Tax reform: Chasing the elusive dream

The paper provides a bird's-eye view of the long and arduous task of reforming the federal individual income tax. As a starting point for reviewing the major reforms, the authors evaluate Secretary Simon's criteria that underlie his contention that the tax system was badly in need of a thorough overhaul. Principles that should guide tax reforms are spelled out. Conflicts that arise with the application of these principles are highlighted. An examination of reform efforts in light of the principles and criteria set in the Treasury Department's Blue Prints for Tax Reform forms the basis for evaluating reforms enacted over the period 1978–2001. The review suggests that we are partway towards achieving the tax man's dream of equity, efficiency, and simplicity.The task of comprehensive reform is monumental in its dimension and far reaching in itspotential impact on our economic well-being.[William E. Simon, 1977, p. 11]     

Problemen van planning op middellange termijn,gezien uit het gezichtspunt van het bedrijfsleven

Voordracht gehouden op 7 november 1964 in het kader van een door de Nederlandse Economische Hoogeschool te Rotterdam georganiseerde post-doctorale leergang over het onderwerp Problemen met betrekking tot de planning op middellange termijn in Europa.     

William E. Simon's contribution to tax policy

This paper analyzes the role of William E. Simon in shaping tax policy during his tenure as Treasury Secretary from 1974 to 1977. Simon believed in supply-side economics. Therefore, the tax policy changes that occurred during his time as Secretary involved reductions in tax rates as well as simplification of rules. A far-reaching effect of the 1975 Tax Act was the introduction of the Earned Income Tax Credit, which retains popular support today. Although these changes did not immediately increase growth and curb inflation, Simon's attempts to reduce marginal tax rates in the 1970s resulted in two decades of legislation to reduce the influence of government on the economy, which resulted in budget surpluses in the 1990s.He was an extraordinarily effective Treasury Secretary in a time of very difficult economic and political transition.[Alan Greenspan, Tribute to William E. Simon, p. 22]     

Causes and Consequences of Bias in the Consumer Price Index as a Measure of the Cost of Living

The accurate measure of prices is fundamental to almost every important issue in economics, from measuring economic progress to the conduct of monetary policy to the indexation of private contracts and public programs and tax rules. This paper reviews the causes of bias in the United States Consumer Price Index (CPI), updates the estimate of such bias (now roughly 0.8 percent per annum) following several improvements by the Bureau of Labor Statistics (BLS), notes the likely far larger substitution bias than previously estimated and calls for a series of priority improvements. Particular attention is called to the over 40 basis point slower growth of the BLS C-CPI-U compared to the CPI-U, more than double the early 1990s estimates, which highlights the importance of moving to a formula such as the chained Tornqvist C-CPI that corrects for traditional substitution bias. The implications for mismeasuring the growth of real wages, real median income, and real returns to stocks and bonds are developed, as are the budgetary implications of the overindexing of spending and tax brackets resulting from the overstatement of changes in the cost of living.Presidential Address presented at the Fifty-Eighth International Conference, October 7-10, 2004, Chicago, Illinois. I would like to thank Leilei Xu for valuable research assistance.     

Over inkomenspolitiek

Summary Incomes policy is defined as that part of government activities which is directly and wittingly engaged in the formation and the distribution of incomes. The results of such a policy are limited by market forces, but it is surely possible for the government to influence the distribution of earning capacities, the market system and the formation of incomes.The aims of incomes policy are twofold. Firstly, to achieve economic equilibrium,i.e., full employment, internal and external monetary equilibrium. Secondly, a more reasonable income distribution, which may be translated as: more equality on the condition that the national product (productive strains and savings) is not reduced too severely.Because other instruments are insufficient, incomes policy is indispensable to restrict inflationary pressures. If a more equal distribution is thought to be desirable, too, this kind of policy is necessary, because in peacetime automatic distributive changes are only very small.Incomes policy may be devided into three parts. Firstly (and most radically), the redistribution of earning factors and capacities, especially capital, market power and education. Secondly, measures with respect to factor payments, of which wages policy is an important part. Guidelines have proved not to be sufficient. Thirdly, income transfers, a typically welfare-state instrument of only limited importance.On these subjects a number of rather detailed proposals are made. It is stressed, however, that the definite choice of measures and priorities is a political one.Openbare les uitgesproken ter gelegenheid van de aanvaarding van ambt van lector in de economic aan de Rijksuniversiteit to Groningen op dinsdag 19 maart 1968.     

An Empirical Study on Taiwan's Tax Policy: 1966–1988

If government financing policy aims at reducing the distortionary cost of taxation over time as Barro's tax smoothing hypothesis suggested, then the government tends to run a "surplus" whenever the growth rate of its expenditure is expected to increase or the growth rate of aggregate income is expected to decline. We examine whether Taiwan's tax policy was consistent with this prediction of the hypothesis for the period between 1966 and 1988. Our formal tests and informal evaluations accord well with such prediction. One implication is that if Taiwan's "six year national development plan" results in a permanent increase in government spending, then the government will raise taxes to finance the increased spending.     

EXPLAINING THE GROWTH OF GOVERNMENT SPENDING IN SOUTH AFRICA

What determines government spending in South Africa? The paper estimates the determinants of real per capita government spending in the Republic of South Africa using annual data for the period 1960‐2007, a tumultuous period during which South Africa experienced a variety of internally imposed changes (e.g. the abolition of apartheid, changes in political institutions) and externally generated shocks (e.g. war, oil shocks). Using multivariate cointegration techniques, we find that per capita government spending, per capita income, the tax share and the wage rate are cointegrated, a result that supports the notion that government spending is associated not only with per capita income and the true cost of government service provision as given by the wage rate but also with the fiscal illusion caused by budget deficits. We also find evidence that per capita government spending was positively affected by external shocks. These external shocks seem to play a significant role in explaining the dynamics of government spending growth.     

Expenditure and deficit policy: An analysis of the William E. Simon's rules

In a speech before the Mont Pelerin Society, William E. Simon recommended that the U.S. government adopt five rules to achieve stability and economic growth. Two of these rules deal with the budget posture. The rules were based upon Simon's belief that excessive government spending and recurring federal budget deficits significantly contributed to the economic instabilities of the 1970s and 1980s, namely, high inflation, high unemployment, and decreasing rates of production and private capital accumulation. This paper seeks to explore the extent to which fiscal action in these two decades had departed from Simon's recommendations and presents evidence on the link between federal budget deficits and economic growth.The proposals to limit spending and balance the budget are sometimes discussed as alternatives, but in my mind, they are not.William E. Simon. Speech before the Mont Pelerin Society. Hoover Institution, 1980, p. 30.     

Will Social Welfare Expenditures Survive Tax Competition?

Increasing economic openness creates demands for social welfareprogrammes designed to cushion the impact of economic changes,but may also encourage governments to reduce tax rates to attractmobile economic resources. Competitive tax reductions couldthen prevent governments from being able to finance significantwelfare spending. Alternatively, economic globalization mightimprove the ability of governments to afford social welfareprogrammes—and several considerations point in this direction.First, taxes on internationally mobile activity represent onlysmall fractions of total revenue collections; personal incometaxes, value-added taxes, and social insurance contributionsfinance most social welfare spending. Second, internationalcompetition need not reduce taxes, and indeed, over the past25 years, corporate tax collections have remained high as fractionsof GDP and total taxes. Third, the vitality of a country's economylargely determines its level of social spending. To the extentthat incomes rise as a result, greater economic openness shouldstrengthen provision of social welfare. Footnotes ¹ E-mail address: jrhines{at}umich.edu     

The excess burden of the tax and social premium system for Dutch married women

Summary The excess burden of a tax is the diminution of utility above that which would have occurred had the tax been collected as a lump sum. Computing the excess burden for the 1983 and 1985 Dutch tax and social premium system enables a partial welfare evaluation of the recent changes in the system, the so-called Tweeverdienersmaatregelen. Based on the equivalent and compensating variation, the excess burden as a percentage of the taxes and social premiums for the 1983 and 1985 system are valued at 27010 and 84010, and 37010 and 58010 respectively. This result indicates that, welfare-theoretically, the old system seems preferable to the new one.The author wishes to thank Hans Doodeman, Paul Renaud and Jacques Siegers for their critical remarks on an earlier version of this article.     

Antwoord Aan Prof. Dr. A. Heertje En Drs. D. Furth

Summary The endogeneous duopoly solution as put forward in the author's paper A Dynamic Duopoly Model (De Economist, 1970, pp. 458–490) is not refuted by the objections raised in the preceding article. The contention that the analysis is based on a reaction pattern in the sense of Launhardt neglects the interdepedence between induced and autonomous price changes as formulated in the price reaction functions. The equilibrium prices in a Launhardt model differ from the endogeneously determined equilibrium prices derived in the author's paper. Since the price reaction coefficients are reconsidered in each period by the duopolists, the dynamic process generates these coefficients endogeneously.     

Target zones and exchange rate management: A stability analysis of the European Monetary System

Since the creation of the EMS in 1979 and the Louvre Accord in 1987, economists and policy makers have debated whether exchange rate management can actually secure better economic performance. This paper supplies some empirical evidence to help answer that question in the context of an environment free of unanticipated shocks. Our results identify the important design characteristics of a target zone or EMS type system focusing on the width of the bands, the length of time between realignments, and the choice of exchange rate parity. Secondly we examine the popular conservation of variance theory: that reducing exchange rate instability will just cause greater instability in the underlying monetary controls. Finally we produce evidence to support the claim that the method of exchange rate management is important because gross or persistent misalignments cause large welfare losses whereas moderate misalignments would impose only small costs. Work on the EMS relative robustness to shocks is under way.     

Tax Level and Tax Internalization Effects on Union Wage Bargaining

High taxes and generous social benefits are often blamed for causing unemployment. The conventional view is that if taxes on labour are (too) high, jobs will be lost and that generous social benefits will exert an upward pressure on unions' wage claims. In the case where unions co-ordinate their wage bargaining strategy, this need not be the case. A simple model is used to illustrate the effects of the tax rate level and tax internalization on unions' wage bargaining strategy. A high marginal tax rate along with endogeneity of the average tax rate shifts the union's trade-off between wages and employment in favour of the latter. These shifts may have contributed to the success of the so-called polder model or tulip model of the Netherlands.     

Betting on the EMS

Two speculative strategies within the European Monetary System are empirically evaluated. The potential profitability of speculating on a currency's devaluation at a realignment crucially depends on being able to predict timing and magnitude of the parity change. Such opportunity has been eliminated from the system since 1983. For the reverse strategy of borrowing low, investing high, the evidence since 1983 suggests significant profitable opportunities for the weaker EMS countries — Belgium, Denmark, France and Italy — unconditional on knowledge of the timing of realignments. We conclude that this is due to a peso problem type of premium.     

The golden rule of accumulation and the open economy

Summary This paper examines the factors which determine the volume of consumption per capita in a small open economy in the long run. The analysis is based on a neoclassical model. It is proved that-in general — Phelps' golden rule of accumulation does not hold for an open economy. This conclusion follows from the decline in the terms of trade, which is generated in an open economy by an increase in the share of investment. The influence of labour supply and world expenditure on the consumption per capita also depend heavily on the induced change in the terms of trade. The analytical results of the model are illustrated by means of a few numerical examples.This paper is written within the framework of the research program Possibilities and Limitations of National and International Economic Policy, code K.H.T. XIII-85-44.     

Fiscal policy in monetary unions: Implications for Europe

This paper analyzes how the feasible mix of government expenditure and financing arrangements may change with the establishment of a monetary union such as that planned by members of the European Community. We find that a monetary union reduces the feasible divergence across countries in their present discounted levels of fiscal spending. Wide differences across countries in their present and future time patterns of spending are still possible, however. Examination of the empirical evidence suggests that the movement toward greater exchange rate fixity associated with the EMS and participation in quasi monetary unions havenot been accompanied by significant fiscal convergence. The experience of member states of several existing monetary unions, however, suggests that a more effective constraint to budgetary discipline arises within full-fledged unions in operation over long periods, even in the absence of binding central rules on government deficit and debt positions.     

Welfare States in Hard Times

Welfare states have been subject to a host of conflicting pressuresfrom high unemployment, rising income inequality, populationaging, tax competition, rising budget deficits and debts, slowgrowth, and fears that economic dynamism was being stifled byexcessive taxes and benefit levels. Nevertheless total spendingon welfare has edged up in many countries and cuts in ratesof benefit have generally been fairly modest. The generosityof the welfare state has an enormous influence on poverty andincome inequality and still appears to be popular in most ofEurope. Suggestions that society would benefit from reducedworking time must reckon with the fact that it is paid workwhich generates the tax revenue required to fund welfare spending. Footnotes ¹ E-mail addresses: donatella.gatti{at}cepremap.cnrs.fr; andrew.glyn{at}economics.oxford.ac.uk     

The effect of futures trading on price variability in the market for onions

Conclusion This paper is in part a study of the operation of futures markets. The empirical evidence presented suggests that futures markets do reduce price fluctuations of traded commodities. Despite these facts, Congress eliminated futures trading in onions at the request of onion growers and shippers. As is often the case with political actions, the losses from the law are spread over a large number of individuals who do not have the incentive to become informed or to lobby on the matter, while the gains accrue to a smaller group with sufficient interest to lobby. Thus, in addition to shedding some light on the operation of futures markets, this paper is also a new illustration of an old maxim in political economy. Over 200 years ago, Adam Smith [11, p. 128] noted, People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. With the government becoming a larger and larger influence on the economy, producers are finding it to be more in their interest to organize with the assistance of the legislature.     

Public Spending and the Paradox of Supermajority Rule

This article examines the paradox that a supermajority rule in a legislature promotes excessive government spending. We propose a simple conjecture: If rent‐seeking coalitions dominate legislative politics and if individual legislators' demands for rent‐seeking activities are price‐inelastic, a change of legislative rules from simple majority to a supermajority will lead to greater public spending, other things equal. Using data from U.S. state legislatures, 1970 to 2007, we find that the adoption of a supermajority rule has a robust, positive impact on various types of tax revenues and government expenditures.     

De teorie van Allais betreffende de onzekerheid en de definitie van rationeel handelen in de ekonomie

Dans ces dernières années, l'idée s'est répandue de plus en plus, parmi les économistes, que les décisions humaines engendrant la situation économique, étant basées sur des éléments aléatoires, il était nécessaire d'introduire la notion de probabilité dans les théories économiques.M. Fréchet, Econometrica, Vol. 23, no. 3, juli 1955.