International Differences in Capital Taxation and Corporate Borrowing Behavior: Evidence from the U.S. Withholding Tax

Securities transactions in the U.S. climbed on a net basis from $19 billion in 1983 to$50 billion in 1985. This rise was due almost entirely to an increase in foreign purchases of U.S. securities - largely corporate and government bonds. One reason suggested for this phenomenon is foreign investors' perception that the U.S. is a safe haven: there are strong investment fundamentals in the U.S. relative to other industrialized countries. Moreover, since the summer of 1984, these instruments have been free from withholding tax on interest paid to foreign holders of notes and bonds issued by U.S. entities. Recently, there has been discussion of re-imposing the withholding tax. A common counter argument to re-imposition is that such a tax is notoriously ineffective at raising revenue. As evidence, opponents point to the U.S. experience with the now-repealed withholding tax on the interest earned by foreigners. This paper explains the reasons that the tax was ineffectual. It is essentially a case study of the earlier U.S. experience with a withholding tax. In particular, the paper focuses on corporate borrowing behavior during the tenure of the tax and the change which took place after repeal.

Are 401(k) Plans Replacing Other Employer-Provided Pensions? Evidence from Panel Data

This paper examines whether sponsors of traditional defined benefit (DB) plans are replacing them with 401(k) or other defined contribution (DC) plans. I compare pension plan offerings by sponsors of a DB plan in 1985 with their offerings in 1992 using Form 5500 filings from those two years. I find that 401(k) and other DC plans are substituting for terminated DB plans and that offering a DC plan of any type increases the probability of a DB termination. Thus, it appears that, at the sponsor level, many of the new 401(k) plans may not be avenues for net saving but are replacements for the more traditional pension forms. Using several specifications, I estimate that a sponsor that starts with no 401(k) or other DC plan and adds a 401(k) is predicted to reduce the number of DB plans offered by at least 0.3. That is, the estimates imply that one sponsor terminates a DB plan for about every three sponsors that offer one new 401(k) plan. The addition of a non-401(k) DC plan is estimated to reduce DB plan offerings by at least 0.4. Plan-level point estimates indicate that if a 401(k) plan is added by a sponsor, the DB termination probability increases by about 18 percentage points to 35 percent. The addition of a non-401(k) DC plan similarly increases the probability that an accompanying DB plan will be terminated.

What Do We Know about Enterprise Zones?

In the last decade, most states have targeted certain depressed areas for revitalization by providing a combination of labor and capital tax incentives to firms operating in an "enterprise zone" (EZ). A partial equilibrium model is used to analyze the theoretical effects of various EZ incentives on zone wages and employment. I review empirical evidence on the operational success of EZ programs in Britain and the U.S., and present new evidence from the 1990 Census on the success of the Indiana program. Most British zone businesses are relocations, with an annual cost per job of approximately $15,000. U.S. surveys find that much zone activity comes from expansions of existing businesses, with the average cost per zone job ranging from$4,564 to $13,000 annually (about$31,113 per zone resident job). How do zones perform relative to what would have been their performance in the absence of zone designation? Evidence on this issue is summarized for the state of Indiana, where the zone program appears to have increased inventory investment and reduced unemployment claims. But new evidence based on the 1990 Census of Population indicates that the economic well-being of zone residents in Indiana has not appreciably improved.

Interstate Business Tax Differentials and New Firm Location: Evidence from Panel Data

This paper examines the impact of state and local tax differentials on the location of industry using a panel data set of manufacturing firm startups. The number of firm births is modeled as a Poisson count process and the estimation technique explicitly accounts for unobserved location or state heterogeneity in the estimation. A second focus of the analysis is the development of an industry and year specific series of effective tax rates for each state. After controlling for state and industry effects, the estimates indicate that a high state marginal effective tax rate reduces the number of firm births for most industries examined.

Tax Policy and Urban Development: Evidence From The Indiana Enterprise Zone Program

In the last decade, most states have targeted certain depressed areas for revitalization by providing a combination of labor and capital tax incentives to firms operating in the "enterprise zone" (EZ). Despite the large number of state initiatives, and the frequent re-introduction of federal EZ legislation, there have been few statistical analyses of the effect of EZs apart from surveys of plan administrators. This paper analyzes the effect of the Indiana EZ program on local employment and investment using a panel of local taxing jurisdictions. In 1988, the direct budgetary costs of the Indiana program totaled over $11 million, averaging$13,933 per participating firm, $4,564 per new job, and$31,113 per new zone resident job. I estimate that zone designation initially reduces the value of depreciable personal property by about 13 percent, but also reduces unemployment claims in the zone and surrounding community by 19 percent. Both estimates are statistically significant. The value of inventories in Indiana zones is 8 percent higher than it otherwise would be, and the estimated effect is marginally statistically significant.

The Asset Allocation of Private Pension Plans

This paper summarizes the Form 5500 data on private pension fund investment. Using Form 5500 data from 1981 to 1987, the asset allocation of single employer and mu1tiemp1oyer defined benefit and defined contribution plans is reported, as well as the asset mix of the following subgroups: defined benefit plans categorized by plan funding ratio, sole and multiple defined contribution plans, savings or thrift, money purchase, ESOP, and 401(k) defined contribution plans. A brief survey of the literature on pension fund investment policy is also included; however, the focus of the paper is to describe the Form 5500 data and inform subsequent research on investment policies of private pension funds. The average single employer defined benefit plan holds about 50 percent in fixed-income securities, 20 percent in equities, and 20 percent in pooled funds (a 50/20/20 mix). Larger single employer defined benefit plans hold a 60/30/2 portfolio on average. While portfolio theory for these plans predicts extreme investment policies, few portfolios are extreme. About 20 percent of plans hold more than 60 percent in equity; about 9 percent of plans hold more than 60 percent in long term fixed-income securities. Multiemployer defined benefit plans hold a 63/19/8 mix. Single employer defined contribution plans invest in a 41/30/20 mix on average, where the mix is 49/38/2 for larger plans. A defined contribution plan which is one of several plans invests more in equities and less in fixed income securities than the average sole defined contribution plan. Multiemployer defined contribution plans invest more heavily in fixed-income securities (73/5/8) .

Econometric Methods for Fractional Response Variables with an Application to 401(k) Plan Participation Rates

We offer simple quasi-likelihood methods for estimating regression models with a fractional dependent variable and for performing asymptotically valid inference. Compared with log-odds type procedures, there is no difficulty in recovering the regression function for the fractional variable, and there is no need to use ad hoc transformations to handle data at the extreme values of zero and one. We also offer some new, simple specification tests by nesting the logit or probit function in a more general functional form. We apply these methods to a data set of employee participation rates in 401(k) pension plans.