productivity differences across employers the roles of employer size age and human capital recent research using longitudinal microeconomic databases on businesses and individuals has uncovered tremendous heterogeneity across businesses even within narrowly defined industrial sectors we observe large differences in the levels and growth rates of inputs outputs and productivity across workers even controlling for demographic characteristics wage and employment outcomes vary a great deal and there are sizable worker flows across jobs in the economy these worker flows are closely connected to firm outcomes reflecting in large part the ongoing shift in resources from less productive to more productive employers the primary message is that the continual process of matching and sorting as businesses and workers seek their niches is heterogeneous with experimentation learning and selection all playing important roles understanding the connection between the matching and sorting of businesses and workers is at the very heart of the overlap between industrial organization and labor economics however due to the paucity of data linking businesses and workers at the micro level we know relatively little about these interactions although a large empirical literature suggests that worker outcomes are associated with firm characteristics notable examples are firm size wage effects compensating wage differentials and interindustry wage differentials very little is known about the converse the process by which business outcomes are associated with the characteristics of their employees there are a number of questions associated with this process do employers choose different modes of production resulting in skill segregation as suggested by the sorting and assignment hypotheses in michael kremer 1993 and michael sattinger 1993 or do all firms in a given industry select roughly the same workforce composition how do employers change their workforce composition either to accommodate demand shocks or to experiment with new modes of production in turn what is the connection between these different decisions regarding workforce composition and observable business outcomes such as survival growth and productivity in this short paper our empirical objectives are relatively modest compared to these broad research questions our focus is to provide an initial investigation into the connection between a key measure of firm performance labor productivity and the composition of the firm s workforce as measured by observable worker characteristics we exploit longitudinal matched employeremployee micro data developed under a recent pilot project at the u s census bureau our data set contains longitudinal information on key outcomes of the businesses as well as many of the basic demographic characteristics for the universe of workers at these businesses although longitudinal matched employer employee micro data have been developed in a variety of countries over the last decade or so see john abowd and francis kramarz 1999 ours is the first large scale micro level data set in the united states that allows the investigation haltiwanger department of economics university of maryland college park md 20742 u s bureau of the census and nber lane department of economics american university washington dc 20016 and u s bureau of the census spletzer bureau of labor statistics 2 massachusetts ave n e washington dc 20212 we thank adela luque and javier miranda for superb research assistance and charles brown and marilyn manser for comments on an earlier draft this research was conducted at the center for economic studies at the u s bureau of the census while the second author was an american statistical association census bureau fellow the analysis and results are attributable to the authors and do not necessarily reflect concurrence of the institutions they represent

testing for the long run relationship between nominal interest rates and inflation using cointegration techniques 1989 testing for the long run relationship between nominal interest rates and inflation using cointegration techniques applied economics vol 21 no 4 pp 439 447

adaptive versus rational expectations and the fisher effect substantial controversy remains over the causes of interest rate fluctuations this controversy frequently focuses on the role of expected inflation the theoretical determinats of the nominal rate are examined usig the is lm as model and it is shown that the augmented fisher equation is sensitive to the expectations generating mechanism the model assumes that the nominal rate ceteris paribuschanges one for one with expected inflation the total impact however may take any value from zero to one the empirical analysis sequentially estimates reduced form equations based on adaptive and rational expectations the results confirm prior findings that nominal rates do not adjust one for one with inflation the results also yield some insight on the applicability of the assumption of rational versus adaptive expectations

evading the use tax on cross border sales abstract a use tax is similar to a sales tax except that it is imposed on purchases made from out of state firms historically the use tax has been widely evaded this paper uses a spatial model to analyze the welfare effects of such evasion the analysis shows that the ability of consumers to evade the use tax alters their behavior in a way that leads firms to charge lower prices this reduces the welfare loss created by the sellers market power and implies that evasion can increase welfare even when tax rates are adjusted to offset the effect of evasion on tax revenue

the effect of fiscal policy on the short run relation between nominal interest rates and inflation this paper presents a simple empirical model of the relation between the inflation rate and the nominal interest rate we show that previous results found in the literature may be attributed to specification error and that there are natural explanations for the observed signs of previous fisher equation estimates our results show that fiscal policy shocks may generate short run negative correlations between changes in inflation and changes in the nominal interest rates these results illustrate the difficulty in discussing the relation between inflation and nominal interest rates without conditioning the analysis with specific assumptions on the course of the economy

tax competition and tax co ordination under destination and origin principles a synthesis this paper proposes a general framework for analysing commodity tax competition under destination and origin principles based on three possible tax spillovers the consumer price spillover the producer price terms of trade spillover and rent spillovers a model is presented which can be extended to accommodate all three spillovers using this model many of the results in the existing literature can be derived compared and extended

the comparison between destination and origin principles under imperfect competition abstract especially but not only in the european union closer economic integration is putting increasing pressure on the destination principle under which goods entering international trade are normally taxed this has raised the possibility of switching to the origin principle which dispenses with problematic border tax adjustments this paper compares destination and origin principles under conditions of imperfect competition previous analyses which have considered only the competitive case have led to a qualified presumption in favour of the destination principle a series of results are established here for both cooperative and non cooperative tax setting which challenge that presumption under imperfect competition

tax principles and tax harmonization under imperfect competition a cautionary example this paper shows that under imperfect competition the welfare effects of indirect tax harmonization may depend crucially on whether taxes are levied by the destination or the origin principle in a standard model of imperfect competition while harmonization always makes at least one country better off and may be pareto improving when taxes are levied under the destination principle which currently applies in the european union harmonization of origin based taxes as recently proposed by the european commission is certain to be pareto worsening when the preferences in the two countries are identical and is likely to be so even when they differ

interest rate policy taxation and risk abstract it is now an established orthodoxy that real interest rates should be positive raising the nominal interest rate above the rate of inflation however does not achieve a positive cost of borrowing if the interest cost of borrowing is tax deductible furthermore high rates of interest and inflation impose heavy risks on borrowers these points are illustrated with data from a sample of countries in eastern and southern africa they strengthen the case for preferring lower inflation to higher nominal interest rates as a way of making real interest rates positive

on interest rates inflationary expectations and tax rates abstract this paper provides new evidence on the relationship between inflation and the rate of interest for the united states during the 1953 1984 period the results indicate that contrary to most previous studies the fisher hypothesis is inverted which means that it is the real rate of interest rather than the nominal rate that moves inversely to the rate of inflation however this is the case only during periods of relatively stable inflation rates and moderate regulatory change over longer periods when factors are more volatile the inverted fisher hypothesis is rejected

can futures market data be used to understand the behavior of real interest rates this paper examines whether futures market data can be used to understand the behavior of real interest rates several ways of examining the data indicate that futures market data are not particularly informative about real interest rates not only does this evidence cast some doubt on results in previous research that make use of futures market data to draw inferences about real interest rates but it also indicates that future research on real interest rates may need to turn to a different line of attack understanding the behavior of real interest rates is a central issue in financial economics in previous research on this topic several approaches have been used to measure real interest rates in one approach real interest rates have been calculated by subtracting survey data on inflation expectations such as the livingston data from nominal interest rates the problem with survey based measures of real interest rates is that they are only as good as the survey measure of inflation expectations and there may be little incentive for the survey respondents to answer accurately an even more telling criticism of survey based measures often ignored in the literature is that the behavior of market expectations in driven by economic agents ai the margin who are eliminating unexploited profit opportunities market expectations are unlikely therefore to be well measured by the average expectations of survey respondents 2 because of doubts about survey based measures of real interest rates other

the effects of different taxes on risky and risk free investment and on the cost of capital this paper analyzes the major factors which determine the effects of taxation on the value of risky assets and on the cost of capital and shows how the magnitudes and even the signs of these effects depend on the values assumed for a few key parameters in the model using plausible values for these parameters it is shown that the results obtained are frequently counter intuitive

toward a neo schumpeterian theory of the firm this article offers a sketch of what an economic theory of the firm would look like if it were founded on the thought of joseph schumpeter particularly on chapters 1 and 2 of his theory of economic development schumpeterian analysis requires an intuitively appealing and realistic conceptualization of the distinction between routine and innovative behavior and in particular a conceptualization relevant to complex organizations and complex tasks it is argued that the production theory found in mainstream economics does not meet this requirement particularly because its characterization of productive knowledge involves an overly sharp distinction between technically possible and technically impossible a distinction which has no counterpart in the realities of organizational knowledge the main elements of a schumpeterian view are described and contrasted with those in the mainstream view copyright 2006 oxford university press

no taxation without information deterrence and self enforcement in the value added tax abstract claims that the vat facilitates tax enforcement by generating paper trails on transactions between firms contributed to widespread vat adoption worldwide but there is surprisingly little evidence this paper analyzes the role of third party information for vat enforcement through two randomized experiments among over 400 000 chilean firms announcing additional monitoring has less impact on transactions that are subject to a paper trail indicating the paper trail s preventive deterrence effect this leads to strong enforcement spillovers up the vat chain these findings confirm that when taking evasion into account significant differences emerge between otherwise equivalent forms of taxation jel d83 h25 h26 k34 o17

the effect of moving to a territorial tax system on profit repatriation evidence from japan abstract in an increasingly globalized world the design of international tax systems in terms of the taxation of foreign corporate income has attracted much attention from policy makers and economists alike in the past japan s worldwide tax system taxed foreign source income upon repatriation however to stimulate dividend repatriations from japanese owned foreign affiliates the japanese government introduced a foreign dividend exemption system in 2009 that exempted dividends remitted by japanese owned foreign affiliates to their parent firms from home country taxation this paper examines the effect of this dividend exemption system on profit repatriation by japanese multinationals we find that the response of japanese owned affiliates to the dividend exemption was heterogeneous more particularly foreign affiliates with a large stock of retained earnings were generally more responsive to the reform and significantly increased dividend payments to their parent firms in response to the enactment of the dividend exemption system dividend payments by these affiliates also became more sensitive to withholding tax rates on dividends levied by host countries under the new exemption system

individual morality and reputation costs as deterrents to tax evasion abstract empirical evidence suggests some taxpayers never evade evasion increases with the tax rate and evasion decisions are interdependent these findings are not easily explained by the existing theory which models evasion as an independently made amoral gamble this paper uses nonpecuniary costs of evasion to reconcile theory with evidence once individuals are assumed to differ by an honesty characteristic taxpayers dichotomise into groups the more honest of which responds to a tax change as the evidence suggests a further extension is to introduce an endogenous reputation cost this suggests a positive relationship between the number of evaders and the tax rate

money output and the expected real interest rate this paper tests the exclusion of lagged growth rates of money and output from regression equations with serially correlated disturbances for the expected real interest rate the authors empirical approach is an extension of the empirical strategies of eugene f fama 1975 and frederic s mishkin 1981 which invoke the orthogonality of the inflation forecast error to predetermined regressors under the maintained hypothesis of rational expectations they discuss the implications of their tests for simple real business cycle models copyright 1991 by mit press

the fisher hypothesis revisited new evidence the nominal interest rate is examined with the is lm model incorporating the fisher hypothesis eight different interest rates are considered for different sample periods ending in 1993 when the livingston survey data are used the coefficients for the expected inflation rate real quantity of money and government spending are significant in most cases when the adaptive expectations model is applied the coefficients for real quantity of money and government spending are insignificant in most cases the fisher hypothesis only holds for the federal funds rate or the aaa bond rate the linear form regression can be rejected at the 1 level in favour of the box cox general functional form

in a world without borders the impact of taxes on internet commerce the rapid rise in sales over the internet and the fact that most internet buyers pay no sales tax has ignited a considerable debate over taxes and the internet this paper uses new data on the purchase decisions of approximately 25 000 online users to examine the effect of local sales taxes on internet commerce the results suggest that controlling for observable characteristics people living in high sales taxes locations are significantly more likely to buy online the results are quite robust and cannot be explained by unobserved technological sophistication shopping costs or other alternative explanations the magnitudes in the paper suggest that applying existing sales taxes to internet commerce might reduce the number of online buyers by up to 24 percent

the footprint of evolutionary processes of learning and selection upon the statistical properties of industrial dynamics evolutionary theories of economic change identify the processes of idiosyncratic learning by individual firms and of market selection as the two main drivers of the dynamics of industries are such processes able to account for the statistical regularities which industrial structures and dynamics display in this work we address this question by means of a simple multi firm model formalizing the mechanisms of learning and selection as such despite its simplicity the model is able to robustly reproduce an ensemble of empirical stylized facts including ample heterogeneity in productivity distributions persistent market turbulence and fat tailed distribution of growth rates

horizontal and vertical indirect tax competition theory and some evidence from the usa this paper provides a simple theoretical framework for analysing simultaneous vertical and horizontal competition in excise taxes and estimates equations informed by the theory on a panel of us state and federal excise taxes on cigarettes and gasoline we also examine the role played by smuggling the results are generally consistent with the theory when the characteristics of the markets for the goods are taken into account for neither good do federal excise taxes affect state taxes taxes in neighbouring states have a significant and large effect in the case of cigarettes and a much weaker effect in the case of gasoline we also find that in the setting of cigarette taxes concerns about cross border shopping play a more important role than concerns about smuggling

government deficits capital flows and interest rates 1988 government deficits capital flows and interest rates applied economics vol 20 no 6 pp 753 765

a study of economists consensus forecasts this study examines the ability of economists to forecast ten major economic series the data for this study were provided by j a livingston of the philadelphia inquirer who since 1947 has collected forecasts for the upcoming 6 and 12 months the results reveal that in general for the period from 1947 through 1978 the economists in livingston s sample did not produce efficient forecasts and were not able to outperform simple statistical models it should be noted however that a substantial and consistent improvement in forecasting performance by economists in livingston s sample did occur over this same period these results contain important information for managers who use macro economic consensus forecasts

on the optimal tax base for commodity taxation taxed considerable effort has been devoted to characterizing the manner in which the optimal tax rates differ across the taxable commodities but the literature has rarely addressed the issue of which commodities should be included in the tax base in fact the standard optimal tax model cannot provide a useful answer to this question because it does not contain any of the resource costs normally associated with the collection of taxes an omission that seriously diminishes the policy relevance of the model 2

interest rates income taxes and anticipated inflation some new evidence abstract this paper re examines the effect of taxes on the fisher hypothesis using a procedure first proposed by peek and using data through the 1980s and a new data set on expected inflation for the us the tax adjusted hypothesis is rejected in favor of the no tax adjusted hypothesis for the period 1968 iv to 1979 iv for the full sample both hypotheses are accepted these results are thus quite different from those reported by peek a brief discussion of the factors responsible for these differences is provided

on pareto improving commodity tax changes under fiscal competition this paper shows that when a noncooperative fiscal equilibrium of the mintz tulkens 1986 model of tax competition is inefficient pareto improving changes are positive for the taxes of both regions under concavity of the regions welfare functions it also identifies a class of such equilibria that are always efficient

interest rates and inflationary expectations abstract the relationship between inflation and the rate of interest for the united states is examined within a dynamic specification framework which yields direct estimates of the long run as distinct from the short run coefficients the fisher hypothesis as a long run proposition is supported by the data the results are shown to be robust with respect to the choice of the interest rate

are tax effects important in the long run fisher relationship evidence from the municipal bond market are nominal bonds appropriately discounted for taxes empirical estimnates of the response of nominal interest rates to changes in inflation the fisher effect have failed to produce a definitive answer four reasons have been put forward as possible explanations i tobin effects ii fiscal illusion iii peso problems and iv different estimators utilizing data on taxable and tax exempt bond interest rates and several different estimators we find that the fisher effect estimates are always larger for the taxable bond relative to the tax exempt bond suggesting that fiscal illusion and different estimators cannot account for the previous results how economic agents respond to the tax burdens of assets with different tax treatment is an important issue at both the level of the individual micro and the aggregate economy macro one clear source of evidence would appear to be the market for high quality debt trading in both taxable and tax exempt debt occurs on a daily basis the response of the rates of return on taxable and tax exempt debt to changes in expected inflation are described by the fisher relationship the fisher relationship is one of the oldest equilibrium relationships in financial economics fisher s original proposition was that if the real rate of interest is relatively constant over time a fully perceived change in the purchasing power of money as proxied by the inverse of the rate of inflation would be accompanied by a proportional increase in the nominal interest rate darby 1975 points out that when nominal interest income is taxed as are interest payments on u s treasury bills the fisher relationship implies a response from nominal interest rates that is greater than the change in expected inflation in order to maintain the constant ex ante real interest rate summers 1983 suggests that given average marginal tax rates in the united states the appropriate value of the fisher effect is 1 3 to 1 5 for tax exempt bonds the original fisher specification should be a good approximation implying a fisher effect close to unity in a seminal paper fama 1975 presents evidence to support the hypothesis that changes in nominal

a simple model of commodity taxation and cross border shopping this paper sets up a simple model in which two countries differing in geographical extent engage in commodity tax competition originating in opportunities for cross border shopping the non cooperative tax equilibrium and various coordination initiatives are examined in the benchmark model and in two model extensions incorporating i costs of transportation for goods and ii border inspection among the more surprising results are the following with i pure profits accrue to sellers near the border but subjecting them to tax may lower the country s total tax revenue with ii the volume of cross border shopping may well increase jel classification h20 h87 h26

commodity tax competition between member states of a federation equilibrium and efficiency we first describe regional market equilibria whereupon consumers of each region allocate their purchases of private goods between domestic and nondomestic ones according to the structure of relative prices taxes and transportation costs next regional optimal tax levels and public good quantities are derived the tax of the other region being held constant fiscal competition arises from the ability of one region in choosing its tax to alter the tax base of the other

interest rates inflation expectations and the inverted fisher hypothesis abstract the purpose of this paper is to reexamine for the u s the statistical validity of the inverted fisher hypothesis as proposed by carmichael and stebbing 1983 this is done using a new data set on expected inflation reported by lahiri et al 1988 and by estimating augmented versions of the hypothesis by incorporating the role of uncertainty about expected inflation as measured by its variance and higher order moments our results support the hypothesis for the entire sample period 1968 iv 1985 iv as well as for the two sub periods this result sharply differs from that of barth and bradley 1988 who reported that the hypothesis did not hold for the second sub period further unlike them we do not find any evidence of a structural break between the two periods

fisher s paradox and the theory of interest irving fisher s theory of interest has proved to be a most durable and influential contribution to economic theory a central element of fisher s contribution is the fisher hypothesis that over the longer term the real rate of interest is approximately constant being determined largely by time preference with movements in the nominal interest rate reflecting movements in the rate of inflation one for one the paradox of the fisher hypothesis is that despite its wide acceptance as the cornerstone of interest rate theory most empirical evidence appears to be inconsistent with the hypothesis at least in its strictest form this empirical anomaly was noted by fisher himself who attributed it to money illusion in the fifty years following the publication of the theory of interest a considerable literature has evolved around this paradox the unifying theme of this literature is a common acceptance of the essence of fisher s hypothesis most of the energy in this literature has been devoted to explaining systematic movements in the real rate of interest and to providing reasons why the relationship between the nominal interest rate and inflation may only be approximate in

the degree of fiscal illusion in interest rates some direct estimates this article demonstrates why the procedures used in previous studies do not permit inference about the relationship between interestrates and taxes we present a model that leads to direct estimates of the degree to which interest rates respond to changes in tax rates the empirical results imply that the adjustment of taxable interest rates has been large enough to render after tax yields impervious to tax rate changes further tax exempt yields are unaffected by changes in taxrates thus there is no evidence of fiscal illusion in interest rates this abstract was borrowed from another version of this item

tax and the city a theory of local tax competition abstract in this paper we propose a novel theoretical model of tax competition at the local level large jurisdictions cities compete both locally with smaller neighbouring communities and interregionally with more distant cities while small jurisdictions hinterlands compete only with other jurisdictions in their neighbourhood the model structure is motivated by recent empirical findings as well as survey results among german mayors the perceived intensity of competition for firms varies considerably between jurisdictions and can mainly be explained by the size and location of the jurisdiction our model predicts contrary to earlier findings for competition between countries or regions that capital taxes of large jurisdictions fall more strongly with increasing interregional competition and may eventually lead to smaller taxes than in small jurisdictions hinterlands are therefore less affected from globalisation than cities we contrast our results with a standard tax competition model in which all jurisdictions compete with all other jurisdictions

putting firms into optimal tax theory firms are for the most part absent from the modern theory of optimal taxation their disappearance dates from the foundational models developed by peter a diamond and james a mirrlees 1971 in which firms are simply mechanical vehicles for combining productive inputs into output in cost minimizing proportions in contrast firms play a central role in all modern tax systems mostly for a reason stated by richard m bird 1996 the key to effective taxation is information and the key to information in the modern economy is the corporation in most countries firms remit the majority of tax revenues to the government either with regard to taxes legally owed by businesses or through withholding of taxes legally owed by employees or other businesses even when businesses are not required to remit taxes they are often required to file information reports that can facilitate monitoring of tax liabilities the lack of a theoretical framework that features firms impedes rigorous welfare analysis of a number of important policy issues one such example is the comparative evaluation of a uniform retail sales tax rst versus a value added tax vat in the standard model these two taxes both remitted entirely by businesses are equivalent consumption taxes but most experts consider the vat to be clearly superior on administrative grounds a view echoed in the recent report of the president s advisory panel on federal tax reform 2005 we propose a simple framework in which these and other issues can be analyzed the new framework recognizes that a tax code must be backed up by an administrative and enforcement structure

interstate commodity tax differentials and the distribution of residents abstract this paper considers the manner in which an unequal distribution of consumers affects the commodity tax policies of neighboring jurisdictions the paper uses a spatial model in which the residents of two states are distributed non uniformly and employs a variety of assumptions about the behavior of governments and firms throughout the paper shows that at a nash equilibrium in tax levels the sparsely populated state imposes a lower tax than does its densely populated neighbor the paper also demonstrates how equilibrium state taxes differ depending on whether firms employ marginal cost or profit maximizing pricing

tax evasion tax competition and the gains from nondiscrimination the case of interest taxation in europe this paper uses a game tlieoredc approach to analyse the taxadon of interest income in europe in the presence of tax evasion the model allows tis to assess the success of various reform proposals we argue tbat the tax treatment of nonresidents interest income plays a crucial role when decisions on discriminatio n and on withholding tax rates are made noncooperadvely the outcome is similar to a prisoners dilemma all countries discriminate but in equilihrium internationally mobile portfolio capital evades taxation successfully in contrast if all governments did not discriminate tax competition leads to less tax evasion the integration of capital markets in europe has hrought various benefits at the same time however governments struggle to contain tax evasion international capital flight as an attempt to evade taxes is particularly relevant in the area of taxation of interest income banking secrecy laws in some eu countries and low tax rates in small countries like luxembourg which hoost its role as financial centre have led to the effective elimination ofthe taxation of interest income for some investors the economist speaks not surprisingly about the disappearing taxpayer may 31 1997 several proposals have been made in order to overcome this situation the european commission supports the introduction of a minimum tax rate and or the status of a community resident under the concept of a community resident a country s tax on interest income is independent of the residence of the investor practically realising the source principle by contrast a proposal of the oecd 1977 argues in favour of a maximum withholding tax rate on interest income none of these proposals has been unanimously accepted since gains and losses from non coordinated policies differ greatly across member states the main beneficiary of the present situation is luxembourg which attracts large amounts of foreign capital in particular from germany the united kingdom opposes any coordination for political reasons and because tax coordination may also threaten london s role as the leading financial centre in europe in contrast germany sticks to its traditional bank secrecy law which enables resident investors to evade german taxation by investing abroad

cross border tax evasion under a unilateral fatca regime abstract cross border tax evasion has emerged in recent years as a central issue in tax enforcement traditionally the legal regime governing cross border tax enforcement was based on information exchange upon request in 2010 the us congress enacted the foreign account tax compliance act fatca which seeks to induce foreign financial institutions ffis to participate in a global regime of automatic information reporting of the income of us residents to the us government this paper presents a simple theoretical model of cross border investment that analyzes the consequences of this unilateral fatca regime the model emphasizes cross border investors heterogeneous intrinsic motivation to comply with tax law as well as the impact of information reporting requirements on the cost of providing financial services in fatca compliant equilibria in which ffis report information to the us government ffis face a higher cost of providing financial services increasing the fees charged to their accountholders consequently tax compliant behavior such as investing via their domestic financial sector becomes more costly for foreign residents under certain conditions a unilateral fatca regime causes increased cross border tax evasion among residents of foreign countries this result is robust to various extensions

more flexible use of survey data on expectations in macroeconomic models a flexible procedure is proposed whereby both the random and systematic errors in measurement of survey data on inflation expectations can be appropriately handled when these surveys are used in the estimation of macroeconomic models during the period 1952 1980 livingston s two expectations series and the src series systematically underestimated inflation expectations by nearly 25 the asa nber survey however does not exhibit such underestimation thus the use of the livingston or src data as an unbiased measure of the true expectations of inflation would result in overestimation of the fisher effect and the ex ante real interest rate

the optimal deterrence of tax evasion the trade off between information reporting and audits abstract despite the widespread recognition of the effectiveness of information reporting to increase tax compliance existing tax theory considers tax audits to be the only tool to prevent evasion this paper extends tax theory by modeling information reporting as an additional enforcement instrument that allows a tax authority to acquire signals about taxpayers income the paper rigorously characterizes the optimal strategy to maximize tax revenue when enforcement resources are limited it determines the optimal allocation of resources between audits and information reporting which is governed by how effectively the signals facilitate audit targeting the model demonstrates that the value of information reporting declines with audit coverage because of the corresponding decline in the value of audit targeting the optimal level of information reporting is an inverse u shaped function of the budget allocated to enforcement while the optimal audit coverage always increases with the budget this finding implies that at some point it may not be optimal to expand information reporting

government borrowing and tax adjusted real and nominal interest rates the purpose of this paper is to test for the effect of federal government budget deficits on one year tax adjusted nominal and real interest rates in an is lm as model the results suggest that the specification of the dependent variable is a crucial issue in the debate over the linkage between deficits and interest rates the evidence shows a positive and significant effect of various measures of the federal government deficit and debt on the real tax adjusted treasury bill rate in both the levels and the first differenced equations but not on the nominal tax adjusted rate the positive and significant deficit debt coefficients are also confirmed when the first differenced equation is estimated by instrumental variables and when the equation is estimated over various time periods thus there is robust evidence of a positive linkage between federal government borrowing and the tax adjusted real but not nominal interest rates

inflation and housing demand a new perspective abstract the effects of inflation on the housing market are investigated in this study of new house prices in 42 u s metropolitan areas from 1971 to 1978 the results show that estimates of the elasticity of real house prices with respect to the real user cost have been biased sharply downward owing to an errors in variables problem when the error term in estimating expected inflation is recognized explicitly the negative relationship between real house prices and real user cost is found to be very strong this analysis helps to resolve the conflict in the literature between the negative cash flow effects and the positive untaxed capital gains and declining real payment effects resulting from inflation

expected inflation and interest rates reply vito tanzi s comment on my earlier study 1982 is based upon his belief that the mundell effect alone could not likely account for the ex ante negative real rates observed in his simulations his suggestion is that perhaps a mundell effect together with a fiscal illusion provides the best explanation p 502 nowhere did i argue that the mundell effect was all encompassing the nominal interest rate is determined by many factors besides expected inflation x my reducedform nominal interest rate equation includes inflation uncertainty the current and lagged money stock and the lagged price level as well as expected inflation as arguments thus at any point in time the nominal rate will shift with a movement in any of these variables one way of looking at this is that holding s constant i will vary with the other predetermined variables so that the real rate changes since tanzi and previous researchers have used partial equilibrium analysis to highlight the relation between 1t and i we tend to forget that the level of the real rate depends upon all the predetermined variables of the system to concentrate on the partial derivative of i with respect to sr we must take as given some initial i holding constant the other factors influencing i tanzi s simulations set the real rate of interest r initially equal to 03 then by assuming different values for di d7r and v he generates implied values for the after tax real interest rate r since the after tax real rate turns negative at quite low rates of 7r tanzi concludes that fiscal illusion is present as interest rates did not adjust for the effect of taxes p 502 the simple fact that the after tax real rate turns negative need imply nothing regarding whether or not investors are cognizant of taxes there is nothing inherently unusual about negative real rates of interest in the short run during inflationary periods clearly if money can be costlessly stored the nominal rate of interest cannot be negative but this in no way rules out negative real rates in a world of incomplete markets there may be inflationary periods when a negative real rate of interest is the best that optimizing agents can earn if there was a suitable asset available that guaranteed a zero return we would not expect to observe ex ante negative real rates benjamin friedman 1980 emphasizes the limited nature of portfolio substitution possibilities by arguing that if holding goods was a feasible portfolio alternative then the expected rate of inflation could be viewed as simply the return from holding such real assets in such a case higher expected inflation would reduce the lenders supply of loans directly via portfolio substitutions from loans bonds to real goods the problem with this scenario as stated by friedman is in practice however the available opportunities for such portfolio substitutions involving consumption or other real commodities are usually extremely limited purchasing the consumer price index basket of goods is not a feasible portfolio alternative p 34 the lack of such a real asset allows market instruments to offer a negative yield of course with no inflation and costless storage one could hold money so that we don t expect to observe negative rates in noninflationary periods frederic mishkin provides corroborating evidence in this area as he finds the real rate whether adjusted or unadjusted for taxes is negatively correlated with inflation 1981 p 191 emphasis added and the real interest rate appears to have been positive in the 1950s and 1960s but has since turned negative in the midand late 1970s p 192 regarding tanzi s simulations i do not believe that they correctly assess the path of the real rate following an exogenous change in inflationary expectations nw a major theme of my earlier paper was the emphasis arizona state university i thank don schlagenhauf john schroeter and richard l smith for helpful discussions

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

commodity tax competition under destination and origin principles abstract this paper studies the effect of switching from the destination to the origin principle of taxation on non cooperative commodity tax equilibrium when taxes are constrained to be uniform across commodities the switch has no effect when differentiated taxes are allowed the effects of the switch depend on whether countries are small or large in both cases the switch imposes the requirement that taxes must be uniform across commodities within each country in the second case there are two further effects of the switch i negative spillover effects from tax policy are introduced ii incentives to manipulate the terms of trade are changed the switch does not necessarily lead to a fall in all tax rates

does inflation affect real behavior the case of housing an important tradition in economics is to assume that demand depends upon relative prices and is homogenous of degree zero for the most part this has been interpreted as meaning inflation changes in the price level leaves demand unchanged recent work by a number of economists has challenged this position for the case of housing demand two arguments have been made that inflation acting in concert with existing institutions alters the quantity of housing demanded and the decision to rent or own a house the first argument states that inflation and the standard fixed payment mortgage combine to reduce the size of the mortgage loan a household can obtain for the purpose of buying a home this works to reduce the quantity of owner occupied housing demanded given the importance of mortgage finance to the demand for owner occupied housing the second argument focuses on the inflation adjusted after tax cost of owner occupied housing it simply states that an increase in the rate of anticipated inflation of the general price level reduces the after tax cost of housing thus increasing the demand for housing and the demand for homeownership there has been little empirical testing of these two arguments the purpose of this paper is to formulate and estimate a model which will give an indication of the quantitative significance of the two arguments a housing demand equation and a tenure choice equation own versus rent are estimated using a sample of about 6000 households from the 1975 annual housing survey 10 the estimates suggest that inflation dampens housing demand and homeownership opportunity for most households even though the inflation adjusted after tax cost of owner occupied housing declines as inflation heats up the paper consists of six sections including the introduction section two examines the ways inflation affects housing choices in more detail the third section contains the specification of the econometric model that forms the basis of the study section four is a discussion of econometric problems and the data used the results of the estimates are discussed in the fifth section the paper concludes with a presentation of the major conclusions and policy implications of the study

will destination based taxes be fully exploited when available an application to the u s commodity tax system abstract we develop a tax competition model that allows for the setting of both an origin based and a destination based commodity tax rate in the presence of avoidance and evasion in the presence of evasion jurisdictions will give cross border shoppers tax preferential treatment thus not fully exploiting the potential of destination based taxation moreover the divergence between origin based and destination based taxes is stronger when the incentives for consumers tax arbitrage opportunities increase the united states is one example of many such systems while sales taxes are due at the point of sale use taxes are due on goods purchased out of state we document that when able to set both rates a majority of jurisdictions levy destination based use taxes at a lower rate than origin based sales taxes in response to changes in state level policies that increase tax avoidance opportunities the results of the empirical model broadly confirm our theory

sales taxes and internet commerce we estimate the sensitivity of internet retail purchasing to sales taxes using ebay data our first approach exploits the fact that a seller s location and therefore the applicable tax rate is revealed only after a buyer has expressed interest in an item we document how adverse tax surprises reduce the likelihood of purchase and shift subsequent purchases toward out of state sellers we then use more aggregated data to estimate that every one percentage point increase in a state s sales tax increases online purchases by state residents by almost 2 percent while decreasing their online purchases from state retailers by 3 4 percent jel h71 l81 l86

production theory accounting for firm heterogeneity and technical change the paper presents a new framework to assess firm level heterogeneity and to study the rate and direction of technical change building on the analysis of revealed short run production functions by hildenbrand 1981 we propose the normalized volume of the zonotope composed by vectors firms in a narrowly defined industry as an indicator of inter firm heterogeneity moreover the angles that the main diagonal of the zonotope form with the axes provide a measure of the rates and directions of technical change over time the proposed framework can easily account for n inputs and m outputs and crucially the measures of heterogeneity and technical change do not require many of the standard assumptions from production theory

asymmetric commodity tax competition comment on de crombrugghe and tulkens abstract a widely noticed result by de crombrugghe and tulkens journal of public economics 41 1990 335 350 states that asymmetric commodity tax competition always leads to tax rates being too low in both countries even though there are counteracting private and public consumption effects for the high tax region this note argues that the result depends crucially on the assumption that welfare in the high tax region is concave in the tax rate of the low tax country and shows that this assumption cannot generally be met in the underlying mintz and tulkens journal of public economics 29 1986 133 172 model it is also shown that a tax increase in the low tax country will hurt the high tax region when the marginal transaction cost schedule is sufficiently elastic with respect to the level of cross border shopping

pareto efficient international taxation this paper analyzes pareto efficient international tax regimes because every country faces its own national budget constraint the diamond mirrlees production efficiency theorem which underlies key tenets of policy advice in international taxation the desirability of destination basis for commodity taxation of the residence principle for capital income taxation and of free trade does not apply the paper establishes conditions relating to the availability of explicit or implicit devices for reallocating tax revenues across countries under which production efficiency is nevertheless desirable and characterizes the precise ways in which pareto efficient international taxation may require violation of established tenets

productivity growth technical progress and efficiency change in industrialized countries this paper analyzes productivity growth in 17 oecd countries over the period 1979 1988 a nonparametric programming method activity analysis is used to compute malmquist productivity indexes these are decomposed into two component measures namely technical change and efficiency change we find that u s productivity growth is slightly higher than average all of which is due to technical change japan s productivity growth is the highest in the sample with almost half due to efficiency change jel c43 d24 in this paper we apply recently developed

jeux sans frontieres tax competition and tax coordination when countries differ in size closer international integration is putting increasing pressure on existing national tax structures this paper uses a simple two country model to address a range of consequent policy concerns focusing particularly on the role of country size differences in size exacerbate the inefficiency from noncooperative behavior harming both countries the smaller country loses from harmonization to any tax rate between those set in the noncooperative equilibrium but both countries gain from the imposition of a minimum tax anywhere in that range the fully optimal response to freer cross border trade however may be to do nothing jel h20 h77

economic efficiency and frontier techniques abstract most of the literature related to the measurement of economic efficiency has based its analysis either on parametric or on non parametric frontier methods the choice of estimation method has been an issue of debate with some researchers preferring the parametric and others the non parametric approach the aim of this paper is to provide a critical and detailed review of both core frontier methods in our opinion no approach is strictly preferable to any other moreover a careful consideration of their main advantages and disadvantages of the data set utilized and of the intrinsic characteristics of the framework under analysis will help us in the correct implementation of these techniques recent developments in frontier techniques and economic efficiency measurement such as bayesian techniques bootstrapping duality theory and the analysis of sampling asymptotic properties are also considered in this paper

the effects of inflation and income taxes on interest rates some new evidence this paper reexamines the empirical relation between inflation and interest rates concentrating on the tax effect proposed by darby and feldstein using the random walk intercept model relative responses of taxable yields and tax exempt yields to expected infla tion are estimated the results show that for the sample period 1953 1982 the nominal yields on treasury bills rise at a rate greater than one for one with expected inflation while the nominal yields on default free municipal bonds rise approximately one for one with expected inflation thus the tax adjusted fisher hypothesis by darby and feldstein is empirically supported the components of treasury bills are also extracted and their variances are compared it is shown that variation of expected inflation is not overwhelmingly larger than that of the after tax real rate therefore on an after tax basis changes in the real rate explain a substantial portion of changes in the nominal rate of interest

evidence of the fisher effect from u k indexed bonds newly available data from the u k market for indexed securities are used to test the fisher hypothesis for monthly observations of interest rates at 14 maturities the hypothesis that the after tax nominal interest rate is a constant plus anticipated inflation proves to be a reasonable approximation of reality for longer maturities the coefficients on the expected rate of inflation are approximately equal to one the mundell tobin effect is in evidence for shorter maturities the inverted fisher effect is in evidence for shorter maturities the inverted fisher effect is decisively rejected the evidence suggests that past difficulties encountered in trying to prove the fisher effect have been due to the lack of a direct measure of inflation expectations and real interest rates copyright 1992 by mit press

special tax regimes and the choice of organizational form evidence from the european tonnage taxes abstract tax systems often discriminate among the various organizational forms of doing business and may therefore affect the choice of organizational form this paper studies how special tax regimes shape the organizational form choice although the full effects depend on the way that firm level special tax regimes are designed special regimes generally tend to favor pass through firms over non pass through firms the tonnage tax a tax incentive for international shipping firms available in many countries worldwide is examined to understand these effects employing european firm and country level data the impact of the tonnage tax on organizational form choice is studied empirically the results are consistent with the theoretical model shipping firms are less likely to incorporate if the tonnage tax is also available for firms that have adopted pass through organizational forms

higher taxes more evasion evidence from border differentials in tv license fees this paper studies the evasion of tv license fees in austria we exploit border differentials to identify the effect of fees on evasion comparing municipalities at the low and high fee side of state borders reveals that higher fees trigger significantly more evasion our preferred estimator indicates that a one percent increase in fees raises the evasion rate by 0 3 percentage points the positive effect of fees on evasion is confirmed in different parametric and non parametric approaches and survives several robustness checks