Recent Evidence on Budget Deficits and National Savings

This paper examines the recent United States experience with sustained budget deficits and concludes that the events of the last five years cast significant doubt on the proposition that the timing of taxes does not affect national savings. Rather than raising private saving, the recent deficits have if anything coincided with reduced saving and increased consumption. These findings suggest that realistic analysis of fiscal policies must recognize that consumers are liquidity constrained and/or myopic.

Finite Lifetimes and the Crowding Out Effects of Budget Deficits

This note explores the sensitivity of the short-run savings effects of government deficits to assumptions about household planning horizons. Using a lifecycle simulation model, we show that even though deficit policies shift sizable tax burdens to future generations, individuals live long enough to make the assumption of an infinite horizon a good approximation for analyzing the short-run savings effects. In practice, periods of debt accumulation such as that in the United States during World War II are reversed sufficiently rapidly to make their short-run effects on consumption and national savings relatively small.

Dividend Taxes, Corporate Investment, and "Q"

Taxes on corporate distributions have traditionally been regarded as a "double tax" on corporate income. This view implies that while the total effective tax rate on corporate source income affects real economic decisions, the distribution of this tax burden between the shareholders and the corporation is irrelevant. Recent research has suggested an alter- native to this traditional view. One explanation of why firms in the U.S. pay dividends in spite of the heavy tax liabilities associated with this form of distribution is that the stock market capitalizes the tax payments associated with corporate distributions. This capitalization leaves investors indifferent at the margin between corporations paying our dividends and retaining earnings. This alternative view holds that while changes in the dividend tax rate will affect shareholder wealth, they will have no impact on corporate investment decisions. This paper develops econometric tests which distinguish between these two views of dividend taxation. By extending Tobin's "q" theory of investment to incorporate taxes at both the corporate and personal levels, the implications of each view for corporate investment decisions can be derived. The competing views may be tested by comparing the performance of investment equations estimates under each theory's predict ions. British time series data are particularly appropriate for testing hypotheses about dividend taxes because of the substantial postwar variation in effective tax rates on corporate distributions. The econometric results suggest that dividend taxes have important effects on investment decisions.

The Persistence of Volatility and Stock Market Fluctuations

This paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices. It demonstrates that volatility is only weakly serially correlated, implying that shocks to volatility do not persist. These shocks can therefore have only a small impact on stockmarket prices, since changes in volatility affect expected required rates of return for relatively short intervals. These findings lead us to be skeptical of recent claims that the stock market's poor performance during the 1970's can be explained by volatility-induced increases in risk premia.

The Economic Effects of Dividend Taxation

This paper tests several competing hypotheses about the economic effects of dividend taxation. It employs British data on security returns, dividend payout rates, and corporate investment, because unlike the United States, Britain has experienced several major dividend tax reforms in the last three decades. These tax changes provide an ideal natural experiment for analyzing the effects of dividend taxes. We compare three different views of how dividend taxes affect decisions by firms and their shareholders. We reject the"tax capitalization" view that dividend taxes are non-distortionary lump sum taxes on the owners of corporate capital. We also reject the hypothes is that firms pay dividends because marginal investors are effectively untaxed. We find that the traditional view that dividend taxes constitute a "double-tax" on corporate capital income is most consistent with our empirical evidence. Our results suggest that dividend taxes reduce corporate investment and exacerbate distortions in the intersectoral and intertemporal allocation of capital.

Survey Response Variation in the Current Population Survey

This paper investigates the problem of responseand coding errors in the Current Population Survey. It draws upon a potentially rich source o finformation for verifying survey answers, a three month matched sample of CPS respondents, to analyze whether individuals' questionnaire responses inadjacent months are mutually consistent.We focus primarily on reported durations of unemployment spells.For individuals who were coded as unemployed in two consecutive months and who experienced no intervening labor market withdrawal or employment,their reported duration in the second interview should exceed the first interview duration by about four weeks. However, this is not what survey responses show. In more than three quarters of all cases, reported durations in successive months are logically inconsistent. The reporting problemis not confined to spell durations. In 25 percent of all cases,the professed reason for unemployment changes as the unemployment spell progresses.Furthermore, analysis of labor force entrants shows that reported changes in labor force status between unemployment and not-in-the labor force are not reliable guides to actual behavior.We conclude that reported durations of unemployment, and to a lesser extent, reasons for unemployment, may be very misleading indicators of future behavior. Econometric analyses which focus on changes in individual behavior over time are likely to be badly flawed by spurious changes due to reporting errors. These problems with the Current Population Survey, one of the best sample surveys available, may suggest far greater difficulties in interpreting other sources of panel data.

New Evidence that Taxes Affect the Valuation of Dividends

This paper uses British data to examine the effects of dividend taxes on investors' relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors' valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.

Killing the Straw Man: Does BICEP Prove Inflation at the GUT Scale?

The surprisingly large value of $r$, the ratio of power in tensor to scalar density perturbations in the CMB reported by the BICEP2 Collaboration, if confirmed, provides strong evidence for Inflation at the GUT scale. While the Inflationary signal remains the best motivated source, a large value of $r$ alone would still allow for the possibility that a comparable gravitational wave background might result from a self ordering scalar field (SOSF) transition that takes place later at somewhat lower energy. We find that even without detailed considerations of the predicted BICEP signature of such a transition, simple existing limits on the isocurvature contribution to CMB anisotropies would definitively rule out a contribution of more than $5\%$ to $r \approx 0.2$,. We also present a general relation for the allowed fractional SOSF contribution to $r$ as a function of the ultimate measured value of $r$. These results point strongly not only to an inflationary origin of the BICEP2 signal, if confirmed, but also to the fact that if the GUT scale is of order $10^{16} GeV$ then either the GUT transition happens before Inflation or the Inflationary transition and the GUT transition must be one and the same.Comment: 3 pages 2 figures, accepted for publication in Physics Letters B . Accepted version revised slightly in response to referee's comment

Joint bidding, information pooling, and the performance of petroleum lease auctions / BEBR No.889

Includes bibliographical references (p. 22)