estimates of effective marginal tax rates on factor incomes this chapter describes a method of calculating summary measures of effective factor income tax rates in the united states using readily available data the numbers resulting from application of this method in a study are reported in the chapter and some of their possible uses are discussed the estimated factor income tax rates behave over time in a manner quite consistent with the behavior of other broad measures of federal tax policy the postwar movement in the tax rate on income from labor relative to that on income from capital or more accurately the relevant components of these tax rates provides suggestive support for the miller scholes hypothesis that the federal personal income tax has been moving in the direction of a pure consumption tax the tax rates reported in the chapter are consistent with other studies that show a decrease since the 1950s in rates of taxation at the corporate level of income from corporate held capital they are also consistent with the view that rates of taxation of such income at the noncorporate level have risen but not quite sufficiently to offset the decline in the corporate tax burden

estimating the tax advantage of corporate debt this paper presents estimates of the effective tax value of incremental interest deductions for corporations taking into account that they may not be able to utilize all their interest deductions fully because of either insufficient taxable income or the availability of nondebt tax shields after describing particular features of the tax code which may drive a wedge between statutory and effective tax rates for debt finance we present estimates using the treasury corporate tax model of effective tax rates for a variety of industry groupings our estimates suggest that the after tax cost of debt varies widely across industries the magnitude of the effective tax advantage to debt finance has important implications for corporate financial behavior one issue which has been examined extensively in the corporate finance literature is whether the value of the firm is affected by the firm s leverage ratio in a recent contribution deangelo and masulis 3 have shown that financing decisions can affect the value of the firm if the effective tax advantage to debt finance varies among firms or is reduced by the presence of nondebt tax shields such as investment tax credits and depreciation deductions the effective tax advantage to debt is also an important determinant of leverage related costs gordon and malkiel 5 have recently used the statutory tax rate to estimate expected bankruptcy costs induced by the corporate tax when the firm is assumed to balance the marginal tax advantage to debt with marginal expected bankruptcy costs if however the effective tax rate for interest deductions falls short of the statutory rate the magnitude of these costs may be overstated this paper presents detailed estimates of the marginal effective tax advantage to debt finance our estimates based on data in the treasury 1978 corporate master statistical file and on simulations done with the treasury corporate tax model quantify the impact of increasing interest deductions without changing other items on the corporation s income statement 1 we simulate the impact of a change in a firm s capital structure holding its investment and production decisions constant this is an appropriate procedure for estimating the marginal

capital income taxation with housing abstract this paper quantitatively investigates capital income taxation in the general equilibrium overlapping generations model with household heterogeneity and housing housing tax policy is found to affect how capital income should be taxed due to substitution between housing and non housing capital given the existing u s preferential tax treatment for owner occupied housing the optimal capital income tax rate is close to zero 1 contrary to the high optimal capital income tax rate found with overlapping generations models without housing 31 a low capital income tax rate improves welfare by narrowing a tax wedge between housing and non housing capital the narrowed tax wedge indirectly nullifies the subsidies taxes for homeowners renters and corrects over investment to housing naturally when the preferential tax treatment for owner occupied housing is eliminated a high capital income tax rate improves welfare as in the model without housing

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

tax distortions and global climate policy abstract we consider the efficiency implications of policies to reduce global carbon emissions in a world with pre existing tax distortions we first note that the weak double dividend the proposition that the welfare improvement from a tax reform where environmental taxes are used to lower distorting taxes must be greater than the welfare improvement from a reform where the environmental taxes are returned in a lump sum fashion need not hold in a world with multiple distortions we then present a large scale computable general equilibrium model of the world economy with distortionary taxation we use this model to evaluate a number of policies to reduce carbon emissions we find that the weak double dividend is not obtained in a number of european countries results also demonstrate the point that the interplay between carbon policies and pre existing taxes can differ markedly across countries thus one must be cautious in extrapolating the results from a country specific analysis to other countries

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

the 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

replicating ricardian equivalence tests with simulated series this paper replicates standard consumption function tests of ricardian equivalence using series generated from a model which nests ricardian equivalence within a non ricardian alternative due to finite horizons and or distortionary taxation the author shows that the estimates of the effects of taxation on consumption are not robust and that standard tests may have weaknesses which can lead to conflicting results whether ricardian equivalence holds or not the simulations also show that no clear conclusions about ricardian equivalence can be drawn from observing a low correlation between the current account and government budget deficits copyright 1997 by american economic association

learning by doing and the introduction of new goods a dynamic general equilibrium model is developed in which goods are valued according to the characteristics they contain the set of goods produced in any period is endogenously determined and learning by doing is the force behind sustained growth it is shown that the set of produced goods changes in a systematic way over time with goods of higher quality entering each period and those of lower quality dropping out the model is then used to study the effect of introducing a traditional sector in which there is no learning

weekly employee hours weeks worked and intertemporal substitution abstract we show that the representative consumer model fits the aggregate consumption and employment data well if a choice of work is allowed both at the intensive and extensive margins the structural preference parameters recovered from the estimation of the euler equations of the model are economically meaningful and the null hypothesis of the overidentifying restrictions implied by our model is far from being rejected we find that the shares in preferences associated with leisure time in the weeks off and in the workweeks are quite large and about equal our estimates also uncover relatively large intertemporal substitution elasticities

does neoclassical theory account for the effects of big fiscal shocks evidence from world war ii much debate surrounds the usefulness of the neoclassical growth model for assessing the macroeconomic impact of fiscal shocks we test the theory using data from world war ii which is by far the largest fiscal shock in the history of the united states we take observed changes in fiscal policy during the war as inputs into a parameterized dynamic general equilibrium model and compare the values of all variables in the model to the actual values of these variables in the data our main finding is that the theory quantitatively accounts for macroeconomic activity during this big fiscal shock

the marginal income tax rate schedule from 1930 to 1990 abstract although it is well known that marginal income tax rates vary with income few economists have studied the effect on real gdp of the distribution of marginal income tax rates this omission is probably because data on the distribution do not exist we remedy this shortcoming by providing a computer program that calculates marginal income tax rates for all income levels for the years 1930 to 1990 we conduct a preliminary empirical investigation into the effect of taxes on economic growth we find that lowering taxes significantly raises economic growth and that changing the tax rate schedule also has significant effects on economic growth

measuring marginal income tax rates for individuals in canada averages and distributions over time average marginal tax rates amtrs and the dispersion of marginal tax rates across income groups for canada over 1947 91 are reported federal amtrs fluctuated with little trend from 1947 to the mid 1960s rose to the mid 1970s fell and then rose from the early 1980s through to 1991 federal plus provincial amtrs trended upward after 1949 increasing fastest from the mid 1960s to the mid 1970s relative dispersion of mtrs shows a strong downward trend over the sample period this compression has been due partly to a decline in top mtrs but the main influence has been the steady increase in the portion of the population and of income subject to tax the amtr time series is quite volatile difference stationarity is not rejected

on the distributional effects of reducing capital taxes this article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes we compare a representative agent economy to an economy in which households face idiosyncratic uninsurable income risk the income process is consistent with empirical estimates and implies a realistic wealth distribution we find that capital tax cuts imply large welfare gains in the representative agent economy however when households are heterogeneous substantial redistribution during transition means that only a minority will support capital tax cuts whereas most households can expect large welfare losses

time consistent optimal fiscal policy this article studies the properties of optimal fiscal policy in a stochastic growth model when the government cannot commit itself beyond the next period s capital income tax rate we find that the results contrast markedly with those under full commitment first capital income tax rates are very high 65 on average versus close to zero on average under full commitment second labor income taxes are rather low on average about 12 versus a value of around 31 under full commitment finally labor income taxes are quite volatile whereas under full commitment their standard deviation is essentially zero

innovation and industry evolution the theoretical literature on innovation has been concerned with a single innovation produced by a number of identical agents by contrast we consider a market in which one firm is the current incumbent while the remaining firms are challengers moreover we consider a sequence of innovations so that success does not imply that the successful firm reaps monopoly profits forever after but only until the next better innovation is developed we begin with a fully optimizing behavioral model and derive the equivalent of the schumpeterian process of creative destruction that is a firm enjoys temporary monopoly power but is soon overthrown by a more inventive challenger the essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers goods the new methods of production or transportation the new markets the new forms of industrial organization that capitalist enterprise creates schumpeter 1942 pp 82 83

some indirect evidence on effective capital gains tax rates this paper presents estimates of effective marginal tax rates on capital gains excluding housing between 1960 and 1978 in the united states concern that the inflation of the 1970s may have worked through the tax system to reduce incentives to produce and save has focused attention on the effective marginal tax rates that apply to various sources of income joines 1981 sheds light on this issue by calculating the historical effective marginal tax rates on factor incomes for the united states part of the recent debate however has focused specifically on capital gains taxes and the desirability of reducing them to enhance incentives for saving and investment the effective marginal tax rate on capital gains henceforth emtg may be the most difficult rate to measure in addition to the usual problems of how to attribute deductions exclusions and tax credits further adjustment must be made because investors pay taxes only when they realize their capital gains 1 the expected emtg this paper reports estimates of effective marginal tax rates on capital gains by comparing reported capital gains with total capital gains on an annual basis the estimates show that the effective marginal tax rates on capital gains fluctuated between 3 4 and 6 6 between 1960 and 1978 and that capital gains are held on average between 24 and 31 years before they are reported

the fiscal role of conscription in the u s world war ii effort an often overlooked role of conscription is as a method of lump sum taxation in times of war conscription of military personnel allows the fiscal authority to minimize wartime government expenditure and hence minimize tax distortions associated with war finance this paper presents a simple dynamic general equilibrium model to articulate this view and calibrates the model to the u s world war ii experience analysis of the calibrated model indicates that the welfare value of conscription as a fiscal policy tool is quantitatively large despite the fact that the american involvement lasted only four years conscription is worth approximately 2 of annual aggregate consumption in perpetuity

multicrop production models with multinomial logit acreage shares the main objective of this paper is to show that the multinomial logit mnl framework can be used for deriving simple acreage share models more specifically we show that mnl acreage choice models can be defined as parts of consistent multicrop models when coupled with suitably designed crop production models e g a specific parameterization of the standard quadratic yield function the parameters of these multicrop models are easily interpreted and estimated although mnl acreage choice models are usually derived by aggregating crop choices defined at the plot level we show that these models can also be derived by considering a profit maximisation problem at the farm level this provides a simple theoretical background for the standard mnl acreage share model as well as for simple extensions of these models the nested mnl acreage share models an empirical application on french farm level data over the period 1996 2007 investigates the empirical performances of the multicrop econometric models based on the proposed mnl framework for modelling acreage choices

the rise and fall of american growth exploring the numbers abstract this paper reviews some of the major claims in robert gordon s rise and fall of american growth his argument that growth of conventional real gdp per person is well below that of real living standards is accepted it is shown that adding an imputation to gdp for reductions in mortality raises growth substantially especially between 1929 and 1950 gordon is also right that total factor productivity growth peaked in the second and third quarters of the twentieth century but his claim that there was a great leap forward in the 1940s stimulated by world war 2 is not persuasive

tax distortions and global climate policy with mustafa babiker and john reilly we consider the efficiency implications of policies to reduce global carbon emissions in a world with preexisting tax distortions we first note that the weak double dividend the proposition that the welfare improvement from a tax reform where environmental taxes are used to lower distorting taxes must be greater than the welfare improvement from a reform where the environmental taxes are returned in a lump sum fashion need not hold in a world with multiple distortions we then present a large scale computable general equilibrium model of the world economy with distortionary taxation we use this model to evaluate a number of policies to reduce carbon emissions we find that the weak double dividend is not obtained in a number of european countries results also demonstrate the point that the interplay between carbon policies and pre existing taxes can differ markedly across countries thus one must be cautious in extrapolating the results from a country specific analysis to other countries r 2003 elsevier science usa all rights reserved

effective tax rates in macroeconomics cross country estimates of tax rates on factor incomes and consumption abstract this paper proposes a method for computing tax rates using national accounts and revenue statistics using this method we construct time series of tax rates for large industrial countries the method identifies the revenue raised by different taxes at the general government level and defines aggregate measures of the corresponding tax bases this method yields estimates of effective tax rates on factor incomes and consumption consistent with the tax distortions faced by a representative agent in a general equilibrium framework these tax rates compare favorably with existing estimates of marginal tax rates and highlight important international differences in tax policy

dynamic r d competition with learning to account for the possibility that firms are unsure about the ease of innovation we formulate a differential game of r d competition with an unknown hazard rate we show as time passes with success firms become more pessimistic about eventual innovation reducing their r d investment and possibly exiting the race an increase in the number of competing firms tends to increase firms r d intensities for given beliefs but because beliefs evolve at different rates depending on the number of firms in the race time paths of r d investment intensity are not unambiguously ordered with respect to the number of competing firms

on testing the intertemporal substitution theory of labor supply many empirical tests of the intertemporal substitution theory of labor market fluctuations have assumed that shocks to the labor demand curve are the sole source of variance in hours and wages we show that conclusions based on these tests are very sensitive to small deviations from this extreme case using data generated by a standard real business cycle model we show that standard methods incorrectly reject the intertemporal substitution theory even when demand curve shocks account for over 90 of the variance in wages and hours

postwar british economic growth and the legacy of keynes the policies used by britain to finance world war ii represented a dramatic departure from the policies used to finance earlier wars and were very different from the policies used by the united states during the war following keynes s recommendations britain taxed capital income at a much higher rate than the united states during the war and for much of the postwar period we analyze quantitatively the policies designed by keneys using an endogenous growth model and the ncoclassical growth model we also evaluate the implications of tax smoothing policies we find that the welfare costs of keynes s policies were very high relative to a tax smoothing policy and argue that britain s poor macroeconomic performance in the early postwar period is a consequence of the high tax rates levied on capital income

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

on fiscal multipliers estimates from a medium scale dsge model this paper contributes to the debate on fiscal multipliers in the context of a structural model i estimate a micro founded dynamic stochastic general equilibrium model that features a rich fiscal policy block and a transmission mechanism for government spending shocks using bayesian techniques for us data

heterogeneity and long run changes in aggregate hours and the labor wedge abstract from 1961 to 2007 u s aggregate hours worked increased and the labor wedge measured as the discrepancy between a representative household s marginal rate of substitution and the marginal product of labor declined substantially the labor wedge is negatively related to hours and is often attributed to labor income taxes however u s labor income taxes increased since 1961 we examine a model with gender and marital status heterogeneity which accounts for the trends in the u s hours and the labor wedge apart from taxes the model s labor wedge reflects non distortionary cross sectional differences in households hours worked and productivity we provide evidence that household heterogeneity is important for long run changes in labor wedges and hours in other oecd economies

preemptive patenting and the persistence of monopoly this article takes a different tack and inquires whether institutions such as the patent system create opportunities for firms with monopoly power to maintain their monopoly power the results apply to other situations such as brand identification spatial location and capacity expansion which share the characteristic that early or preemptive actions may lower the returns to potential competitors

the baby boom and world war ii a macroeconomic analysis we argue that one major cause of the u s postwar baby boom was the rise in female labor supply during world war ii we develop a quantitative dynamic general equilibrium model with endogenous fertility and female labor force participation decisions we use the model to assess the impact of the war on female labor supply and fertility in the decades following the war for the war generation of women the high demand for female labor brought about by mobilization leads to an increase in labor supply that persists after the war as a result younger women who reach adulthood in the 1950s face increased labor market competition which impels them to exit the labor market and start having children earlier the effect is amplified by the rise in taxes necessary to pay down wartime government debt in our calibrated model the war generates a substantial baby boom followed by a baby bust

has fiscal policy helped stabilize the postwar u s economy abstract in this paper i consider whether postwar fiscal policy has helped stabilize the u s economy i do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data these rules allow fiscal policies to respond to current and lagged output and labor hours i use the estimated policy rules to see if postwar fiscal policy reduces output volatility and or lengthens expansions and shortens recessions i find that fiscal policy in general provides little stability on either count i also find that the endogenous feedback links by themselves can provide some stabilization

production experiences and market structure in r d competition abstract in the rd and ii the likelihood of persistent leadership increases with the value of being the winner and the value of being a loser but decreases with expected waiting time of r d innovation and the flow of monopoly profits however destructive innovations may still occur even when production experiences are allowed to play an important role in the r d competition

fiscal shocks and their consequences this paper investigates the response of hours worked and real wages to fiscal policy shocks in the post world war ii us we identify these shocks with exogenous changes in military purchases and argue that they lead to a persistent increase in government purchases and tax rates on capital and labor income and a persistent rise in aggregate hours worked as well as declines in real wages the shocks are also associated with short lived rises in aggregate investment and small movements in private consumption we describe and implement a methodology for assessing whether standard neoclassical models can account for the consequences of a fiscal policy shock simple versions of the neoclassical model can account for the qualitative effects of a fiscal shock once we allow for habit formation and investment adjustment costs the model can also account reasonably well for the quantitative effects of a fiscal shock

capital taxation during the u s great depression previous studies of the u s great depression find that increased government spending and taxation contributed little to either the dramatic downturn or the slow recovery these studies include only one type of capital taxation a business profits tax the contribution is much greater when the analysis includes other types of capital taxes a general equilibrium model extended to include taxes on dividends property capital stock excess profits and undistributed profits predicts patterns of output investment and hours worked that are more like those in the 1930s than found in earlier studies the greatest effects come from the increased taxes on corporate dividends and undistributed profits jel codes e13 e32 h25 copyright 2012 oxford university press

fiscal policy under loose commitment due to time inconsistency or political turnover policymakers promises are not always fulfilled we analyze an optimal fiscal policy problem where the plans made by the benevolent government are periodically revised in this loose commitment setting the properties of labor and capital income taxes are significantly different than under the full commitment and no commitment assumptions because of the occasional reoptimizations the average capital income tax is positive even in the long run also the autocorrelation of taxes is lower their volatility with respect to output increases and the correlation between capital income taxes and output changes sign our method can be used to analyze the plausibility and the importance of commitment in a wide class of dynamic problems

on the construction of marginal federal personal and social security tax rates in the u s abstract in this article i correct and extend my earlier series on marginal federal personal income tax rates i also construct a measure of the marginal social security tax rate and add this to the income tax rate to obtain a measure of the effective marginal tax rate on income due to federal taxes finally i compare my series on marginal income tax rates and its method of construction with those of barro and sahasakul

using theory for measurement an analysis of the cyclical behavior of home production abstract a significant amount of economic activity takes place within the home unfortunately it is difficult to assess the cyclical properties of home production because the available data are too sporadic using a real business cycle rbc model we construct quarterly data on three variables that are unobservable at a quarterly frequency hours worked in the home sector hours spent in leisure and the consumption of home produced goods three results emerge leisure is countercyclical while nonmarket hours are acyclical hours spent in home production have declined significantly since the 1970s fluctuations in market output are a good measure of fluctuations in individual utility as long as home and market consumption are either extreme complements or extreme substitutes in the production of utility

the macroeconomic effects of war finance in the united states world war ii and the korean war during world war ii government expenditures were financed primarily by issuing debt during the korean war expenditures were financed almost exclusively by higher taxes reflecting president truman s preference for balanced budgets this paper evaluates quantitatively the economic effects of the different policies used to finance these two wars counterfactual experiments are used to explore the implications of financing world war ii like the korean war and financing the korean war like world war ii the author finds that using a korean war policy during world war ii would have resulted in much lower output and welfare relative to the actual policy copyright 1997 by american economic association

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

a dynamic game of r and d patent protection and competitive behavior a theory of dynamic optimal resource allocation to r and d in an n firm industry is developed using differential games this technique represents a synthesis of the analytic methods previously applied to the problem static game theory and optimal control the use of particular functional forms allows the computation and detailed discussion of the nash equilibrium in investment rules this paper addresses the problem of resource allocation to research and development among the important issues that a firm engaging in r and d must evaluate are uncertainty regarding the feasibility and profitability of a particular innovation the possibility of a protracted development period the possibility that a rival firm may innovate first capturing either a patent or a significant share of the new market the possibility that a rival firm may imitate the innovation and appropriate some of the profits in the new market in what follows we will develop a theory of optimal resource allocation to research and development which incorporates the aspects of r and d enumerated above we will use a dynamic game theoretic analysis determining the nash equilibrium strategies for n identical firms the availability of perfect patent protection is shown to accelerate development of the innovation and the effect of increasing rivalry is addressed the impact of increasing rivalry on nash equilibrium investment in r and d depends upon the degree of appropriability of rewards if patent protection is perfect then increasing the number of nash rivals results in increased r and d effort however when imitation is rewarded the opposite may be true finally some notions of competitive and perfectly competitive equilibrium are examined in the context of the model developed below