Alan J. Auerbach

The Theory of Excess Burden and Optimal Taxation

The purpose of this paper is to present the chronological development ofthe concept of excess burden and the related study of optimal tax theory. A main objective of this exercise is to uncover the interrelationships among various apparently distinct results, so as to bring out the basic structure of the entire problem.The paper includes a discussion of various measures of excess burden,focusing on issues of approximation, informational requirements, aggregation over individuals, and the effects of technology. Included in the presentation of optimal tax theory is a section on tax reform, as well as an application of the theory to the case where uncertainty is present.

Inventory Behavior in Durable-Goods Manufacturing: The Target-Adjustment Model

THE RECENT problems of inflation and of a seemingly permanent high rate of unemployment have caused a virtual neglect of research on cyclical fluctuations in demand. Yet even a cursory review of the past twenty years uncovers a familiar pattern of repeated expansion and contraction of industrial production with concomitant changes in employment, capacity utilization, profits, and the like. Inventory fluctuations have long been recognized as the major endogenous force in American business cycles. Rarely does a study of inventory behavior fail to note that some 75 percent of the cyclical downturn in gross national product from peak to trough can be accounted for by the reduction of business inventories. A decade before Metzlers illuminating analysis of the inventory accelerator process and Abramovitzs fundamental

Share valuation and corporate equity policy

Abstract In recent years many contributions have appeared which examine the effects of corporate and personal taxation on firm financial policy. However, there has yet to appear an adequate explanation of why corporations continue to distribute dividends despite their disadvantageous tax treatment. We study this problem anew, in the context of an overlapping generations growth model with corporations financed by equity. Among our findings are: (1) capital owned by corporations may well be undervalued, even in the long run; (2) as a result of such undervaluation, firms may find it in the best interest of their stockholders to distribute dividends; and (3) an increase in the tax on distributions, while depressing the return to personal saving, may lead to an increase in the capital intensity of the economy. We also consider the criterion firms will use in evaluating new investment projects.

Generational accounting: a new approach for understanding the effects of fiscal policy on saving

An application of generational accounting to fiscal policies that feature intergenerational redistribution. The authors consider different policies, only some of which show up as a change in the deficit, and explore their impact on the net national saving rate.

Tax Reform and Adjustment Costs: the Impact on Investment and Market Value

This paper derives analytical measures of the combined effects of tax changes and adjustment costs on investment and market value. Unlike earlier measures, the effective tax rate derived is valid in the presence of adjustment costs and anticipated tax changes. The derived measure of the impact of tax changes on market value permits one to estimate the effects of various tax changes on market value and its components, discounted pure profits and normal returns to capital, and to decompose changes in the value of capital into changes in the marginal value of new capital and changes in the relative value of new and existing capital. These measures are used to evaluate tax changes similar to those introduced by the recent U.S. tax reform.

The U.S. Fiscal Problem: Where We are, How We Got Here and Where We're Going

Several issues are dealt with regarding the causes and implications of recent and projected U.S. federal budget deficits. The author considers why deficits have remained so large in spite of deficit reduction efforts, evaluates the impact of the recent policies of the Clinton administration, and offers long-range deficit projections. Among his findings are the following: 1. Until the past year, deficit projections over the past decade have been consistently too optimistic; had initial projections for the current fiscal year proved accurate, the deficit-reducing policies of the early 1990s already would have driven the federal budget well into surplus; there is no single explanation for these large and systematic forecasting errors. 2. The budget rules that legislators have developed to control deficits, including those now in effect, are ill-designed for their apparent purpose. They fail to compensate for forecasting errors and encourage shifts in the timing of revenues and expenditures. The paper presents evidence that such shifting has followed the incentives of the different schemes. 3. The projected decline in the deficit as a share of gross domestic product (GDP) over the next few years reflects not only the policies already enacted but also the continuation of significant real reductions in discretionary spending-representing a drop of 2.2% of GDP between 1994 and 2004. 4. Eve if such optimistic forecasts prove to be correct, longer-run projections suggest that current fiscal policy is unsustainable. Without any growth in the relative price of health care, the demographic transition still is projected to lead to sharp increases in Social Security and Medicare benefits as a share of GDP, and primary deficits of nearly 4% of GDP.

Why Have Corporate Tax Revenues Declined

This paper examines the source of changes in corporate tax revenues during the last twenty-five years. It finds that legislative changes explain less than half of the revenue decline during this period. Falling corporate profits have had a larger influence on revenue collections than a11 legislative changes taken together, a result that is often obscured in studies focusing solely on the average corporate tax rate. Changes in capital recovery provisions are the most important legislative factor influencing corporate tax revenues, especially in the last five years. The paper also considers the impact of the Tax Reform Act of 1986. The new law will increase the average tax rate on corporate profits by approximately 10 percent. By 1990, the average tax rate will equal its level in the late 1970s, although it will remain substantially below its level in the 1960s and the early 1970s.

Generalized Cash Flow Taxation

We show the unique form that must be taken by a tax system based entirely on realization accounting to implement a uniform capital income tax, or, equivalently, a uniform wealth tax. This system combines elements of an accrual based capital income tax and a traditional cash flow tax, having many of the attributes of the latter while still imposing a tax burden on marginal capital income. Like the traditional cash flow tax, this system may be integrated with a tax on labor income. We also show how such a tax can be supplemented with an optional accounting for a segregated subset of actively traded securities, subjected separately to mark-to-market taxation at the uniform capital income tax rate, to permit a fully graduated tax system applicable to labor income.

Recent U.S. Investment Behavior and the Tax Reform Act of 1986: A Disaggregate View

The Tax Reform Act of 1986 was expected to cause an overall decline in business fixed investment and a shift in the composition of investment away from machinery and equipment, which previously had received an investment tax credit. Yet neither investment relative to GNP nor equipment investment relative to total investment declined during the period 1987-89. This papers analysis of investment at the level of individual industries and assets helps reconcile the recent pattern of investment and the predicted effects of the Tax Reform Act. We find that the trend toward investment in equipment predated the Act, and that recent investment in equipment has fallen short of what would have been expected on the basis on nontax factors alone. Using a new technique to identify the impact of taxation on investment, we confirm the importance of tax policy using the cross-section pattern of equipment investment since 1986.

Demographic Change and Fiscal Policy

As public expenditures on health, education and transfer programmes increase, demographic change has a growing impact on public expenditures, and the incentives for behaviour created by public transfer programs increase as well. The essays in this volume discuss such topics as: demographic change and the outlook for Social Security and Medicare in the United States; long-term decision making under uncertainty; the effect of changing family structure on government spending; how the structure of public retirement policies has encouraged early retirement in some countries and not others; the response of local community spending to demographic change; and related topics. Contributors include many of the worlds leading public finance economists and economic demographers.