are consumption taxes really better than income taxes abstract we use political equilibrium theory and the neoclassical growth model to compare consumption and income tax systems if government outlays are used for redistribution through transfers then steady state equilibria in societies that use income taxes are not necessarily worse in welfare terms and may even be better income taxes are attractive precisely because they are more distortionary since this implies low equilibrium transfer levels we also find that switching tax systems typically does not benefit the median voter moreover a change from income to consumption taxes may make everybody worse off

is the price level tied to the m2 monetary aggregate in the long run a long run link between money and prices is evident for the united states since the korean war if the m2 measure of money is used and the velocity of m2 v2 is modeled as a mean reverting series this link between m2 and prices is the basis for a dynamic model of inflation that compares favorably in forecasting exercises with phillips curve and more typical monetarist approaches the behavior of v2 is examined from 1870 to the present providing a basis for reconsidering previous findings that v2 follows a random walk copyright 1991 by american economic association

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

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

public versus private investment in human capital endogenous growth and income inequality in this paper we present an overlapping generations model with heterogeneous agents in which human capital investment through formal schooling is the engine of growth we use simple functional forms for preferences technologies and income distribution to highlight the distinction between economies with public education and those with private education we find that income inequality declines more quickly under public education on the other hand private education yields greater per capita incomes unless the initial income inequality is sufficiently high we also find that societies will choose public education if a majority of agents have incomes below average

on the desirability of taxing capital income in optimal social insurance abstract this paper analyzes optimal linear taxes on labor income and savings in a two period life cycle model with ex ante identical households endogenous leisure demands in both periods and general processes of skill shocks over the life cycle we demonstrate that the atkinson stiglitz theorem breaks down under risk capital taxes are employed besides labor income taxes for two distinct reasons i capital taxes reduce labor supply distortions on second period labor supply since second period labor supply and saving are substitutes ii capital taxes insure first period income risk although this benefit is partially off set because first period labor supply and saving are complements our results imply that retirement saving should not be actuarially fair

money and prices evidence from the g7 countries this paper examines the exogeneity of money and prices within a money demand vector error correction model the exogeneity of the variables is central to several buffer stock models however the paper makes two modifications to the traditional approach the first is to explicitly acknowledge the importance of the supply of money function by including the function alongside its demand counterpart the second is to estimate the behaviour of the nominal sector and real sector simultaneously overall the results from the g7 countries suggest that the concerns raised by buffer stock models are relevant

monetary anticipations and the demand for money reply to mackinnon and milbourne abstract mackinnon and milbourne 1984 in an extended comment on carr and darby 1981 claim that money supply shocks do not enter the money demand function for the united states this reply discusses the economic and econometric errors which led to this conclusion and presents further empirical evidence in support of our approach

health education and life cycle savings in the development process this paper studies investment in health and human capital in a life cycle model health investment enhances survival to old age by improving health from its endowed level the model predicts two distinctive phases of development when income is low enough the economy has no health investment and little savings leading to slow growth when income grows health investment will become positive and the saving rate will rise leading to higher life expectancy and faster growth a health subsidy can move the economy from the first phase to the next subsidies on health and human capital investments can improve welfare

consumption vs income taxes when private human capital investments are imperfectly observable abstract this paper considers optimal taxation in an endogenous growth model where private education investments are imperfectly observable consumption taxation is better than labor income taxation for public provision of goods unless educational investment is completely unobservable if subsidies are feasible for observed education investment the consumption tax rate is independent of the degree of observability but the subsidy rate is higher the lower is the observability if subsidies are not feasible the consumption tax rate is lower the more limited is the observability optimal tax rates for goods that provide consumption and education investment simultaneously are below normal rates for observed pure consumption growth and welfare are positively related to independent of the degree of observability without with subsidies

optimal taxation in models of endogenous growth we study the problem of optimal taxation in three infinite horizon representative agent endogenous growth models the first model is a convex model in which physical and human capital are perfectly symmetric our second model incorporates elastic labor supply through a lucas style technology analysis of these two models points out the danger of assuming that government expenditures are exogenous in our third model we include government expenditures as a productive input in capital formation showing that the limiting tax rate on capital is no longer zero in numerical simulations we find similar effects on growth and welfare in all three models

money income prices and interest rates including data from the 1980s sharply weakens the postwar time series evidence indicating significant relationships between money however defined and nominal income or between money and either real income or prices separately focusing on data from 1970 onward destroys this evidence altogether evidence indicating cointegration of real income and real money balances with due allowance for the effect of interest rates also deteriorates when the sample extends through the 1980s a positive finding is that the spread between the commercial paper rate and the treasury bill rate consistently contains highly significant information about future movements in real income copyright 1992 by american economic association

structural analysis of cointegrating vars this survey uses a number of recent developments in the analysis of cointegrating vector autoregressions vars to examine their links to the older structural modelling traditions using autoregressive distributed lag ardl and simultaneous equations models sems in particular it emphasizes the importance of using judgement and economic theory to supplement the statistical information after a brief historical review it sets out the statistical framework discusses the identification of impulse responses using the generalized impulse response functions reviews the analysis of cointegrating vars and highlights the large number of choices applied workers have to make in determining a specification in particular it considers the problem of specification of intercepts and trends and the size of the var in more detail and examines the advantages of the use of exogenous variables in cointegration analysis the issues are illustrated with a small u s macroeconomic model

the short run demand for money a reconsideration the partial adjustment approach to the specification of the short run demand for money has dominated the literature for more than a decade there are three basic problems with this approach first the same lag structure is imposed on all variables and each independent variable enters only as a current value in contrast a rational individual would respond to different variables income interest rates prices with quite different lags second when the general price levelis subject to gradual adjustment hut can move quickly in response to supply shocks the influence of these supply shocks should enter with a negative sign third the estimated equation for real balances may not be a money demand equation at all but rather its coefficients may represent a shifting mixture of demand and supply responses the empirical work examines several alternative dynamic specifications including a generalized partial adjustment framework and the error correction model both of the latter specifications exhibit greater structural stability after 1973 than the standard partial adjustment specification and the generalized partial adjustment model also yields relatively small errors in post sample dynamic simulations shifts in coefficients as the sample period is extended after 1973 are consistent with the interpretation that the real balance equation no longer traces out structural demand parameters hut rather a mixture of demand and supply responses this abstract was borrowed from another version of this item

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

consumption path following a tax increase implications for the analysis of the welfare cost of taxation abstract the consumption path following a capital income tax increase is analyzed to demonstrate that short run increases in consumption dominate future declines in consumption for a considerable time it takes 25 years before a tax increase resutls in a loss of welfare

optimal tax rules and public sector efficiency with an externality in an overlapping generations model abstract this paper examines optimal tax rules and public sector efficiency integrating them in a second best world with pollution by using an overlapping generations model the second best world is characterized by the comparative statics of green preferences the main results obtained are as follows first the marginal cost of public funds may be reduced by the externalities regardless of the choice of taxes second optimal environmental and non environmental tax rules are additively and directly affected by the dynamic efficiency of capital accumulation per unit labour decal and indirectly by it through the efficiency of the public sector environmental taxes going beyond pigovian ones may be welfare improving if the decal is improved by the environmental tax even optimal non environmental tax rules should additively and directly counter the dynamics of pollution to consider the income effects of the optimal tax system for the future third the additivity property or the principle of targeting does not hold even in the absence of incentive compatibility constraints the essential reasons for this are clarified as follows distortions that should be countered by taxes that is the income effects of the optimal tax system and the decal in this model break the equality between optimal environmental taxes and the externalities measured by governments finally growing environmental concerns may in fact increase pollution the inverse relationship between environmental and labour income taxes may not hold

on measuring deprivation and the standard of living in a multidimensional framework on the basis of aggregate data in measuring social deprivation in a multidimensional framework ideally one should first measure each individual s overall deprivation and then aggregate the overall deprivation levels of all individuals however given only aggregate data one is often forced to measure social deprivation in terms of each attribute separately and then to aggregate them so as to get the overall social deprivation this paper shows that it is only under extremely stringent conditions that this procedure would always yield the same result as the conceptually sound procedure referred to earlier a similar difficulty also arises in measuring a society s standard of living

the trend and the measurement of world inequality over extended periods of accounting abstract the principal result of this paper is the demonstration of a method for measuring an index of e g nominal gnp over extended periods of time and the inequality thereof snap shot inequality for specific points in 1964 1972 and 1980 is also reported and decomposed for six subgroups in 122 countries

the friedman rule in an overlapping generations model with nonlinear taxation and income misreporting this paper models a two period overlapping generations economy with money populated with individuals of different skills they face a nonlinear income tax schedule and can engage in tax evasion money serves two purposes the traditional one modeled through a money in the utility function it also facilitates tax evasion the main message of the paper is that income tax evasion in this framework leads to the violation of the friedman rule the paper also shows that even in the absence of tax evasion when optimality requires differential commodity taxation complementarity of real cash balances and labor supply does not guarantee the optimality of the friedman rule as a boundary solution an additional assumption is required

measuring the deadweight loss from taxation in a small open economy a general method with an application to sweden the paper develops a simple general equilibrium framework for calculating the marginal deadweight loss from taxation in a small open economy the framework allows a decomposition of the deadweight loss from each tax instrument into the losses stemming from the contraction of the different tax bases the paper describes a method of calibrating the model which exploits the links between the various factor supply elasticities implied by the standard life cycle model it also develops a method of estimating effective tax rates that is consistent with optimising household and firm behaviour to illustrate how the model works it is calibrated to a data set for sweden the quantitative results highlight the importance of accounting for the interaction between the major tax bases when estimating deadweight loss

wellbeing inequality and preference heterogeneity standard measures of multidimensional inequality implicitly assume common preferences for all individuals and hence are not sensitive to preference heterogeneity among the members of society in this paper we measure the inequality of the distribution of equivalent incomes which is a preference sensitive multidimensional well being measure to quantify the contribution of preference heterogeneity to well being inequality we use a decomposition method that calculates well being inequality in different counterfactual distributions we focus on four sources of well being inequality the correlation between outcomes and preferences the preference heterogeneity the correlation between the outcome dimensions and the inequality within each of the outcome dimensions we find that preference heterogeneity accounts for a considerable part of overall well being inequality in russia for the period of 1995 to 2005 this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item

optimal taxation with consumption time as a leisure or labor substitute abstract this paper studies the optimal commodity taxation problem when time taken in consumption is a perfect substitute for either labor or leisure it shows that while labor substitutability affects the optimal tax structure leisure substitutability leaves the classical optimal tax results intact in the ramsey tax framework with linear income taxes whether the consumers have the same or different earning abilities labor substitutes tend to be taxed at a higher rate than leisure substitutes with the tax differential being increasing in consumption time this is not necessarily the case when one allows for nonlinear income taxation

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

growth effects of flat rate taxes recent estimates of the potential growth effects of tax reform vary wildly ranging from zero to eight percentage points using an endogenous growth model we assess which model features and parameter values are important for determining the quantitative impact of tax reform we find that the critical parameters are factor shares depreciation rates the elasticity of intertemporal substitution and the elasticity of labor supply the elasticities of substitution in production on the other hand are relatively unimportant the quantitative estimates in several recent papers are compared with each other and with some of the evidence from u s experience we find that robert lucas s conclusion that tax reform would have little or no effect on the u s growth rate is theoretically robust and consistent with the evidence

buffer stock money interpreting short run dynamics using long run restrictions time series techniques are used to assess the quantitative importance of buffer stock money the short run response of real money holdings to nominal money supply shocks the empirical model a vector autoregression of real and nominal money balances captures general dynamic properties of the time series but requires theoretical restrictions for sensible interpretation the authors just identify the system by imposing a long run neutrality restriction nominal money shocks have no permanent effects on real money they find that buffer stock effects play an important role in the evolution of real m1 in the short run the evidence for m2 is less conclusive copyright 1994 by ohio state university press

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

the effect of taxation on human capital this study finds a significant negative effect of proportional income taxation on human capital of the few earlier studies to address this issue most suggested a negligible effect of taxation on investment in human capital this earlier conclusion is shown to be incorrect by using a model that is more general in several respects than the models used previously

multivariate estimates of the permanent components of gnp and stock prices the economic assumption that a present value relation holds between consumption and income and between stock prices and dividends or the statistical assumption that the consumption income ratio and the dividend price ratio are stationary imply that the permanent or random walk component in each series of a pair must be the same as the permanent component in the other series of a pair either assumption then allows us to estimate the variance of the permanent component of one series gnp stock prices from the variance of the permanent component of the other consumption dividends or from the covariance of the two series permanent components this paper presents such estimates and finds that the permanent components are about half those estimated by similar univariate methods a series of recent papers has examined the importance of a potential unit root to the behavior of real gnp campbell and mankiw 1986 1987 cochrane 1986 clark 1987 and stock prices fama and french 1986 lo and mai if by 0 the series is stationary the response can be any real number which is the innovation in these estimates instead of forcing us to ask the dichotomous question is there a unit root or not they allow us to continuously measure the importance of a potential unit root the actual estimating technique used in these papers varied somewhat cochrane poterba and summers and lo and mai if a series is stationary the variance of k differences will tend to a precursor to this paper appeared under the title spectral density estimates of unit roots we thank masanao aoki lam hansen masao ogaki and chris sims for helpful suggestions the computer programs and data used in this paper are available on request from the authors

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

optimal differentiation of international environmental taxes in the presence of national labor market distortions we explore the implication of the doubledividend debate for international environmentaltaxes in our scenario small open economies withdifferent labor market distortions follow a commonenvironmental policy and use national environmentaltax revenues to finance labor tax cuts since thedouble dividend hypothesis does not hold a high labortax implies a low environmental tax relative to othercountries the optimal differentiation ofinternational environmental taxes is proven to be afunction of the national labor tax rates and theuncompensated elasticities of labor supply

welfare effects of changing commodity tax rates toward uniformity abstract this paper presents a theory of tax reform that is applicable to a many good economy where i the initial tax structure is arbitrarily given ii no lump sum tax exists and iii the initial tax revenue must be maintained after the reform sufficient conditions are established under which tax changes definitely result in increases in welfare they indicate that in a wide class of situations the uniform tax structure can be a useful intermediate target on the way to optimum

the causal direction between money and prices abstract causality is viewed as a matter of control controllability is captured in simon s analysis of causality as an asymmetrical relation of recursion between variables in the unobservable data generating process tests of the stability of marginal and conditional distributions for these variables can provide evidence of causal ordering the causal direction between prices and money in the united states 1950 1985 is assessed the balance of evidence supports the view that money does not cause prices and that prices do cause money

optimal taxation with home production abstract optimal taxes for europe and the u s are derived in a realistically calibrated model in which agents buy consumption goods and services and use home capital and labor to produce household services the optimal tax rate on services is substantially lower than the tax rate on goods specifically the planner cannot tax home production directly and instead lowers the tax rate on market services to increase the relative price of home production the optimal tax rate on the return to home capital is strictly positive and the welfare gains from switching to optimal taxes are large

the efficiency gains from dynamic tax reform this paper presents a new simulation methodology for determining the pure efficiency gains from tax reform along the general equilibrium rational expectations growth path of life cycle economies the principal findings concern the effects of switching from a proportional income tax with rates similar to those in the u s to either a proportional tax on consumption or a proportional tax on labor income a switch to consumption taxation generates a sustainable welfare gain of almost 2 percent of lifetime resources in contrast a transition to wage taxation generates a loss of greater than percent of lifetime re sources a second general result is that even a mild degree of progressivity in the income tax system imposes a very large efficiency cost this abstract was borrowed from another version of this item

taxing education in ramsey s tradition abstract assuming a two period model with endogenous choices of labour education and saving it is shown to be second best efficient to deviate from ramsey s rule and to distort qualified labour less than nonqualified labour furthermore if the earnings function displays constant elasticity the choice of education should not be distorted with the necessary qualifications the results extend to the case when taxpayers are heterogeneous and when the planner trades off efficiency against equity

economic policies and demand for money evidence from canada this study identifies canadian fiscal and monetary policy regime changes that could influence the services of money it is argued that if these policy regime changes were not incorporated in the estimation of demand for real balances the resulting estimate would be biased and unstable using canadian monthly data for the january 1975 to june 2001 period the paper estimates a standard demand for money m1 function with and without these policy regime changes it was found the demand for money in canada is stable over the short and long run periods when these policy regime changes are incorporated and the estimated coefficients have correct signs

tax structure and growth in a model with human capital abstract the effect of the tax structure on the long run growth rate of income and consumption is analyzed where tax structure refers to the mix of taxes on physical and human capital which satisfy an exogenously given government budget constraint the factor used intensively in the consumption good sector relative to the capital goods sector as a whole is taxed more highly in a growth maximizing tax structure an endogenous labor supply the tax treatment of depreciation and the effect of replacing the income tax with a consumption tax are all considered

regression direction and weak exogeneity abstract the absence of testing for weak exogeneity in money demand has often led to stark conditioning claims regarding the validity of price equations this paper uses the johansen procedure to explore the conditioning properties of money demand systems for nonborrowed reserves m1 and m2 our results show that irrespective of the specification of the cointegrating relation a feedback mechanism enters the equation for money the opposite however is not true for the price equations the results also cast a warning for single equation models of money demand in that weak exogeneity is sensitive to how the system is defined

inequality of wellbeing a multidimensional approach an important aspect of multidimensional wellbeing distributions is the correlation between different dimensions we propose two indices for measuring multidimensional inequality derived from two underlying social evaluation functions these functions aggregate both across dimensions and across individuals the social evaluation functions differ only with respect to the sequencing of aggregation aggregating first across dimensions is more attractive since it allows the inequality index to depend on the correlation between dimensions we illustrate both indices and the impact of correlation sensitivity using russian household data between 1995 and 2005 for four dimensions of wellbeing expenditure health schooling and housing quality

energy taxation reasons for discriminating in favor of the production sector abstract if a small open economy wishes to restrict it s greenhouse gas emissions it has to decide whether to impose uniform taxes on all polluters or to resort to a discriminatory policy in practice countries tend to impose higher taxes on households and to tax the industrial sector more leniently this paper identifies conditions under which this is efficient it is shown that an efficiency maximizing tax planner discriminates in favor of the production sector if i there are restrictions on the taxation of lump sum income or if ii labor supply exerts market power

time consistent taxation in a dynastic family model with human and physical capital and a balanced government budget this paper analyzes optimal time consistent taxation in a dynastic family model with human and physical capital and with a balanced government budget when tax revenue is used for publicly provided consumption or lump sum transfers leisure would be higher than its social optimum pareto optimal taxation requires taxing capital income more heavily than labour income and subsidizing investment at the same rate of the tax also it requires either subsidizing labour at the same rate as a consumption tax or subsidizing consumption at the same rate as a labour income tax and hence it is not a practical guide to policy further a consumption tax or equivalently a uniform income tax with investment subsidies at the same rate can be improved on by taxing capital income more heavily than labour income ce memoire analyse la fiscalite optimale et consistante dans le temps dans un modele de famille dynastique avec capital humain et physique et un budget gouvernemental equilibre quand le revenu fiscal est utilise pour financer la consommation publique ou pour des transferts forfaitaires le niveau de loisir sera plus eleve que l optimum social la fiscalite optimale paretienne exige qu on taxe le revenu du capital plus fortement que celui du travail et qu on subventionne l investissement au meme taux que la taxe elle exige aussi soit qu on subventionne le travail au meme taux que la taxe a la comsommation soit qu on subventionne la consommation au meme taux que l impot sur le revenu du travail et donc ce n est pas un guide pratique pour la politique de plus un regime de taxe sur la consommation ou de maniere equivalente d impot uniforme sur le revenu avec subvention a l investissement au meme taux peut etre ameliore en taxant le revenu du capital plus fortement que celui du travail

tax evasion in an open economy abstract ignoring tax evasion possibilities a value added and a cash flow income tax have similar behavioral and distributional consequences yet the available means of tax evasion under each can be very different under a vat avoidance occurs through cross border shopping whereas under an income tax it can occur through shifting taxable income abroad given evasion we show that a country would make use of both taxes in order to minimize the efficiency costs of evasion activity relying relatively more on whichever tax is harder to evade we then make use of aggregate danish tax and accounting data from 1992 to measure the amount of evasion that occurred under the two taxes while the estimates of evasion activity are small the figures imply that denmark could reduce the real costs of evasion activity by relying more on value added taxes

the long run link between money growth and inflation is inflation always a monetary phenomenon many economists believe that the link between money growth and inflation in the u s has weakened over the last two decades due in part to the federal reserve s policy experiment in 1979 1982 and innovations in the financial sector of the economy i find that the long run relationship between money growth and inflation is strong in a statistical sense and important economically the key result is that the trend or growth component in cpi inflation is entirely due to the trend component of monetary base growth jel c32 e31 e51

how much inequality can we explain a methodology and an application to the united states we develop two simple measures of how much inequality is explained by individual population characteristics or groups of characteristics analogous to r2 in regression analysis we investigate the measures empirical implementation using several alternative theoretically consistent approaches to inequality decomposition results are illustrated using us psid income data explaining the level of and trends in inequality is an intriguing topic but one that is often dependent on a researcher s particular approach to inequality measurement sometimes the approach is simply one that accords with intuition sometimes principles of applied welfare economics or statistical analysis are invoked the particular approach adopted is important the issue of the explanation of inequality is not just a matter of computational procedure but can significantly affect our understanding of economic inequality and can potentially guide the design of economic policy in this paper we develop new summary measures of explanation the income inequality literature s analogue of the r2 statistic used in regression analysis using an approach which pays particular attention to theoretically consistent methods for inequality decomposition and illustrate them using a specially cleaned set of us psid data an important example of the explanation issue that is relevant to current policy debate is the suggestion that personal attributes and labour market status are major determinants of interpersonal income differences formal economic models stress the role of labour market opportunities in the structure of the income distribution other types of analysis emphasise the importance of characteristics such as ethnicity age and gender it is commonly supposed that these factors explain a major part of observed income inequality and of changes in inequality in the case of the united states we show that this conjecture is empirically unfounded the supposed determinants of inequality in fact account for only a very small part of the actual inequality of broadly defined personal income

what do normative indices of multidimensional inequality really measure we argue that normative indices of multidimensional inequality do not only measure a distribution s extent of inequity i e the gaps between the better off and the worse off but also its extent of inefficiency i e the non realized mutually beneficial exchanges of goods we provide a decomposition that allows quantifying these two parts of inequality exact formulas of the inequity and inefficiency components are provided for a generic class of social welfare functions the inequity component turns out to be a two stage measure which applies a unidimensional inequality measure to the vector of well being levels we critically discuss two prominent transfer principles viz uniform majorization and correlation increasing majorization in the light of the decomposition a decomposition of inequality in human development illustrates the analysis

the role of money supply shocks in the short run demand for money abstract previous money demand models are either inconsistent with contemporaneous adjustment of the price level to expected changes in the nominal money supply or imply implausible interest rate fluctuations in response to innovations in nominal money we propose a shock absorber money demand model in which money supply shocks affect the synchronization of asset transactions and so engender a temporary increase or decrease in desired money holdings expected changes do not engender such fluctuations in real money inventories in simultaneous estimates for eight industrial countries the shock absorber model proved empirically superior

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

a reinterpretation of elasticity formulae in optimum tax theory this paper presents a unified interpretation of three special cases which have been widely discussed in the theory of optimum taxation these are the corlett hague case and two versions of the inverse elasticity rule derived on the assumption that either the compensated or the uncompensated cross elasticities of demand are zero it is demonstrated that all three cases imply that it is the compensated elasticities which determine efficient tax differentiation and that complementarity with the untaxed numeraire emphasized by w j corlett and d c hague 1953 54 plays a role in the interpretation of all three cases copyright 1987 by the review of economic studies limited

atkinson and stiglitz theorem in the presence of a household production sector we show that the celebrated atkinson and stiglitz 1976 result on the uniformity of the commodity tax rates when preferences are weakly separable between goods and leisure does not hold when at least one of the goods is produced within the household the result is restored if preferences are weakly separable in market goods on the one hand and leisure and household goods on the other

optimal shadow prices for public production abstract the purpose of this paper is mainly expository in showing that within a very simple model famous and previously unrelated results on optimal public sector pricing emerge as special cases of a general optimal pricing formula it also examines the relationships between the elasticity of scale in private production and the optimal shadow prices for public production

optimal financing of the government s budget taxes bonds or money financing of the government s budget in particular we consider taxation bond issuance and money creation as alternative means of financing these issues are not new some of them were extensively explored in the public finance literature some of them were explored in the monetary theory literature what we believe to be new however is that our work integrates the relevant elements from both strands of literature into a unified general equilibrium framework with this approach we are able to jointly determine the optimal combination of tax rates the rate of inflation and the interest rate on government bonds this type of analysis enables us to ask whether the rate of inflation should be positive or negative and to provide simple conditions on compensated demand elasticities which determine the answer it also enables us to reconsider milton friedman s optimum quantity of money rule in a public finance framework without lump sum taxes and to show how this rule should be modified in addition we provide insight into the desirability of a social security scheme by showing that such a program is undesirable when social security payments are financed

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

social security and endogenous growth abstract this paper examines the effects of social security on the steady state growth of per capita income in an endogenous growth model in which agents care about their own consumption the number of children and the welfare of each child it shows that an unfunded program may simulate growth by reducing fertility and increasing the ratio of human capital investment per child to per family income when bequests are positive also it may cause faster growth than funded programs especially when receipts from funded programs are independent of contributions when voluntary saving is positive funded social security is neutral if receipts are linked to contributions and most likely depresses growth if receipts are independent of contributions

the comparison of multi dimensioned distributions of economic status the literature on inequality measurement has been largely concerned with single dimensioned indicators this paper explores some of the issues which arise when there are several dimensions to inequality and these are not readily reduced to a single index concentrating particularly on the two dimensioned case we make use of results on multi variate stochastic dominance in portfolio theory extending these and applying them to the measurement of inequality the use of the dominance conditions is illustrated by an application to the international distribution of income and life expectancy

welfare criteria for tax reforms efficiency aspects there are essentially two types of problems to which the normative theory of taxation addresses itself one of these problems is that of designing de novo i e from scratch a tax system which is optimal in some appropriate welfare sense the other major problem is that of finding conditions under which tax reforms i e changes in an existing tax system are welfareimproving the efficiency aspects of the latter problem are the subject of this paper there has been a considerable interest in the theory of tax reform in the last decade in the earlier part of this decade most studies of tax reforms concerned themselves primarily with the question of changing price distortions e g foster and sonnenschein 1970 bertrand and vanek 1971 kawamata 1974 1977 dixit 1975 hatta 1977 and rader 1976 a common drawback of these studies however is that the kind of tax changes analyzed by them rely on an implicit lump sum tax transfer mechanism for instance some consider the question of whether a reduction in tax rates such as a radial decrease in distortions improves welfare such a reduction will most likely decrease the tax revenues accruing to the government and hence some lump sum tax will have to be introduced therefore it is difficult to draw policy relevant conclusions from these studies more recently there have been several studies e g guesnerie 1977 diewert 1978 dixit 1979 harris 1979 and weymark 1979 which deal

forecasting in a large macroeconomic system this paper examines the efficiency gains yielded from estimating multiple equation cointegrated systems as compared to their single equation counterparts in particular this paper is concerned with the ability of utilizing the cointegrating information to improve forecasting performance recently an inability to improve forecasts of real income once money demand error correction terms were introduced has been used to argue that the m2 relationship had broken down during the early 1990s however the results suggest that once the underlying responses of variables are more closely investigated the behaviour of m2 has remained stable

second best pollution taxes and the structure of preferences we characterize optimal taxes on polluting and nonpolluting goods in ramsey and mirrlees second best environments the polluting good tax differs from the pigouvian tax by ramsey terms in the first and by stiglitz mirrlees plus another adjustment term in the second these terms can be positive negative or zero if preferences are weakly separable in public and private goods with the private good subutility weakly separable in labor and produced goods nonpolluting goods are taxed uniformly and the concept of a tax differential between polluting and nonpolluting goods is well defined the differential is then less than the pigouvian tax in the ramsey framework but it can be greater equal to or smaller than the pigouvian tax in the mirrlees second best in mirrlees second best if preferences are separable in labor supply and other goods the second best tax differential is identical to the pigouvian tax

imperfect observability of emissions and second best emission and output taxes abstract this paper studies the second best tax design problem when emissions are publicly unobservable but can be discovered through costly monitoring a representative firm in industry chooses its emissions and declarations to maximize its expected profits the paper shows the pigouvian rule of equating the marginal private benefit of emissions in production to the marginal social damage of emissions is modified to take account of the resource costs of monitoring and enforcement emissions from different sectors must be taxed at different rates every polluting good must face an effective emission tax that is less than the full marginal social damage of emissions emission taxes do not reflect standard optimal tax objectives output taxes have a pigouvian role so that the targeting principle fails

uniform labor income taxation and economic efficiency abstract this paper uses a two period representative agent optimal taxation model to characterize government tax policy when the interest rate is determined in equilibrium and is affected by policy choices it shows that dynamic tax smoothing may not be optimal and the response of the interest rate with respect to policy choices is extremely important in characterizing government s tax policy

are efficient linear taxes inequitable abstract i explore the household weights in the bergson samuelson social welfare functions which have a turning point at an efficient linear tax structure the inverse optima a tax structure is defined to be inequitable if every inverse optimum has weights that increase with household productivity over part of the productivity range i find that the inequity of an efficient tax structure depends on the normality of leisure on the number of households and on the natureof household demands an efficient indirect tax structure is not inequitable if the expenditure share of each taxed commodity is constant across households this has welfare implications for the choice of tax instrument to finance a project accepted under benefit cost analysis

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

the two part instrument in a second best world abstract standard pigovian tax theory has been extended in two directions first many polluting activities are difficult to tax because they are not market transactions and so recent papers have shown that the same effects can be achieved by use of a two part instrument 2pi a tax on output or income and a subsidy for clean alternatives to pollution it is a generalization of a deposit refund system drs second a different literature concerns the second best pollution tax in the presence of other tax distortions here we combine the two extensions by looking at the second best 2pi when government needs revenue is the deposit larger and the rebate smaller we find explicit solutions for each tax and subsidy in a general equilibrium model with other tax distortions and we compare these to the rates in a first best model the tax subsidy combination is explained in terms of a tax effect an environmental effect and a revenue effect the model allows for flexible interpretation to show various applications of the 2pi we also discuss important caveats

optimal taxation of capital income in general equilibrium with infinite lives this paper analyzes the optimal tax on capital income in general equilibrium models of the second best agents have infinite lives and utility functions which are extensions from the koopmans form the population is heterogeneous the important property of the models is the equality between the social and the private discount rates in the long run i find that the optimal tax rate is zero in the long run for a special case of additively separable utility functions i then determine the tax rates along the dynamic path and conditions that are sufficient for the local stability of the steady state

is money really exogenous testing for weak exogeneity in swiss money demand although exogeneity is often associated with controllable policy variables engle hendry and richard 1983 show that the one condition is neither necessary nor sufficient for the other whether variables such as monetary aggregates are weakly exogenous depends on the conditioning properties of the data generating process testing exogeneity claims represents an important step in analyzing money demand functions although switzerland adheres to fairly strict monetarist prescriptions we reject the hypothesis that m0 and m1 are weakly exogenous for a price equation our results for m1 support the conventional view in which money market equations reflect the demand for money as the dependent variable copyright 1993 by ohio state university press

the demand for money in the united states evidence from cointegration tests this paper uses recent cointegration test procedures to investigate the underlying economic relationship between real money balances real income and interest rates for the united states unlike recent studies of money demand the authors analysis uses quarterly data spanning the period 1915 88 thus providing a sample encompassing a wide variety of economic experiences the evidence presented indicates that the broader m2 measure of money is the preferable measure with which to consider the long run effects of monetary policy copyright 1991 by ohio state university press

how large is the optimal inflation tax abstract i examine the title question in a competitive framework where the transaction demand for money is modeled using a cash in advance constraint and only distortionary taxes are possible empirical evidence and simulations are used to document the plausibility of the assumptions which produce the friedman rule these findings suggest that it is not a good benchmark my results suggest that an optimal monetary policy calls for nominal interest rates that can exceed 6 per year

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

risky human capital and deferred capital income taxation abstract we study the structure of optimal wedges and capital taxes in a dynamic mirrlees economy with endogenous distribution of skills human capital is a private stochastic state variable that drives the skill process of each individual building on the findings of the labor literature we construct a tractable life cycle model of human capital evolution with risky investment and stochastic depreciation in this setting we demonstrate the optimality of a a human capital premium i e an excess return on human capital relative to physical capital b a large intertemporal wedge early in the life cycle and c a non zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life cycle the main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital the average marginal tax rate on physical capital held in every period is zero in present value however expected capital tax payments do not equal zero in every period necessarily agents face negative expected capital tax payments early in the life cycle and positive expected capital tax payments late in the life cycle

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

the buffer stock notion in monetary economics not the least of harry johnson s contributions to our discipline was the series of survey papers on aspects of monetary economics which he produced during the 1960s and 1970s it is no exaggeration to say that the way in which the literature of monetary economics is organised even now follows the design which johnson first set out in 1962 and built on in the subsequent decade nevertheless the subject has not stood still and one of the more interesting developments of the last few years has involved the introduction of what has been variously described as the disequilibrium money shock absorber or as i prefer to call it the buffer stock notion into monetary economics the development of this line of thought was getting underway before johnson s untimely death much of it indeed under the auspices of his own research programme at the lse even so this did not happen early enough for the relevant ideas to be put in their proper niche by johnson himself and the buffer stock approach is not yet fully integrated into the mainstream of monetary economics much of the relevant literature is empirical concerned with modelling particular aspects of the monetary experience of specific countries hence it is fragmented and contains few papers which attempt a coherent account of just what this approach is and how it relates to other approaches to monetary analysis although essays by goodhart 1982a b and judd and scadding 1982a contain important discussions of these issues to the best of my knowledge only jonson 1976a and knoester 1979a have devoted entire papers solely to this central issue and these are relatively inaccessible and hence less widely known than they deserve to be in this lecture i shall attempt to give a brief account of the essentials of this approach first i shall sketch out its microeconomic background and then i shall discuss those theoretical characteristics which differentiate it from the neo austrian analysis of robert e lucas jr and his associates as well as from the conventional keynesian approach to monetary economics last but by no means least i shall argue that it yields simple theoretical insights into important empirical and policy related issues which are troublesome for alternative approaches in short my tribute to harry

should day care be subsidized in the presence of distortionary taxes on labor can subsidies on childcare flnanced by a further increase in taxes raise welfare by encouraging women with small children to work we approach this question in two difierent ways first we consider a set of stylized models where we prove analytically that under some conditions the ramsey optimal policy consists in making childcare expenses tax deductible then we construct a calibrated stochastic dynamic life cycle model of household decision making designed to capture some facts about labor supply in germany we flnd that the welfare gains associated with subsidizing childcare are considerable and that the maximum gains are realized when childcare is subsidized to an even greater extent than what tax deductibility implies

uncertainty and optimally uniform commodity taxes this paper examines the implications of uncertainty for the structure of optimal commodity taxes in the presence of a linear income tax consumers face uncertain income and commit to consumption of some goods before the resolution of uncertainty and to others after preferences are separable between labor and consumption goods we prove that optimal commodity taxes are i uniform within the category of noncommitted goods if their subutility is logarithmic ii uniform within the two categories if both subutilities are logarithmic and iii nonzero across categories with the tax rate on precommitted goods being lower than the tax rate on noncommitted goods starting with atkinson and stiglitz 1976 a number of economists have argued that under certain restrictions on preferences e g logarithmic a linear income tax is a sufficient tool for optimal tax policy see atkinson 1977 deaton 1979 and deaton and stern 1986 recently cremer and gahvari 1995a showed that these results do not carry to an economy in which individuals face wage uncertainty in models with uncertainty taxation is useful for the insurance it provides if consumption takes place both before and after the resolution of uncertainty commodity taxes will have different insurance properties depending on when consumption occurs this property makes differential tax treatment of these two types of goods optimal cremer and gahvari 1995a divided commodities into two categories the consumption levels in one category are committed to before the resolution of uncertainty and those in the other after their study pinpoints a fundamental difference between these categories of goods that calls for their tax treatment to be different however their analysis leaves open the question of the uniformity of tax rates within each category the main aim of the current paper is to address this question we shall examine the type of preferences for which the tax rates within each category have to be uniform in this way we will build a bridge between the results of cremer and gahvari 1995a and the literature on uniform taxation in the presence of a linear