Implications of Social Security Reform on Interest Rates: Theory and Evidence

This article investigates the potential effect that Social Security reform may have on bond and equity returns. We specifically focus on the effect of proposals to shift a portion of the investment of the U.S. Social Security Trust Fund to the equities market. Models are developed to demonstrate the relationship between returns and both the relative size of the Social Security Trust Fund and the portfolio allocation of the Trust Fund. Using these two models, we then show that interest rates will increase from either a decrease in the size of the Social Security Trust Fund or a shifting in the investment mix from bonds to equities. We derive an adjustment factor that relates the magnitude of change in interest rates from either source and use this adjustment factor in conjunction with estimates of the relationship between government debt and interest rates to forecast the potential effect on interest rates from shifting part of the Trust Fund to the equity market. The estimates herein suggest that investing some of the Social Security funds in equities is not a painless cure‐all for the Social Security system and may even have some adverse effects in terms of income transfers from American taxpayers to foreign bondholders.     

Mitigating America's demographic dilemma by pre-funding social security

Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes, which crowd out savings and slow real wage growth below the rate of technological progress. A faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them. Addressing the financing problem by reducing Social Security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees. By contrast, a pre-funding of Social Security financed with consumption taxes more evenly spreads the welfare losses across generations, and it helps future generations, especially the poor, by stimulating capital formation.     

THE EFFECT OF TAX PREFERENCES ON HEALTH SPENDING

In this paper, we estimate the effect of the tax preference for health insurance on health care spending using data from the Medical Expenditure Panel Surveys from 1996-2005. We use the fact that Social Security taxes are only levied on earnings below a statutory threshold to identify the impact of the tax preference. Because employer-sponsored health insurance premiums are excluded from Social Security payroll taxes, workers who earn just below the Social Security tax threshold receive a larger tax preference for health insurance than workers who earn just above it. We find a significant effect of the tax preference, consistent with previous research.     

Single payer: the California referendum

The California Health Security Act is likely to appear on the November 1994 ballot. The bill would provide universal coverage to California residents and assign the state as the single payer for all medical care provided, financed with funding for programs already in place, employer payroll taxes, individual income taxes and taxes on tobacco products.     

Market knowledge in managed municipal bond portfolios

In this paper, we analyze the investment performance of two types of open-end municipal bond mutual funds: first, mutual funds that have the objective of generating income free from federal income taxes; second, funds that have the objective of generating income free from not only federal but also a particular state 's income taxes. Our results suggest the following: first, municipal bond fund monthly returns either mirror or lag the Lehman Brothers Municipal Bond Index returns on a risk-adjusted basis; second, when state taxes are significant, such as in California and New York, the investor benefits from investing in state-specific municipal bond funds.     

机构投资者股权对银行公司治理与绩效的影响

在机构投资者对银行进行投资时,不同类型的机构投资者具有不同的表现.其中,QFII、证券公司、社保和保险基金都能影响银行的公司治理,促进其综合业绩的提高;证券投资基金和企业不能对这两个方面产生显著影响.在选择银行股时,证券投资基金注重银行过去综合业绩的表现,企业、社保基金和保险基金注重银行过去市场价值的增长,QFII和证券公司同时考虑了这两个方面.实行银行股权全流通,放松时机构投资者的管制,改革证券交易方面的税收制度,培养机构投资者的投资理念,有利于发挥机构投资者对银行公司治理的积极作用.     

Comparing the top and the bottom income earners: Distribution of income and taxes in the United States

Tax reform is again at the center stage as Congress grapples with ideas to reduce the US budget deficit and the country readies itself for another election year. Given this unusually charged tax reform season, populist and party rhetoric appears to the general population to have largely replaced reasoned debate as politicians, economists and pundits “cherry pick” facts to justify their claims. Our contribution to the current debate on tax equity is that this is one of the very few studies that jointly consider the impact of payroll and income taxes. Most tax equity studies focus only on the federal income tax and as such issue misleading implications. It is important to jointly consider payroll and income taxes because (a) for taxpayers in lower income ranges, the payroll tax burden outweighs the income tax burden, while (b) for higher income taxpayers income from wages above $106,800 ($110,000 in 2012) are payroll-tax free, and (c) other sources of income, namely dividends and capital gains, are not subject to payroll taxes at all. Thus, we provide a more comprehensive picture of the overall progressivity (or lack thereof) exhibited by the current tax laws. In addition, we also consider how some often-raised tax proposals would prospectively affect income inequality and tax progressivity.     

提高我国居民资本参与分配程度的设想

针对我国居民资本参与分配程度低,导致财产性收入较低,居民收入占国民收入分配比重过低的情况,本文提出划拨一定比例的国有股权,补充社保基金,探讨我国国民资本参与分配的途径,让更多群众增加财产性收入的政策设想。该政策设想将弥补我国养老保险资金缺口与提高国民资本参与分配有机结合起来,对于切实增加群众财产性收入,完善收入分配体制,推动养老保险体制改革,以及促进资本市场发展。完善国有企业公司治理等方面都具有非常重大的意义。本文同时对具体操作中涉及到重要问题进行了探讨,并对按政策设想运作可能取得的效果作出了粗略的估算。     

National income taxation and the geographic distribution of population

We study how different national taxation schemes interact with geographic variation in productivity and consumption amenities in determining regional populations. A neoclassical migration equilibrium model is used to analyze the current nominal income tax system in Norway. The analysis is based on estimated regional income differences accounting for both observable and unobservable individual characteristics and the value of experience. Given regional differences in incomes and housing prices, quality of life and productivity are calibrated to model equilibrium. Compared to an undistorted equilibrium with lump-sum taxation, nominal income taxation creates a disincentive to locate in productive high-income regions. The deadweight loss due to locational inefficiencies is 0.18% of gross domestic product (GDP). We study real income taxation and equal real taxes as alternative tax systems. Both alternatives generate a geographic distribution of the population closer to the undistorted equilibrium, and hence with lower deadweight loss. In an extension of the analysis, we take into account payroll taxes. The existing regionally differentiated payroll taxes to the disadvantage of cities generate a deadweight loss of 0.22% of GDP in an economy with lump-sum income taxation. The two distortionary taxes interact and strengthen each other and the combined distortionary effect of income and payroll taxation in the Norwegian system is 0.46% of GDP.     

Risk sharing across generations without publicly owned equities

The U.S. Social Security trust fund currently invests in government bonds. Investing some of it instead in equities while continuing to pay Social Security benefits under existing rules would alter—potentially improve—the sharing of financial risks across non-trading generations. This paper shows that the same risk sharing can be achieved without direct government ownership of equities if instead the government places a linear and symmetric tax on risky private capital returns. This equivalence is very robust and holds even if some agents are endogenously borrowing constrained.     

On the construction of marginal federal personal and social security tax rates in the U.S

In this article, I correct and extend my earlier series on marginal federal personal income tax rates. I also construct a measure of the marginal Social Security tax rate and add this to the income tax rate to obtain a measure of the effective marginal tax rate on income due to federal taxes. Finally, I compare my series on marginal income tax rates and its method of construction with those of Barro and Sahasakul.     

Social Security investment accounts: lessons from participant-directed 401(k) data

Newly available 401(k) participant investment data may have implications for individual Social Security account (IA) proposals. We found that women with wages between $25,000 and $50,000 have a significantly greater probability of investing a small percentage of their 401(k) in equities than their male counterparts, but those with salaries over $75,000 have a smaller probability. Hence, women’s less aggressive investment behavior may be primarily due to younger cohorts and may not apply above a threshold wage. However, overall, 28.4% of men and 33.8% of women are conservative investors, suggesting the possible risk low IA accumulations under some proposals.     

Employment and wage effects of a payroll-tax cut—evidence from a regional experiment

In this paper, we evaluate the effects of a regional experiment that reduced payroll taxes by 3–6 percentage points for 3 years in northern Finland. We match each firm in the target region with a similar firm in a comparison region and estimate the effect of the payroll tax reduction by comparing employment and wage changes within the matched pairs before and after the start of the experiment. According to our results, the reduction in the payroll taxes led to an increase in wages in the target region. The point estimates indicate that the increase in wages offset roughly half of the impact of the payroll tax cut on the labor costs. The remaining labor cost reduction had no significant effects on employment.     

Dividend taxes,employment, and firm productivity

The paper examines the effect of dividend taxation on employment and productivity. I exploit a dividend tax cut of 10 percentage points for closely held private corporations in Sweden. Using data on all closely held Swedish firms with exact information on employees and their wages, I find that firms with limited internal funds increase productivity and wages relative to firms with sufficient internal funds whose investment decisions are less affected by dividend taxes. My findings indicate that dividend taxes constrain firms in investing efficiently. Lower taxes can result in higher capital and labor input and, thus, in higher productivity.     

Payroll Taxes and the Decision to be Self-Employed

This paper investigates and quantifies the role of payroll taxes in the decision to be self-employed. It examines the effects of introducing into the labour market a payroll tax which taxes employers, but which exempts the self-employed. It exploits two changes in the tax legislation to confirm that it is changes in legislation and not other sector specific trends that are driving the results. Our findings suggest that payroll taxes do indeed influence the decision to be self-employed, with the probability of self-employment increasing as taxes on employees increase and vice versa. Furthermore, there appear to be declines in the return to self-employment caused by the tax, possibly due to inefficient allocation of labour towards self-employment.     

The downside of formula apportionment: evidence on factor demand distortions

This paper investigates the impact of corporate taxes on the input factor choice of multi-jurisdictional entities (MJEs) under a formula apportionment (FA) regime. Our testing ground is the German local business tax that applies FA regulations with income apportionment according to the relative payroll share. Using unique data on the population of German firms, we find that MJEs distort their employment and payroll costs in favor of low-tax locations. On average, a 1-percentage-point-increase in the tax rate differential between an affiliate and foreign group members is found to lower the affiliate’s payroll to capital ratio by 1.9%.     

Effective labor taxation and the international location of headquarters

Profit taxes are widely acknowledged to influence the location of firms’ headquarters. This paper sheds light on the role of aspects of labor taxation for the international location of headquarters. While profit taxes can be avoided in various ways, it is much harder for firms to manipulate the firm-specific labor tax base so that labor taxes may be relatively important for firm location. We construct a unique data set of effective labor taxes in 120 countries and use data on the location of 35,206 firms to analyze the impact of labor income tax rates, the progressivity of the income tax schedule, and social security contributions on firms’ decisions where to locate their headquarters. The findings suggest that both a higher progressivity of the tax system and higher (employee- and employer-borne) social security contributions negatively influence a country’s attractiveness for headquarters location. Hence, a one percentage point increase in these payroll taxes, reduces the probability of a country to attract headquarters by 6.1 %. The results prove robust in various empirical model specifications and subsets of the data.     

401(k) Investment Decisions and Social Security Reform

Abstract

This paper uses the 1995 Survey of Consumer Finances to show that 401(k) participants with an underlying defined benefit plan are more likely to invest in equities than are participants whose 401(k) is their primary plan. This suggests that workers with a guaranteed source of retirement income are more likely to invest their other retirement assets more aggressively. Removing this guarantee might result in more conservative investment. Therefore, using current 401(k) asset allocation behavior to project income under a Social Security individual account system with reduced guaranteed benefits could overstate returns to these accounts, thus overstating their attractiveness relative to the current system.     

Funding a PAYG pension system: the case of Italy

Italy is characterised by a mature pay‐as‐you‐go social security system and by particularly adverse population projections. Given these trends, the social security contribution rate is expected to increase above its current high level. This hinders the development of employer‐provided pension funds and introduces a significant wedge between labour cost and earnings that discourages both labour demand and labour supply. Any proposal to reduce payroll taxes and to reform the system in the direction of partial funding has to cope with the state of Italian public finances. Italy has to comply with the Stability and Growth Pact that imposes constraints on budget deficit and debt trends. Using micro data from the Bank of Italy's Survey of Household Income and Wealth and official population projections, we estimate future employment trends under different demographic and macroeconomic scenarios and compute the cost of the transition. We show that it would be substantially reduced if positive effects on employment were induced by the payroll tax reduction.     

Taxes and the growth in mutual funds: Evidence from OBRA 93

In recent years, individuals have steadily moved from direct ownership of equities to holding securities through mutual funds. Prior research has attributed this phenomenon to tax incentives to hold mutual funds in tax-preferred retirement accounts. In contrast, employing household-level microdata and using OBRA 93 as a quasi-natural experimental setting, we find that on average, investors reduced their mutual fund holdings within tax-preferred accounts following a tax rate increase. However, we also observe that this effect is primarily driven by investors with relatively high trading activity within their tax-preferred accounts; investors exhibiting relatively low trading activity generally increased their mutual fund investments in these accounts after OBRA 93. Investors who increased their mutual fund holdings did not do so by rebalancing away from other asset classes. Collectively, our results suggest that taxes are not driving the growth in mutual funds. This finding has important public policy implications because of the growing popularity of using mutual funds as a retirement savings vehicle, the dwindling number of individuals covered by defined benefit plans, the dramatic increase in the importance of mutual funds as a financial intermediary, and the continued state of flux in U.S. tax policy.