Inflation And Taxation With Optimizing Governments

This paper extends and evaluates previous work on the positive theory of inflation. We examine the behavior of governments concerned solely with minimizing the deadweight loss from raising revenue through inflation and tax finance. We show that both governments that can commit to future policy actions, as well as those that cannot precommit, will choose a positive contemporaneous association between inflation and the level of tax burdens. We examine the empirical validity of this prediction using data from Britain, France, Germany, Japan, and the United States. Inflation and tax rates are as likely to be negatively as positively correlated, so the results cast doubt on the empirical relevance of simple models in which governments with time-invariant tastes choose monetary policy to equate the marginal deadweight burdens of inflation and taxes.

Money in the Utility Function: An Empirical Implementation

This paper studies household asset demands by allowing certain assets to contribute directly to utility. It estimates the parameters of an aggregate utility function which includes both consumption and liquidity services.These liquidity services depend on the level of various asset stocks. We apply these estimates to investigate the long- and short-run interest elasticities of demand for money, time deposits, and Treasury bills. We also examine the impact of open market operations on interest rates, and present new estimates of the welfare cost of inflation.

Tax Loss Carryforwards and Corporate Tax Incentives

This paper investigates the extent to which loss-offset constraints affect corporate tax incentives. Using data gathered from corporate annual reports, we estimate that in 1984 fifteen percent of the firms in the nonfinancial corporate sector had tax loss carryforwards. When weighted by their market value, however, these firms account for less than three percent of this sector, suggesting that loss carryforwards are concentrated among small firms and affect relatively few large corporations. For those firms with loss carryforwards, however, the incentive effects of the corporate income tax may differ significantly from those facing taxable firms. We demonstrate this by calculating the effective tax rates on equipment and structures for both types of firms. Our results suggest that firms which are currently taxable have a substantially greater incentive for equipment investment than firms with loss carryforwards, but that loss carryforwards have a relatively smaller effect on the tax incentive for investing in structures. Overall, firms with loss carryforwards receive a smaller investment stimulus than taxable firms.

Taxing Retirement Income: Nonqualified Annuities and Distributions from Qualified Accounts

This paper explores the current tax treatment of non-qualified immediate annuities and distributions from tax-qualified retirement plans in the United States. First, we describe how immediate annuities held outside retirement accounts are taxed. We conclude that the current income tax treatment of annuities does not substantially alter the incentive to purchase an annuity rather than a taxable bond. We nevertheless find differences across different individuals in the effective tax burden on annuity contracts. Second, we examine an alternative method of taxing annuities that would avoid changing the fraction of the annuity payment that is included in taxable income as the annuitant ages, but would still raise the same expected present discounted value of revenues as the current income tax rule. We find that a shift to a constant inclusion ratio increases the utility of annuitants, and that this increase is greater for more risk averse individuals. Third, we examine how payouts from qualified accounts are taxed, focusing on both annuity payouts and minimum distribution requirements that constrain the feasible time path of nonannuitized payouts. We describe briefly the origins and workings of the minimum distribution rules and we also provide evidence on the fraction of retirement assets potentially affected by these rules.

Capital Gains Tax Rules, Tax Loss Trading and Turn-of-the-Year Returns

This paper investigates the effect of specific features of the U.S. capital gains tax on turn-of-the-year stock returns. It focuses on two tax changes. The first, enacted in 1969, reduced the fraction of long-term losses that were deductible from Adjusted Gross Income from 100 percent to 50 percent. The second, part of the Tax Reform Act of 1976, raised the required holding period for long-term gains and losses from six months to one year. This paper describes how each of these tax changes should have affected incentives for year-end capital loss realization and the potential magnitude of the turn of the year effect in stock returns. We present evidence that is consistent with the hypothesis that detailed provisions of the capital gains tax, such as the short-term holding period, affect the link between past capital losses and turn-of-the-year stock returns. These findings provide support for the role of tax-loss trading in contributing to turn-of-the-year return patterns.