the deadweight loss from non neutral capital income taxation abstract this paper develops an overlapping generations general equilibrium model that treats explicitly the role of capital goods in the production process and uses the model to measure the relative magnitudes of different distortions associated with capital income taxation across industries assets and time one of the main results is that uniform capital income taxation is almost certainly suboptimal theoritically but that optimal deviations from uniform taxation are empirically inconsequencial the paper also introduces and applies a general technique for distinguishing intergenerational transfers from efficiency gains in the analysis of the impact of policy changes on long run welfare

women s fertility market work and marital status a test of the new household economics with international data since its emergence from the pioneering efforts of becker 1960 and mincer 1962 the new household economics has inspired a wide range of theoretical and empirical models of demographic behaviour with particular emphasis on fertility female labour force participation and marriage a central principle of these models has been to assign critical roles to the values of men s and women s time in the decision making process in the present paper i adhere to that principle while seeking to contribute to the empirical literature in two important respects 1 the econometric model developed in this paper incorporates several improvements over prior models although women s fertility market work and marital status are closely interconnected their endogeneity has not been fully reflected in previous econometric work 2 in the present model all these demographic variables are endogenous and are subject to a common set of incomes and prices another distinctive feature represents an extension of the approach developed by butz and ward 1979 they used interaction termsmen s and women s earnings weighted by female labour force participation to explain variation in us birth rates here earnings are interacted with the endogenous demographic variables in all equations simulation experiments are used to gauge the total impacts of changes in men s and women s pay under alternative sets of initial conditions 2 for the first time so far as known cross national data are used in a direct test of the new household economics although the literature contains

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

modelling the joint determination of household labour supplies and commodity demands in addition to choosing the allocation of total expenditure between commodities households may also be able to make decisions over the allocation of their time between market work and leisure in both theoretical and empirical work it has often been the case that these decisions have been analysed separately in this paper we stress the theoretical attractions of considering the joint determination of the allocation of time between work and leisure and the allocation of total expenditure between commodities in a utility maximising framework using a sample of individual households we attempt to evaluate the empirical importance of the joint determination model over the separate determination of labour supplies and commodity demands our approach follows that of abbott and ashenfelter i976 phlips i978 barnett i979 deaton and muellbauer i980 and atkinson and stern i980 here we pay particular attention to the following four important aspects of household decision making over commodity demand and labour supply the first concerns the commonly assumed restriction on the household s preferences of weak separability between goods and leisure this assumption allows the estimation of commodity demand systems and engel curves that exclude wage rate variables in cross section household budget data with large variation in wage rates across the sample the invalidity of this assumption would involve a serious mis specification any correlation between the excluded wage variable and the included price income and demographic variables would lead to biased parameter estimates and hence biased estimated elasticities similarly this assumption allows the estimation of labour supply curves that exclude relative price variables and its invalidity could produce biased labour supply elasticities a second aspect of household decision making which we wish to highlight arises from the suspicion commonly alluded to in labour economics texts that primary male workers may not be free to choose their hours of work thus we estimate a matched pair of rationed and unrationed systems following the work of neary and roberts i 980 and deaton and muellbauer i 979 the separability restriction is not unrelated to this point since without it we will see that the rationed hours of work enter demand systems in a complex fashion in effect

dynamic tax incidence and intergenerationally neutral reform the paper proposes a basic definition of intergenerational neutrality in the overlapping generations model when agents have a pure life cycle motive of savings the derivation of intergenerationally neutral tax effects provides a redistribution free benchmark case that isolates the relative price effects of taxes and the deadweight losses associated with them the paper clarifies the intergenerational incidence which has to be determined simultaneously with the substitution effects of taxes on savings a tax reform example demonstrates how taxes with diverging intergenerational incidence may be combined to achieve intergenerational neutrality finally the paper extends the analysis of generational tax incidence to the case of a small open economy

assessing empirical approaches for analyzing taxes and labor supply recent surveys on the labor supply responses of men document a divergence in the estimates of substitution and income effects obtained using various estimation approaches generally studies accounting for nonlinear tax schedules in a static setting via a piecewise linear approach produce estimates that typically imply higher substitution and lower income responses than are suggested by empirical work applying other approaches this paper demonstrates that maximum likelihood estimation of a consumer choice problem with nonlinear budget sets implicitly relies on the satisfaction of inequality constraints that translate into behaviorally meaningful restrictions these constraints arise not as a consequence of economic theory but instead as a requirement to create a properly defined statistical model in the analysis of piecewise linear budget sets the implicit constraints required by maximum likelihood in estimation amount to imposition of slutsky conditions at all wage income combinations associated with kink points in the analysis of differentiable budget sets the tacit constraints invoked by maximum likelihood also involve inequality restrictions on slutsky terms the empirical work presented in this study supports the contention that these implicit constraints play a major role in explaining the discrepancies in estimates found in the literature on men s labor supply

gradual reforms of capital income taxation this paper analyzes the intertemporal allocation effects of anticipated tax rate changes reconsidering the recommendations of the meade committee in a perfect foresight general equilibrium model of economic growth it is shown that the r base or consumption tax can be more distortionary than an income tax and that a revenue neutral integration of corporate and personal taxation will lower social welfare moreover it is argued that a dividend tax dominates the r base tax because it places its distortions on the financial rather than on the real side of the economy copyright 1989 by american economic association

the effect of the investment tax credit on the value of the firm abstract a change in the tax law that increases investment incentives for new assets may result in excess returns on new investment causing firm value to increase alternatively because the investment incentives apply only to new investments the value of existing assets that compete with these investments may decline in general investment incentives have a theoretically ambiguous effect on firm value cross sectional tests examine the changes in firm value to repeated changes of the investment tax credit changes in firm value are found to be positively related to the expected receipt of investment tax credits no evidence is found to support a relationship between expected changes in the value of a firm s existing assets and changes in firm value

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

a participation model with non convex budget sets the case of the wives of the unemployed in great britain in this paper we estimate a participation model for the wives of the unemployed in great britain the aim is to bring new evidence about the importance of the disincentive effect caused by the benefit system in particular by supplementary benefit in explaning the low probability of participation associated with the wives of the unemployed the participation model takes into account the non convexities of the budget set which are due to the characteristics of supplementary benefit the utility function is assumed to be of the ces type

intergenerational aspects of public transfers borrowing and debt the paper analyzes intergeneration distributional effects of taxes transfer payments public borrowing and debt a two period life cucle model with overlapping generations is constructed the model has two specific features private wealth in both periods enter as arguments in the preference function and the individuals inelastically supply labor in both periods it turns out that some fiscal policy actions favor both of the currently lliving generations possibly at the expense of future generations while other actions generate conflicts between the currently living generations the analysis also shows that it makes considerable difference whether the burden of public spending debt and borrowing is defined in terms of wealth consumption and utility the different implications of foreign vs domestic debt are examined

on barro s theorem of debt neutrality the irrelevance of net wealth the effects of national debt on real economic activity has been a recurring topic in the literature on macroeconomic policy analysis since the time of adam smith the problem is usually stated as follows for a given level of government spending is the economy sensitive to the financing mix between tax and debt historically attention has focused on the question of whether or not individuals perceive government bonds as net wealth the link between wealth and real activity being taken as given the main point of debate is well established the issue of bonds raises private assets by the full value of the bonds the corresponding tax liabilities for interest payments and retirement of the debt extend indefinitely into the future the perception of bonds as net wealth would then appear to depend on the length of the individual s optimization horizon the most recent contribution to this debate was made by robert barro 1974 in which he argued that despite the limitation of finite lives bonds will not be regarded as net wealth in a system characterized by operative intergenerational transfers the essence of his argument is that inclusion of a bequest motive effectively converts a finite horizon into an infinite one in that paper barro acknowledged a potential limitation on his proof of the neutrality result it was only valid for bonds that are redeemed at a known point in the future this limitation was raised again in a subsequent exchange with martin feldstein in which barro 1976 agreed that for a growing economy an increase in steady state per capita debt will generate net wealth if the rate of growth is greater than the interest rate however he argued that such a steadystate growth situation would not be consistent with rational utility maximizing behavior the main theme of this paper is that the literature has focused attention on the wrong question the real effects of national debt are independent of whether or not individuals perceive the debt as net wealth the correct question is whether or not changes in the level of debt force individuals into patterns of intertemporal consumption that they are unable to neutralize by adjustments in their portfolio behavior viewing neutrality in this light leads to some reinterpretation of the conditions under which neutrality is likely to hold my analysis starts where barro and feldstein leave off within the framework of the overlapping generations model with gift and bequest motives i show that steady state equilibrium growth is consistent with a growth rate in excess of the interest rate indeed without specific knowledge of the parameters of the economy there are no a priori grounds on which to expect any particular relationship between the growth and interest rates more importantly so long as it is valid to view the aggregate economy as behaving like a composite individual changes in the steady state level of government debt are neutral regardless of which relationship prevails provided one or the other of the intergenerational transfer motives is operative i will refer to this as the extended neutrality theorem section i presents an analysis of steadystate growth with gift and bequest behavior the steady state growth path is shown to lie above the golden rule solution if the gift

capital income taxation in growing open economies abstract this paper studies how alternative capital mobility assumptions affect the incidence and efficiency of capital income taxation the study uses a two country intertemporal equilibrium model in which imperfectly elastic investment captures the notion of imperfectly mobile physical capital if home goods and foreign goods are perfect substitutes and investment is inelastic the tax effects in open and closed economies are similar only if physical capital is perfectly mobile are capital income taxes completely shifted in small open economies only then and if significant terms of trade effects are absent do open economy efficiency losses substantially exceed the closed economy losses

taxes female labour supply and household income differences between the netherlands and the federal republic of germany the article investigates the effect of taxes and social premiums on female labour supply and household income a comparison is made between labour supply and household income between the netherlands and the federal republic of germany in 1992 a discrete choice model for labour supply is used in which taxes and social premiums are implicitly incorporated as male labour supply is highly inelastic an individual male chauvinist model is used the estimated models are used to simulate the effect of the differences in the tax and social premium system on the differences in labour supply and income between both countries the results indicate that labour force participation is higher the more individualized the system the german system leads to a lower tax burden compared to the dutch system it is concluded that differences in the tax and social premium system between both countries have hardly any influence on the differences in the inequality of net household labour income there is evidence that the germ

imf conditionality threat perception and political repression a cross national analysis this article investigates the impact of international monetary fund imf conditionality on political repression conditionality refers to the conditions that borrowing countries must implement bef

the ces utility function non linear budget constraints and labour supply results on female participation and hours the most recent efforts in the study of labour supply decisions have concentrated on the estimation of explicit utility indices as a means to overcome the specification and endogeneity problems created by non linear budget constraints the presence of non convexities and the interest in making welfare comparisons between individuals are additional reasons that make the use of explicit utility functions in either direct or indirect form an essential requirement for labour supply studies it is therefore important to consider carefully the available possibilities from a utility index we want flexibility and ease of estimation the stonegeary function has proved its relative worth in consumption studies but its performance has been disappointing when leisure is incorporated into the set of commodities abbot and ashenfelter i976 found that for part of their sample estimated available time was less than hours worked and these results have pervasively reappeared in subsequent studies using this function hausman i980 has recently proposed a utility function which yields a linear hours function this is an important contribution which facilitates the task of estimation enormously this paper argues that the ces utility function despite not generating a linear hours function is also very convenient for estimation purposes in fact it is shown below that to estimate the parameters of the utility function there is no need whatsoever for any explicit hours function labour supply responses by married women have been previously estimated with british data but none of the available results has taken full account of the joint decision on participation and hours and of the non linear shape of the budget constraint that the tax system generates layard et al i980 consider the joint decision in their estimation procedure but ignore the tax system greenhalgh i980 takes into account the non linearity of the budget constraint but estimates labour supply responses by a method which treats participation and hours of work as separate and independent decisions in the present paper on the other hand using an explicit utility index we propose an estimation method which takes into account both the tax system and the joint hours participation decision

taxing capital in a large open economy abstract this paper analyzes capital taxation in a dynamic optimizing equilibrium model of a large open economy it is shown that the existence of current account imbalances may yield surprising results for example if a country has a current account deficit the tendency of an increased tax on investment to lower wages is dampened if the deficit is sufficiently large an increased investment tax may actually increase both wages and welfare in the long run a country with a current account surplus may find that temporary investment incentives improve its current account in all but the short run

married women s hours and participation revisited elasticity estimates are presented for participation and hours of work for a sample of married women in the social change and economic life initiative sceli 1986 data set a logit model is used to estimate the participation function and a tobit model is employed to estimate an hours of work equation the results are in agreement with the evidence available for the uk the own wage hours of work elasticity is found to be relatively elastic with negligible effects detected for non labour income and the husband or spouse s wage the effects on participation of an unemployed husband or spouse were examined and found to have a strong negative effect

the econometrics of piecewise linear budget constraints a survey and exposition of the maximum likelihood method in this article maximum likelihood techniques for estimating consumer demand functions when budget constraints are piecewise linear are exposited and surveyed consumer demand functions are formally derived under such constraints and it is shown that the functions are themselves nonlinear as a result the econometric problems in estimating such functions are exposited and the importance of the stochastic specification is stressed in particular the specification of both unobserved heterogeneity of preferences and measurement error econometric issues in estimation and testing are discussed and the results of the studies that have been conducted to date are surveyed

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

the effects of imf programs in the third world debate and evidence from latin america abstract this article reviews the debate about the effects of imf sponsored stabilization programs in the third world after examining recent studies by fund economists results of a new study on a latin american country set are presented in this research imf programs are associated with insignificant changes in the current account significant improvements in the overall balance of payments increases in inflation mixed effects on growth and a strong and consistent pattern of reduction in labor share of income the latter result is incorporated into a distribution oriented critique of fund policy

reconsidering the economics of demand analysis with kinked budget constraints this paper has two objectives first we identify a problem with the ability of the discrete continuous choice framework and conditional demand functions to fully describe consumer preferences in the presence of kinked budget constraints second we propose and illustrate an alternative preference based method for estimating consumer responses to price changes under these conditions this framework recognizes that commitments to commodities such as pools or outdoor landscaping influence how water consumption responds to price changes as part of the long run consumption adjustments with microdata on household choices this approach could be used to design increasing block rate structures that recognize the differences in water consumption responses with these commitments

economic stabilization conditionality and political stability imf conditionality is seldom so important that it dominates all other considerations for political stability imf stabilization programs often shift benefits from one group to another they expose elites to charges of selling the sovereignty of their countries the imposition of imf conditions particularly subsidy cuts may lead to sharp outbreaks of civil disorder nonetheless the imf provides resources that make adjustment easier and thus may lessen the chances of political instability for a country imf programs are seldom implemented fully as negotiated and the penalties for partial compliance are not great debtor countries have more flexibility in imposing austerity measures and the economic constraints are less binding than often assumed the very availability of alternatives to imf programs results in internal divisions because some favor debt repudiation and others oppose it groups now contend over solutions to the debt problems of their countries

why are more women working in britain in britain female labor force participation rose steadily from the second world war to 1977 to explain this we estimate a pooled time series cross section supply function for single year age groups of women the life cycle pattern is explained quite well by the presence of children at a second stage we try to explain the rising level of the cohort intercepts estimated at the first stage real wage growth may be an explanatory factor as cross section evidence suggests it should be finally we point to the 15 rise in the relative pay of women in the mid 1970s caused by the equal pay act this did not cause the expected decline in the relative demand for female employees

the econometrics of nonlinear budget sets traditional empirical analysis of consumer demand has usually made the assumption of linear budget sets that is the consumer is assumed to purchase any desired quantity at a constant price subject to a budget constraint the major exception to this framework is the analysis of demand when some goods are rationed 2 in the rationed case the price is constant up to a quantity limit in contrast to the rationed case here i consider the situation where the price varies with the amount of the good purchased empirical situations with nonconstant prices come readily to mind and of course they have received much recent attention from theorists since mirrlees 44 paper on optimal nonlinear taxation the following examples are meant to give a partial listing of cases when nonlinear budget sets occur i electricity prices many electric utilities engage in declining block pricing that is the marginal price of successive kwh s of electricity decrease at a given number of points determined by total demand thus the budget set is piecewise linear houthakker 36 was the first to propose an approach to this problem taylor 51 analyzes the problem at length and hausman kinnucin and mcfadden 31 use an instrumental variables estimator to provide consistent estimates of the demand function

measuring welfare changes when quantity is constrained in this article we propose a simple and efficient method of estimating welfare measures in an n equation consumer demand system when some quantities are constrained or rationed we also estimate the variance of these measures the method is evaluated using monte carlo studies of two demand systems we also use the method to analyze the welfare costs of constraining the hours worked by married women in canada the gauss code for implementing the method is included

labour market experience in female wage equations does the experience measure matter many studies have found estimated female wage and labour supply equations to be sensitive in some way to labour market experience although different studies yield different results and it seems there is still more to know about this key human capital variable this is especially so when separate information on individual womes s labour market experience is not available making it necessary to construct some measure of experience from other information this paper takes four such measures of labour market experience and investigates the effects of these upon the coefficients from an estimated wage equation as heckman s 1976 1979 two stage probit selection model is still widely used to test and correct for censoring bias the effect of different measures of experience upon the results from this procedure is also investigated

income taxes and the labor supply of married women in quebec in recent years a substantial literature has developed for the most part in the u s concerning labor supply behavior of particular interest is the labor force behavior of married women since this raises a set of interesting theoretical and empirical issues despite the extensive research in both the u s and the u k there has been relatively little empirical investigation in canada this is surprising given the increasing importance of women in the canadian labor force and the concern expressed by policy makers 2 this study presents some empirical results on the labor supply behavior of married women in quebec using data on 2439 husband wife families for 1979 in estimating labor supply responses of married women we take into account the effect of income taxes and address the question of tax perception 3 the impact of taxes on labor supply is particularly important in the quebec context since quebec marginal tax rates are the highest in canada and it appears in north america the study also compares the results of alternative methods of estimation married women s labor supply functions are estimated using standard ols techniques a procedure suggested by heckman 12 13 which corrects for selectivity bias a two stage gls technique which also corrects for selectivity bias and a gls method applied to a system of equations the conceptual framework of labor supply determination is briefly reviewed in section ii section iii describes the data the empirical specification and the estimation strategy

political repression and economic doctrines the case of argentina recent studies linking political repression to free market economic policy have failed to explain fully the relationship to uncover important theoretical linkages this article will examine the principles behind policy and argue that increases in governments use of force are principally a function of 1 shifts in economic stabilization doctrines from structuralist to orthodox which are prompted by severe economic crises and 2 strengthened alliances between ruling elites and international financial institutions partial to orthodox deflationary strategies multiple regression analysis on time series data from argentina over a 23 year period provides a strong statistical confirmation for these suppositions even when holding constant for particular regime types a historical narrative has been provided to buttress these results by establishing the precise timing and sequence of events that precipitated the use of coercion by state leaders

capital income taxation in a growing open economy abstract the paper studies the dynamic macroeconomic effects of various forms of capital income taxation in a model of a small open economy with perfect mobility of financial capital and intertemporal optimization on the part of households and firms one of the noteworthy results is that the introduction of a low corporate income tax will not affect consumption in the long run but will simply lead to a replacement of shares by foreign financial assets in household portfolios it is also found that an anticipated investment tax credit can have and that an anticipated dividend tax will have contractionary effects on investment before they are introduced moreover it is shown that while an unanticipated dividend tax is neutral with respect to investment it will have real effects on consumption and net foreign assets in a growing economy

birth death and taxes abstract this paper analyzes the effects of lump sum tax policy in an overlapping generations model in which consumers have uncertain longevity it extends previous analyses by considering the case in which private insurance arrangements are actuarially unfair in addition it considers the polar case of actuarially fair insurance and the polar case of no insurance a general condition for debt neutrality is derived this condition depends explicitly on the degree of actuarial unfairness in insurance and on the extent to which parents care about the utility of their children

a model of female labour supply in the presence of hours restrictions abstract we develop a discrete choice model of female labour supply in finland using a data set constructed by merging the 1980 labour force survey and housing and population census this contains observations on the perceived incidence of constraints in the labour market and allows us to identify the effects of such constraints on observed labour supply approximately one in five women appears to be seriously constrained in her choice of hours of work our estimated model implies that the response of labour supply to variation in tax and wage rates is rather small

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

government debt in an overlapping generations model with bequests and gifts in 1974 robert barro argued that if individuals in successive generations were linked by bequests changes in the stock of government debt or in social security programs would have no effect on the steady state capital stock barro assumed that individuals held static expectations and that the size of the population was constant martin feldstein 1974 1977 had concluded that social security would reduce the capital labor ratio in models that did not admit a bequest motive and in his 1976 comment on barro argued that the introduction of government debt or social security into a perfect foresight dynamic growth model with bequests would still reduce the capital labor ratio barro replied that feldstein s criticisms were invalid if the steady state capital labor ratio were smaller than the golden rule level but would be correct if the opposite were true barro did suggest however that the latter possibility with overaccumulation of capital might be ruled out in his model as it was in miguel sidrauski 1967 but he was unable to demonstrate that the required behavior would be consistent with utility maximization by finite lived individuals 1976 p 345 although recent work by willem buiter 1979 jeffrey carmichael 1979 1982 truman bewley 1981 a b and others has helped to elucidate the nature of overlapping generations models with bequests and gifts and the issues in the barro feldstein debate they remain far from clear the purpose of this paper is to shed a little more light on the subject in what follows i contend that some of the authors cited above either have specified the individual s optimization problem in an asymmetric way or have failed to impose necessary conditions for a sensible optimization problem or both there is a natural specification of the barro model 1 that emphasizes the similarity between this model and optimal growth models see for example david cass 1965 peter diamond 1973 here in steady state equilibrium the aftertax interest rate r must equal the rate at which individuals discount the utility of their heirs p r p has become known as the modified golden rule and a meaningful individual optimization problem requires that p exceed n the natural growth rate of the economy my results confirm barro s hunch about his model in a barro model r must exceed n much of the barro feldstein 1976 interchange which assumed that r could have any relation to n is wrong headed barro and feldstein reach different conclusions about the effects of government debt and social security because they assume different individual utility functions also my results contrast sharply with those of buiter and carmichael for example carmichael concluded that with intergenerational transfers from parents to children bequests r must exceed n but with transfers in the opposite direction n must exceed r 1982 pp 205 06 indeed i believe that the buiter carmichael representation of the barro model is logically faulty see section ii in section i i outline an overlapping generations model with gifts and bequests and derive its steady state properties in the next section i discuss the shortand long run effects of introducing government debt into the model and contrast my results with those

love thy children abstract this paper proves that barro s 1974 debt neutrality proposition whose relevance hinges in an economy with bequest motives on bequests being operative in the economy without public debt is not applicable to a wide class of overlapping generation economies those with a weak bequest motive in particular it is shown that the bequest motive is always too weak and public debt therefore non neutral when non physical assets have a well defined function reducing oversavings in the corresponding economy without bequest motive i e when the non altruistic economy is dynamically inefficient

taxation and savings a neoclassical perspective this paper discusses recent neoclassical analyses of taxation and savings contrary to the popular view that fiscal policy has highly ambiguous impacts on savings neoclassical models admit a host of policies with clear and potentially quite powerful affects on the accumulation of wealth the paper considers four fundamental types of fiscal policies and compares their quantitative affect on savings the essential elements of these policies involve inter and intragenerational redistribution marginal and intra marginal taxation and the level of government consumption conventional accounting measures of taxes spending and deficits provide at best little guide to changes in underlying fiscal instruments and at worst precisely opposite indicators of the direction of such changes indeed the continued use of and concern with conventional fiscal measures is symptomatic of wide spread fiscal illusion these points are developed within the context of certainty models the paper also considers the role of fiscal policy in both mitigating and exacerbating economic risks facing the private sector since precaution is a major motivation for saving governments can greatly influence wealth accumulation either by using fiscal policy to pool private risks or by making fiscal policy itself highly uncertain this abstract was borrowed from another version of this item