A Dynamic Incentive‐Based Argument for Conditional Transfers*

We compare the long‐run effects of replacing unconditional transfers to the poor by transfers conditional on the education of children. Unlike Mirrlees’ income taxation model, the distribution of skill evolves endogenously. Human capital accumulation follows the Freeman–Ljungqvist–Mookherjee–Ray OLG model with missing capital markets and dynastic bequest motives. Conditional transfers (funded by taxes on earnings of the skilled) are shown to induce higher long‐run output per capita and (both utilitarian and Rawlsian) welfare, owing to their superior effect on skill accumulation incentives. The result is established both with two skill levels, and a continuum of occupations.     

Tax Policy and Human Capital Formation with Public Investment in Education

This paper studies the effects of distortionary taxes and public investment in an endogenous growth OLG model with knowledge transmission. Fiscal policy affects growth in two respects: first, work time reacts to variations of prospective tax rates and modifies knowledge formation; second, public spending enhances labour efficiency but also stimulates physical capital through increased savings. It is shown that Ramsey-optimal policies reduce savings due to high tax rates on young generations, and are not necessarily growth-improving with respect to a pure private system. Non-Ramsey policies that shift the burden on adults are always growth-improving due to crowding-in effects: the welfare of all generations is unambiguously higher with respect to a private system, and there generally exists a continuum of non-optimal tax rates under which long-run growth and welfare are higher than with the Ramsey-optimal policy.     

Who gains from capital market integration? Tax competition between unionized and non‐unionized countries

The welfare effects of capital market integration are examined under a model of tax competition with two asymmetric countries. The asymmetry is expressed through the labour market: one country has a perfect labour market whereas the other country's labour market is unionized. Our results indicate that the welfare effects of capital market integration differ depending on whether governments are active or passive in attracting capital. In the absence of active governments, capital market integration benefits the country with a competitive labour market whereas it harms the unionized country. Capital market integration benefits both countries if governments are active and compete for mobile capital using taxes/subsidies.     

Optimal education and pensions in an endogenous growth model

In OLG economies with life-cycle saving and exogenous growth, competitive equilibria in general fail to achieve optimality because individuals accumulate amounts of physical capital that differ from the one that maximizes welfare along a balanced growth path (the Golden Rule). With human capital, a second potential source of departure from optimality arises, related to education decisions. We propose to recover the Golden Rule of physical and also human capital accumulation. We characterize the optimal policy to decentralize the Golden Rule balanced growth path when there are no constraints for individuals to finance their education investments, and show that it involves education taxes. Also, when the government subsidizes the repayment of education loans, optimal pensions are positive.     

Welfare Effects of Different Public Expenditures and Taxes in the Netherlands

This paper explores the welfare effects of public consumption, income transfers and public investment financed through different types of taxes. One surprising result is that, contrary to public consumption goods, public capital goods do not necessarily become less attractive if distortionary taxes, rather than lump-sum taxes, are necessary to finance them. The numerical simulations reveal that the net welfare effects of public investments in the Netherlands are typically positive if financed through lump-sum taxes or distortionary taxes on labor. However, if a source-based capital tax is adopted to finance public investments, the overall welfare effect may be negative.     

MACROECONOMIC AND REDISTRIBUTIONAL EFFECTS OF CONSUMPTION TAXES IN THE USA*

This paper studies the effect of an increase in consumption taxes using a dynamic general equilibrium model of overlapping generations calibrated to the US economy. When the proceeds are used to reduce income taxes, the reform raises the aggregate capital and labour supply in the long run. Workers increase labour supply immediately in response to the reform, while consumption rises only gradually. The tax reform also transfers wealth from old consumers to young consumers. As a result, while future generations experience significant welfare gains, current generations, particularly old consumers, tend to experience sizable welfare losses. When the proceeds are used for a lump‐sum transfer, the aggregate capital and labour both decrease in the long run. This reform is welfare‐improving for the current low‐income households.     

Capital and Consumption Tax Reforms in a Small Open Economy

The effects of a reform in capital and consumption taxes on private welfare and government tax revenue are examined for a small open, capital‐importing economy. A trade‐off between private welfare and tax revenue is encountered in maximizing social welfare. Nonetheless, lowering capital taxes and raising consumption taxes can increase both private welfare and tax revenue if the initial tax rates are not optimal. In addition, a tax reform by this fashion is a likely response to a rise in the foreign rate of return on capital.     

The effect of immigrants on natives' incomes through the use of capital

"This paper deals with questions about the effects of immigrants on three types of capital: the private capital immigrants work with, the public (government) capital that immigrant workers use, and the public capital used for services by immigrants." The geographic focus is on the United States. The authors conclude that although the average cost to natives in 1975 dollars to provide services for immigrants is 4,172 dollars, this amount "is considerably smaller than the benefits of immigrants to natives through their relatively low use of welfare services and their relatively high contribution of taxes." Comments by Jacob Mincer (pp. 95-7) are included.     

Existence of equilibrium in an OLG model with production and altruistic preferences

Summary. This note deals with the existence and uniqueness of a non-trivial steady-state equilibrium in an overlapping generations (OLG) model with productive capital and altruistic agents. We establish a necessary and sufficient condition for operative bequests which extends Abel (1987) and Weil (1987). Interestingly, we prove that the OLG model with production and altruistic agents always experiences a non-trivial steady-state equilibrium. Received: July 16, 1998; revised version: January 29, 1999     

The dynamic welfare cost of seignorage tax and consumption tax in a neoclassical growth model with a cash-in-advance constraint

Using a public finance approach, this study investigates welfare costs between seignorage and consumption taxes in a standard growth model. One of these two taxes is used to finance exogenous public spending to balance the government budget. The steady-state welfare cost of consumption taxes is lower if the consumption effect dominates the leisure effect. This paper compares equilibrium along transitional dynamic and steady-state paths and finds that because of lower consumption and leisure and thus higher welfare costs of consumption taxes during early periods, the welfare cost of consumption taxes is larger than the welfare cost of seignorage taxes.     

Sustainable social security: Four options

Four options to make the social security sustainable under the coming demographic shift are presented; increase payroll taxes by 6 percentage points, reduce replacement rates by one-third, raise the normal retirement age to 73, or means-test the benefits and reduce them in income. The paper accounts for labor supply at both intensive and extensive margins and analyzes welfare effects across agents that differ in age, wealth and cohorts. While the four policies all achieve the same goal, economic outcomes differ significantly. Options to curtail benefits encourage own savings and capital accumulation, while the payroll tax increase and the means-test reduce work effort. Future generations prefer options to reduce benefits, but current generations prefer to finance the transition with payroll taxes.     

THE WELFARE EFFECTS OF FOREIGN CAPITAL INFLOW WITH TARIFF-RIDDEN AND QUOTA-RESTRICTED IMPORTS*

The welfare effects of foreign capital inflow and changes in the foreign price and tariff rate of a tariff-ridden imported good are considered for a small country for both 3 times 2 and 3 times 3 trade models with a quota-restricted imported good (whose special case is a nontraded good). For the 3 times 2 model, foreign capital inflow does not affect home welfare when there is no tariff on imports, but it harms the home country if a tariff is imposed on the imports to the extent that the tariff-ridden imported good is more capital intensive than the exported good. On the other hand, for the 3 times 3 model the foreign-capital inflow benefits the home country if the tariff rate is below a certain level under the analogous capital-intensity assumptions. The welfare effects of changes in the foreign price of the tariff-ridden good and its tariff rate remain the same for both models.     

Employment Flows,Capital Mobility,and Policy Analysis

This article extends Hopenhayn and Rogerson's analysis of firing taxes by introducing a flexible form of capital and considering transitionary dynamics. The article finds that capital is not important for understanding the long run and welfare effects of firing taxes. However, capital is crucial for determining the short run consequences of eliminating this type of policy.     

On Cost Benefit Rules for Green Taxes

This paper concerns the welfare effects of a green tax reform in a dynamic general equilibrium model with preexisting taxes on labor income and capital income. In comparison with previous studies on green taxes in dynamic models, which have focused their main attention on long run effects of such reforms, I derive cost benefit rules for a change in the tax mix by using the properties of the value function in optimal control theory. This enables me to relate the welfare effect of a change in the tax mix to responses in employment, the capital stock, (flow) emissions and the stock of pollution along the whole general equilibrium path. Another contribution of the paper is to examine under what conditions an emission tax, which is set permanently below the marginal damage of pollution, is welfare superior to an emission tax path that fully internalizes the external effect.     

THE ECONOMIC WELFARE OF THE AGED AND INCOME SECURITY PROGRAMS*

This paper examines several nonmoney components of economic welfare in both a theoretical and an empirical framework, computes the distributional ranking of aged families arising from such a measure, and subsequently examines the target effectiveness of eleven programs of the U.S. federal government aimed at the aged. While the theoretical discussion attempts to cover all factors contributing to the economic welfare of the aged, the empirical measure is somewhat less comprehensive, excluding the value of nonmarket productive activities and leisure time as well as benefits derived from direct government expenditures and some in-kind transfers and taxes. The study makes use of a subsample of the 1967 Survey of Economic Opportunity data composed of all families with at least one aged member. Specific attention is devoted to dissaving from net worth, in-kind transfers, incidence of taxes, and intrafamily transfers. Government cash and in-kind transfers are found to constitute a third of the total measured economic welfare of the aged, and the impact of each of these programs is examined individually. As might be expected, public assistance and public housing are the programs of most benefit to the aged poor. Medicaid and Medicare are substantially less so, and Social Security is distributionally neutral. Such programs as unemployment insurance are of little benefit to the aged. Tax expenditures, finally, provide no benefits to even the lower half of the distribution.     

Demographic change, human capital and welfare

Projected demographic changes in the U.S. will reduce the share of the working-age population. Analyses based on standard OLG models predict that these changes will increase the capital-labor ratio. Hence, rates of return to capital decrease and wages increase, which has adverse welfare consequences for current cohorts who will be retired when the rate of return is low. This paper argues that adding endogenous human capital accumulation to the standard model dampens these forces. We find that this adjustment channel is quantitatively important. The standard model with exogenous human capital predicts welfare losses up to 12.5% (5.6%) of lifetime consumption, when contribution (replacement) rates to the pension system are kept constant. These numbers reduce to approximately 8.7% (4.4%) when human capital can endogenously adjust.     

Fair Accumulation under Risky Lifetime

Individuals save for their old days, but not all of them enjoy the old age. This paper characterizes the optimal capital accumulation in a two‐period OLG model where lifetime is risky and varies across individuals. We compare two long‐run social optima: (1) the average utilitarian optimum, where steady‐state average welfare is maximized; (2) the egalitarian optimum, where the welfare of the worst‐off at the steady‐state is maximized. It is shown that, under plausible conditions, the egalitarian optimum involves a higher capital and a lower fertility than the utilitarian optimum. Those inequalities hold also in a second‐best framework where survival conditions are exogenously linked to the capital level.     

Constrained Inefficiency and Optimal Taxation with Uninsurable Risks

When individuals' labor and capital income are subject to uninsurable idiosyncratic risks, should capital and labor be taxed, and if so how? In a two‐period general equilibrium model with production, we derive a decomposition formula of the welfare effects of these taxes into insurance and distribution effects. This allows us to determine how the sign of the optimal taxes on capital and labor depend on the nature of the shocks and the degree of heterogeneity among consumers' income, as well as on the way in which the tax revenue is used to provide lump‐sum transfers to consumers. When shocks affect primarily labor income and heterogeneity is small, the optimal tax on capital is positive. However, in other cases a negative tax on capital is welfare‐improving.     

Inflation and capital accumulation in an OLG model with money in the production function

This article analyses the consequences of the money supply growth rate on capital intensity and economic growth in an overlapping-generations model with real balances entering the production function. Within this theoretical framework, anticipated inflation generates an ambiguous effect on capital–labour ratio, because two forces work simultaneously in opposite directions: one driving towards a pure Tobin effect (due to the OLG demographic structure of the economy) and the other pushing down the capital stock (due to the productive role of real balances). Despite the unclear effects exerted on capital intensity, higher monetary growth rates unambiguously reduce real money demand, consumption, total wealth and welfare.     

The role of natural capital in supporting national income and social welfare

Using life satisfaction as a proxy for social welfare, this study contributes to the extant literature by empirically demonstrating that natural capital contributes to social welfare, functioning in part through increasing national income and in part through its direct effect on life satisfaction; the direct effect is approximately 40% greater than the indirect effect. This suggests that the true welfare benefits of natural capital may not be adequately reflected in conventional economic data and, therefore, studies seeking to evaluate the contribution of natural capital to human well-being should consider employing data sets that capture subjective elements of welfare. The magnitudes of the reported marginal effects of natural capital on social welfare, however, are small. This is perhaps due to the fact that (1) there are shortcomings in the measure of natural capital; (2) life satisfaction effects are unlikely to reflect the poorly understood benefits that natural capital provides; and (3) keystone species (such as mosquitoes) and integral ecosystems (such as wetlands) may be negatively associated with life satisfaction, even though such components of natural capital are vitally important to sustaining ecosystems and human life