the effective tax rate and the pretax rate of return abstract this paper presents new estimates of the taxes paid on nonfinancial corporate capital on the pretax rate of return to capital and on the effective tax rate the basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century an explicit analysis indicates that after adjusting for different aspects of the business cycle pretax profitability was between one and 1 5 percentage points lower in the 1970s than in the 1960s the rate of profitability in the 1960s was also about one half of a percentage point greater than the profitability in the 7 years of the 1950s after the korean war changes in productivity growth in inflation in relative unit labor costs and in other variables are all associated with changes in profitability none of these variables however can explain the differences in profitability between the 1950s 1960s and 1970s looking at broad decade averages the effective tax rate and the pretax rate of return move in opposite directions lower pretax profits occuring when the tax rate is high there thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates

inefficient credit booms this paper studies the welfare properties of competitive equilibria in an economy with financial frictions hit by aggregate shocks in particular it shows that competitive financial contracts can result in excessive borrowing ex ante and excessive volatility ex post even though from a first best perspective the equilibrium always displays under borrowing from a second best point of view excessive borrowing can arise the inefficiency is due to the combination of limited commitment in financial contracts and the fact that asset prices are determined in a spot market this generates a pecuniary externality that is not internalized in private contracts the model provides a framework to evaluate preventive policies which can be used during a credit boom to reduce the expected costs of a financial crisis copyright 2008 wiley blackwell

the relation between tax rates and pre tax returns direct evidence from the 1981 and 1986 tax rate reductions abstract this study documents one effect of the theory of implicit taxes providing evidence that a change in the tax rate results in a change in pre tax returns yield spreads of pairs of treasury bills maturing in the last week of december and the first week of january are examined year ends not affected by rate changes show a significant positive yield spread between these pairs of bills reflecting an upward sloping yield curve however for year ends coinciding with the tax rate reductions of 1981 and 1986 there is a significant negative yield spread between these pairs of bills

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

the incidence and allocation effects of a tax on corporate distributions abstract to study the effects of double taxation first at the corporation level then at the shareholder level this paper analyzes a model with a tax on all corporate distributions to equity owners and no other taxes contrary to the common view the tax is shown to have no subtitution effect and in particular no effect on the corporate choice between debt and equity via retained earnings finance the analysis opens to question certain arguments commonly used to support integration of corporation and individual income taxes via dividend relief

excessive volatility in capital flows a pigouvian taxation approach this paper analyzes prudential controls on capital flows to emerging markets from the perspective of a pigouvian tax that addresses externalities associated with the deleveraging cycle it presents a model in which restricting capital inflows during boom times reduces the potential outflows during busts this mitigates the feedback effects of deleveraging episodes when tightening financial constraints on borrowers and collapsing prices for collateral assets have mutually reinforcing effects in our model capital controls reduce macroeconomic volatility and increase standard measures of consumer welfare

debt and taxes in the theory of public finance if a specified amount of government spending must be financed how should that finance be divided between taxes and government borrowing in the case of a temporary increase in government spending it has been argued that debt finance is optimal because the small increments in all future tax rates to finance interest payments involves a smaller excess burden than the single large tax rate increase that would be required to avoid an initial increase in the national debt this argument ignores the excess burden of debt finance that results if the initial capital stock is smaller than optimal e g because of taxes or capital income the first section of the present paper shows how the debt finance advantage of a small increase in tax rates can be explicitly balanced against the disadvantage of the excess burden that arises from additional debt the analysis shows that with plausible parameter values the excess burden of debt finance is likely to outweigh the advantage of avoiding a large single tax change and therefore that financing a temporary increase in government spending by an immediate tax increase is likely to be preferable to debt financing the second section examines the appropriate response to a permanent increase in government spending and shows that such spending cannot be financed by a permanent increase in government debt moreover whenever the golden rule level of capital intensity is an optimality condition independent of the level of government spending any increase in government spending should be matched by an equal increase in tax revenue this abstract was borrowed from another version of this item

regional policy incentives and the relative costs of capital in assisted areas in britain and germany bennett r j and krebs g 1989 regional policy incentives and the relative costs of capital in assisted areas in britain and germany reg studies 23 201 218 regional policies of various forms have been employed in most european countries both as means of stimulating investment in problem regions and as an attempt to limit the pace of industrial contraction this paper evaluates the resulting incentives to capital in britain and germany and compares the stimulus provided by the different packages of incentives over time and between the two countries it is demonstrated that pre tax real rates of return and fiscal wedges between pre and post tax real rates of return are affected very markedly by the incentive packages in britain fiscal wedges of 3 derive from regional policy up to the late 1970s but decline to 1 6 in the mid 1980s in germany fiscal wedges increase from 3 to 3 5 over the same period on a standardized basis of comparison thus declines in the significance of regional po

why does household investment lead business investment over the business cycle household investment leads nonresidential business fixed investment over the u s business cycle because real business cycle theory has not been able to account for this observation it represents a potent challenge to the view that transitory productivity disturbances are the main source of aggregate fluctuations this paper reconciles rbc theory with the investment dynamics by extending the traditional home production model to make household capital complementary to business capital and labor in market production empirical evidence suggesting that household capital is a complementary input in market production is also presented

an empirical analysis of intergovernmental tax interaction the case of business income taxes in canada both federal and provincial governments in canada levy corporate taxes on busi nesses in their jurisdictions which potentially gives rise to horizontal and vertical tax exter nalities within the federation using a simple model of interdependent tax choices we estimate tax setting functions for the federal government ontario quebec and an aggregate of the remaining eight provinces we find evidence of significant vertical and horizontal tax inter actions provincial tax rates respond negatively to the federal tax rate while at least some provinces increase their tax rates in response to increases in the tax rates of other provinces

is the united states really underinvesting in agricultural research that the level of public investment in u s agricultural research is too low is widely accepted this paper argues that there are two important limitations to the evidence assembled in support of the underinvestment hypothesis a many authors have compared the social rate of return to public investments with the private rate of return to private investments b costs of public expenditures on agricultural research have been underestimated by a failure to account for the marginal excess burden of the tax collection system taking these two factors into account evidence in support of the underinvestment hypothesis is weakened considerably

the impact of the corporate income tax evidence from state organizational form data abstract by taxing the income of corporate firms at a different rate than non corporate firms taxes can play an important role in a firm s choice of organizational form the sensitivity of the organizational form decision to tax rates provides a key indicator of the distortion created by the corporate income tax this paper uses new cross sectional data on organizational form choices across states compiled in the census of retail trade to estimate this sensitivity the results document a significant impact of the relative taxation of corporate to personal income on the share of real economic activity that is done by corporations and that the impact is many times larger than has been found in the previous empirical literature based on time series data the results show little impact however on the actual operations of firms such as their labor intensity wages and the like they do indicate that firms are able to exploit the progressivity of the corporate income tax system by dividing into numerous firms

does the tax system favor investment in high tech or smoke stack industries in this paper we examine whether differential use of depreciable assets gives rise to differential tax treatment of high technology industries relative to other industries we calculate the total effective tax rate on a marginal investment in each of 34 assets and weighting by the use of these assets we calculate total effective tax rates for 73 industries we find considerable variation within the high tech sector and within the more traditional sector but for the case of a taxable firm with a given debt equity ratio we do not find any systematic differences between overall rates in the two sectors

measuring the energy savings from home improvement investments evidence from monthly billing data an important factor driving energy policy over the past two decades has been the energy paradox the perception that consumers apply unreasonably high hurdle rates to energy saving investments we explore one possible explanation for this apparent puzzle that realized returns fall short of the returns promised by engineers and product manufacturers using a unique data set we find that the realized return to attic insulation is statistically significant but the median estimate 9 7 is almost identical to a discount rate for this investment implied by a capm analysis we conclude that the case for the energy paradox is weaker than has previously been believed

imperfect annuity markets unintended bequests and the optimal age structure of social security benefits the social security program now provides a constant real benefit throughout each retirees lifetime this paper examines whether total welfare would rise if benefits were lower in early retirement years when most individuals have some saving with which to finance consumption and higher in later years when the uncertainty of survival and the absence of actuarially fair private annuities makes the availability of social security benefits more important the analysis shows that there is a potentially important difference between the structure of benefits that would be preferred by the current population of workers and retirees and the structure of benefits that would maximize the steady state level of social welfare this difference reflects the role of unintended bequests the provision of higher benefits to older retirees reduces individually optimal savings and therefore the level of unintended bequests while those bequests may have no value to the retirees they are clearly of value to the young workers who will receive those bequests more generally the system of level benefits raises the steady state level of the capital stock and of total real income the present paper provides an explicit analysis of a case in which the current workers want benefits to increase with age while the social security system that maximizes steady state welfare would provide higher benefits to young retirees than to the very old this abstract was borrowed from another version of this item

household production and the excess sensitivity of consumption to current income empirical research on the permanent income hypothesis pih has found that consumption growth is excessively sensitive to predictable changes in income this finding is interpreted as strong evidence against the pih we propose an explanation for apparent excess sensitivity that is based on a quantitative equilibrium model of household production in which permanent income consumers respond to shifts in sectoral wages and prices by substituting work effort and consumption across home and market sectors although the pih is true this mechanism generates apparent excess sensitivity because market consumption responds to predictable income growth

do taxes affect corporate debt policy evidence from us corporate tax return data abstract this paper uses u s statistics of income soi corporate income tax returns balance sheet data on all corporations to estimate the effects of changes in corporate tax rates on the debt policies of firms of different sizes small firms face very different tax rates than larger firms and relative tax rates have also changed frequently over time providing substantial information to identify tax effects the results suggest that taxes have had a strong and statistically significant effect on debt levels for example cutting the corporate tax rate by ten percentage points e g from 46 to 36 holding personal tax rates fixed is forecast to reduce the fraction of assets financed with debt by around 3 5 since small firms normally rely much more heavily on debt finance yet face much lower tax incentives to use debt the estimated effect of taxes would be strongly biased downwards without controls for firm size

new evidence that taxes affect the valuation of dividends this paper uses british data to examine the effects of dividend taxes on investors relative valuation of dividends and capital gains british data offer great potential to illuminate the dividends and taxes question since there have been two radical changes and several minor reforms in british dividend tax policy during the last 30 years studying the relationship between dividends and stock price movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors valuation of dividends using daily data on a small sample of firms and monthly data on a much broader sample we find clear evidence that taxes affect the equilibrium relationship between dividend yields and market returns these findings suggest that taxes are important determinants of security market equilibrium and deepen the puzzle of why firms pay dividends financial economists have long been puzzled by corporate dividend behavior many individual investors should value a dollar of corporate dividends less than a dollar of corporate retentions because the former gives rise to greater tax liabilities corporations however face equal costs of paying out dividends and retaining earnings miller and modigliani 31 demonstrated that in the absence of taxes dividend policy should have no effect on share valuation if dividends are tax penalized however a value maximizing firm should pay no dividends widespread dividend payments to taxable investors are therefore surprising in 1981 dividend tax revenues in the united states were estimated to exceed 20 billion dollars indeed some have interpreted the large volume of dividends paid as evidence against the rational behavior postulates typically used by economists the dividend question has stimulated a large theoretical and empirical literature concerned with the qluestion of investors valuation of dividends in particular the question of how taxes affect the market valuation of dividends has generated considerable controversy numerous studies including auerbach 2 litzenberger and ramaswamy 24 26 morgan 34 and rosenberg and marathe

the method of endogenous gridpoints with occasionally binding constraints among endogenous variables we show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently we present the method for a consumer problem with occasionally binding collateral constraints and non separable utility in durable and non durable consumption this problem allows for a joint analysis of durable and non durable consumption in models with uninsurable income risk which is important to understand patterns of consumption saving and collateralized debt we illustrate the algorithm and its efficiency by calibrating the model to us data

a normative analysis of public capital a normative analysis of short term public capital investment is carried out using cost benefit analysis this cost benefit approach explicitly incorporates the durability of capital into the computation and thus include an aspect of public capital omitted from previous studies which focus on productivity estimation methods used else where have been improved by properly handling several concerns that have been raised in addition this behavioural model yields many structural equations suitable for estimation which results in highly efficient parameter estimates although a small elasticity is found for public capital the benefit is greater than the cost

a macroeconomic model with a financial sector this paper studies a macroeconomic model in which financial experts borrow from less productive agents we pursue four sets of results i the economy is prone to instability and occasionally enters volatile episodes as volatility spikes agents precautionary motive increases depressing prices even further log linear approximations fail to capture these non linear effects that can cause economies to be significantly depressed for long periods of time ii endogenous risk during volatile episodes increases asset price correlations iii financial experts impose a negative externality on each other and on the labor sector by not maintaining adequate capital cushion and funding structure iv while risk sharing within the financial sector through securitization and derivatives contracts reduces many inefficiencies it can also amlify systemic risks

discrimination and growth the distribution across skills matters abstract this paper examines the impact of differences in the degree of discrimination across skill levels in a model of endogenous growth the impact of labor market discrimination on human capital formation and hence the rate of per capita growth depends on how wage differentials at low levels of skills compare to differentials at high levels of skills from a policy perspective the analysis suggests that it is an eliminating discrimination at high skill levels relative to low skill levels that enhances the rate of growth

quantitative implications of a debt deflation theory of sudden stops and asset prices abstract this paper shows that the quantitative predictions of an equilibrium asset pricing model with financial frictions are consistent with key features of the sudden stop phenomenon foreign traders incur costs in trading assets with domestic agents and a collateral constraint limits external debt to a fraction of the market value of domestic equity holdings when this constraint does not bind standard productivity shocks cause typical real business cycle effects when it binds the same shocks cause strikingly different effects depending on the leverage ratio and asset market liquidity with high leverage and a liquid market the shocks force fire sales of assets and fisher s debt deflation mechanism amplifies the responses of asset prices consumption and the current account precautionary saving makes these sudden stops infrequent in the long run

managing credit booms and busts a pigouvian taxation approach we study a dynamic model in which the interaction between debt ac cumulation and asset prices magni es credit booms and busts we nd that borrowers do not internalize these feedback eects and therefore suf fer from excessively large booms and busts in both credit ows and asset prices we show that a pigouvian tax on borrowing may induce borrowers to internalize these externalities and increase welfare we calibrate the model by reference to i the us small and medium sized enterprise sector and ii the household sector and nd the optimal tax to be countercycli cal in both cases dropping to zero in busts and rising to approximately half a percentage point of the amount of debt outstanding during booms

the effect of large government deficits on interest rates and equity returns with the current economic expansion in the united states now beginning its third year the persistence of federal government budget deficits on a historically unprecedented scale has clearly become the chief distinguishing characteristic of this business cycle both economically and politically the budget for the 1978 fiscal year submitted to congress by president reagan acknowledges that after a small improvement in 1984 the 1985 deficit will exceed even the record 208 billion mark posted in the immediate post recession environment of 1983 more important the president s new budget indi cates that even with a strong economy and even after 50 billion of proposed spending cuts the 1985 deficit will show no improvement over 1984

taxes organizational form and the deadweight loss of the corporate income tax abstract by changing the relative gain to incorporation corporate taxation can play an important role in a firm s choice of organizational form general equilibrium models have shown that substantial shifting of organizational form in response to tax rates implies a large deadweight loss of taxation this paper estimates the impact of taxes on organizational form using data from 1900 1939 the results indicate that the effect of taxes is significant but small a corporate rate increase of 0 10 raises the non corporate share of capital 0 002 0 03 the implied deadweight loss of the corporate income tax is around 5 10 of revenue

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

fiscal policies capital formation and capitalism abstract this lecture examines the effect of tax policy and social security retirement benefits on capital accumulation and economic welfare the paper begins by examining how capital income taxes reduce the real return to savers and then discusses the welfare loss of capital income taxation relative to the alternatives of taxing consumption and labor income the analysis shows that capital income taxes impose a very substantial deadweight loss even if they do not alter private saving the first section of the paper also discusses the theory and empirical literature on the effect of capital income taxes on national saving the second part of the lecture deals with social security retirement benefits in 1994 the aged members of the u s population will receive cash and medical benefits that cost the government 530 billion or 16 000 per person over age 65 the likely impact of these benefits on private saving and the empirical evidence on this subject are then reviewed the second part of the paper concludes by discussing the welfare loss of unfunded social security benefits and the possibilities for alternative arrangements a final section discusses the implications of international capital flows for this analysis as capital flows become more important particularly in europe the response of government policy may be to compete for foreign capital inflows and to tax domestic savers more heavily this would lead to a smaller total volume of capital the sharp decline in the net national saving rate from more than 8 percent of gdp in the united states in the 1970s to only 4 5 percent in the 1980s and from more than 14 percent of gdp in europe in the 1970s to 9 9 percent in the 1980s may not only create lower real incomes and slower growth but may weaken capitalism itself in the united states a decade of slow growth has increased protectionist tendencies in international trade and led to a new interest in industrial policies that expand the role of government in guiding the direction of technology and of private investment in these ways the government policies that discourage saving might make the schumpeterian vision of a shift from private capitalism to a government dominated economy more likely

intertemporal optimizing models of trade and current account balance a survey abstract this study surveys the intertemporal optimizing models of trade and current account balance that were developed calibrated and empirically tested since they came into vogue in the 1980s the implications of these models often differ from those of static and dynamic conventional non optimizing models the literature on optimizing models has not only grown reasonably fast but has also witnessed significant advances in methodology and these models have culminated into a distinct strand of new open economy macroeconomics the studies conducted until the late 1980s have used deterministic perfect foresight models while several studies conducted since the 1990s relax the perfect foresight and certainty equivalence assumptions and develop stochastic dynamic general equilibrium models to account for uncertainty confronting the optimizing agents the future research needs to explore the possibility of tracing any preferred specification of household preferences model the effect of time varying discount factor on household utility function and intertemporal budget constraint examine the role of costs in international trade place a parallel emphasis on the empirical verifications of theoretical propositions examine the relative performance of optimizing vis a vis non optimizing models and rationalize the extreme propositions of perfect and imperfect capital mobility in the wake of moderately open capital accounts

tax distortions to the choice of organizational form income from corporate and noncorporate firms is treated very differently under the tax law in theory given existing tax law the noncorporate sector should consist of very profitable firms owned by low tax bracket investors and firms with tax losses owned by high tax bracket investors but the degree to which firms change their form of organization in response to taxes and the resulting excess burden depends as well on nontax factors given the role of taxes we estimate what size the nontax advantage to incorporating must take in each industry so that the forecasted choices for organizational form aggregated over investors in different tax brackets are consistent with the aggregate evidence while the estimated nontax costs are large in some industries noncorporate activity tends to be concentrated where the costs are small leading to little excess burden from the tax distortion to organizational form

pecuniary externalities in economies with financial frictions this article characterizes the efficiency properties of competitive economies with financial constraints in which phenomena such as fire sales and financial amplification may arise we show that financial constraints lead to two distinct types of pecuniary externalities distributive externalities that arise from incomplete insurance markets and collateral externalities that arise from price dependent financial constraints for both types of externalities we identify three sufficient statistics that determine optimal taxes on financing and investment decisions to implement constrained efficient allocations we also show that fire sales and financial amplification are neither necessary nor sufficient to generate inefficient pecuniary externalities we demonstrate how to employ our framework in a number of applications whereas collateral externalities generally lead to over borrowing the distortions from distributive externalities may easily flip sign leading to either under or over borrowing both types of externalities may lead to under or over investment

the ineffectiveness of effective tax rates on business investment a critique of feldstein s fisher schultz lecture abstract in his fisher schultz lecture martin feldstein 1982 examined the effects of non neutral tax rules on business investment by estimating three econometric models and he concluded that the rising rate of inflation has because of the structure of existing u s tax rules substantially discouraged investment in the past 15 years in a detailed examination of feldstein s effective tax rate model and a less extensive review of his other formulations neoclassical and return over cost we advance a number of important and independent criticisms and find that these three models fail to support feldstein s conclusion that taxes have exerted a significantly depressing effect on net investment during the recent inflation episode

monetary policy as financial stability regulation this paper develops a model that speaks to the goals and methods of financialstability policies there are three main points first from a normative perspective the model defines the fundamental market failure to be addressed namely that unregulated private money creation can lead to an externality in which intermediaries issue too much short term debt and leave the system excessively vulnerable to costly financial crises second it shows how in a simple economy where commercial banks are the only lenders conventional monetary policy tools such as open market operations can be used to regulate this externality while in more advanced economies it may be helpful to supplement monetary policy with other measures third from a positive perspective the model provides an account of how monetary policy can influence bank lending and real activity even in a world where prices adjust frictionlessly and there are other transactions media besides bank created money that are outside the control of the central bank

marginal effective tax rates for capital in the canadian mining industry the authors model a firm that explores develops and extracts a depletable asset taking into account various features of canadian corporate and ontario and quebec mining tax law they derive the user cost of capital and effective tax rate for investments undertaken by a mining firm calculations based on 1985 tax law show that there is considerable dispersion in effective tax rates most being negative especially for processing assets the authors conclude that these taxes have been very poor collectors of mining rents compared to a neutral cash flow tax coauthors are neil bruce ken mckenzie and jack mintz

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

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

intermediate inputs and sectoral comovement in the business cycle abstract the post war us business cycle is characterized by positive comovement of employment and output across sectors it has been argued that multi sector growth models are inconsistent with this observation when changes in relative productivities are the main source of fluctuations we suggest that the input output structure of an economy in particular the pervasive use of intermediate inputs can induce positive comovement in sectoral employment and output following changes in relative productivities we calibrate a model of the us economy for the durable and nondurable goods producing sectors and show that sectoral employment and output move together if intermediate inputs are used in production the model is also consistent with the observation that the relative price of nondurable goods is procyclical

home production meets time to build an innovation in this paper is to introduce a time to build technology for the production of market capital into a model with home production our main finding is that the two anomalies that have plagued all household production models the positive correlation between business and household investment and household investment s leading business investment over the business cycle are resolved when time to build is added

the productivity slowdown and the savings shortfall a challenge to the permanent income hypothesis i introduction the permanent income hypothesis has been extensively tested over the years most of these tests reject the permanent income hypothesis at conventional significance levels but the implied deviations are small in economic terms in this paper i argue that the savings shortfall that followed the post 1973 productivity slowdown constitutes a large deviation from the permanent income hypothesis according to the permanent income hypothesis current consumption depends upon preferences interest rates and expected future income in the united states the productivity growth rate sharply declined after 1973 and economic agents forecasted that the lower growth rate would persist the permanent income hypothesis generally predicts that a productivity slowdown by lowering future expected income will stimulate saving the slower growth rate reduces the ratio of permanent income to current income and thereby reduces the ratio of consumption to current income unless the intertemporal elasticity of substitution is high however the u s national saving rate instead fell to a postwar low after the productivity slowdown the permanent income hypothesis therefore appears to be inconsistent with recent economic experience carroll and summers 1991 327 328 briefly noted that these events pose a challenge to the permanent income hypothesis in this paper i extend their analysis along four dimensions first i calculate the savings response predicted by the permanent income hypothesis in an economy with declining returns to capital abandoning their assumption of a fixed rate of return second i consider the case in which consumers only gradually recognize the extent and duration of the slowdown third i examine published forecasts to demonstrate that the slowdown caused a fall in expected not merely realized growth rates which is necessary for the predicted savings increase fourth i consider the effects of other variables on saving during this period the paper is organized as follows in section ii i examine the permanent income hypothesis s prediction of the savings response to a productivity slowdown by solving a linearized infinite horizon specification of the permanent income hypothesis in a closed economy with concave production technology unless the intertemporal elasticity of substitution is high the permanent income hypothesis predicts rapid capital accumulation in response to the slowdown in section iii i document the post 1973 decline in productivity growth the downward revision in economic forecasts and the decline in national saving and capital accumulation i argue that other recent economic events cannot explain the saving decline and discuss the implications of these events for the permanent income hypothesis i briefly conclude in section iv ii effects of a productivity slowdown under the permanent income hypothesis in this section i show that the permanent income hypothesis predicts that a productivity slowdown increases saving unless the intertemporal elasticity of substitution is high specification of the permanent income hypothesis i use the model of ramsey 1928 and blanchard and fischer 1989 38 47 there is one good which can be consumed or costlessly transformed into capital labor supply is exogenous and factors are paid their marginal products the economy is closed relaxing this assumption increases the predicted savings effects of a slowdown the production function for gross output y is cobb douglas mathematical expression omitted where k is the capital stock z is the level of productivity l is labor supply and alpha is a constant between zero and one i refer to lz as the amount of effective labor gross output grows at rate 2 d y sub t dt y sub t alpha g sub t alpha n sub t 1 alpha d k sub t dt k sub t where g

the inefficiency of the stock market equilibrium this paper establishes that when there is not a complete set of markets but more than one commodity the stock market equilibrium will not in general be a constrained pareto optimum the economy will lack both the property of exchange and production efficiency necessary conditions which must be satisfied if the economy is to be a constrained pareto optimum for all technologies are derived if all individuals have identical homothetic indifference maps then either there must be unitary price elasticities so there is no effective risk or all individuals must have the same degree of risk aversion so there is no trade on the stock market

oligopoly structure and the incidence of cigarette excise taxes abstract a model of oligopoly price behavior and tax incidence for the u s cigarette industry for the period 1955 1990 is presented a cost function is estimated and shows manufacture to be subject to increasing returns to scale the mean price elasticity of demand is 0 71 the model indicates that competition among manufacturers has been decreasing since 1980 a simulation shows that an increase in the federal excise tax causes a greater increase in price and a greater decrease in consumption than does the same increase in the average of state and local tax rates

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

how much do taxes discourage incorporation the double taxation of corporate income should discourage firms from incorporating we investigate the extent to which the aggregate allocation of assets and taxable income in the united states between corporate and noncorporate firms responds to the size of this tax distortion during the period 1959 1986 in theory profitable firms should shift out of the corporate sector when the tax distortion is large and conversely for firms with tax losses our empirical results provide strong support for these forecasts and imply that the resulting excess burden equals 16 percent of business tax revenue one of the most basic distortions created by the double taxation of corporate income in the united states is the disincentive to incorporate even in most countries with integrated or partially integrated tax systems there are differential taxes across organizational forms however obvious this distortion may be most articles investigating the distortions created by the corporate tax have taken as exogenous a firm s choice whether or not to incorporate assuming for example that some industries are inherently corporate while others are inherently noncorporate a variety of nontax factors described below can certainly influence a firm s choice of organizational form causing some to favor incorporating and others not but are these nontax factors so dominant that taxes do not in practice influence a firm s choice of organizational form as gravelle and kotlikoff 1989 1993 emphasize tax induced changes in firms choices of organizational form in principle can create large excess burdens the size of these excess burdens in practice depends on the extent to which firms respond to these tax incentives in this article we calculate how the tax distortion discouraging firms from incorporating has varied over time then estimate the extent to which the allocation of assets and taxable income between corporate and noncorporate

the effects of tax based saving incentives on government revenue and national saving this paper shows that previous analyses of ira type plans that seek to encourage household saving have miscalculated their effect on tax revenue and therefore on national saving by ignoring their favorable impact on corporate tax payments recognizing the important effects of ira plans on corporate tax revenue changes previous conclusions about the revenue loss in a fundamental way the revenue loss associated with iras either is much smaller than has generally been estimated or is actually a revenue gain