individual taxpayer response to tax cuts 1982 1984 with implications for the revenue maximizing tax rate abstract this paper measures the response of taxpayers to the u s personal rate reductions from 1982 to 1984 a baseline income distribution is created to describe what level and distribution could be expected in the absence of tax changes comparison of this baseline with actual tax return data shows that at least one sixth and probably one quarter of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior the data also show that federal income tax revenue would have been maximized at a tax rate of about 35 percent and total income tax revenue maximized at a total tax rate of about 40 percent

can stabilisation policy reduce long run growth this paper presents an analysis of the long run implications of short term stabilisation policy the analysis is based on a simple stochastic model of an imperfectly competitive economy with nominal rigidities and an endogenous technology by virtue of the latter temporary shocks have permanent effects such that the cyclical and secular properties of output are related in particular smoother cyclical fluctuations may be associated with flatter secular trends implying a trade off between short term stabilisation and long term growth

on the relationship between growth and volatility abstract we study the relationship between output growth and output variability in a simple stochastic monetary growth model with nominal rigidities and learning by doing we show that this relationship may be positive or negative depending on the impulse source of fluctuations

long term growth and short term economic instability when learning by doing is at the origin of growth the long run growth rate should be negatively related to the amplitude of the business cycle if human capital accumulation is increasing and concave in the cyclical component of production empirical evidence strongly supports this nding for industrialized countries and european regions using the standard control variables we nd that countries and regions that have a higher standard deviation of growth and of unemployment have lower growth rates the result does not come from an e ect of instability on investment the negative relation however does not hold for non industrialized countries for which learning by doing may not to be the main engine of growth 2000 elsevier science b v all rights reserved jel classixcation o40 e32

the importance of reporting conventions for the theory of corporate taxation abstract this paper shows that for the analysis of a tax policy it is important to be explicit about the reporting convention to which a corporation tax is required or allowed to adhere the paper shows that the corporation tax cannot be used to alter capital formation under uniform reporting a convention required by the majority of the oecd countries this tax is however a more useful policy tool in those oecd countries that have created the privilege of separate reporting fiscal depreciation makes the marginal valuation of equity differ from the marginal valuation of capital use of tax allowances directed to investment stimulus operates rather differently under the two reporting conventions

product market imperfections and loan commitments i show in a model of competitive banks that the characteristics of loan contracts are affected by product market imperfections in the borrower s industry a bank loan commitment increases the value of a borrower firm operating in an imperfectly competitive industry and thus dominates a simple loan even in the absence of risk sharing considerations and informational asymmetries between the borrower and the bank while it is individually rational for a firm to obtain a loan commitment all the firms in that industry taken together are made worse off by the existence of loan commitments a loan commitment is a contract guaranteeing future availability of credit to a borrower at a prespecified fixed or stochastic interest rate although bank loan commitments are an important financial instrument and there exists an extensive literature analyzing them the rationale for their existence is still a matter of research this paper provides an explanation for the existence of bank loan commitments to borrowers from industries in which there is imperfect competition in the product market it is shown that in such industries the option to acquire financing at predetermined rates enhances the borrower s strategic power and thus creates value for the individual borrower consider an industry with imperfect competition where firms face the problem of noncooperatively exploiting a product market opportunity the optimal product market strategy of a firm depends on the output of its rivals a firm with access to resources at a lower marginal cost than its competitors has a strategic advantage that it can exploit to gain a larger market share and profits it is shown here that a firm that does not have such a strategic advantage can create it by purchasing for a fixed initial fee an option to acquire a factor of production such as financing at favorable terms specifically by initially negotiating a bank loan commitment the firm can finance an expansion of output to meet a strategic contingency at more favorable terms than would be possible if the expansion had to be financed in the spot market the ability to exercise the commitment enables the firm to threaten its rivals strategically and moves the industry to an equilibrium more favorable to that firm thus creating value for the borrower it is shown below that it is optimal for all firms to acquire bank loan commitments altering the industry equilibrium in the process

inflation and indexation an empirical approach previous studies have examined various aspects of indexation we can distinguish two major points of interest wage determination and the effects of indexation on macroeconomic fluctuations some scholars have attempted to determine empirically and theoretically the causes of cost of living adjustment cola clauses in wage contracts 3 7 11 the focus in this research is often on major union contracts with wage change a function of both real factors e g the unemployment rate and monetary factors e g past inflation typical results are that past inflation will increase the adoption of indexation while industry specific shocks may cause resistance to indexation in addition kaufman and woglom 7 have shown that current labor market conditions have a significant impact on long term contracts research has also been concerned with the effect of wage indexation on the macroeconomy 1 2 5 6 how can wage indexation schemes be designed so as to alleviate the substantial income redistribution due to inflation and the use of contracts in nominal

revisiting the bright and dark sides of capital flows in business groups prior studies report that the business group structure and the associated intra group capital flows are prone to conflicts of interest between controlling shareholders and minority investors yet business group is a prevalent and stable structure around the globe particularly where capital markets are underdeveloped using data from china this paper empirically studies the trade off between the negative and positive roles played by intra group capital flows and tests the efficiency implications of such trade off we find that from the perspective of the whole group intra group capital flows are most efficient when the groups are least subject to conflicts of interest between controlling shareholders and minority shareholders and when they face strong external financing constraints

irreversible investment and endogenous financing abstract we evaluate the effects of corporate taxation on firms investment and financing choices we focus on how the asymmetry of the corporate tax imperfect loss carry overs endogenous financing with credit constraints and different degrees of investment irreversibility affect both incremental investment and entry decisions we find that as long as capital can be financed with debt at the margin the tax distortions on the marginal investment decision are small this is particularly so if the technology is flexible in contrast the tax distortions on the entry decision are substantial the ability of firms to carry over their losses and choose their financial structure endogenously are important for reducing both types of distortions

capital malleability macro performance and policy effectiveness capital has distinguished itself as one of the more controversial concepts in economics it has fostered debate spanning volumes years and at least one ocean it has given rise to different schools of thought and it has even become a trademark of the schools that house the different schools of thought from the midst of the controversy however comes one point about which there seems to be some albeit hardly unanimous agreement capital s relationship to labor differs ex ante and ex post during its design stage capital admits substitution with labor to an extent restricted only by what might be called the technology of the moment after its construction capital admits substitution less readily because then it is subject to an additional constraint namely the constraint of capital in place 3 65 8 this property can be described another way the ex post elasticity of factor substitution a is smaller than the ex ante elasticity a for the past several decades and certainly since 1959 theorists formulating models of production and economic growth have given careful attention to malleability and they have ventured beyond the neoclassical postulate of putty putty which holds that the ease of substitution is the same ex ante and ex post and therefore that the constraint of capital in place is not binding a a 0 some scholars such as johansen 14 phelps 17 bliss 2 and gapinski 8 10 argued that capital is putty clay factor substitution is possible only ex ante the constraint of capital in place is binding and it is absolute a a 0 other scholars such as hu 13 and gordon 11 stepped away from the limiting case and adopted the more lenient view that the capital in place constraint is binding but not absolute capital is putty tin a a 0 2 malleability matters it governs entrepreneurs in their attempts to adjust existing inputs to contemporaneous price events and it typically obligates them to search the future in choosing the specification of new capital since failure to do so would likely mean a faulty design higher input cost and lower quasi rent malleability matters for entrepreneurial behavior and hence it should matter for macro performance and for policy intended to improve that performance those relationships which have been largely ignored in the literature are studied here underlying the inquiry is a dynamic macro model that features putty tin capital and

the political economy of fiscal deficits a survey this paper surveys recent literature both theoretical and empirical regarding political explanations for fiscal deficits political economy suggests conflicts of interest may lie behind the emergence of deficits 1 opportunistic politicians generate deficits to win elections even in conflict with general welfare 2 conflicts of interests between politicians partisan preferences create incentives for at least some incumbents to run deficits and 3 conflicts of interest between different social groups or regions generate tensions in the allocation of government resources leading to overspending this paper reviews these different strands of the literature it also covers contributions that highlight the crucial role of budget institutions in determining the extent to which the political motivations to generate deficits are indeed translated into poor fiscal outcomes promising avenues for future research are highlighted

a spatial model of corporate tax incidence using a unique self compiled data set on international tax rates we explore the link between taxes and manufacturing wages for a panel of 66 countries over 25 years we find controlling for other macroeconomic variables that wages are significantly responsive to corporate taxation higher corporate tax rates depress wages using spatial modelling techniques we also find that tax characteristics of neighbouring countries whether geographic or economic have a significant effect on domestic wages we test for and reject spatial autocorrelation in our model using a modification of the moran i test statistic that accounts for country specific fixed effects in a panel data setting our article fits in with the new economic geography literature as well as the urban economics literature which attempt to explain the spatial distribution of wages

output volatility and economic growth abstract this paper proposes a new instrument to identify the causal effect of output volatility on economic growth which is based on exogenous volatility spillovers from abroad cross section evidence from 128 countries points to a negative effect of volatility on growth

investment capital structure and complementarities between debt and new equity we study simultaneous investment and financing decisions made by incumbent owners in the presence of capital market imperfections we present a theory for how the optimal combination of debt and equity financing depends on the firm s internal funds we identify complementarities between the two financial instruments we test these predictions empirically with panel data on 3 119 corporations in the compustat database our estimates using instrumental variable techniques support our theoretical predictions regarding the link between internal funds and capital investments as well as the interaction effects between debt and new equity we explore implications for managers financiers and policy makers

tax policy and consumer foresight a general equilibrium simulation study this paper presents a dynamic computational general equilibrium model in which expectations regarding future prices can be varied systematically the model is employed to evaluate how expectations influence the effect of long run tax policy changes under policies like a consumption tax that reduce rates of return over time individuals with perfect foresight save less than individuals with myopic beliefs this is because consumers with foresight are better able to anticipate the lower returns lower saving means that existing distortions due to capital taxes are not offset as much so that welfare gains are smaller under perfect foresight

taxes incentives and production the case of turkey abstract this paper investigates the effectiveness of investment incentives and corporate income taxes in influencing production and investment decisions in the turkish electrical machinery non electrical machinery and transportation equipment industries three tax instruments are considered the corporate income tax cit the investment tax allowance ita and the capital cost allowance cca the results show that since there are significant capital adjustment costs it is important to distinguish between the short intermediate and long run effects associated with the tax instruments production decisions are relatively more responsive to changes in the ita rate compared to changes in either the cca or cit rates in each of the runs however the ita and cca rates are equally cost effective in stimulating investment and superior to the cit the cca and ita rates generate investment expenditures of 1 5 to 2 5 times the loss in government revenue thus targeted instruments outperform the general cit instrument in addition although the incentive to invest is enhanced there is little effect on output and employment therefore these tax incentives essentially after production techniques

the vanishing harberger triangle this paper shows that the double taxation of corporate dividends or profit repatriations implies a nucleus theory of the corporation after the firm is set up with a small stock of original capital it enters a phase of purely internal growth during which no dividends are paid and no shares are issued the phase terminates when an efficient stock of capital has been accumulated and dividends are paid during the growth phases the tax distortion is inversely related to the tax burden and it is larger than conventional formulae for the cost of internal and external equity finance suggest

product market competition and optimal debt contracts the limited liability effect revisited abstract this paper shows that asymmetric information between lenders and borrowers plays a crucial role in the existence of interactions between financial decisions and output market strategies lenders offer an optimal renegotiation proof financial contract which resembles a standard debt contract computing cournot equilibria debt causes firms to compete less aggressively the usual positive limited liability effect on quantities is offset by a negative one due to endogenous financial costs

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

on the relationship between firm size and export intensity export marketing literature supports the view that firm size is positively related to export intensity although the empirical findings have been mixed a number of theoretical arguments are used to support this proposition i e international marketing economies of scale limited managerial and financial resources of small firms decisionmaker s risk perception based on a large survey of the italian manufacturing industry the article falsifies the proposition and challenges some widely held assumptions in export marketing literature

the 1986 us tax reform and the world capital market the 1986 u s tax reform was a policy of tax cut cum base broadening among other things the corporate and personal tax rates were reduced the investment tax credit itc was lifted the depreciation periods of the accelerated cost recovery system acrs were lenghtened and realized capital gains became fully included in the personal tax base this paper gives a brief overview of the main effects on international capital movements that these measures may have drawing on related and more elaborate discussions of the subject in sinn 1987a ch 7 and 1987b the analysis focuses on the interactions between the real and financial spheres of the economy and unlike most of the existing literature on taxation and international capital flows it is based on a microfoundation of the tax influence on the firms marginal investment conditions the main result is that in the presence of accelerated depreciation and the residence principle for interest income taxation not only the base broadening but also the tax cuts may expel capital from the united states

the effect of the stock market on investment a comparative study this paper is concerned with examining whether exogenous events whose only direct effect is to change stock prices can indirectly affect corporate investment through the stock price mechanism it is argued that the actual effect of share price changes depends on institutional considerations which affect the degree of managerial autonomy e g the extent of the use of the takeover mechanism gearing ratios and the role of employees in corporate decision making therefore it would be reasonable to expect the stock market to be less influential in japan or germany when compared with the u s or u k this paper provides some econometric evidence which supports this view in that once one has allowed for other influences on investment share prices provide no additional explanatory power for investment behaviour in japan or germany but they do affect investment in the u k and u s if one believes that the stock market is sometimes swayed by irrational considerations the absence of an influence of share prices on investment in japan or germany may then be regarded as an advantage

accrual equivalent marginal tax rates for personal financial assets this paper shows that the appropriate approach to calculating accrual equivalent marginal tax rates for nonaccrual taxes on personal financial investments is the relative reduction in the internal rate of return approach which equates the present values from the after tax returns from an investment under an accrual and a nonaccrual tax detailed comparisons are made with alternative approaches proposed by boadway bruce and mintz 1984 and by king and fullerton 1984 for the capital gains tax both find accrual tax rates that equate the present values of accrual and actual tax revenues fundamental problems are found with both alternative approaches

an intertemporal general equilibrium analysis of financial crowding out a policy model and an application to australia abstract this paper constructs a two period perfect foresight general equilibrium model that analyzes crowding out private investment is debt financed while government deficits are financed by money and debt the existence of equilibrium is demonstrated and the model is applied to australia for 1981 1982 the last years for which australia had a fixed exchange rate a benchmark solution is derived and two counterfactual simulations are carried out small increases in real government spending are found not to lead to crowding out while an increase in the debt financed portion of the government s budget deficit does lead to crowding out

business cycle models with endogenous technology this paper compares real and monetary business cycle models with and without endogenous technical change if technology is endogenous the properties of these models change significantly in particular both real and monetary models yield very similar output processes if growth is endogenous and changes in aggregate demand can result in permanent changes in productivity employment and output the effect of depreciation of technology is examined and the pattern of real wage movements over the cycle when money wages are fixed but technology is changing is briefly considered copyright 1990 by american economic association

estimating the long run user cost elasticity abstract the user cost elasticity is a parameter of central importance in economics if the supply curve for capital is upward sloping as is more likely in a large economy like the u s and shocks to demand are important as they are likely to be over the business cycle estimates of the user cost elasticity that rely on high frequency movements in the variables will tend to be biased applying cointegration techniques to a small open economy yields an estimate of the long run user cost elasticity that is about 75 larger in absolute value than the best existing estimate

the relationship between firm growth size and age estimates for 100 manufacturing industries this study uses a sample of all firms operating in 100 manufacturing industries to examine some aspects of firm dynamics it finds that firm growth the variability of firm growth and the probability that a firm will fail decrease with firm age it also finds that firm growth decreases at a diminishing rate with firm size even after controlling for the exit of slow growing firms from the sample gibrat s law therefore fails although the severity of the failure decreases with firm size copyright 1987 by blackwell publishing ltd

on endogenous growth under uncertainty this paper incorporates uncertainty in two distinct models of endogenous growth in both models the representative agent is uncertain about the productivity of knowledge creation as represented by a probability measure over the relevant parameter the main purpose of this paper is to analyze the effects of risk or volatility in productivity of knowledge creation on the decision variables and the expected long run growth rate both the first and the second models may explain part of the observed negative link between volatility and growth

growth volatility and learning abstract this paper presents a simple stochastic growth model in which productivity improvements are the result of both internal deliberate and external serendipitous learning behaviour the model is used to illustrate how these different mechanisms of endogenous technological change can lead to different implications for the correlation between output growth and output variability

social polarization fiscal instability and growth abstract we present a dynamic model of fiscal policy in a simple growth framework where social polarization of preferences plays a central role in the evolution of fiscal instability and growth collapse in a highly polarized society a deficit occurs endogenously fiscal spending path becomes more volatile output collapses and economic growth rate is reduced along the transition path to a new lower level of output one novel feature is that the size of fiscal deficit the magnitude of fiscal volatility and the size of reduction in output and growth rate are explicitly shown to be increasing functions of the degree of social polarization this is because of the positive relationship between the polarization of preferences and the incentive for policymakers or socio economic groups to overexploit the government resources in a common pool setting polarization effect thereby we offer a fiscal instability channel that negatively links social polarization and growth which is an alternative yet distinct explanation for the empirical finding that social polarization is harmful to growth moreover we fully distinguish the incentive to engage in such short term policies under political uncertainty from that under polarization polarization and political uncertainty are shown to be distinct yet critical to the dynamic coordination failure in the common pool setting

long dark shadows or innovative spirits the effects of smoothing business cycles on economic growth a survey of the literature abstract it is argued that fiscal policy can play a part in preventing a possible downward spiral or be instrumental in achieving a higher long term path of growth never before has this argument been advanced as frequently as in the current economic crisis however the economic literature an overview of which is given here does not provide an unambiguous answer either theoretically or empirically to the question of the relationship between the smoothing of cyclical fluctuations and long term growth in this context two main contrasting explanatory paradigms can be identified schumpeter s concept of creative destruction and the learning by doing hypothesis even if it were possible to identify the relationship more clearly on this basis it is important not to lose sight of the problems associated with the real time assessment of the current economic situation time lags and political economic incentives even in difficult times

miller s irrelevance mechanism a note this note attempts to clarify miller s 12 capital structure irrelevance mechanism using a geometric edgeworth box diagrams presentation such an exercise is useful because miller s proposition is founded on analytically complex equilibrium arguments that tend to mask the intuition and logic behind his result since miller s original discussion unnecessarily assumed a zero tax on equity income and since miller did not prove his clientele effects rigorously we also focus our attention on the deangelo and masulis 8 9 henceforth d m generalization of the miller model the d m framework is also important because it assumes a proportional tax code as we shall see whether the tax code is proportional or progressive is an important factor in understanding miller s proposition

problems with integrating corporate and personal income taxes in an open economy abstract this paper analyzes income tax integration in a small open economy when agents exploit all legal tax arbitrage opportunities the analysis shows that integration does not accomplish the objectives that have been attributed to it instead of eliminating the double taxation of equity income it simply removes the primary taxation of savings done through the corporation the analysis has implications for the choice of a personal tax base and for the design of the corporate tax

optimal simple and implementable monetary and fiscal rules welfare maximizing monetary and fiscal policy rules are studied in a model with sticky prices money and distortionary taxation the ramsey optimal policy is used as a point of comparison the main findings are the size of the inflation coefficient in the interest rate rule plays a minor role for welfare it matters only insofar as it affects the determinacy of equilibrium optimal monetary policy features a muted response to output interest rate rules that feature a positive response to output can lead to significant welfare losses the welfare gains from interest rate smoothing are negligible optimal fiscal policy is passive the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the ramsey optimal policy

taxes firm financial policy and the cost of capital an empirical analysis abstract this paper develops a theoretical model of firm behavior consistent with the maximization of shareholder utility and derives empirically testable implications of different theories of equity finance using data on firm earnings and previous investment and financial behavior we assess whether firms treat new share issues as a more expensive source of finance than retentions and whether such behavior varies across firms according to the composition of their shareholders our results support the hypothesis that firms perceive a higher cost of capital when issuing new shares and that the cost of capital varies significantly across firms having different estimated tax clienteles as theory would predict

tax policy and capital allocation summary the purpose of this paper is to analyze the impact of u s tax policy on the efficiency of capital allocation to achieve this objective we employ an intertemporal general equilibrium model of the u s economy implemented econometrically for annual data covering the period 1955 1980 we present a detailed model of the provisions of u s tax law applicable to income from capital we use intertemporal equilibrium paths corresponding to alternative tax policies to evaluate proposals for tax reform we find that dramatic gains in economic welfare would result from a shift from direct to indirect taxation

is there a tradeoff between bank competition and financial fragility abstract we use a model of mean shifting investment technologies to study the relationship between market structure risk taking and social welfare in lending markets introduction of loan market competition is shown to reduce lending rates and to generate higher investments without increasing the equilibrium bankruptcy risk of borrowers hence there need not be a tradeoff between lending market competition and financial fragility such a tradeoff may not emerge either when banks compete by conditioning interest rates on investment volumes irrespectively of whether credit rationing takes place or not

capital gains taxation in an economy with an austrian sector abstract this paper examines the effects of a proportional capital gains in an economy with an austrian sector with wine and trees and an ordinary sector we analyze the effect of capital gains taxation on both an accrual and a realization basis on the efficiency with which resources are used within the austrian sector since time is the only input which can be varied in the austrian sector this amounts to looking at the effect of capital gains taxation on the harvesting time or selling time of assets accrual taxation decreases the selling time of austrian assets realization taxation decreases the selling time of some austrian assets and leaves it unchanged for others inflation further reduces the selling time of assets taxed on an accrual basis often but not always inflation increases the selling time of austrian assets taxed on a realization basis we also examine the effect of the special tax treatment of capital gains at death and find that the current u s tax system under which capital gains taxes are waived at death encourages investors to hold assets longer in contrast to these results which suggest that the capital gains tax can reduce the holding period of an asset we show that there is a sense in which such taxes at least when levied on a realization basis discourage transactions and increase holding periods it is never profitable to change the ownership of an austrian asset between the time of the original constraint and the ultimate harvesting of the asset for final use capital gains taxation diverts resources from the austrian sector to the ordinary sector the effects on the efficiency of the allocation of investment between sectors are complicated and not easy to summarize

firm s output under uncertainty and asymmetric taxation we consider competitive firms operating under price uncertainty when taxation is asymmetric i e profits are taxed at a higher rate than losses are compensated in the absence of risk sharing tools the larger gap in taxation may either lower or increase the firm s optimal output depending on whether the relative measure of risk aversion is less than or larger than 1 in the presence of risk sharing markets optimal output does not depend on the tax rates nor on the price distribution or the firm s attitude towards risk the firm will engage in hedging and as a result will lower its expected taxes

evaluating risky consumption paths the role of intertemporal substitutability abstract in dynamic stochastic welfare comparisons a failure clearly to distinguish between risk aversion and intertemporal substitutability can result in misleading assessments of the impact of risk aversion on the welfare costs of consumption risk changes the problem arises in any setting in which uncertainty is propagated over time notably but not exclusively in economies with stochastic consumption trends regardless of the preference setup adopted an increase in risk aversion amplifies the per period costs of risks the weights consumers use to cumulate the per period costs of risks with persistent effects should however depend on intertemporal substitutability as well as on risk aversion under time separable expected utility preferences an increase in the period utility function s curvature therefore alters the welfare effect of risk for reasons that are in part unrelated to risk aversion to illustrate these points i reconsider lucas s estimate of the cost of consumption instability for the postwar united states

taxes investment and q this paper attempts to provide a unified analysis of the effects of taxation on the equilibrium value of marginal q under alternative financial policies it is shown that the q approach does not avoid all the specification problems associated with analyses based on the cost of capital the theoretically and empirically crucial relationship between average and marginal q is also examined and it is shown that under uk and us tax rules the possibility of winding up precludes persistent undervaluation in equilibrium there have now been a considerable number of empirical studies of investment behaviour based on some variant of tobin s q defined as the ratio of the firm s market value to the value of its capital stock see for instance jenkinson 1981 oulton 1981 poterba and summers 1981 summers 1981 and von furstenberg 1977 the q approach is seen as having the empirical advantage compared in particular with the more traditional approach based on the cost of capital of allowing expectations to be brought directly into the study of investment behaviour by relying on asset prices to digest all relevant expectations and reflect them in observable data an immediate difficulty however is that whilst the incentive to invest is related to the effect on shareholder wealth at the margin and hence to marginal q only the value of average q is directly observable the consequent difficulty of implementation is not however considered here see bailey and scarth 1980 and hayashi 1982 for discussion of conditions under which marginal q can be inferred from average q rather this paper is concerned with the prior question of how personal and corporate taxation affects the equilibrium value of marginal q for there has as yet been no systematic analysis of the effects of taxation on the equilibrium value of marginal q comparable with the analysis of the relationship between taxation and the cost of capital in king 1974 thus auerbach 1979a b bradford 1981 and edwards and keen 1984 have all considered how taxes affect q when the marginal source of funds is either retained profit or the sale of new equity and the distinction between these two cases has also been recognized in the empirical work of poterba and summers 1983 but the important case in which debt is the marginal source has been ignored the effects on marginal q of the constraints that typically need to be imposed in modelling financial policy have also been neglected this paper attempts to fill these gaps in the literature by providing a general analysis of the relationships between taxation financial policy investment and q the paper also examines the implications of the special tax provisions that may apply in the event in the firm s ceasing operations winding up this bears upon one of the unresolved issues associated with the new view of equity finance auerbach 1983 namely the suggestion that if dividends are taxed more heavily than capital gains

production growth and business cycles ii new directions abstract this paper outlines new directions for investigations of real business cycle models consideration of stochastic growth of exogenous and endogenous forms analysis of suboptimal outcomes arising due to externalities of distorting taxes and implications of labor market heterogeneity

industrial policy through the restriction of capital flows a test of several claims made about industrial policy we examine the extent and effect of an interest rate based industrial policy in japan france great britain and west germany while using the united states as a control case we argue that some governments have undertaken industrial policies that achieve a belowcompetitive market interest rate thereby allowing the redirection of financial flows to firms in the form of cheaper capital zysman shonfield and others believe these restrictions on interest rates cause additional firm investment change the time horizon of managers and transfer wealth from domestic savers to domestic firms we first examine the role of industrial policy by assessing the relationship between domestic interest rates and eurocurrency rates we argue that the degree of difference between these rates is an indication of the extent of one type of industrial policy we then evaluate the relative influences of domestic and external interest rates on stock prices as a way of measuring the consequences of these industrial policies if the policy were completely effective i e insulating the relevant interest rate from market forces only the domestic interest rate would influence stock prices we assess the conditions under which states demonstrate sufficient strength to undertake policies to insulate domestic markets we find that only france under the socialists succeeded in positively affecting economic activity through this type of industrial policy and that britain prior to thatcher s election demonstrated ineffective policies some evidence also indicates that japan s industrial policies were less effective than previously believed no evidence of such policies was found for west germany under either the socialists or the csu cdu alliance we tested for partisan political changes in government policies and except in great britain found none

internationally mobile firms and tax policy abstract this paper analyses how the government should tax internationally mobile firms the analysis finds that if tax authorities are unable to observe firms true mobility and domestic and foreign profitability are uncorrelated then 1 information rents are acquired by immobile inefficient firms and 2 the optimal policy will stimulate investment in the immobile sector compared to the complete information case another result of the paper is that the optimal allocation is implementable within the framework of a corporate income tax system where mobile firms self select more unfavourable capital allowances than immobile firms

tobin s q investment and the endogenous adjustment of financial structure abstract should q theory be modified to take account of financial structure this paper analyzes a general equilibrium q model where financial structure affects firm value agency costs and taxes combine to yield an interior solution for the endogenous debt equity ratio although q is still a sufficient statistic for investment the endogenous adjustment of financial structure alters the relation between the interest rate and investment in this model an increase in the corporate tax rate could either raise or lower the steady state capital stock furthermore both q and investment could jump in opposite directions to that of their steady state values

on measuring the welfare cost of business cycles lucas 1987 argues that the gain from eliminating aggregate fluctuations is trivial following lucas a number of researchers have altered assumptions on preferences and found that the gain from eliminating business cycles are potentially very large however in these exercises little discipline is placed on preference parameters this paper estimates the welfare cost of business cycles allowing for potential time non separabilities in preferences where discipline is placed on the choice of preference parameters by requiring that the preferences be consistent with observed fluctuations in a model of business cycles that is a theoretical real business cycle world is constructed and the representative agent is then placed in this world the agent responds optimally to exogenous shocks given the frictions in the economy the agent s preference parameters along with other structural parameters are estimated using a bayesian procedure involving markov chain monte carlo methods two main results emerge from the paper first the form for the time non separability estimated in this paper is very different than the forms suggested and used elsewhere in the literature second the welfare cost of business cycles is close to lucas s estimate

optimal monetary and fiscal policy in a currency union we lay out a tractable model for the analysis of optimal monetary and fiscal policy in a currency union the monetary authority sets a common interest rate for the union whereas fiscal policy is implemented at the country level through the choice of government spending in the presence of country specific shocks and nominal rigidities the policy mix that is optimal from the viewpoint of the union as a whole requires that inflation be stabilized at the union level by the common central bank whereas fiscal policy has a country specific stabilization role one beyond the efficient provision of public goods

new findings on firm investment and monetary transmission in the euro area in this paper we present comparable results on the determinants of firms investment and their link to monetary policy the results have been obtained by the eurosystem monetary transmission network this network has produced a series of papers in which the use of micro data permits estimating and quantifying the relevance of two channels of monetary policy transmission the interest rate and the broad credit channel the research findings provide evidence of an operative interest rate channel in all countries examined moreover the results indicate that variables which proxy firms financial conditions play a role firms characterised by weaker balance sheets show higher liquidity sensitivity

replacing the u s income tax with a progressive consumption tax a sequenced general equilibrium approach abstract this paper examines the welfare consequences of changing the current u s income tax system to a progressive consumption tax we compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital in the presence of existing income taxes the u s economy is assumed to lie on a balanced growth path with the change to a consumption tax individuals save more and initially consume less as the capital stock grows consumption eventually overtakes that of the original path and the economy approaches the new balanced growth path with higher consumption and a greater capital stock both the transition and the balanced growth paths enter our welfare evaluations we find the discounted present value of the stream of net gains is approximately 650 billion in 1973 dollars just over 1 percent of the discounted present value of national income larger gains occur if further reform of capital income taxation accompanies the change we examine the sensitivity of the results both to the design of the consumption tax and to the values of elasticity and other parameters the paper also contains estimates of the time required to adjust from one growth path to the other

taxation corporate financial policy and the cost of capital the cost of capital plays an important role in the allocation of resources among competing uses in a decentralized market system the purpose of this paper is to organize and present what is known and what is hypothesized about the effects of taxation on the incentive to invest via the cost of capital taking full account of important issues that arise independently from the question of taxation included in the analysis is a discussion of empirical findings about the interaction of inflation and taxation in influencing the incentive to invest and a treatment of taxation and uncertainty this abstract was borrowed from another version of this item

the irrelevance of detail in and computable general equilibrium model abstract we eliminate many complicated features of a computable general equilibrium model and reevaluate several reforms of capital taxation results of the simple model are surprisingly similar welfare gains depend more on a key unknown elasticity than on all the additional modeling complications combined

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

animal spirits through creative destruction we show how a schumpeterian process of creative destruction can induce rational herd behavior by entrepreneurs across diverse sectors as if fueled by animal spirits consequently a multisector economy in which productivity improvements are made by independent profit seeking entrepreneurs exhibits regular booms slowdowns and downturns as part of the long run growth process our cyclical equilibrium has higher average growth but lower welfare than the corresponding acyclical one we show how a negative relationship can emerge between volatility and growth across cycling economies and assess the extent to which our model matches several features of actual business cycles

the general equilibrium effects of the residential property tax incidence and excess burden abstract an urban general equilibrium model is used to explore the efficiency effects and distributional consequences of the residential property tax in a model of a small open city the replacement of a nondistortionary land tax with the residential property tax reduces the land area density and population of the city the aggregate net return on land falls by an amount equal to 164 93 of total tax revenue in a model of a closed region when city q replaces the land tax with the residential property tax production and employment shift to other cities in the region the net return on land decreases in city q and increases in other cities in the region in aggregate landowners are made better off by the change in tax policy while residents are made worse off the excess burden of the property tax is computed as 6 5197 of tax revenue

tax policy and business fixed investment in the united states abstract this paper derives and estimates models of nonresidential investment behavior in which current and future tax conditions directly affect the incentive to invest the estimates suggest that taxes have played an independent role in affecting postwar u s investment behavior particularly for investment in machinery and equipment in addition the paper develops a method for assessing the impact of tax policy on the volatility of investment when such policy is endogenous illustrative calculations using this technique based on the paper s empirical estimates suggest that tax policy has not served to stabilize investment in equipment or nonresidential structures during the sample period

structural dependence of the state on capital a central claim of both marxist and neoclassical political theory is that under capitalism all governments must respect and protect the essential claims of those who own the productive wealth of society this is the theory of structural dependence of the state on capital using a formal model the internal logic and the robustness of the theory is examined we conclude that in a static sense the theory is false virtually any distribution of consumption between wage earners and owners of capital is compatible with continual private investment once an appropriate set of taxes and transfers is in place yet the state may be structurally dependent in a dynamic sense policies that once in place redistribute income without reducing investment do reduce investment during the period in which they are anticipated but not yet implemented

corporate tax integration in the united states a general equilibrium approach this paper presents estimates of static and dynamic general equilibrium resource allocation effects for four alternative plans for corporate and personal income tax integration in the united states a medium scale numerical general equilibrium model is used which integrates the u s tax system with consumer demand behavior by household and producer behavior by industry results indicate that total integration of personal and corporate taxes would yield an annual static efficiency gain of around 6 billion 1973 dollars partial integration plans yield less dynamic effects are larger and our analysis indicates that full integration may yield gains whose present value is as large as 500 billion or about 1 0 percent of the discounted present value of the gnp stream to the u s economy after correction for population growth plans differ in their distributional impacts although these findings depend on the nature of replacement taxes used to preserve government revenues the size of dynamic resource allocation effects is sensitive to the choice of the replacement tax while static gains are reasonably robust

the effects of real and nominal uncertainty on inflation and output growth some garch m evidence in this paper we use garch m methods to test four hypotheses about the effects of real and nominal uncertainty on average inflation and output growth in the united states from 1948 to 1996 we find no evidence that higher inflation uncertainty or higher output growth uncertainty raises the average inflation rate we also find no support for the idea that more risky output growth is associated with a higher average real growth rate our key result is that in a variety of models and sample periods inflation uncertainty significantly lowers real output growth copyright 2000 john wiley sons ltd

a re examination of the use of ability to pay taxes by local governments abstract the orthodox view of local finance in the u s is that local governments should abstain from using ability to pay taxes because migration would result in a misallocation of resources and would nullify any attempt to redistribute income this paper uses a general equilibrium model of a metropolitan area to examine the efficiency and redistributive properties of local income taxation relative to local head taxes contrary to the orthodox assertion the results indicate that local governments can use income taxation without substantially misallocating resources in addition some redistribution results from the use of local income taxes

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

capital income taxation depletion allowances and nonrenewable resource extraction abstract this paper analyses the distortionary effects of the corporate income tax on the output path of the resource sector and on the allocation of resources between the mining and non mining corporate sectors the cost of capital for a resource industry facing a corporate income tax is derived as well as the resulting effective tax rate on capital income the comparison of the effective tax rates of the mining and non mining sectors pays particular attention to the role played by the depletion allowance in assuring equal treatment

user cost elasticity of capital revisited researchers still lack consensus about the size of the user cost elasticity of capital the divergence in prior estimates may have arisen because one of the two strands of research has neglected cointegration among capital its user costs and sales using german firm level panel data i show that estimating a distributed lag model prevalent in prior literature leads to low estimates of the user cost elasticity properly accounting for cointegration in an error correction model yields a much larger point estimate of the price elasticity of capital close to 1 non random sample attrition is found to be relatively unimportant

the effects of discretionary fiscal policy on macroeconomic aggregates a reappraisal fiscal stimuli to recover a cascade of academic and layman articles debate the effectiveness of fiscal policy in stimulating the economy backed up by different economic models and empirical support this essay surveys the theoretical predictions and recent empirical vector autoregression var evidence on the short run effects of discretionary fiscal policy on macroeconomic aggregates

the cleansing effect of recessions the authors investigate industry response to cyclical variations in demand production units that embody the newest process and product innovations are continuously being created and outdated units are being destroyed although outdated units are the most likely to turn unprofitable and be scrapped in a recession they can be insulated from the fall in demand by a reduction in creation the structure of adjustment costs plays a determinant role in the responsiveness of those two margins the calibrated model matches the relative volatilities of the observed manufacturing job creation and destruction series and their asymmetries over the cycle copyright 1994 by american economic association

the non neutrality of inflation for international capital movements this paper studies the question of how unilateral changes in the rate of inflation affect the international allocation of capital presenting a model that incorporates a transaction motive for money holding and capital income taxation with historical cost accounting it counters the view that inflation will be neutral in a world of perfect foresight and costless arbitrage under mild conditions domestic inflation will unambiguously induce a capital export the paper includes a discussion of the fisher effect the empirical observation of a less than one to one translation of inflation into nominal interest rates is shown to be compatible with the model and in fact the capital export turns out to be stronger the lower the degree of translation

debts and deficits with fragmented fiscal policymaking abstract this paper develops a political economic model of fiscal policy one in which government resources are a common property out of which interest groups can finance expenditures on their preferred items this setup has striking macroeconomic implications transfers are higher than a benevolent planner would choose them to be fiscal deficits emerge even when there are no reasons for intertemporal smoothing and in the long run government debt tends to be excessively high peculiar time profiles for transfers can emerge with high net transfers early on giving rise to high taxes later on

cross country evidence on the link between volatility and growth this paper presents empirical evidence against the standard dichotomy in macroeconomics that separates growth from the volatility of economic fluctuations in a sample of ninety two countries as well as a sample of oecd countries the authors find that countries with higher volatility have lower growth the addition of standard control variables strengthens the negative relationship the authors also find that government spending induced volatility is negatively associated with growth even after controlling for both time and country fixed effects copyright 1995 by american economic association