predicted will affect real output in the short run and 3 that as lucas has argued the slope of the phillips curve is smaller in size for countries where money and prices are less predictable

unemployment inflation and monetarism a further analysis comment in a recent paper in this review robert van order proposes an interesting simplification of the important model of jerome stein 1974 the purpose of this comment is to correct some errors in van order s analysis to relate his results to stein s later work 1976b c and to analyze the role of these papers in the current debate over the mechanisms and effectiveness of macroeconomic policy for the convenience of the reader and to simplify the necessary references to van order s paper his equations through 7 and relevant notation are reproduced g g actual and expected rates of inflation y real output f indicator of fiscal policy m m nominal and real money supply p w levels of prices and wages v velocity of circulation n growth rate of m x speed of adjustment of expected inflation 9 ratio of bonds to money functions p phillips curve f production function e aggregate demand s aggregate supply r reduced form of e and s van order s equations are as follows

is the united states really underinvesting in agricultural research that the level of public investment in u s agricultural research is too low is widely accepted this paper argues that there are two important limitations to the evidence assembled in support of the underinvestment hypothesis a many authors have compared the social rate of return to public investments with the private rate of return to private investments b costs of public expenditures on agricultural research have been underestimated by a failure to account for the marginal excess burden of the tax collection system taking these two factors into account evidence in support of the underinvestment hypothesis is weakened considerably

on fiscal policy and the stock market this paper provides some empirical evidence on the relationship between aggregate quarterly stock prices and other macro variables including measures of monetary and fiscal policy in canada the results indicate the presence of significant lags in the reaction of stock prices to fiscal policy moves to the extent that a proxy for the fiscal policy effect on required expected return to capital was included in the model such a finding conflicts with the stock market efficiency hypothesis further tests also suggest that anticipated and unanticipated fiscal policy changes have significant lagged relationships with current stock prices the canadian stock market therefore appears to have been inefficient with respect to available information on fiscal policy copyright 1988 by ohio state university press

the impact of the corporate income tax evidence from state organizational form data abstract by taxing the income of corporate firms at a different rate than non corporate firms taxes can play an important role in a firm s choice of organizational form the sensitivity of the organizational form decision to tax rates provides a key indicator of the distortion created by the corporate income tax this paper uses new cross sectional data on organizational form choices across states compiled in the census of retail trade to estimate this sensitivity the results document a significant impact of the relative taxation of corporate to personal income on the share of real economic activity that is done by corporations and that the impact is many times larger than has been found in the previous empirical literature based on time series data the results show little impact however on the actual operations of firms such as their labor intensity wages and the like they do indicate that firms are able to exploit the progressivity of the corporate income tax system by dividing into numerous firms

taxes and financial frictions implications for corporate capital structure abstract according to data from compustat we observe three general trends between 1980 and 2012 first firms have been reducing their reliance on debt as leverage ratios have fallen and an increasing fraction of firms are now actually net lenders second the frequency at which firms neither issue external equity nor distribute dividends to shareholders has fallen third marginal corporate income tax rates have fallen significantly as well using compustat balance sheet data we structurally estimate a model in which heterogeneous firms finance investment with equity and debt our model incorporates costly external finance as well as a detailed tax structure including personal dividend and corporate income taxes we conclude that there has been a significant reduction in the cost of external equity while overall leverage ratios have fallen mainly because of a lower tax advantage of debt

does the tax system favor investment in high tech or smoke stack industries in this paper we examine whether differential use of depreciable assets gives rise to differential tax treatment of high technology industries relative to other industries we calculate the total effective tax rate on a marginal investment in each of 34 assets and weighting by the use of these assets we calculate total effective tax rates for 73 industries we find considerable variation within the high tech sector and within the more traditional sector but for the case of a taxable firm with a given debt equity ratio we do not find any systematic differences between overall rates in the two sectors

measuring the energy savings from home improvement investments evidence from monthly billing data an important factor driving energy policy over the past two decades has been the energy paradox the perception that consumers apply unreasonably high hurdle rates to energy saving investments we explore one possible explanation for this apparent puzzle that realized returns fall short of the returns promised by engineers and product manufacturers using a unique data set we find that the realized return to attic insulation is statistically significant but the median estimate 9 7 is almost identical to a discount rate for this investment implied by a capm analysis we conclude that the case for the energy paradox is weaker than has previously been believed

imperfect annuity markets unintended bequests and the optimal age structure of social security benefits the social security program now provides a constant real benefit throughout each retirees lifetime this paper examines whether total welfare would rise if benefits were lower in early retirement years when most individuals have some saving with which to finance consumption and higher in later years when the uncertainty of survival and the absence of actuarially fair private annuities makes the availability of social security benefits more important the analysis shows that there is a potentially important difference between the structure of benefits that would be preferred by the current population of workers and retirees and the structure of benefits that would maximize the steady state level of social welfare this difference reflects the role of unintended bequests the provision of higher benefits to older retirees reduces individually optimal savings and therefore the level of unintended bequests while those bequests may have no value to the retirees they are clearly of value to the young workers who will receive those bequests more generally the system of level benefits raises the steady state level of the capital stock and of total real income the present paper provides an explicit analysis of a case in which the current workers want benefits to increase with age while the social security system that maximizes steady state welfare would provide higher benefits to young retirees than to the very old this abstract was borrowed from another version of this item

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

do taxes affect corporate debt policy evidence from us corporate tax return data abstract this paper uses u s statistics of income soi corporate income tax returns balance sheet data on all corporations to estimate the effects of changes in corporate tax rates on the debt policies of firms of different sizes small firms face very different tax rates than larger firms and relative tax rates have also changed frequently over time providing substantial information to identify tax effects the results suggest that taxes have had a strong and statistically significant effect on debt levels for example cutting the corporate tax rate by ten percentage points e g from 46 to 36 holding personal tax rates fixed is forecast to reduce the fraction of assets financed with debt by around 3 5 since small firms normally rely much more heavily on debt finance yet face much lower tax incentives to use debt the estimated effect of taxes would be strongly biased downwards without controls for firm size

private information trading volume and stock return variances new evidence is provided on the determinants of stock return variances first when the tokyo stock exchange is open on saturday the weekend variance increases weekly variance is unaffected however despite an increase in weekly volume second the listing of u s stocks in tokyo substantially increases the number of trading hours but tokyo volume is negligible for these u s stocks and their 24 hour variance is unaffected the overall results are consistent with the predictions of private information based rational trading models but inconsistent with both the irrational trading noise and public information hypotheses

correlations in price changes and volatility across international stock markets the short run interdependence of prices and price volatility across three major international stock markets is studied daily opening and closing prices of major stock indexes for the tokyo london and new york stock markets are examined the analysis utilizes the autoregressive conditionally heteroskedastic arch family of statistical models to explore these pricing relationships evidence of price volatility spillovers from new york to tokyo london to tokyo and new york to london is observed but no price volatility spillover effects in other directions are found for the pre october 1987 period article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

policy impacts under rational expectations abstract this paper re examines for the u s the validity of the macro rational expectations mre hypothesis in contrast to most previous studies in this area the paper a considers the potential real effects of both monetary and fiscal policies b allows for possible endogeneity of these policies and c uses a joint non linear estimation methodology to distangle the hypothesis of rationality from that of neutrality the empirical results reject the joint mre hypothesis for both policies the results also indicate that policy non neutrality is the culprit behind such rejection this evidence offers further empirical support for macro rational expectations models where monetary and fiscal policies can due to some rigidities play a key role in stabilizing the real economy

a normative analysis of public capital a normative analysis of short term public capital investment is carried out using cost benefit analysis this cost benefit approach explicitly incorporates the durability of capital into the computation and thus include an aspect of public capital omitted from previous studies which focus on productivity estimation methods used else where have been improved by properly handling several concerns that have been raised in addition this behavioural model yields many structural equations suitable for estimation which results in highly efficient parameter estimates although a small elasticity is found for public capital the benefit is greater than the cost

new evidence that taxes affect the valuation of dividends this paper uses british data to examine the effects of dividend taxes on investors relative valuation of dividends and capital gains british data offer great potential to illuminate the dividends and taxes question since there have been two radical changes and several minor reforms in british dividend tax policy during the last 30 years studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors valuation of dividends using daily data on a small sample of firms and monthly data on a much broader sample we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns these findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends financial economists have long been puzzled by corporate dividend behavior many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions because the former gives rise to greater tax liabilities corporations however face equal costs of paying out dividends and retaining earnings miller and modigliani 31 demonstrated that in the absence of taxes dividend policy should have no effect on share valuation if dividends are tax penalized however a value maximizing firm should pay no dividends widespread dividend payments to taxable investors are therefore surprising in 1981 dividend tax revenues in the united states were estimated to exceed 20 billion dollars indeed some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists the dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors valuation of dividends in particular the question of how taxes affect the market valuation of dividends has generated considerable controversy numerous studies including auerbach 2 litzenberger and ramaswamy 24 26 morgan 34 and rosenberg and marathe

the effect of large government deficits on interest rates and equity returns with the current economic expansion in the united states now beginning its third year the persistence of federal government budget deficits on a historically unprecedented scale has clearly become the chief distinguishing characteristic of this business cycle both economically and politically the budget for the 1978 fiscal year submitted to congress by president reagan acknowledges that after a small improvement in 1984 the 1985 deficit will exceed even the record 208 billion mark posted in the immediate post recession environment of 1983 more important the president s new budget indi cates that even with a strong economy and even after 50 billion of proposed spending cuts the 1985 deficit will show no improvement over 1984

a multivariate garch model of international transmissions of stock returns and volatility the case of the united states and canada this study examines the short run dynamics of returns and volatility for stocks traded on the new york and toronto stock exchanges the main finding is that inferences about the magnitude and persistence of return innovations that originate in either market and that transmit to the other market depend importantly on how the cross market dynamics in volatility are modeled moreover much weaker cross market dynamics in returns and volatility prevail during later subperiods and especially for canadian stocks with shares dually listed in new york implications for international asset pricing hedging strategies and regulatory policy are discussed

the global rise of corporate saving abstract the sectoral composition of global saving changed dramatically during the last three decades whereas in the early 1980s most of global investment was funded by household saving nowadays nearly two thirds of global investment is funded by corporate saving this shift in the sectoral composition of saving was not accompanied by changes in the sectoral composition of investment implying an improvement in the corporate net lending position we characterize the behavior of corporate saving using both national income accounts and firm level data and clarify its relationship with the global decline in labor share the accumulation of corporate cash stocks and the greater propensity for equity buybacks we develop a general equilibrium model with product and capital market imperfections to explore quantitatively the determination of the flow of funds across sectors changes including declines in the real interest rate the price of investment and corporate income taxes generate increases in corporate profits and shifts in the supply of sectoral saving that are of similar magnitude to those observed in the data

taxes organizational form and the deadweight loss of the corporate income tax abstract by changing the relative gain to incorporation corporate taxation can play an important role in a firm s choice of organizational form general equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation this paper estimates the impact of taxes on organizational form using data from 1900 1939 the results indicate that the effect of taxes is significant but small a corporate rate increase of 0 10 raises the non corporate share of capital 0 002 0 03 the implied deadweight loss of the corporate income tax is around 5 10 of revenue

a macroeconomic approach to corporate capital structure abstract the cross sectional distribution of corporate capital structure and its macroeconomic implications are underexplored research areas this paper embeds a dynamic trade off theory of firm financing into a general equilibrium model with firm dynamics i find that the stationary equilibrium replicates fairly well the distribution of leverage as well as the relationship between leverage size and profitability the counterfactual experiment points out relatively small effects of tax benefits on corporate capital structure it also implies that the effects of the default cost on macroeconomic variables are almost negligible under endogenous capital structure choice

the indexation of interest depreciation and capital gains and tax reform in the united states abstract the treasury s 1984 tax plan suggests features of a comprehensive income tax including the indexation of interest depreciation and capital gains the 1985 president s proposal retains some of these indexing provisions but the tax reform act of 1986 does not this paper looks at the incentives under these tax regimes to make marginal investments in the corporate sector noncorporate sector and owner occupied housing it finds that inflation in the old system caused effective tax rates to rise for some assets and fall for others under the treasury or president s proposals the interference of inflation is virtually eliminated also the effects of inflation are substantially reduced by the 1986 act because mismeasured depreciation and interest deductions are taken at much lower rates

fiscal policies capital formation and capitalism abstract this lecture examines the effect of tax policy and social security retirement benefits on capital accumulation and economic welfare the paper begins by examining how capital income taxes reduce the real return to savers and then discusses the welfare loss of capital income taxation relative to the alternatives of taxing consumption and labor income the analysis shows that capital income taxes impose a very substantial deadweight loss even if they do not alter private saving the first section of the paper also discusses the theory and empirical literature on the effect of capital income taxes on national saving the second part of the lecture deals with social security retirement benefits in 1994 the aged members of the u s population will receive cash and medical benefits that cost the government 530 billion or 16 000 per person over age 65 the likely impact of these benefits on private saving and the empirical evidence on this subject are then reviewed the second part of the paper concludes by discussing the welfare loss of unfunded social security benefits and the possibilities for alternative arrangements a final section discusses the implications of international capital flows for this analysis as capital flows become more important particularly in europe the response of government policy may be to compete for foreign capital inflows and to tax domestic savers more heavily this would lead to a smaller total volume of capital the sharp decline in the net national saving rate from more than 8 percent of gdp in the united states in the 1970s to only 4 5 percent in the 1980s and from more than 14 percent of gdp in europe in the 1970s to 9 9 percent in the 1980s may not only create lower real incomes and slower growth but may weaken capitalism itself in the united states a decade of slow growth has increased protectionist tendencies in international trade and led to a new interest in industrial policies that expand the role of government in guiding the direction of technology and of private investment in these ways the government policies that discourage saving might make the schumpeterian vision of a shift from private capitalism to a government dominated economy more likely

tests of rationality neutrality and market efficiency a monte carlo analysis of alternative test statistics abstract this paper examines the small sample properties of three testing strategies used to analyze the rationality monetary neutrality and market efficiency hypotheses we focus on the original two step barro test of the mre hypothesis formed entirely from ols results a test that employs the correct variance covariance formulae for these two step estimates and mishkin s fimle testing framework each test is examined under likely model respecifications the findings highlight the extensive bias incurred by drawing inferences from simple unadjusted two step estimates and reveal the relative power of all tests in identifying alternatives to the null hypotheses

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

have the tax benefits of debt been overestimated abstract we re examine the claim that many corporations are underleveraged in that they fail to take full advantage of debt tax shields we show prior results suggesting underleverage stems from biased estimates of tax benefits from interest deductions we develop improved estimates of marginal tax rates using a non parametric procedure that produces more accurate estimates of the distribution of future taxable income we show that additional debt would provide firms with much smaller tax benefits than previously thought and when expected distress costs and difficult to measure non debt tax shields are also considered it appears plausible that most firms have tax efficient capital structures

international transmission of stock market movements this paper investigates the international transmission mechanism of stock market movements by estimating a nine market vector autoregression var system using simulated responses of the estimated var system we i locate all the main channels of interactions among national stock markets and ii trace out the dynamic responses of one market to innovations in another generally speaking a substantial amount of multi lateral interaction is detected among national stock markets innovations in the u s are rapidly transmitted to other markets in a clearly recognizable fashion whereas no single foreign market can significantly explain the u s market movements also the dynamic response pattern is found to be generally consistent with the notion of informationally efficient international stock markets

a note on the transmission of public informtion across inetrnational stock markets abstract previous studies have established that public information cannot explain the decrease in return volatility during the closing of a stock exchange the present study shows that the failure of the public information hypothesis in explaining the trading nontrading volatility differential is merely a domestic phenomenon the manifestation of public information in an international setting is very different specifically the absence of price information due to the closing of the us market affects both volatility and trading volume in the canadian market

tax distortions to the choice of organizational form income from corporate and noncorporate firms is treated very differently under the tax law in theory given existing tax law the noncorporate sector should consist of very profitable firms owned by low tax bracket investors and firms with tax losses owned by high tax bracket investors but the degree to which firms change their form of organization in response to taxes and the resulting excess burden depends as well on nontax factors given the role of taxes we estimate what size the nontax advantage to incorporating must take in each industry so that the forecasted choices for organizational form aggregated over investors in different tax brackets are consistent with the aggregate evidence while the estimated nontax costs are large in some industries noncorporate activity tends to be concentrated where the costs are small leading to little excess burden from the tax distortion to organizational form

federal deficits and money growth in the united states a vector autoregressive analysis abstract a multivariate var modelling technique is employed in this paper to test for causality between federal deficits and money growth in the united states four alternative causality hypotheses including the common accommodation view are examined in addition to the two policy variables four other related macro variables are included in the empirical analysis namely short term interest rates prices real output and exchange rates the var results consistently reject the accommodation hypothesis and indicate that monetary and fiscal policy actions are set independently in the united states other causality inferences are also obtained and their implications are discussed

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

inflation and the evolution of firm level liquid assets abstract this paper shows that inflation has been an important determinant of firm level liquid asset holdings liquid assets as a share of total assets the cash ratio for u s corporations steadily declined from the 1960s to the early 1980s and has since steadily increased our empirical analysis finds that inflation is a key factor accounting for these changes we show that these liquid asset holdings are imperfectly hedged against inflation hence changes in inflation alter the real value of a firm s liquid asset portfolio causing them to readjust these balances

marginal effective tax rates for capital in the canadian mining industry the authors model a firm that explores develops and extracts a depletable asset taking into account various features of canadian corporate and ontario and quebec mining tax law they derive the user cost of capital and effective tax rate for investments undertaken by a mining firm calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates most being negative especially for processing assets the authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax coauthors are neil bruce ken mckenzie and jack mintz

a simple model of endogenous tax reform abstract this paper presents a model of optimal taxation that is useful for understanding governments incentives to switch from wage to consumption taxation the key ingredient is the fact that governments cannot precommit policy although under precommitment governments would tax only wages there is an ex post incentive to switch to the consumption tax as savings grow numerical examples for a nested ces utility function find that for reasonable parameter values equilibrium features a switch to consumption taxation in particular the model produces this tax reform when parameterized as in auerbach and kotlikoff s 1987 study

the corporate propensity to save why do corporations accumulate liquid assets we show theoretically that intertemporal trade offs between interest income taxation and the cost of external finance determine optimal savings intriguingly we find that controlling for tobin s q saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash flow shocks and vice versa consistent with theory we estimate negative propensities to save out of cash flow we also find that income uncertainty affects saving more than do external finance constraints therefore contrary to previous evidence saving propensities reflect too many forces to be used to measure external finance constraints

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

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

the personal tax advantages of equity abstract we value a firm that pays its cash flows to equity through share repurchases in a dynamic environment where personal taxes are paid on capital gains upon realization the cost of capital is reduced by approximately 0 8 through the use of repurchases relative to dividends we use the empirical distribution of pre tax free cash flows in fama and french 1999 to evaluate the tradeoffs between the costs of financial distress the personal tax advantages of equity and the corporate tax advantage to debt the optimal capital structure is interior with a 3 bankruptcy cost

home production meets time to build an innovation in this paper is to introduce a time to build technology for the production of market capital into a model with home production our main finding is that the two anomalies that have plagued all household production models the positive correlation between business and household investment and household investment s leading business investment over the business cycle are resolved when time to build is added

the productivity slowdown and the savings shortfall a challenge to the permanent income hypothesis i introduction the permanent income hypothesis has been extensively tested over the years most of these tests reject the permanent income hypothesis at conventional significance levels but the implied deviations are small in economic terms in this paper i argue that the savings shortfall that followed the post 1973 productivity slowdown constitutes a large deviation from the permanent income hypothesis according to the permanent income hypothesis current consumption depends upon preferences interest rates and expected future income in the united states the productivity growth rate sharply declined after 1973 and economic agents forecasted that the lower growth rate would persist the permanent income hypothesis generally predicts that a productivity slowdown by lowering future expected income will stimulate saving the slower growth rate reduces the ratio of permanent income to current income and thereby reduces the ratio of consumption to current income unless the intertemporal elasticity of substitution is high however the u s national saving rate instead fell to a postwar low after the productivity slowdown the permanent income hypothesis therefore appears to be inconsistent with recent economic experience carroll and summers 1991 327 328 briefly noted that these events pose a challenge to the permanent income hypothesis in this paper i extend their analysis along four dimensions first i calculate the savings response predicted by the permanent income hypothesis in an economy with declining returns to capital abandoning their assumption of a fixed rate of return second i consider the case in which consumers only gradually recognize the extent and duration of the slowdown third i examine published forecasts to demonstrate that the slowdown caused a fall in expected not merely realized growth rates which is necessary for the predicted savings increase fourth i consider the effects of other variables on saving during this period the paper is organized as follows in section ii i examine the permanent income hypothesis s prediction of the savings response to a productivity slowdown by solving a linearized infinite horizon specification of the permanent income hypothesis in a closed economy with concave production technology unless the intertemporal elasticity of substitution is high the permanent income hypothesis predicts rapid capital accumulation in response to the slowdown in section iii i document the post 1973 decline in productivity growth the downward revision in economic forecasts and the decline in national saving and capital accumulation i argue that other recent economic events cannot explain the saving decline and discuss the implications of these events for the permanent income hypothesis i briefly conclude in section iv ii effects of a productivity slowdown under the permanent income hypothesis in this section i show that the permanent income hypothesis predicts that a productivity slowdown increases saving unless the intertemporal elasticity of substitution is high specification of the permanent income hypothesis i use the model of ramsey 1928 and blanchard and fischer 1989 38 47 there is one good which can be consumed or costlessly transformed into capital labor supply is exogenous and factors are paid their marginal products the economy is closed relaxing this assumption increases the predicted savings effects of a slowdown the production function for gross output y is cobb douglas mathematical expression omitted where k is the capital stock z is the level of productivity l is labor supply and alpha is a constant between zero and one i refer to lz as the amount of effective labor gross output grows at rate 2 d y sub t dt y sub t alpha g sub t alpha n sub t 1 alpha d k sub t dt k sub t where g

corporate cash holdings and credit line usage we investigate the factors driving the unprecedented rise in corporate liquidities since the 1970s we find that an economy wide reduction in the cost of holding liquidities and an increase in risk best explain the rise in cash holdings and the widespread use of credit lines the structural estimation results shed light on two widely acknowledged motives for holding cash the precautionary motive and the liquidity motive translate risk exposure into cash holdings our results however do not suggest that firms have become more prudent over time it is higher liquidity needs that has forced firms to hold more cash and use more credit lines abstract from author

oligopoly structure and the incidence of cigarette excise taxes abstract a model of oligopoly price behavior and tax incidence for the u s cigarette industry for the period 1955 1990 is presented a cost function is estimated and shows manufacture to be subject to increasing returns to scale the mean price elasticity of demand is 0 71 the model indicates that competition among manufacturers has been decreasing since 1980 a simulation shows that an increase in the federal excise tax causes a greater increase in price and a greater decrease in consumption than does the same increase in the average of state and local tax rates

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

how much do taxes discourage incorporation the double taxation of corporate income should discourage firms from incorporating we investigate the extent to which the aggregate allocation of assets and taxable income in the united states between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959 1986 in theory profitable firms should shift out of the corporate sector when the tax distortion is large and conversely for firms with tax losses our empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue one of the most basic distortions created by the double taxation of corporate income in the united states is the disincentive to incorporate even in most countries with integrated or partially integrated tax systems there are differential taxes across organizational forms however obvious this distortion may be most articles investigating the distortions created by the corporate tax have taken as exogenous a firm s choice whether or not to incorporate assuming for example that some industries are inherently corporate while others are inherently noncorporate a variety of nontax factors described below can certainly influence a firm s choice of organizational form causing some to favor incorporating and others not but are these nontax factors so dominant that taxes do not in practice influence a firm s choice of organizational form as gravelle and kotlikoff 1989 1993 emphasize tax induced changes in firms choices of organizational form in principle can create large excess burdens the size of these excess burdens in practice depends on the extent to which firms respond to these tax incentives in this article we calculate how the tax distortion discouraging firms from incorporating has varied over time then estimate the extent to which the allocation of assets and taxable income between corporate and noncorporate

the effects of tax based saving incentives on government revenue and national saving this paper shows that previous analyses of ira type plans that seek to encourage household saving have miscalculated their effect on tax revenue and therefore on national saving by ignoring their favorable impact on corporate tax payments recognizing the important effects of ira plans on corporate tax revenue changes previous conclusions about the revenue loss in a fundamental way the revenue loss associated with iras either is much smaller than has generally been estimated or is actually a revenue gain