Economic Effects of the 2003 Partial Integration Proposal in the United States

On January 7, 2003, President George W. Bush proposed a significant change in capital income taxation in the United States. In the context of a jobs and growth package, the President proposed to reduce substantially the double taxation of corporate-source income by eliminating investor-level taxes on dividends paid from earnings on which corporate tax had been paid. In addition, the Presidents proposal would have reduced the tax on retained earnings by allowing a basis adjustment for accumulated previously taxed retained earnings. Taken together, these proposals would have moved the U.S. income tax much closer to an integrated tax system along the lines outlined by the Treasury Department in President George H.W. Bushs administration a decade earlier.Putting together the impacts of the Presidents proposal on economic activity through greater capital accumulation and improved calculation, I estimate that the proposal, if it had been enacted in its original form, would yield a permanent increase of 0.48 percent in the U.S. economys potential output. This estimated gain does not include any gains made possible by improved corporate financial policy.At the time of the integration proposal, the author was Chairman of the Council of Economic Advisers.     

Company Tax Structure and Company Tax Incidence

This paper reviews conflicting theories of company tax incidence impliedby the alternative new and traditional views of dividends andexamines their contrasting policy implications. Whereas, under thetraditional view, closer integration of the corporate and personalincome tax systems is suggested, an alternative policy orientationemphasizing the non-distorting features of the classical system is impliedby the new view. Even if the traditional view is accepted, theimplications for design and reform of the company tax vary widely underalternative specifications of domestic and international tax policy objectives. Schedular alternatives to global income taxation are alsoconsidered.     

A New Approach to Group Structure, Burden Sharing, and the Equilibrium Provision of Public Goods

In the received model of the voluntary provision of a pure public good, the usual practice is to proceed from assumptions about the group characteristics to inferences about an implied outcome. The approach advocated in this paper reverses the traditional direction. Assuming a Nash equilibrium, we ask how to characterize the diverse set of group characteristics which will support it. Approaching the problem from this angle we define three crucial characteristics of a group-equilibrium: consumer's free rider inducing supply, zero contribution-inducing wealth and voluntary surplus tribute which is the amount by which a person's actual income exceeds his/her zero-contribution inducing wealth. Defining these indicators we show how they form the foundation of a complete mapping between the distribution of individual characteristics of a group, and equilibrium public good supply. Certain questions such as the interaction between size of the group and heterogeneity of incomes and tastes not yet adequately addressed are shown to yield easily to this approach.     

Decomposition of Japanese Yen Interest Rate Data Through Local Regression

Seven different Japanese Yen interest rates recorded on a daily basisfor the period from 1986 to 1992 are simultaneously analyzed. Byintroducing a new concept of short term trend, we decomposeeach interest rate series into three components, long termtrend, short term trend and irregular. It is obtained by atwo step lowess smoothing technique. After that, amultivariate autoregressive model (MAR) is fitted to the vectorvalued time series obtained by combining those seven irregularcomponents. The decomposition and MAR model fitting were quitesatisfactory. It enables us to understand well various aspects ofinterest rate series from the trends, the MAR (2) coefficientsand its residuals. The result is compared with the decompositionthrough sabl and the advantages of our procedure will bedemonstrated in relations to other parametric model fitting likeARCH or GARCH. Based on the decomposition we can have betterdaily prediction and more stable long term forecasting.     

Information Monopoly and Commitment in Intermediary-Firm Relationships

A bank may use the private information that it acquires through monitoring to hold up borrowers. This information monopoly of the bank may inefficiently distort the borrowers investment decisions in environments where moral hazard is prevalent. The paper analyses how this problem is resolved within bank-firm relationships. In the benchmark case when the bank can contractually commit to future actions, the optimal contract turns out to be ambiguous in nature. When commitment contracts cannot be written, firms have an incentive to develop multiple banking relationships in order to decrease the inside banks bargaining power. However, with costly monitoring, this may defeat the initial purpose for contracting with a financial intermediary, namely information production. The paper argues that when contractual commitment is not feasible, bank size may serve as an alternative commitment device that prevents the bank from holding up borrowers in the future.     

Performance Evaluation and Corporate Income Taxes in a Sequential Delegation Setting

We consider a setting where a firm delegates an investment decision and, subsequently, a sales decision to a privately informed manager. For both decisions corporate income taxes have real effects. We show that compensating the manager based on pre-tax residual income can ensure after-tax NPV-maximization (goal congruence) for each decision problem in isolation. However, this metric fails if both decisions are nontrivial, since it requires asset-specific hurdle rates and hence precludes asset aggregation. After-tax residual income metrics (e.g., EVA) allow the firm to consistently apply its after-tax cost of capital as the hurdle rate to its aggregate asset base. We show that existing tax depreciation schedules may explain why firms in practice use more accelerated depreciation schedules than those suggested by previous studies. Our findings also rationalize the widespread use of dirty surplus accounting for windfall gains and losses for managerial retention purposes.     

Environmental Taxes, International Capital Mobility and Inefficient Tax Systems: Tax Burden vs. Tax Shifting

This paper deals with the so-called double dividend of an environmental tax reform. In a model with only labor and a polluting input as factors of production, we find that society faces a trade-off between internalizing environmental externalities and raising revenues in the least distortionary way. However, if capital enters the production structure, an ecological tax reform may render the tax structure more efficient from a non-environmental point of view, thereby raising not only environmental quality but also private incomes.     

Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment

As well known, companies shift income from high to low tax jurisdictions. Typically, profit shifting is achieved by direct financing structures whereby companies use debt finance in the high tax entity and equity finance in the low tax entity. However, certain tax policies can lead to indirect financing structures whereby a conduit entity provides an opportunity to achieve at least two deductions for interest expenses for an investment made in the host country. The effect of direct and indirect financing structures on real investment is compared.     

The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes

We estimate the impact of taxation on foreign direct investment (FDI) flows, using data on flows between seven countries for 1984 through 1989, and a sophisticated measure of the cost of capital. We find that the choice between domestic investment and total outward FDI is not significantly affected by taxation but that taxation does affect the location of outward FDI. These results are used to examine the impact of tax integration systems. Giving a tax credit to foreign shareholders may induce a large increase in inward FDI from exemption countries but not from partial-credit countries. For the United States, the total effect would be small.     

The impact of settlement period on sales price

This study is an empirical investigation of the impact of settlement period on sales price while controlling for marketing period and standard explanatory variables. The hypothesized positive relationship between settlement period and sales price is confirmed by the results of this study. The estimated coefficient on settlement period is 0.0008 meaning that our market, on average, exacts a premium of 0.08 percent per day of settlement period beyond a norm of 60 days. The estimated coefficient on marketing period (a control variable) is –0.0003 meaning that our market, on average, requires a discount of 0.03 percent per day of marketing period. Our findings show the relative importance of settlement period in making real estate pricing decisions.     

Financial Distress and Bank Restructuring of Small to Medium Size UK Companies

We use a unique data set to study how U.K. banks deal with financially distressed small and medium-sized companies under a contractualist bankruptcy system. Unlike in the U.S., these procedures limit the discretion of courts to strict enforcement of debt contracts, without any dilution of creditors claims. We show that lenders and borrowers select a debt structure that avoids some of the market failures often attributed to a contractualist system. Collateral and liquidation rights are highly concentrated in the hands of the main bank, giving it a dominant position in restructuring or liquidating a defaulting firm. There is little litigation, and no evidence of co-ordination failures or creditors runs. However, there is some evidence that the banks dominance makes it lazy in monitoring, relying heavily on the value of its collateral in timing the bankruptcy decision.     

Optimal Consumption Taxes and Social Security Under Tax Measurement Problems and Uncertainty

A representative individual lives for two periods; works when young and depends on savings and a government operated social security system when old—the returns on both sources of income, when old, are random. Due to administrative problems the returns to savings are observed with some measurement error. Two alternative consumption tax systems are considered; the Registered Asset Treatment (RAT) and the Non-Registered Asset Treatment (NRAT). The advantage of the RAT is that it can perform a social insurance role while the disadvantage is that it imposes measurement error risk. Correlation between the random return on saving and its measurement error can provide a risk-hedging role that can be further strengthened by the RAT version. The NRAT version neither provides social insurance nor imposes measurement error risk. Both tax systems hedge against the uncertainties in the social security system. The taxpayer engages in precautionary saving in response to future uncertainty.     

Explaining intercity home price differences

This paper develops and tests an equilibrium model seeking to explain intercity variation in owner-occupied housing prices. Empirical tests with a reduced form equation using aggregated 1980 data on 94 SMSAs suggest explanation for 84% of this intercity home price variation. Intercity housing demand, based upon homeowner quality of life equilibrium, is successfully represented by the non-monetary income determinant of climate mildness in addition to several monetary income determinants that reflect household residual after-tax real income. Intercity housing supply was found to be influenced by intercity variation in construction costs and limitations upon the available supply of undeveloped urban land.     

Tax Competition, Income Differentials and Local Public Services

This paper examines strategic tax setting between fiscal authorities in the presence of mobile workers who locate across these jurisdictions in response to differing tax structures and congestable local public amenities. We find that the nature of the tax setting outcomes depend crucially on the proximity between cities. For distant cities with the same size populations, the pressure on tax rates of a more mobile workforce depends on the whether mobile workers are net beneficiaries or net contributors. If mobile workers are either high or low income earners, cities lower tax rates. If mobile workers are middle income earners, cities raise tax rates. For close or neighbouring cities, workers locate in one of the cities and tax rates and local public amenities are dispersed.     

Parallel cartoons of fractal models of finance

Summary. Having been crafted to welcome a new scientific journal, this paper looks forward but requires no special prerequisite. The argument builds on a technical wrinkle (used earlier but explained here fully for the first time), namely, the authors grid-bound variant of Brownian motion B(t). While B(t) itself is additive, this variant is a multiplicative recursive process the author calls a cartoon. Reliance on this and related cartoons allows a new perspicuous exposition of the various fractal/multifractal models for the variation of financial prices. These illustrations do not claim to represent reality in its full detail, but suffice to imitate and bring out its principal features, namely, long tailedness, long dependence, and clustering. The goal is to convince the reader that the fractals/multifractals are not an exotic technical nightmare that could be avoided. In fact, the authors models arose successively as proper, natural, and even unavoidable generalization of the Brownian motion model of price variation. Considered within the context of those generalizations, the original Brownian comes out as very special and narrowly constricted, while the fractal/multifractal models come out as nearly as simple and parsimonious as the Brownian. The cartoons are stylized recursive variants of the authors fractal/multifractal models, which are even more versatile and realistic.This revised version was published online in January 2005 with corrections to the Cover date.     

Global Trends and Issues in Value Added Taxation

Since the late 1960s, the VAT has become one of the mainstays of the tax systems in over one hundred countries. Apparently, its revenue raising and neutrality properties make it an attractive tax in a rapidly integrating, high-tax world. Following an overview of VATs throughout the world, this article examines various VAT structure and policy issues under the following headings: tax coverage features, tax base aspects, hard-to-tax sectors, rate structure issues, and interjurisdictional coordination problems. It is shown that the normative requirements of a good VAT are often met only in the breach.     

The Impact of Taxing Unemployment Insurance Benefits on Unemployment Duration and Post-unemployment Earnings

In 1979, unemployment insurance benefits became taxableincome for recipients with income above a specified threshold.Further legislation in 1982 lowered the income threshold. Thispaper uses the Continuous Wage and Benefit History (CWBH) database to evaluate the effects of the 1982 change on the compensatedduration of unemployment and post-unemployment earnings. The1982 episode is a particularly useful natural experimentbecause the treatment group (those newly subject to benefittaxation) is the middle income category and the two controlgroups (those whose benefits were already taxed and those whosebenefits still were not taxed) are the high and low income categories.If the two control groups show similar trends in unemploymentduration (or post-unemployment earnings) and the treatment groupshows a strikingly different pattern, this is compelling evidenceof a tax effect. The empirical results suggest that taxing unemploymentbenefits reduced the affected workers' mean compensated durationby more than a week, but did not have a statistically significanteffect on their post-unemployment earnings.     

Residual Income and Value-Creation: The Missing Link

This paper extends the residual income literature to provide a framework for the use of residual income in performance measurement, applicable in value-based management. It shows that, under a simple initializing assumption, an accounting-free measure of excess value created over a multi-period interval can be written entirely in terms of (i) within-interval realized residual incomes and (ii) end-of-interval expected future residual incomes, both appropriately adjusted for the time value of money. It also shows that, when the simple initializing assumption is relaxed, excess value created can be expressed in terms of excess residual incomes, measured by comparison with expectations as at the beginning of the multiperiod interval.     

Environmental Taxes and Pre-Existing Distortions: The Normalization Trap

The double-dividend hypothesisclaims that green taxes will both improve the environment andreduce the distortions of existing taxes. According to the earlierliterature on the double dividend the tax rate for pollutinggoods should be higher than the Pigovian tax which fully internalizesthe marginal social damage from pollution, in order to obtaina second dividend. On the contrary, Bovenberg and de Mooij(1994) argue that environmental taxes typically exacerbate, ratherthan alleviate, pre-existing distortions. The optimal pollutiontax should therefore lie below the Pigovian tax. This paper pointsout that there is no real contradiction between these apparentlyopposing policy recommendations. It will be shown that the differencein the results appears because, implicitly, different definitionsof the second-best optimal pollution tax are chosen.     

Two Games of Interjurisdictional Competition When Local Governments Provide Industrial Public Goods

In this paper we investigate two different games of interjurisdictional competition when local governments provide public goods that benefit industry. Governments play a game either in tax rates on mobile industrial capital or in public expenditures. Although the literature suggests that competition in public expenditures is more competitive than in tax rates, this is not necessarily true in the case of industrial public goods. Moreover, in the presence of industrial public goods interjurisdictional competition may also lead to overprovision of public services.