Westphal, Larry E.

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Swarthmore College Works Economics Faculty Works Economics 12-1-1994 Review Of "The Political Economy Of Tax Reform" By T. Ito and A. O. Krueger Larry E. Westphal Swarthmore College, lwestph1@swarthmore.edu This work is brought to you for free and open access by . It has been accepted for inclusion in Economics Faculty Works by an authorized administrator of Works. For more information, please contact myworks@swarthmore.edu. Follow this and additional works at: https://works.swarthmore.edu/fac-economics  Part of the Economics Commons Let us know how access to these works benefits you  Recommended Citation Larry E. Westphal. (1994). "Review Of "The Political Economy Of Tax Reform" By T. Ito and A. O. Krueger". Journal Of Economic Literature. Volume 32, Issue 4. 1894-1895. https://works.swarthmore.edu/fac-economics/315 American Economic Association  ReviewReviewed Work(s): The Political Economy of Tax Reform. by Takatoshi Ito and  Anne O.KruegerReview by: Larry E. WestphalSource: Journal of Economic Literature, Vol. 32, No. 4 (Dec., 1994), pp. 1894-1895Published by: American Economic AssociationStable URL: http://www.jstor.org/stable/2728823Accessed: 21-09-2017 15:47 UTC JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a widerange of content in a trusted digital archive. We use information technology and tools to increase productivity andfacilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available athttp://about.jstor.org/termsAmerican Economic Association is collaborating with JSTOR to digitize, preserve and extendaccess to Journal of Economic LiteratureThis content downloaded from 130.58.65.13 on Thu, 21 Sep 2017 15:47:06 UTCAll use subject to http://about.jstor.org/terms 1894 Journal of Economic Literature, Vol. XXXII (December 1994) delivery point relative to the general flow of the commodity. The authors then go on to discuss possible solutions to manipulation, including ex ante enforcement, in which the exchange forces traders to reduce large positions prior to de- livery, and otherwise attempts to influence potentially manipulative trading strategies as they develop; ex post enforcement, in which manipulators are sanctioned, and contract design, in which the exchange attempts to adjust contract provisions to make manipula- tion difficult. They argue for a mixture of approaches, but express doubt that a com- plete solution can be found, because all enforcement efforts run the risk of deter- ring economically beneficial activity, and because contract designs that deter long ma- nipulation tend to facilitate short manipula- tion. Despite its coherent and detailed analysis, the manipulation section fails to draw on the resources of the Exchange to present con- crete examples of manipulation, or to exam- ine data on manipulation attempts. By confin- ing themselves to a theoretical discussion, the authors pass up the opportunity to enliven their somewhat dry presentation, and to break some new and potentially very useful ground. Finally, the book concludes with an analy- sis of potential changes in the delivery mech- anism that might compensate for some of the problems identified in earlier chapters. In particular, the authors argue that the evolu- tion of the grain market has reduced Chicago to a delivery role of secondary importance, and that a change in contract provisions to encourage deliveries at other points would improve the contract as a hedge for main- stream users. They support these conclusions with a simulation analysis of potential deliv- ery points. Overall, Pirrong, Haddock, and Kormendi have created a detailed and tightly reasoned, but rather specialized and dry analysis of the grain futures delivery mechanism. This work will be useful to serious students of com- modities futures, but will probably find its most attentive audience at the CBOT. KENNETH CONE Lexecon Inc. H Public Economics The political economy of tax reform. Edited by TAKATOSHI ITO AND ANNE 0. KRUEGER. NBER East Asia Seminar on Economics, vol. 1. Chicago and London: University of Chicago Press, 1992. Pp. x, 348. $60.00. ISBN 0-226- 38667-8. JEL 93-0140 This worthwhile volume is the result of a conference-held in Seoul, Korea in June 1990-jointly sponsored by the Korea Devel- opment Institute and the National Bureau of Economic Research. Each chapter will be of considerable value to readers interested in its subject matter. Ito and Krueger's introduction emphasizes two themes: growing international economic interdependence and increasing concern with tax policy consequences. As they state, only the latter pervades the volume. International repercussions remain of secondary impor- tance relative to domestic interests in the contemplation and design of tax reforms. Nonetheless, several chapters pay more than passing attention to international interac- tions. Two chapters provide a general back- ground. In a theoretical chapter, Assaf Razin and Efraim Sadka contend that arbitrage con- ditions imply that tax competition among countries may lead to taxation only of immo- bile factors. In turn, Vito Tanzi and Partha- sarathi Shome provide an extremely informa- tive overview of tax structures and their effects in Hong Kong, Indonesia, Korea, Ma- laysia, the Philippines, Singapore, Taiwan, and Thailand. By discussing structural char- acteristics and distinguishing features in each case, they highlight many specific issues cov- ered at greater depth in other chapters, plac- ing them in a richer comparative context. Four chapters provide general perspectives on past tax reforms. The introduction of con- sumption-related value added taxes (VAT) in Japan and Taiwan are respectively discussed by Masaaki Homma and Chuan Lin. The Japanese sought simplification and rationa- lization as well as greater horizontal and ver- tical equity in the tax structure. It was not until the second round of reform, in 1987, that opposition to the VAT was overcome, in part because the original intention of revenueThis content downloaded from 130.58.65.13 on Thu, 21 Sep 2017 15:47:06 UTCAll use subject to http://about.jstor.org/terms Book Reviews 1895 neutrality was abandoned in favor of overall tax reduction. Homma's examination of dis- tributional effects suggests that the great ma- jority of households benefited to some degree from its introduction. Less ambitious objectives were sought in Taiwan's case. The VAT introduced in 1986 was intended as a revenue neutral replace- ment of the existing turnover tax. Lin judges that it improved the progressivity of the over- all tax system. Lin, and Homma to a lesser degree, give fascinating accounts of adminis- trative difficulties, indicating that a devil is in the details. But not for this reason alone do both authors view the VAT's introduction as but the first in a sequence of changes leading to a more comprehensive VAT system. Charles McLure's chapter on American tax reform provides a rich account of how seren- dipitous interaction of circumstances and personalities enabled a technocratically in- spired simplification of the federal tax struc- ture in 1986. He observes that international ramifications were not considered adequately in the prior tax reform of 1981, which in- creased incentives for investment far more than for savings, leading to an increased for- eign capital inflow. The balance was some- what redressed by the 1986 act, but McLure concludes that discussions preceding this re- form did not reflect a complete under- standing of international effects. Taewon Kwack and Kye-Sik Lee present a well-balanced overview of the history of Ko- rean tax reform since 1948, emphasizing the continuous iteration between fine-tuning ad- justments and more fundamental structural reforms. Important reforms took place in the mid-1970s with the introduction of a global income tax and replacement of various indi- rect taxes by a VAT coupled with other changes to offset possible adverse effects and mitigate political controversy. Korea's estab- lishment of the VAT, which now yields more than one-fifth of total tax revenue, appears to have been less problematic and more success- ful than either Japan's or Taiwan's. Unlike Taiwan, Korea has lacked an effective means of taxing capital gains from investments in land and structures. The search for an appro- priate means is a central issue of tax reform in the 1990s, focused on equity. The remaining six chapters are more nar- rowly focused. Using a neoclassical dynasty model, Tatsuo Hatta and Hideki Nishioka in- vestigate efficiency gains from distortion re- ducing changes in Japanese capital income taxes, finding them to be quite small. Irene Trela and John Whalley, using a small com- putable equilibrium model, conclude that Korea's export-oriented tax policies ac- counted for no more than ten percent of its growth over the 1962-82 period. Krueger's comments on this result usefully emphasize that the contribution is not so small as it might appear when considered in light of mu- tually reinforcing reforms across many policy domains. Yokio Noguchi's chapter provides a careful analysis of revenue requirements under alter- native tax policies to maintain the existing so- cial security system in the face of Japan's rap- idly aging population. He argues that the VAT has an important future role to play in spreading the increased tax burden equitably among generations. Thomas Barthold and Takatoshi Ito give a detailed comparative description of American and Japanese gift, estat'e, and inheritance taxes. In a seminal exercise using tax return data, they also estimate the share of intergenerational transfers in total household assets. The American share is determined to be at least one quarter; the Japanese share is somewhat greater, disproportionately so for land be- quests which are effectively given preferen- tial treatment. The final two chapters focus on direct for- eign investment. Kun-Young Yun carefully estimates effective tax rates on such invest- ments made in Korea, finding that most rates are well below ten percent, with many being negative. In turn, in the course of providing a more comprehensive overview of direct in- vestment in Taiwan, Ching-huei Chang and Peter Cheng demonstrate that it also pro- vides an attractive tax climate for direct in- vestment. I trust that the foregoing sketch of the vol- ume's complete contents will suffice to entice the many readers who can benefit from one or more of its chapters. LARRY E. WESTPHAL Swarthmore CollegeThis content downloaded from 130.58.65.13 on Thu, 21 Sep 2017 15:47:06 UTCAll use subject to http://about.jstor.org/terms

Review Of  The Political Economy Of Tax Reform  By T. Ito and A. O. Krueger

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Review Of The Political Economy Of Tax Reform By T. Ito and A. O. Krueger

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