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

the new great debate about unionism and collective bargaining in u s state and local governments recently some state and local governments in the united states have sharply reduced or eliminated public employee unionism and bargaining rights in the belief that their fiscal adversity stems mainly from overcompensation of public employees caused by collective bargaining the authors examine public private sector pay and benefit relationships the effects of unions on public employee pay the effectiveness of employment dispute resolution procedures and the ability of public sector labor and management to combat fiscal adversity they provide new evidence showing that on balance public employees are undercompensated relative to their private sector counterparts the effects of unions on compensation are smaller in the public than in the private sector and public sector dispute resolution procedures and joint labor management initiatives to reform work function reasonably well

inflation corporate income taxation and the demand for capital assets the demand for capital is not systematically related to either the level or the rate of change of effective income tax rates on corporate capital assets rising inflation during the last 10 years has raised the user cost of capital for durable assets relative to that for short lived assets even though this inflation has raised effective tax rates for more durable capital less than for short lived assets even with replacement cost depreciation allowances the level and pattern of investment incentives probably will continue to vary with the inflation rate

accelerated depreciation and the efficacy of temporary fiscal policy implications for an inflationary economy abstract the effect on investment of temporary tax rate changes depends on the age profile of depreciation deductions if the depreciation allowance schedule is accelerated then temporary cuts in the corporate tax rate could reduce investment inflation causes the age profile of real depreciation deductions to become accelerated and thus could make temporary tax cuts have a contractionary effect on investment two currently proposed reforms are shown to exacerbate this effect under each of these proposals temporary tax cuts are likely to have opposite effects on investment in short lived and long lived capital thereby complicating the conduct of countercyclical fiscal policy

institutions and the convergence hypothesis the cross national evidence delong and others have shown that cross country convergence in per capita incomes is limited to samples of currently industrialized nations or universal literacy nations in particular income dispersion has failed to decline in groups of ex ante rich nations this study finds strong convergence in per capita incomes among nations with institutions namely secure property rights conducive to saving investing and producing incomes are shown to converge even within ex ante rich samples when measures of institutional quality are held constant

why don t poor countries catch up a cross national test of an institutional explanation early neoclassical analyses predicted that poor countries would grow faster than wealthy countries because of technological advances and diminishing returns to capital in the latter the reverse has occurred poor countries are falling back rather than catching up we suggest here that deficient institutions underlie this divergence employing various indicators of institutional quality including the rule of law the pervasiveness of corruption and the risk of expropriation and contract repudiation we show that the ability of poor countries to catch up is determined in large part by the institutional environment in which economic activity in these countries takes place jel o00 o10

the effects of property rights on economic performance this study augments the neoclassical growth model proposed by mankiw et al 1992 to analyse the effects of the property rights protection on the levels of economic performance measured by per capita gross domestic product gdp across countries the augmented model predicts that 1 the accumulation of physical and human capital and therefore the level of per capita gdp in a country is positively related with the degree of property rights protection as well as with the saving rates and 2 the effects of the saving rates on the level of per capita gdp in a country are positively related with the degree of property rights protection empirical evidence shows that the predictions of the augmented model are consistent with the variations in the levels of per capita gdp across countries

taxes inflation and the durability of capital the choice of capital durability is affected by the rate of inflation because nominal depreciation deductions are based on historical cost rather than replacement cost this paper analyzes a model with competitive firms and demonstrates that an increase in the rate of inflation will lead to an increase in the durability of capital if the ratio of the nominal discount rate to the rate of depreciation exceeds a critical value however if this ratio is less than the crucial value this effect is reversed the effect of costs of adjustments on the crucial value is analyzed

regional pay the public private sector pay differential abstractregional pay the public private sector pay differential regional studies this paper extends the debate on making public sector wages more responsive to those in the private sector the way in which the public private sector wage differential is calculated dramatically alters conclusions and far from there being substantial regional disparity in wages offered to public sector workers any differences are predominantly concentrated in london and the south east where public sector workers are significantly disadvantaged relative to private sector workers this has implications for staff recruitment and retention such findings question the need for regional market facing pay but highlight the necessity to revisit the london weighting offered to public sector workers

confronting the environmental kuznets curve t he environmental kuznets curve posits an inverted u relationship between pollution and economic development kuznets s name was apparently attached to the curve by grossman and krueger 1993 who noted its resemblance to kuznets s inverted u relationship between income inequality and development in the first stage of industrialization pollution in the environmental kuznets curve world grows rapidly because people are more interested in jobs and income than clean air and water communities are too poor to pay for abatement and environmental regulation is correspondingly weak the balance shifts as income rises leading industrial sectors become cleaner people value the environment more highly and regulatory institutions become more effective along the curve pollution levels off in the middle income range and then falls toward pre industrial levels in wealthy societies the environmental kuznets curve model has elicited conflicting reactions from researchers and policymakers applied econometricians have generally accepted the basic tenets of the model and focused on measuring its parameters their regressions typically fitted to cross sectional observations across countries or regions suggest that air and water pollution increase with development until per capita income reaches a range of 5000 to 8000 when income rises beyond that level pollution starts to decline as shown in the conventional ekc line in figure 1 in developing countries some policymakers have interpreted such results as conveying a message about priorities grow first then clean up numerous critics have challenged the conventional environmental kuznets curve both as a representation of what actually happens in the development process and as a policy prescription some pessimistic critics argue that crosssectional evidence for the environmental kuznets curve is nothing more than a

the structure and incentive effects of corporate tax liabilities this paper describes situations in which tax liabilities assume the form of a negative position in a call option this structure motivates an examination of the investment decisions of taxed corporations in the presence of risk it is shown that the structure of the tax liability creates an incentive to underinvest in more risky projects and an incentive for conglomerate merger these effects are then evaluated in the presence of conflicts of interest between stockholders and bondholders and under alternative assumptions about the tax code and about the timing of investment and financing decisions this paper makes an observation regarding the functional form assumed by the tax liabilities of corporations with potentially redundant deductions and evaluates its consequences for investment incentives interest and other deductions against taxable income can be taken for the most part only to the extent of that income in a single period model this gives the net tax liability a familiar structure it can be viewed as a call option where the exercise price on the call is the allowable deductions the tax paying entity holds a positive position in the assets which generate the taxable income and a negative position in a call option on those assets the analogy between options and the structure of tax liabilities calls attention to some interesting incentive effects concerning risk using their model of option valuation black and scholes 5 showed that the value of an option is increasing in the variance of the asset it is written on other authors have generalized this result and studied its implications for corporate financing see jagannathan 16 jensen and meckling 17 and green 15 the importance of the risk attributes of the underlying asset in option valuation suggests that taxation may have important incentive consequences for investment decisions involving risk it has been recognized in the public economics literature for some time that asymmetries in the tax schedule can affect risk taking behavior early papers by mossin 20 and stiglitz 25 studied individual portfolio decisions over a riskless and a risky asset our analysis differs from these in a number of respects the most important of these is our use of market valuation rather than expected utility in the decision maker s objective function this is surely a more appropri

public service employment and the public private wage differential in british regions successive forms of regional policy in the uk have sought to support the maintenance and creation of public sector employment opportunities in relatively disadvantaged regions nationally negotiated public sector pay rates mean that the private public pay gap is likely to be wider in lower demand regions this will be reinforced by the relative absence of private sector employment crowding out in such higher unemployment regions this paper investigates the association between private and public sector service employment using panel data for british regions and estimates regional public private wage differentials using british household panel survey data for 1991 to 1996 across britain private sector employment growth is weakly positively associated with higher public service employment growth but the association is stronger in scotland and the north of england the pattern of regional wage differentials found is consistent with lower crowding out in higher unemployment regions this suggests that reg

tax neutrality and the social discount rate a suggested framework abstract there are few problems in tax analysis which have generated as much study and discussion among economist as the question of how to formulate neutral tax incentives for investment yet no consensus has been reached concerning the proper approach to take when adjusting taxes comparing the two fundamental notions of neutrality found in the literature referred to here as present value rules and internal rate of return rules we argue that to the extent that neutrality is a useful concept only the latter of these approaches makes sense in terms of achievement of production efficiency

relocation of public sector workers evaluating a place based policy this paper investigates the local labor market impact of a uk relocation initiative the 2004 lyons review the review resulted in the dispersal of about 25 000 civil service jobs out of london and the south east towards other uk destinations this study aims to detect whether the inflow of public sector jobs crowded out private sector activity or stimulated the local provision of jobs in the private sector focusing on short term effects i find that the relocation initiative raised private sector employment in receiving areas and changed the sectoral distribution of local employment towards services i also find evidence of displacement i e a tendency for private businesses to locate closer to a relocation site moving out of areas at 1 2km and 2 3km distances into areas at 0 1km distance these agglomeration effects appear highly localized the largest policy impact is found in areas that received the relocated jobs with spillover effects reducing sharply over distance

property and income taxation in an economy with an austrian sector on industries producing austrian assets in particular the forest industry has been a topic of great interest and much misunderstanding for many years in a series of articles appearing recently in the literature bentick 1980 1982 klemperer 1982 mills 1981 1982 and wildasin 1982 a general consensus was reached that a land value tax insofar as this tax is levied on market value is nonneutral neutrality however unless defined with respect to a complete tax system may not be an appropriate goal of tax policy when tax distortions already exist in an economy the imposition of a nonneutral tax in any given sector may prove more efficient than the imposition of a neutral tax the purpose of this paper is to illustrate this point in a simple and explicit model of an economy with an austrian sector and an ordinary sector in this model efficiency is easily defined and taxinduced distortion easily measured contrary to the findings of bentick 1980 a land value tax does appear appropriate for the austrian sector when the ordinary sector is subject to an income tax a land value tax at a properly chosen rate allows the economy to achieve production efficiency bentick s proposed neutral tax a realized income tax with immediate expensing is inconsistent with production efficiency we outline our paper as follows in section ii we present our basic model efficiency is defined and the case where the austrian sector

the location of overseas production and production for export by u s multinational firms abstract the location of overseas manufacturing production is influenced by common factors that operate in all industries notably proximity to the united states and to other markets within industries opposites attract low wage and low capital intensity parents choose high wage countries production for export is attracted by large internal markets in host countries economies of scale in production presumably make large markets economical as export bases another factor is high trade propensities of host countries u s firms tend to export from high wage countries but labor cost is not in general a major influence on the location of export production

production efficiency and the design of temporary investment incentives the attainment of production efficiency requires that tax incentives equalize pretax rates of return on different assets at each point in time to achieve this objective the conventional theory of investment tax credits itcs prescribes significantly lower credit rates on shorter lived assets however this result is valid only for permanent itcs we show that the credit rates for temporary itcs should be much closer to uniform than the conventional theory prescribes this result is robust to the presence and specification of adjustment costs

investment climate and fdi in developing countries firm level evidence this paper uses firm level data across 77 developing countries to show that constraints related to investment climate hamper foreign direct investment fdi the main results show that physical infrastructure problems financing constraints and institutional problems discourage fdi these results are robust to an alternative definition of fdi introduction of additional explanatory variables and some breakdown analyses different sectors of activity and comparison between sub saharan africa and other developing countries the results also highlight that exporter foreign firms are more constrained in their activity by physical infrastructure hurdles and the lack of skilled workers compared to firms supplying the domestic market

why do smaller firms pay less this paper uses data from the national longitudinal survey of young men and the current population survey for 1983 to examine the relationships among wages firm size and plant size we reach three key findings first plant size has little independent effect on wages once we have controlled for firm size for firms with fewer than 1 000 employees second we find evidence of sorting on observed and unobserved ability characteristics across firm sizes better educated and more stable workers are in larger firms third results from a first difference estimator indicate that about 60 percent of the wage size effect is due to unobserved heterogeneity when all firms are considered and about 100 percent when firms with 25 or more employees are considered

the institutional framework and economic development the compound growth rates of per capita output and farrell type efficiency measures for 115 market economies over the period 1960 80 were compared with measures of political civil and economic liberty it was found that the institutional framework has significant and large effects on the efficiency and growth rate of economies politically open societies which subscribe to the rule of law to private property and to the market allocation of resources grow at three times the rate and are two and one half times as efficient as societies in which these freedoms are abridged

dynamic effects of permanent and temporary tax policies in a q model of investment abstract this paper incorporates the tax policy analysis of hall and jorgenson into a dynamic optimizing model with adjustment costs to develop a q model of investment this framework is particularly useful for analyzing the dynamic effects on investment of permanent and temporary changes in tax policy it is shown that contrary to the conventional intertemporal substitution argument a temporary investment tax credit need not be nore expansionary than a permanent investment tax credit the role of depreciation allowances in determining the dynamic response of investment to temporary changes in the tax rate is also investigated

a reexamination of the federal private wage differential in the united states the federal private wage differential is reexamined with recent data using specifications similar to those used in three previous studies i find that the federal private wage differential has narrowed since the 1974 79 period analyzed in those studies in addition i discover that wage differentials based on specifications used in the literature are biased upward because the previous studies did not control for detailed occupational and locational characteristics of workers corrected point estimates of the wage gap are much smaller than previous estimates in the literature differences in the gap across demographic groups occupations and locations are also discussed

a stock flow consistent macro econometric model of the uk economy part i this paper is the second of a series of two which describe the estimation and simulation of a stock flow consistent macro economic model of the uk economy the first part davis 1987 surveyed the theoretical literature on stock adjustment dynamics criticized existing uk forecasting models for omitting many potential stock flow interactions and gave an outline of the model which is constructed here the estimation and simulation results suggest that variables encapsulating such stock flow effects are frequently significant in the estimation of key equations and that their inclusion may make a sizeable difference to the simulation properties of a model

spatially rebalancing the uk economy towards a new policy model martin r pike a tyler p and gardiner b spatially rebalancing the uk economy towards a new policy model regional studies the current uk government has announced its intention to rebalance the national economy spatially to create a northern powerhouse to rival that in london and the south east this imbalance is in fact a longstanding problem that 90 years of regional policy has not resolved this paper argues that the entrenched nature of the uk s spatial imbalance derives in part from the centralized nature of the national political economy and that only a bold and radical change in that political economy based on a devolution and decentralization of or economic financial and political power is called for

tax neutrality in the presence of adjustment costs it is well known that expensing of capital expenditures will lead to tax neutrality with respect to investment provided that interest payments are not tax deductible brown 1948 however if interest payments are deductible then allowing firms to deduct economic depreciation will lead to a neutral tax system samuelson 1964 these neutrality results have been derived in models without costs of adjustment see also hall and jorgenson 1971 stiglitz 1973 and king 1974 however recent research in investment theory has emphasized the role of costs of adjustment lucas 1967 gould 1968 hayashi 1982 abel 1982a b using a separable adjustment cost technology in which adjustment costs depend only on the rate of investment abel 1982a b has shown that the two neutrality propositions above continue to hold however using a general nonseparable adjustment cost technology hartman 1978 showed that only one of the two neutrality propositions remains valid in the presence of adjustment costs expensing continues to lead to neutrality if interest payments are not deductible but hartman finds that economic depreciation and interest deductibility do not lead to neutrality in the presence of adjustment costs in this paper we analyze investment behavior in an adjustment cost framework and construct a neutral tax system with interest deductibility the neutral tax system allows for economic depreciation but requires some adjustments to taxable income which recognize the fact that capital can implicitly produce net revenue by reducing adjustment costs hartman found economic depreciation to be nonneutral because he did not make this necessary adjustment to taxable income and because he calculated economic depreciation incorrectly using the price of uninstalled capital rather than the value of newly installed capital in the presence of costs of adjustment true economic depreciation is calculated using the shadow price of installed capital rather than the observable market price of new uninstalled capital it has been shown by hayashi 1982 that under appropriate linear homogeneity and price taking assumptions the shadow price of capital can

the volatility of offshore investment abstract offshore investment often bears the image of footloose industry with little to hinder movement to the most favorable environment an effort to describe this particular segment of u s direct investment supports some elements of the colorful anecdotal portrait painted by critics in the third world semiconductor assemblers are moderately sensitive to wage rates and adjust quite rapidly in maintaining what they perceive as a diversified portfolio of risky ldc production locations on the other hand this reaction is small enough to guarantee that modest increases in wages will not send all investment fleeing from an export platform new methods of modelling direct foreign investment when risk diversification is important in explaining industrial location decisions are introduced in this paper

international investment location decisions abstract in international location tournaments governments compete for foreign investment with tax and other short run incentives such tournaments can be won if agglomeration economies are sufficiently powerful to overcome investors desire to spread investments as a hedge against risk we focus on manufacturing investments by u s multinationals in the 1980s our econometric results suggest that agglomeration economies are indeed the dominant influence on investor calculations paradoxically short run incentives have limited apparent impact on location choice we conclude that high cost tournament play is unnecessary for countries with good infrastructure development specialized input suppliers and an expanding domestic market

foreign direct investment and local linkages this paper analyses the pattern of local linkages in foreign direct investment fdi treating such local linkages as an investment in local relationships using taiwanese manufacturing firms investing abroad as the sample for our case study we find that the local linkage intensity of a foreign subsidiary differs by fdi location entry mode firm size and the nature of the production network in which an investor is embedded more local linkages will be pursued by an investor if it is in search of distinctive and inimitable resources as opposed to homogeneous and reproducible resources investment in local linkages always begins with the linkage that carries the lowest risk to the original business network for manufacturing firms the sequence of such linkages is workers components and parts subcontracting and finally sources of r d

inflation and the tax treatment of firm behavior in the past decade economists have be gun to realize that inflation even when fully anticipated constitutes a great deal more than a tax on money balances the primary reason for inflation s wider impact is the existence of a tax system designed with stable prices in mind this paper offers a brief summary of the effects of inflation on the tax treatment of the firm focusing on four important decisions the firm makes the scale of investment the method of finance the durability of assets used in production and the holding period of these assets there are a number of interesting and related issues which cannot be covered in a paper of this length as i will be considering inflation that is both uniform and fully anticipated questions concerning the behavior of the firm in response to uncertainty about inflation or to a concommitant change in relative prices will not arise this abstract was borrowed from another version of this item

multinational enterprises and wage costs vertical fdi revisited abstract this study explores how wage costs for high skilled and less skilled labor in host countries affect the level of affiliate activities conducted by foreign mnes we find support for vertical fdi in the sense that more fdi is conducted in countries where less skilled labor is relatively cheap in addition we find that skilled wage cost premia also affect fdi activities previously associated with horizontal fdi i e local affiliate sales consequently the potential effects of relative wage costs on mne activities are large rough calculations suggest that more than 20 percent of us affiliate sales in 1998 can be attributed to skilled wage cost premia

a note on the efficient design of investment incentives in a recent article in this journal robin boadway has argued that the appropriate requirement for neutrality is that the present value of the returns from an initial investment of 1pound using the social discount rate should be equal for all projects undertaken at the margin we have few qualifications about this approach itself although discounting with the social rate of time preference stp may be inappropriate in the current context however we would take issue with two aspects of boadwav s application of his view of neutrality the first problem concerns the appropriate definition of the constraint on firm leverage which would arise from the existence of limited liability we believe boadway s assumption to be inappropriate and find that its replacement with what we argue to be the correct one leads to important revisions in evaluating the neutrality of different incentives another point we would make is that boadway s results depend crucially on the absence of both personal taxes and inflation we argue below that once realistic account has been taken of these important elements of the problem general results about the neutrality of different incentives can no longer be derived so that while boadway s criterion may be appropriate its application promises to be very difficult this abstract was borrowed from another version of this item