Lifting the burden: fundamental tax reform and U.S. economic growth

This paper presents a comprehensive treatment of the cost-of-capital approach for analyzing the economic impact of tax policy. This approach has provided an intellectual impetus for reforms of capital income taxation in the United States and around the world. The most dramatic example is the Tax Reform Act of 1986 in the United States. In this landmark legislation the income tax base was broadened by wholesale elimination of tax preferences for both individuals and corporations. Revenues generated by base broadening were used to finance sharp reductions in tax rates at corporate and individual levels. The cost-of-capital approach presented in this paper shows that important opportunities for tax reform still remain. This approach suggests two avenues for reform. One would retain the income tax base of the existing U.S. tax system, but would equalize tax burdens on all forms of assets as well as average and marginal rates on labor income. Elimination of differences in the tax treatment of all forms of assets would produce gains in efficiency comparable to those from the Tax Reform Act of 1986. Equalization of marginal and average tax rates on labor income would more than double these gains in efficiency. Proposals to replace income by consumption as a tax base were revived in the United States during the 1990's. The Hall-Rabushka Flat Tax proposal would produce efficiency gains comparable to those from equalizing tax burdens on all forms of assets under the income tax. However, a progressive National Retail Sales Tax, collected on personal consumption expenditures at the retail level, would generate gains in efficiency exceeding those from the Flat Tax by more than 50 percent! Equalizing marginal and average rates of taxation on consumption would double the gains from the Flat Tax.

Information Value of Two-Prover Games

We introduce a generalization of the standard framework for studying the difficulty of two-prover games. Specifically, we study the model where Alice and Bob are allowed to communicate (with information constraints) - in contrast to the usual two-prover game where they are not allowed to communicate after receiving their respective input. We study the trade-off between the information cost of the protocol and the achieved value of the game after the protocol. In particular, we show the connection of this trade-off and the amortized behavior of the game (i.e. repeated value of the game). We show that if one can win the game with at least (1 - epsilon)-probability by communicating at most epsilon bits of information, then one can win n copies with probability at least 2^{-O(epsilon n)}. This gives an intuitive explanation why Raz\u27s counter-example to strong parallel repetition [Raz2008] (the odd cycle game) is a counter-example to strong parallel repetition - one can win the odd-cycle game on a cycle of length $m$ by communicating O(m^{-2})-bits where m is the number of vertices. Conversely, for projection games, we show that if one can win n copies with probability larger than (1-epsilon)^n, then one can win one copy with at least (1 - O(epsilon))-probability by communicating O(epsilon) bits of information. By showing the equivalence between information value and amortized value, we give an alternative direction for further works in studying amortized behavior of the two-prover games. The main technical tool is the "Chi-Squared Lemma" which bounds the information cost of the protocol in terms of Chi-Squared distance, instead of usual divergence. This avoids the square loss from using Pinsker\u27s Inequality

Information Value of Two-Prover Games

We introduce a generalization of the standard framework for studying the difficulty of two-prover games. Specifically, we study the model where Alice and Bob are allowed to communicate (with information constraints) - in contrast to the usual two-prover game where they are not allowed to communicate after receiving their respective input. We study the trade-off between the information cost of the protocol and the achieved value of the game after the protocol. In particular, we show the connection of this trade-off and the amortized behavior of the game (i.e. repeated value of the game). We show that if one can win the game with at least (1 - epsilon)-probability by communicating at most epsilon bits of information, then one can win n copies with probability at least 2^{-O(epsilon n)}. This gives an intuitive explanation why Raz\u27s counter-example to strong parallel repetition [Raz2008] (the odd cycle game) is a counter-example to strong parallel repetition - one can win the odd-cycle game on a cycle of length $m$ by communicating O(m^{-2})-bits where m is the number of vertices. Conversely, for projection games, we show that if one can win n copies with probability larger than (1-epsilon)^n, then one can win one copy with at least (1 - O(epsilon))-probability by communicating O(epsilon) bits of information. By showing the equivalence between information value and amortized value, we give an alternative direction for further works in studying amortized behavior of the two-prover games. The main technical tool is the "Chi-Squared Lemma" which bounds the information cost of the protocol in terms of Chi-Squared distance, instead of usual divergence. This avoids the square loss from using Pinsker\u27s Inequality