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

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

ants rationality and recruitment this paper offers an explanation of behavior that puzzled entomologists and economists ants faced with two identical food sources were observed to concentrate more on one of these but after a period they would turn their attention to the other the same phenomenon has been observed in humans choosing between restaurants after discussing the nature of foraging and recruitment behavior in ants a simple model of stochastic recruitment is suggested this explains the herding and epidemics described in the literature on financial markets as corresponding to the equilibrium distribution of a stochastic process rather than to switching between multiple equilibria

the impact of maximum markup regulation on prices markup regulation is a common yet understudied type of regulation we analyze the repeal of maximum wholesale and retail markup regulation in an oligopolistic and vertically non integrated market by comparing the prices of products affected by regulation before and after the policy change and using unregulated products as a control group we find that abolishing regulation led to a significant decrease in both retail and wholesale prices the results provide indirect but consistent evidence that markup ceilings provided a focal point for collusion among wholesalers

an economic analysis of the homeownership decision analysts of the homeownership decision have traditionally asserted that owning makes much greater sense than renting 16 p 359 for families in high tax brackets however empirical studies of homeownership propensities indicate that not all high income families own nor do all low income families rent for example li 8 p 1081 notes that a large number of studies find that a variety of variables such as family size age of the head and race are generally found to be determinants of homeownership even when income or the marginal tax bracket are held constant previous attempts to explain why the marginal tax bracket is not a sufficient statistic for homeownership argue that people differ in their preferences for homeownership either because owning and renting are not perfect substitutes in consumption see for example 13 141 or because of differences in liquidity mobility ability at home repairs and home management and simply peculiar circumstances 4 p 14 this paper develops a general model of the homeownership decision and explores two alternative explanations of why the marginal tax bracket is not a sufficient statistic this is accomplished by incorporating both transaction costs and housing market quality sorting into the model section ii derives a simple parametric statement of the homeownership decision the third section examines the special case which yields a homeownership decision rule which is comparable to existing models an alternative special case is presented in the fourth section which incorporates consumer sorting across quality markets it is demonstrated that the housing market may adjust until

a note on dynamic tax incidence under certain reasonable conditions for a growth model the path of adjustment between steady states generated by a change in an exogenous policy variable is solved for explicitly the overall welfare effect is then shown to be a weighted average of the short and long run effects for a large class of social welfare functions these results are applied to a simple neoclassical growth model for the purpose of investigating the dynamic incidence of a labor income tax contrary to the claims of previous investigators the long run effect is shown to be more important for a wide range of parameter values

taxation and housing old questions new answers this paper sketches how the tax reforms of the 1980s affected the incentives and distortions associated with tax policy toward housing markets there are three principal conclusions 1 reductions in marginal tax rates particularly for high income households reduced the tax induced distortion in the user cost of owner occupied housing this lowered the deadweight losses associated with the favorable tax treatment of homeownership 2 the increase in the standard deduction in the tax reform act of 1986 tra86 removed several million middle income homeowners who previously itemized from the ranks of itemizers for these households tra86 raised the marginal cost of owner occupied housing these changes also exacerbated the regressive nature of the mortgage interest subsidy in 1988 more than half of the tax losses associated with mortgage interest deductions accrued to the 8 of taxpayers with the highest economic incomes 3 tra86 reduced incentives for rental housing investment contributing to the decline in new multifamily housing starts from 500 000 per year in 1985 to less than 150 000 in 1991 in the long run these policies will lead to higher rents this abstract was borrowed from another version of this item

saving puzzles and saving policies in the united states in the past two decades the widely reported personal saving rate in the united states has dropped from double digits to below zero first we attempt to account for the decline in the national income and product accounts nipa saving rate the macroeconomic literature suggests that 40 50 per cent of the drop since 1988 can be attributed to households spending stock market capital gains another 30 per cent is accounting transfers from personal saving into government and corporate saving because of the way pensions and capital gains taxes are treated in the nipa second while nipa saving measures are well suited to measuring the supply of new funds for investment and capital accumulation it is not clear that they should be the target of government saving policies finally we emphasize that the nipa saving rate is not useful in judging whether households are preparing for retirement or other contingencies many households have accumulated significant wealth primarily through retirement saving vehicles and capital gains even as the saving rate slid there remains a segment of the population who save little and whose behaviour appears untouched either by the stock market boom or the slide in personal saving we explore reasons and policy options for their puzzling low saving rate copyright 2001 oxford university press

welfare analysis and intertemporal substitution abstract this paper explores the structure of welfare comparisons when direct utility is weakly separable over time the lifetime welfare effect of a reform is then the sum of atemporal hicksian variations and intertemporal variations reflecting intertemporal substitution these latter are shown to be of only second order importance in lifetime welfare comparisons approximations to the intertemporal variations when preferences are intertemporally additive are derived pointing to the welfare significance in this context of not only the intertemporal elasticity of substitution but also within period income effects numerical examples illustrate the analysis and suggest possible orders of magnitude

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

welfare analysis of tax reforms using household data abstract this paper discusses a methodology for calculating the distribution of gains and losses from a policy change using data for a large sample of households estimates are based on the equivalent income function which is money metric utility defined over observable variables this enables calculations to be standardised and a computer program to compute the statistics presented in the paper is available for a general demand system equivalent income is related to measures of deadweight loss and standard errors are computed for each of the welfare measures an application to u k data for 5 895 households is given which simulates a reform that involves eliminating housing subsidies

credit rationing and the demand for owner occupied housing abstract this study applies cross sectional data to test whether default risk induced credit constraints affect the demand for owner occupied housing credit constrained households are argued to exhibit different elasticities of demand for housing than less constrained households housing demand elasticities are then estimated separately for households obtaining va insured and non va loans the government guarantee on va loans insures lenders against default enabling lenders to apply easier nonprice terms of credit results indicate that observed demand elasticities differ significantly across va and conventional mortgage holders that marginal changes in credit constraints affect housing demand and that fha financing mitigates the effect of mortgage constraints

the effects of anticipated inflation on housing market equilibrium an increase in the anticipated rate of inflation causes distortions in the housing market due to a nonindexed tax system since nominal rather than real interest payments are tax deductible an increase in inflation decreases the aftertax cost of capital for homeowners which in turn increases the demand for housing and increases its real price this tax gain is shown to be larger for rental housing than for owner occupied housing in a competitive market this implies that although the real price of housing increases with a rise in anticipated inflation real rental rates fall in the last decade the real price of corporate capital fell while the price of housing increased dramatically during this same period the rate of inflation increased substantially empirical studies have found a negative relationship between stock returns and the inflation rate 1 while housing has been found to have been a good hedge against inflation 2 tax distortions related to the change in the rate of inflation provide one popular explanation for the negative relationship between stock prices and inflation 3 the effect of similar tax induced distortions on the equilibrium in the housing market will be studied in this paper it is shown that the real price of housing increases with the anticipated rate of inflation while the real rental rate declines these results are consistent with published data for the period 1967 77 during which the anticipated rate of inflation increased substantially 4 the general price level as measured by the consumer price index increased 81 5 percent between 1967 and 1977 5 in this

fiscal incidence in an overlapping generations model with a fixed asset abstract we analyze a model of overlapping generations with a fixed factor land malleable capital and labor we consider the dynamic effects of various fiscal policies including taxes on rent wages and creation of public debt on capital accumulation land prices and intergenerational welfare minimal assumptions uniqueness and stability imply that a land tax may initially raise land values but the upper bound is less than one half of the tax revenues assuming homothetic utility the ratio between the long run capital responses to a land tax and to a lump sum transfer of equivalent revenue from the young to the old depends solely on the share of labor

the normative and positive aspects of the taxation of imputed rent on owner occupied housing received july 1983 revised version received march 1984 1 introduction this paper is concerned with two basic issues associated with the special income tax treatment of owner occupied housing the first is the effect of this policy on resource allocation and in particular on the rate of productive capital accumulation i e capital accumulation which contributes to the increase of the marginal and average product of labor the rate of total capital accumulation productive and residential capital and consequently on the interest rate and the wage rate the second is whether this policy can or cannot be consistent with some notions of optimality the income tax treatment of owner occupied housing is considered in the existing literature to be discriminatory in favoring this type of capital accumulation versus rental housing and productive capital such a discrimin ation is believed to attract resources from the rental housing and productive capital to owner occupied housing and thus to distort resource allocation however the literature is mainly concerned with the impact of the preferen tial treatment of owner occupied housing on income distribution the total loss of welfare and the owner occupied versus the rental market shares see for example laidler 1969 shelton 1970 aaron 1970 white and white 1977 weiss 1978 rosen 1979 and henderson and ioannides 1983 the long run impact of this policy on the allocation of resources between housing and productive capital and on the total supply of capital are only casually analyzed for example although aaron 1970 recognizes the possibility that the tax benefits to homeowners may affect the total supply of savings in his main analysis he assumes that this supply is unaffected by this financial assistance from the foerder institute for economic research is gratafully acknowledged

tax subsidies to owner occupied housing an asset market approach inflation reduces the effective cost of homeownership and raises the tax subsidy to owner occupation this paper presents an asset market model of the housing market and estimates how changes in the expected inflation rate affect the real price of houses and the equilibrium size of the housing capital stock simulation results suggest that the accelerating inflation of the 1970s which substantially reduced homeowners user costs could have accounted for as much as a 30 percent increase in real house prices persistent high inflation rates could lead ultimately to a sizable increase in the stock of owner occupied housing

the baby boom housing and loanable funds this paper examines baby boom effects in a simple three period overlapping generations model in which equilibrium must be maintained in the housing market as well as in the loanable funds market all agents must buy a house financed by an adjustable rate mortgage in the first period expectations regarding the path of interest rates and the price of housing play a crucial role in determining effects of the population bulge under static expectations the rate of interest falls sharply at the appearance of the baby boom while the price of housing increases behavior in the market for loanable funds explains this surprising result when rational expectations are assumed however the rate of interest rises prior to and during the appearance of the baby boom and the price of housing increases as well welfare and long term effects in the two scenarios do not differ markedly

marginal cost of public funds for different tax instruments and government expenditures the marginal cost of public funds that is the size of the direct and indirect excess burden costs for marginal tax revenues is examined in this paper for an open economy with a savings response and using swedish 1979 data the marginal cost of public funds spent on transfer payments is estimated to vary from 1 47 for a distributionally neutral tax on labor and capital to 7 20 for a more progressive tax where average and marginal labor taxes increase by the same rates for changes in the most important tax instrument the marginal cost of public funds varies from 0 98 for expenditures on infrastructure to 2 27 for transfer payments

income taxes and housing this paper presents new estimates of the distributional impact of special income tax provisions relating to housing it also discusses possible secondary effects of these tax factors resulting from adjustments in the returns to capital shifts in investment and changes in the housing stock the tax benefits to homeowners are shown to be

can sustainable consumption be learned a model of cultural evolution abstract this paper shows how sustainable consumption patterns can spread within a population via processes of social learning even though a strong individual learning bias may favor environmentally harmful products we present a model depicting how the biased transmission of different behaviors via individual and social learning influences agents consumption behavior the underlying learning biases can be traced back to evolved cognitive dispositions challenging the vision of a permanent transition toward sustainability we argue that green consumption patterns are not self reinforcing and cannot be locked in permanently

rules of thumb for social learning this paper studies agents who consider the experiences of their neighbors in deciding which of two technologies to use we analyze two learning environments one in which the same technology is optimal for all players and another in which each technology is better for some of them in both environments players use exogenously specified rules of thumb that ignore historical data but may incorporate a tendency to use the more popular technology in some cases these naive rules can lead to fairly efficient decisions in the long run but adjustment can be slow when a superior technology is first introduced

taxation and the tiebout model the differential effects of head taxes taxes on land rents and property taxes on the theory of state and local public finance is the seminal paper by charles tiebout 1956 tiebout constructed a multijurisdictional model in which independent local governments offer a wide variety of expenditure and tax policies and perfectly mobile consumers reveal their preferences for local public goods through their choice of residential community he argued that under such circumstances local public service provision would be efficient the tiebout model has formed the basis of a vast number of subsequent articles in the state and local public finance literature and has also been very influential in urban and regional economics the efficiency properties of various tiebout type models of local public good provision have been examined and the role of politics in these models has been debated at length in this literature of more direct relevance to this paper however is the fact that although tiebout had little to say directly about taxation simply assuming the existence of head taxes subsequent analyses have used adaptations of this model to examine the effects of local head taxes land taxes and property taxes it is the literature on the efficiency and distributional effects of alternative local taxes that is the subject of this survey 1

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

the second theorem of the second best abstract this paper interprets many results from the literature on incentive compatibility and cost benefit analysis as illustrations of a second theorem of the second best the theorem states that if there exists any restriction on transactions required for first best efficiency then there is no presumption that a social welfare maximum entails equal marginal social utilities of income across individuals one reason is that incentive constraints shift with redistributions of wealth so that redistributions have an instrumental role in relaxing constraints that make the economy second best two examples relate such wealth effects to countervailing incentives and hostage taking

the allocative cost of price ceilings in the u s residential market for natural gas a direct consequence of restricting the price of a good for which secondary markets do not exist is that in the presence of excess demand the good will not be allocated to the buyers who value it the most we demonstrate the empirical importance of this allocative cost for the u s residential market for natural gas which was subject to price ceilings during 1954 89 using a household level discrete continuous model of natural gas demand we estimate that the allocative cost in this market averaged 3 6 billion annually nearly tripling previous estimates of the net welfare loss to u s consumers

saving pension contributions and the real interest rate a test of the hypothesis that estimates of the interest elasticity of personal and private saving may be biased downward by a failure to control for behavior related to defined benefit pension programs fails to reject existence of a positive interest elasticity of private saving correcting for pension funding bias the estimated interest elasticity of private saving is 0 04 well below michael j boskin s 1978 estimate of 0 4 obtained with a different data set and different estimation procedures the estimated interest elasticity of personal saving is 0 28 copyright 1989 by mit press

housing taxation and capital accumulation this paper studies the impact of the preferential tax treatment of housing capital in a dynamic general equilibrium life cycle economy populated by heterogeneous individuals the model includes the main housing tax provisions currently in place in the u s and a minimum downpayment requirement upon purchasing non divisible houses the tax code makes the return on housing capital larger than that on business capital which distorts the lifetime profile and composition of individuals savings the wedge between the two rates of return emanates from the failure to tax imputed rents and is amplified by the presence of mortgage interest deductibility simulations show that individuals at all income levels would rather live in a world where imputed rents are taxed or one where mortgage interest payments are not deductible furthermore distributional effects are much smaller than conventionally believed

from the static to the dynamic some problems in the theory of taxation abstract this paper considers problems and issues that arise when we attempt to extend the static theory of taxation and production planning to a dynamic context and to combine that theory with theories of growth the reasons dynamic theory is less developed include problems with the analytical tractability of even those dynamic models which attempt to retain the basic structure of the static model furthermore difficult and interesting issues arise in a dynamic context which are either not present or are much less severe in the static theory special attention is paid to these new issues and the difficulties they pose

taxing residential housing capital this paper discusses the main aspects of the taxation of housing drawing on general principles of optimal taxation it focuses on the role of the property tax in achieving neutrality between rental and owner occupied housing assuming that landlords are taxed according to a neutral profits tax it follows that the property tax should be based on the rate of interest the paper discusses how the tax rate could be adjusted to account for the lack of effective taxation of capital gains the double taxation of dividends and the differences in the cost of labour between rental and owner occupied housing in most oecd countries the combined effect of the different housing taxes amounts to a tax subsidy to owner occupied housing it is demonstrated how this subsidy has been reduced in sweden as in many other countries in the past decade as a result of tax reforms and a lower rate of inflation the subsidy has effects on consumption patterns saving capital accumulation the distribution of welfare across gener

tenure neutral and equitable housing taxation equity and neutrality are distinct concepts in housing taxation and weak and strong tenure neutrality should be distinguished when a tax system is tested for those criteria the taxes paid by landlords must be included as they affect the rents renters pay this paper defines appropriate tests applies them to a stylised tax system and proposes tax changes designed to restore tenure equity and or neutrality it shows how the homeowner s implicit income should be computed for taxes to be fundamentally tenure neutral or equitable or both it also shows the key role played by the cost differential in producing housing services under owner occupation and renting

imputed rental income taxation and income distribution in finland in most western countries owner occupied housing is tax favoured compared with other investments and housing tenure modes this paper analyses the effects of imputed rental income and its tax treatment on income distribution in finland using household data from the 2004 wealth survey produced by statistics finland it is found that imputed rental income has a major effect on homeowners well being as it constitutes on average almost 10 per cent of homeowner households disposable income furthermore including imputed rental income in household disposable income decreased overall inequality measured by the gini index the tax subsidy resulting from non taxation of imputed rental income is skewed towards high income households however the effects of a new tax on imputed rental income on overall inequality would depend vitally on the way the increased government tax revenue is transferred back to the households

the allocation of capital between residential and nonresidential uses taxes inflation and capital market constraints we have constructed a simple two sector model of the demand for housing and corporate capital economic growth and an increase in the inflation rate were then simulated with a number of model variants the model and simulation experiments illustrate both the tax bias in favor of housing and the manner in which the increase in inflation between 1965 and 1978 magnified it the existence of capital market constraints offsets the bias against corporate capital but it introduces a sharp inefficient reallocation of housing from less wealthy constrained households to wealthy households who do not have gains on mortgages and are not financially constrained

a welfare measure of consumer vulnerability to rising prices of food imports in the uae abstract the recent and expected continuing rise in food prices has re ignited concern and discussion in the united arab emirates about the country s vulnerability to food supply shocks defining vulnerability as the compensating variation relative to household income we find that although uae households in the lowest income quintile spend on food on average less than a quarter of what households in the highest income quintile spend the former are 3 5 times more vulnerable to rising prices of food imports than the latter

technological diffusion and preference learning in the world of homo sustinens the challenges for politics abstract this article relates agents learning of a preference for a technology competition of technologies and their relative diffusion among potential adopters competitive interactions between two technologies are captured by an extended lotka volterra model to also incorporate preference learning on the part of potential adopters of these technologies we combine it with a model of cultural learning based on role model conformist and hedonistic learning our theoretical analysis is illustrated by a concrete example the competition between electric mobility and conventional forms of individual mobility the model enables an evaluation of specific policy instruments as to the promotion of sustainable technology

competition and culture in an evolutionary process of equilibrium selection a simple example abstract competition tends to promote efficient equilibrium behavior through the higher survival of the organizations say firms that adopt it on the other hand culture understood as the inherited social pattern of behavior may induce certain short run inertias this paper analyzes a dynamic model of the struggle between these two forces in the evolution of alternative stable configurations of social behavior journal of economic literature classification numbers c72 l20

homeownership in the 1980s and 1990s aggregate trends and racial gaps abstract housing policy under the clinton and bush administrations has sought to boost homeownership while also narrowing racial gaps in owner occupancy rates against that backdrop homeownership rose sharply in the 1990s but white minority gaps remain in excess of 25 percentage points we analyze these patterns using data from the 1983 to 2001 survey of consumer finances results indicate that household characteristics explain most of the increase in homeownership and roughly two thirds of the white minority homeownership gap credit barriers account for no more than 5 percentage points of the remaining gap this suggests that policy makers will need to look beyond innovations in mortgage finance if their goal is to further expand homeownership

on the organization of rural markets and the process of economic development the authors consider how the organization of rural markets will affect capital accumul ation and long run aggregate income in the development process they show that in a simple dual economy overlapping generations model c apital accumulation and aggregate income will be lowest when both fac tor markets in the agricultural sector are fully competitive both ca pital and aggregate income will be higher when land is not traded but the labor market is competitive and highest in the absence of compe titive markets in both factors in the agricultural sector when incom e distribution favors rural workers over landlords copyright 1988 by american economic association

real estate assets and consumer spending in an interesting contribution to this journal elliott 1980 shows that consumer spending is better explained if permanent income is estimated from explicit measures of wealth the wealth approach rather than current and past incomes the income approach in the income approach permanent income yp is computed as a distributed lag mechanism in the wealth approach this procedure is followed for labor income but permanent nonhuman income is specified as a constant multiple 72 of actual nonhuman wealth at the beginning of a period ant the distinction between income and wealth approaches is intuitively appealing and has been tried before elliott s equation 12 is the same as equation 5 in bhatia 1972 except that elliott uses actual wealth instead of bhatia s expected wealth the novelty in elliott s specification lies in considering different components of wealth which is also appealing because measures of wealth ranging from real money balances to broad aggregates of human and nonhuman wealth have been used in the literature elliott s most striking result that real assets mainly real estate and durable goods have no significant effect on consumer spending however is disturbing because real estate is a major household asset in fact the largest one in many years according to frb balance sheets 1983 and accrued gains on real estate have often been larger than gains on corporate equities during the last decade or two also there is some recent empirical evidence that gains on real assets significantly reduce personal saving peek 1983 the main purpose of this note is to reexamine and rehabilitate the role of real assets one can question elliott s specification which does not adequately allow for expected gains or his use of undistributed corporate profits as a contemporaneous proxy for all capital gains tenuous at best but the heart of the matter is the residential value series derived by elliott from perpetual inventory benchmarks pp 533 34 which being accumulations of construc

the social selection of flexible and rigid agents people differ in how they respond to their environment some individuals treat each situation as unique and tailor their behavior accordingly while others respond in the same manner regardless of the situation the authors objective is to explore how social systems select from such a heterogeneous population a class of simple hierarchical systems is considered which encompasses some features of corporations and electoral systems a selection process operates on this population which results in successful agents going on to compete against equally successful agents for further advancement the author characterizes the population dynamics and the type of agent that ultimately dominates copyright 1998 by american economic association

some evolutionary foundations for price level rigidity this paper shows that price rigidity evolves in an economy populated by imperfectly rational agents who experiment with alternative rules of thumb in the model firms must set their prices in face of aggregate demand shocks their payoff depends on the level of aggregate demand as well as on their own price and their neighbor s price the latter assumption captures local interactions despite the fact that the rational expectations equilibrium ree is characterized by a simple pricing rule that firms can easily adopt the economy does not converge to the ree for all parameter values when the volatility of monetary innovations is low and interactions among firms are high the aggregate price level exhibits rigidity in that it does not fully react to contemporaneous aggregate demand shocks we discuss the role of the nature of experimentation and of path dependence driven by interactions in explaining these results

the quality of managers in centralized versus decentralized organizations a central task of the leadership of any organization is the choice of its successors and subordinates corporate presidents spend a significant part of their time selecting upper management tenured faculty sometimes spends months deciding whether particular individuals should be admitted into their ranks the effort and contentiousness which often go into this process suggests that it has important consequences for the organization it is recognized that there are large differences in individuals abilities and that the abilities of those in leadership inevitably affect the performance and survival of the organization our objective here is to examine how the centralization or decentralization of decision making authority affects the quality of the managers who are actually selected this question is naturally dynamic because the quality of current managers is not only influenced by that of past managers but it in turn affects the quality of future managers we consider stylized economies consisting of an arbitrary number of hierarchies organizations of different sizes the size of a hierarchy is the number of managers within the hierarchy one of whom is the hierarch the boss and others are subordinates the current hierarch appoints his own successor and those of his subordinates but has no influence on any other hierarchy this assumption exaggerates somewhat the typical asymmetry of authority between the hierarch and the subordinates our definition of a more or less centralized economy is intuitive an economy is more centralized if it has a larger proportion of the total number of managers in larger hierarchies our main result is that there is a greater variability over time in the steady state quality of managers in a more centralized economy this is because highly capable decision makers have greater beneficial effects on the managerial choices in a more centralized economy by the same token highly incapable managers placed in the same positions have greater deleterious effects

time for revisionism on rent control economists traditional hostility to rent contols is based on models that treat the housing market as perfectly competitive and on the experience with hard controls in new york city and many european countries following world war ii the current soft rent control systems in north america are varied and qualitatively different from earlier hard controls the theoretical case against them is weak particularly when the housing market is viewed as imperfectly competitive the empirical case against them is weak too economists should reconsider their blanket opposition to current rent control systems and evaluate them on a case by case basis

the economics of tenancy rent control we consider a rent control regime where rent increases on and eviction of a sitting tenant are forbidden when apartments become vacant landlords may negotiate new rents if inflation exists landlords prefer to rent to short staying tenants since departure date contingent contracts are forbidden and landlords cannot tell whether tenants are short stayers an adverse selection problem arises with a pareto inefficient equilibrium when tenant types are determined endogenously multiple equilibria can arise where one equilibrium is pareto dominated abolition of the rent control regime cannot only shift the equilibrium out of this inferior outcome but also result in across the board lowering of rents

a general equilibrium model of housing taxes and portfolio choice we describe a model in which rental and owner housing are risky assets tenure choice is endogenous and each household is constrained to consume the same amount of owner housing that it has in its investment portfolio at each iteration in the search for an equilibrium we determine the new taxable income for each of 3 578 households from the survey of consumer finances and we use statutory schedules to find the marginal rate and tax paid equilibrium net rates of return are major determinants of the amount of owner housing but a logit model indicates that demographic factors are the main determinants of ownership rates in our simulation taxes on owner housing would raise welfare not only by reallocating capital but also by the government s taking part of the risk from individual properties and diversifying it away measures to disallow property tax or mortgage interest deductions do not help share this risk simulations of the 1986 tax reform indicate a small shift from rental to owner housing and

introducing risky housing and endogenous tenure choice into a portfolio based general equilibrium model abstract portfolio based general equilibrium models are useful for analyzing the interaction between the structure of individual tax rates and the way particular assets are taxed for considering the role of differential tax rules and risk in determining household portfolio choices and for addressing distributional questions unfortunately current versions of these models give housing short shrift owner housing is assumed to be riskless rental housing is not a separately identifiable asset and tenure choice is of necessity exogenously determined this paper extends one of these models to incorporate a full housing subsector and uses the model to analyze the impact of the u s 1986 tax reform act

a residence time model of housing markets abstract this paper estimates a semi markov model of housing markets in which families move from one home to another spend a random amount of time in each home and choose whether to own or to rent at each move limiting conditions of the semi markov process are used to characterize the steady state frequency of owner occupied housing and to simulate the impact of changes in housing tax policy this approach differs markedly from previous studies of housing tax policy which focus on the entire population as opposed to the movers and ignore the effect of household residence times see king 1980 rosen 1979 white and white 1977 or laidler 1969 residence times further influence the analysis by affecting the relative cost of owning to renting in the tenure choice model homeowners pay legal and realtor fees at the time they move out of their homes which renters do not have to pay the discounted value of these fees declines with length of stay and provides a structural explanation of why families with longer residence times have a greater propensity to own results from the empirical analysis suggest that the semi markov model closely predicts conditions in the united states and provide important insights into the effects of housing tax policy residence times are also found to influence household tenure choice through their impact on the discounted legal and realtor fees paid by homeowners

owner occupied housing capital gains and the tax reform act of 1986 abstract previous homeowners face a nonlinear kinked budget constraint because they can avoid paying tax on the capital gain from the sale of their home if they purchase a more expensive home when they move simulation results suggest that the tax reform act of 1986 tra86 has enhanced the importance of the capital gains kink by raising the after tax cost of housing through lower marginal income tax rates while increasing the tax rate on capital gains as a result a reduction in the capital gains tax rate would reduce housing demand as some families currently at the kink would buy a less expensive home our findings also indicate that the level of excess burden increases with the capital gains tax rate but that tra86 reduced the size of implicit price subsidies received by owner occupiers and related deadweight loss by roughly one half however the distribution of benefits and deadweight loss from the favorable tax treatment of housing remains heavily weighted to higher income families in addition the size of the implicit housing subsidy and related distortion is sensitive to the level of mortgage rates

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

housing and endogenous long term growth abstract in this paper we develop an endogenous growth model where housing plays a role as a consumption and an investment good for households as an input to production and as a production sector we show that the long term endogenous growth rate for the economy while not affected by housing related preference parameters depends critically on housing related production parameters the key modeling assumption is that housing and other assets in the economy are not perfect substitutes with this we can show that the endogenous long term growth rate depends on the relative price of housing and other types of capital accordingly the effects of productivity shocks on growth can be understood through their effects on the relative asset price and the corresponding changes in capital intensity we show that productivity shocks to the three sectors of production manufacturing construction and educational and training activities have positive effects on long term growth for reasonable parameter values however the responsiveness of the long term growth rate to shocks in construction is greater than responsiveness to shocks in manufacturing

do urban neighborhoods benefit from homeowners evidence from housing prices homeownership is heavily subsidized in most countries the adverse effects of this policy on economic efficiency and income distribution are well documented in the economics literature the main argument in favor of subsidizing homeownership is that it creates positive externalities that offset these adverse effects in this paper we test whether homeowners create positive externalities that capitalize into housing prices in multi storey buildings using semi parametric hedonic regressions with and without instrumental variables we find no evidence of positive externalities although the results with instrumental variables are somewhat imprecise this result is robust to several sensitivity checks and to a relaxation of the identification assumptions of our instrument using set identification

tax treatment of housing in a dynamic sequenced general equilibrium model this paper evaluates the efliciency effects of possible changes in the tax treatment of housing using a dynamic sequenced general equilibrium model based on canadian data for 1972 our model is similar in structure to that used by fullerton shoven and whalley fsw 1983 to analyze the impacts of a switch to a consumption tax in the united states except that we include two assets rather than one the motivation for the paper arises from existing literature on the treatment of housing under the income tax most of this literature emphasizes the non taxation of imputed income from owner occupied housing as a deviation from the haig simons concept of income and approaches taxation of housing as a static resource allocation issue this implicitly argues for the inclusion of imputed income in the income tax base and suggests that a welfare gain would result when viewed from a dynamic perspective one s perception of the appropriate tax treatment for housing correspondingly changes evaluated relative to a pure consumption tax rather than a pure income tax housing is appropriately treated if imputed income goes untaxed since the income stream to the asset is not further taxed once the asset has been purchased the intertemporal misallocation problem arises not with housing but from taxation of non housing capital income this issue is however more complex than this discussion indicates because of inter asset distortions arising from the differential tax treatment of housing

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

a dynamic specific factors model of international trade in a dynamic economy land and capital serve not only as factors of production but as assets which individuals use to transfer income from working periods to retirement changes in the terms of trade and in the endowments of fixed factors do not necessarily have the same effects on factor prices and on the composition of output as they do in a static framework changes in these variables affect both total savings and the amount of savings that is diverted toward investment in capital results derived from the traditional specific factors model are more likely to emerge when the sector using land as a factor of production has a higher labor share than the sector using capital in this case the land using sector dominates factor markets more than asset markets once the roles for land and capital as assets are recognized the possibility of natural resource booms that reduce steady state welfare arises at the same time an increase in population can raise steady state welfare

a naturalistic approach to the theory of the firm the role of cooperation and cultural evolution one reason why firms exist this paper argues is because they are suitable organizations within which cooperative production systems based on human social predispositions can evolve in addition we show how an entrepreneur given these predispositions can shape human behavior within a firm to illustrate these processes we will present a model that depicts how the biased transmission of cultural contents via social learning processes within the firm influence employees behavior and the performance of the firm these biases can be traced back to evolved social predispositions humans lived in tribal scale social systems based on significant amounts of intra and even intergroup cooperation for tens if not a few hundred thousand years before the first complex societies arose firms rest upon the social psychology originally evolved for tribal life we also relate our conclusions to empirical evidence on the performance and size of different kinds of organizations modern organizations have functions rather different from ancient tribes leading to friction between our social predispositions and organization goals firms that manage to reduce this friction will tend to function better

tax policy and economic growth lessons from the 1980s the past seven years of u s economic policy and performance constitute a truly remarkable if confusing experiment few would have guessed in 1980 that inflation would fall rapidly to 4 percent and hold pretty steady during a lengthy recovery that productivity growth would partially rebound the national debt more than double capital imports reach 150 billion in a single year or that employment would continue to expand at rates envied by other advanced economies perhaps fewer still would have predicted two major and two minor tax reforms would be passed in six years a flip flop in depreciation schedules and a top personal tax rate below 30 percent while it is always easier to draw inferences concerning economic growth its determinants and policies affecting the determinants with long historical hindsight this paper will attempt to provide information evaluation and conjecture to draw some tentative lessons about the effects of tax policies in the 1980s on long run economic growth the good news from the 1980s is the remarkable achievement of substantially lower marginal tax rates making the government a much smaller silent partner in many economic decisions for example the tax advantage of debt finance is reduced substantially with the much lower marginal tax rates the bad news is that the nation could not afford all of the good news the very large budget deficits add to the instability in the tax code in addition to whatever other problems they cause moreover in a country with the lowest saving and investment rates in the advanced world the consequence of which may be to decrease our long run growth potential and short run trade competitiveness the remaining anti saving and investment features of our tax law while probably less important in the long run than the u s

on optimal taxation of housing abstract this paper studies the question of optimal taxation of housing when the set of tax instruments at the government s disposal is not artificially restricted there are two groups of persons who differ in earning abilities and in tastes and two types of housing goods high and low quality the paper characterizes the pareto efficient allocations that are attainable through the tax policy it demonstrates that optimality calls for differential tax treatment of housing and that the required tax rates are nonlinear it derives conditions under which consumption of housing by the poor must be subsidized it also notes the circumstances under which taxation rather than subsidization is the required policy

relative consumption of housing marginal saving subsidies and income taxes as a second best policy this paper analyzes whether marginal taxation of labor and capital income are useful second best instruments for internalizing the externalities caused by conspicuous housing consumption when the

defining the federal role in housing back to basics abstract the several objectives of government intervention in the housing sector and the economic rationale for them are briefly reviewed the case for and efficiency of this intervention is then examined pursuant to two objectives ensuring the availability of adequate and affordable housing to low income households and encouraging homeownership present approaches are found wanting in both cases the paper concludes with suggested modifications that appear to be reasonable on budgeting efficiency and political grounds

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

the 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

uncertain parameter values and the choice among policy options abstract we use a tax policy example to show how debate on the value of an elasticity parameter translates into a debate about policy choices to construct this example suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain for each reform we show how the size of this gain depends upon the elasticity of saving with respect to the net rate of return moreover within quite narrow and reasonable bounds for the elasticity parameter we find regions in which each of three different tax reforms turns out to dominate the others

how altruism can prevail in an evolutionary environment abstract we study environments in which an individual gets a higher payoff from defecting than from cooperating and where copies of an individual are more likely to appear the higher is the individual s payoff we demonstrate that even in single shot prisoner s dilemma models where cooperation benefits one s opponent at a cost to oneself evolution can sustain cooperative behavior between relatives or neighbors in addition we show that selfish individuals who conciously choose their actions may find it in their interest to be altruistic when there is some probability that their practices will be imitated both genetic and cultural inheritance appear to be blunt instruments that do not operate on individuals in isolation those who inherit a genetic tendency to cooperate are more likely than others to enjoy the benefits of cooperative siblings similarly with culturel inheritance altruism can prevail when individuals are likely to interact with others who share the same role model

rigidity of social systems the tendency for the members of a corporation or government to be resistant to change is explored in a model that encompasses two endemic features of such systems first the social system is modeled as a hierarchy and implicit within it is a selection process that determines who advances to higher levels second an agent s behavior is partially determined by imitating those who have risen in the ranks a behavioral norm of being rigid is found to be more prevalent and robust than one of being flexible a more volatile environment may also induce agents to be more resistant to change admirandi sed imitandi to be admired but not imitated st augustine

price ceilings in competitive markets with variable quality abstract this paper analyzes the impact of a price ceiling on a competitive market for a good which yields a utility bearing characteristic the household characteristic producing technology is linear firms have u shaped cost curves in quantity and in total amount of characteristic produced essentially the market is cleared by an equilibrium hedonic price the hedonic price rises in response to the excess demand gap induced by a ceiling on output price bringing the market from an unconstrained equilibrium into a constrained equilibrium a price ceiling also leads to a fall in quality a fall in consumer welfare and locally a rise in producer welfare

the dynamic efficiency cost of not taxing housing traditional welfare cost estimates of tax subsidies for owner occupied housing are less than 0 5 of gnp in the united states and canada this paper argues that these static measures understate the true cost of the tax subsidy increasing the capital income tax makes untaxed housing more valuable delivering a windfall bonus to existing homeowners at the expense of future generations this intergenerational transfer has real efficiency effects in the presence of pre existing tax distortions when housing is in fixed supply the dynamic efficiency cost of preferential tax treatment for housing is as much as 2 2 of gnp or 120 billion dollars in 1990

civil institutions and evolution concepts critique and models abstract the paper examines the relation between civil norms and evolution the survival of norms in the long run may depend on the evolutionary process and natural selection the sieve of natural selection may ensure that norms which persist must have minimal efficiency properties this paper begins with a general discussion of evolutionary processes and the survival of civil institutions it then presents an introductory account of the theory of evolutionary games it is argued that the model of evolutionary games is more suited to analyzing animal behaviour than the human one since it is the latter that is of interest to economists an attempt is made in this paper to develop some new solution concepts which are more apt for human games

tax reform and external balance abstract this paper examines the effect of a transformation from capital taxation to consumption in an open economy with the residential capital tax rate being endogenous an increase in the domestic consumption tax rate decreases the interest rate increases capital accumulation and increases the domestic country s net foreign asset holdings and trade surplus with the territorial capital tax rate being endogenous an increase in the domestic consumption tax rate may either increase or decrease the domestic country s interest rate net foreign asset holdings and trade surplus depending on the interest elasticity of capital demand

housing price functions and ownership capitalization rates abstract in this paper we examine the problem of consistently estimating capitalization rates and hedonic housing prices we specify a hedonic pricing model for housing that combines owner occupied and rental unit samples in a manner yielding hedonic prices not subject to selection bias and capitalization rates which vary with the age and family income of the residents we use the 1982 annual housing survey ahs for metropolitan philadelphia to obtain parameter estimates for this model our findings indicate that selectivity bias is present in price functions utilizing only owner occupied or rental unit samples our results further indicate that the mean annual capitalization rate for owner occupied units is approximately 10 however the capitalization rate is non monotonically related to both age of the head and family income