Consumption Taxes: Some Fundamental Transition Issues

A number of tax reform plans under discussion in the United States would replace the existing hybrid income-based system with a consumption-based system. In this paper I use uniform (single-rate) consumption and income taxes: (a) to explain how the problem of taxing 'old savings' or 'old capital' manifests itself in the shift from an income to a consumption base; (b) to indicate the tradeoffs that must be confronted in dealing with this phenomenon; (c) to show how price level changes that may or may not accompany a transition affect the distribution of gains and losses; (d) to sketch out how a transition might affect interest rates and asset prices (including owner-occupied housing); (e) to explore the case in equity for protecting the tax- free recovery of old savings; and (f) to emphasize the incentive problems that arise if savers and investors anticipate a change in the tax rate in a consumption-based system.

Tax Neutrality and the Investment Tax Credit

This paper concerns the question of how the rules for calculating the investment tax credit and the associated rules for calculating depreciation allowances for tax purposes should be structured to assure the "appropriate" relationship between the subsidy granted to long-lived assets and that to short-lived assets. The increasing rate of tax subsidy under the investment credit favors long-lived assets by comparison with a flat-rate credit, while the neglect of the credit in calculating depreciation allowances favors short-lived assets (for which the depreciation allowance is a more important element in the cash flow). In reviewing the literature on this issue, Emil Sunley focused on the question of whether the investment credit should vary with the durability of the asset purchased. He concluded that neutrality requires a subsidy rate increasing with the useful life of the asset in a way qualitatively similar to that prescribed in present U.S. law. This paper develops Sunley's discussion through the use of simple formal models of the yield from investment.

Improving on Kyoto: Greenhouse Gas Control as the Purchase of a Global Public Good

One way to obtain a global public good is to set up an institution to buy it, with the nations of the world contributing to the cost according to whatever sharing arrangements make political sense. An example would be the purchase of the services of national armed forces to carry out peacekeeping, with the cost separately apportioned. In these notes I suggest a way to exploit this approach to limiting accumulations of greenhouse gases in the atmosphere. The “service” that produces the control is the reduction, by nations, in the levels of emissions over time from what they would otherwise choose, also known as the “business as usual” emissions path. In the scheme as envisioned, which could be used in a successor agreement to the Kyoto Protocol, the fact that all nations are sellers of reductions ameliorates the enforcement problems typical of commitments to particular emission paths. Another difference from the Kyoto-style system: In the scheme sketched here, the distributive of burdens is explicit, rather than implicit in the allowable emission amounts. The conflation of distributive and allocational issues is, arguably, an unnecessary source of contention in the design of institutions to control anthropogenic effects on the climate system.

Reforming Budgetary Language

In the context of several examples of problems associated with present budgetary conventions, I revisit Musgrave's conceptual division of the government's program into Allocation, Distribution and Stabilization Branch subbudgets. I suggest progress towards Musgrave's ideal of a more informative budgetary "language," one less dependent on arbitrary institutional labeling, must be based on the nonarbitrary description of the individual's economic environment, as it is affected by government. As a first approximation, that environment can be summed up in terms of the individual's budget constraint and levels of public goods provided. Simple models suggest that an unambiguous budgetary language may be feasible but there remains much to clarify about both the objectives of the exercise and the specifics of methods to deal with particular problems.

CHANGES IN THE WELL-BEING OF NONMETROPOLITAN SINGLE-MOTHER FAMILIES: A SEMI-PARAMETRIC ANALYSIS

In nonmetropolitan areas of the United States, single-mother families contain a majority of children living below the poverty line. Changes between 1992 and 2000 in the economic well-being of nonmetropolitan single-mother families are examined using kernel density estimation and density reweighting methods. The results show that increased education levels of single mothers and the strengthening of area economic conditions explain much of the observed gains in the economic well-being of this family group. But temporal changes in propensities to work and to be on welfare from 1992 to 2000 have also contributed to observed gains.Institutional and Behavioral Economics,

NON-METROPOLITAN TO METROPOLITAN COUNTY COMMUTING: GATEWAY TO PROSPERITY OR BARBARIANS AT THE GATE

Labor and Human Capital,

The Effects of Tax-Law Changes on Property-Casualty Insurance Prices

During the 1980s, the federal income tax treatment of property-casualty insurers and their policyholders underwent several important changes, the most significant of which came in 1986. This paper develops theoretical predictions for how these changes should have affected the equilibrium prices of property-casualty insurance policies, and explores the extent to which the theoretical predictions are reflected in data on industry experience. The paper is devoted mainly to a careful specification of the income tax rules, and to deriving the connection between predictions about simple forms of insurance policy and industry data on premiums earned. Although the predicted impact of the changes in the tax rules enacted in 1986 translates into a tax on premiums (net of the cost of acquisition) of up to 13 percent (on medical malpractice, the longest-tail line of insurance, in 1987), it is small relative to the variability of the actual loss experience.