Pay-as-you-go Social Security and the aging of America: an economic analysis

Because it is a mature pay-as-you-go retirement system, Social Security provides current and future workers with below-market returns. These workers bear the burden of the unfunded liability arising from windfall gains to past retirees. Alan D. Viard uses these principles to examine the effects of three demographic developments: the low birthrate since the baby boom ended in 1965, the impending retirement of the baby boomers, and the downward trend in old-age mortality. The low birthrate reduces Social Security’s long-run rate of return as the unfunded liability is spread across fewer workers. The boomers’ retirement does not pose a separate problem, but marks the end of the temporary gains provided by the high birthrate during the boom. Because the downward mortality trend does not change Social Security’s long-run rate of return or the number of workers across whom the unfunded liability can be spread, it need not change any worker’s burden. However, policy responses to the trend are likely to shift burdens from earlier generations to later ones.Social security

The federal budget: what a difference a year makes

Monetary policy

The new budget outlook: policymakers respond to the surplus

Economic events and policy changes have unexpectedly moved the federal budget into surplus. If current policies are maintained, surpluses are expected to continue for twenty years, although deficits are expected to return after 2020. Congress and President Clinton are considering proposals to reduce the projected surpluses through tax cuts or spending increases. In this article, Alan Viard describes the recent budget events and the new budget outlook. He analyzes the effects of the proposed tax cuts and spending increases, finding that they are likely to reduce national saving and lower future output. He concludes that the desirability of this outcome depends on value judgments about the needs and rights of current and future generations.Budget ; Budget deficits

The welfare effects of pay-as-you-go retirement programs: the role of tax and benefit timing

It is well known that pay-as-you-go retirement programs reduce steady-state welfare and the capital stock in dynamically efficient OLG economies. The common two-period OLG model obscures, however, the dependence of these effects on the ages at which taxes are paid and benefits are received. Program changes that shift taxes to older workers or benefits to younger retirees have effects similar to reductions in program size, yielding steady-state welfare gains and increases in capital accumulation while imposing transition costs on current generations. This analysis has policy implications for both tax and benefit timing.Social security ; Fiscal policy ; Taxation

The transition to consumption taxation, Part 2: the impact on existing financial assets

Replacing the income tax with a consumption tax is likely to reduce the total value of the capital stock. Alan D. Viard reviews how this decline is divided between bondholders and stockholders and the effect on household borrowers and lenders. He explains that the results depend on whether monetary policy accommodates the tax through a higher price level. Without accommodation, the decline in the value of capital is largely borne by stockholders and there is little reallocation of wealth between household borrowers and lenders. If the tax is fully accommodated, bondholders bear heavier burdens than stockholders and household borrowers gain at the expense of the household lenders.Taxation ; Stocks ; Monetary policy ; Wealth

The transition to consumption taxation, part 1: the impact on existing capital

Alan Viard reviews the transitional impact on existing capital from replacing the income tax with a consumption tax. This replacement generally reduces the real value of existing capital because it does not receive the tax relief given to new investment. If the income and consumption taxes had stylized forms and capital were produced without adjustment costs, the proportional decline would equal the consumption tax rate--a 25 percent tax would uniformly reduce the value of existing capital by 25 percent. Under more realistic assumptions, however, the actual decline is likely to be smaller and less uniform and some types of capital may even increase in value. The burden on owners of existing capital is also mitigated because the tax reform increases the rate of return they earn from reinvestment.

The looming challenge of the alternative minimum tax

The United States adopted its first minimum income tax in 1969 in response to reports that a few hundred high-income individuals had avoided paying any income taxes. From these humble beginnings, the alternative minimum tax (AMT) has grown to the point where it will soon raise taxes for millions of Americans, many of them middle-income workers who weren’t the targets of the original law. ; While the AMT applied to 200,000 taxpayers in 1990, roughly 4 million will pay it this year, according to the Urban-Brookings Tax Policy Center. But that is only the beginning. Under current law, the AMT rolls will explode to 22 million in 2007. The AMT’s revenue yield follows a similar pattern, having risen from $2 billion in 1990 to$22 billion this year. It’s projected to nearly triple to $65 billion in 2007. ; The AMT’s spread has added substantial complexity to the tax code, imposing burdens on taxpayers and the economy. A variety of reform options could address these problems, but difficult choices would have to be made to offset the resulting revenue losses.Income tax ; Consumer price indexes ; Economic conditions

Legal fee restrictions, moral hazard, and attorney profits

When attorney effort is unobservable and certain other simplifying assumptions (such as risk neutrality) hold, it is efficient for an attorney to purchase the rights to a client's legal claim. However, the American Bar Association Model Rules of Professional Conduct prohibit this arrangement. We show that this ethical restriction, which is formally equivalent to requiring a minimum fixed fee of zero, can create economic rents for attorneys, even though they continue to compete along the contingent-fee dimension. The contingent fee is not bid down to the zero-profit level, because such a fee does not induce sufficient attorney effort. We thereby provide a political economy explanation for these restrictions.

The second great migration: economic and policy implications

Emigration and immigration ; Employment (Economic theory)

Putting the Commerce Back in the Dormant Commerce Clause: State Taxes, State Subsidies, and Commerce Neutrality

The unpredictability of the Supreme Court’s dormant Commerce Clause (“DCC”) jurisprudence continues to draw trenchant criticism from commentators and the Justices themselves, as the Court remains unable to explain which state taxes and subsidies impede interstate commerce. We show that these problems can be resolved by a Commerce Neutrality framework requiring that state taxes and subsidies provide a combined treatment of inbound and outbound transactions at least as favorable as their treatment of intrastate transactions. This simple test has an economic foundation because taxes and subsidies that violate it create incentives to engage in intrastate rather than interstate transactions. The Supreme Court recently took an important step toward implementing this framework in Maryland Comptroller v. Wynne, 135 S. Ct. 1787 (2015), when it invalidated Maryland’s income tax scheme based on economic analysis similar to that presented in this article. The simple Commerce Neutrality condition resembles the Court’s oft-used, but poorly explained, internal consistency test. At the same time, Commerce Neutrality simplifies DCC jurisprudence by sweeping away the Court’s flawed call for equal treatment of out-of-state and in-state parties (as opposed to equal treatment of interstate and intrastate transactions), its half-hearted concern about multiple taxation, and its ill-defined concept of external consistency. And, because Commerce Neutrality applies to subsidies on the same terms as taxes, it eliminates the tax-subsidy confusion that has figured so prominently in analyses of the DCC. By focusing on the prevention of discrimination against interstate commerce, Commerce Neutrality puts the commerce back in the Dormant Commerce Clause