John B. Shoven

General Equilibrium with Taxes: A Computational Procedure and an Existence Proof

The purpose of this paper is to describe a computational procedure for the determination of a competitive equilibrium for an economy with producer and consumer commodity 3 taxes. This procedure enables a proof of the existence of such an equilibrium to be obtained. While no properties of efficiency are claimed for such an equilibrium, the procedure is of great potential use in the consideration of the efficiency losses and distributional impacts from alternative tax schemes. Application 4 of such a technique may be found in such areas as the tax reform programmes being discussed in the USA, Canada, the UK and other countries.5 We consider a general Walrasian model with an arbitrary set of ad valorem commodity taxes. The method of computing an equilibrium is based on Scarfs Algorithm [7, 8]. The tax rates need not be uniform across production sectors or individuals. The revenue generated from the tax system is dispersed among the individual consumers, each of whom is assigned an arbitrary share of the total, or retained by the government for the purchase of goods and services. The only restriction on revenue distribution schemes is that the shares (those of individuals and the government) sum to unity and that each recipients allocation be a continuous function of total tax revenue. The major theorem of this paper is a substantial extension of the existence proof of a competitive equilibrium in the absence of taxes (see, for example, Arrow and Hahn [1], Scarf [7], McKenzie [6], or Debreu [2]) and is of particular importance if the general equilibrium framework is to be useful for the evaluation of economic policy regarding taxes and tariffs. Without such an existence proof, it is difficult to contemplate the computation of equilibria under various tax regimes. For convenience most of the exposition will be concerned only with an economy with differential producer taxes; the case of differential producer and consumer taxes is discussed in Section 4. The economy considered here is characterized by (1) a set of market demand functions, (2) a description of the technological production possibilities through a listing of activity

Taxation and Mutual Funds: An Investor Perspective

Shareholder level taxes are taken into account in determining the performance of growth and growth and income mutual funds over the 1963-1992 period. We rank a sample of funds on a before- and after-tax basis for investors in different income classes facing various investment horizons. The differences between the relative rankings of funds on a before- and after-tax basis are dramatic, especially for middle- and high-income investors. For instance, one fund that ranks in the 19th percentile on a pretax basis ranks in the 63rd percentile for an upper-income, taxable investor. We also present an analysis of the extra taxes that shareholders bear because of the failure of mutual funds to manage their realized capital gains in such a way as to permit a substantial deferral of taxes. While it is not possible to determine precisely this magnitude, the extra taxes almost certainly amounted to more than

Implicit Taxes on Work from Social Security and Medicare

1 billion in 1993.

Fiscalité et coût du capital: une comparaison internationale

Implicit taxes are present in many government programs and can create substantial work disincentives. The implicit tax created by Social Security is the payroll tax used to fund the retirement portion of Social Security minus the present value of the incremental retirement benefits associated with the earnings. While the payroll tax is always 10.6%, the implicit tax varies over a worker’s career because additional earnings translate nonlinearly into additional retirement benefits. We show that workers at the start of their careers experience lower implicit tax rates, as the increase in benefits from additional work is relatively large. However, workers who are closer to retirement earn little or no additional benefit from additional work. The main implicit tax in Medicare lies in the Medicare as Secondary Payer (MSP) policy, which requires Medicare to be a secondary payer for Medicare-eligible workers whose employers offer a health plan and have 20 or more employees. Thus, affected workers effectively forgo the Medicare benefits that they would have received if they had not been working. We investigate a combination of policies that can reduce average implicit tax rates on older workers by as much as 45%.

Work incentives in the Social Security Disability benefit formula

This paper analyzes the cost of capital in four industrial countries (Japan, United Kingdom, United States, West Germany). It shows that international disparities in the cost of capital are to be imputed largely to different internal conditions on credit markets. However, the effect of the tax systems on the cost of capital cannot be ignored. It is shown, for instance, that simple tax reforms in the United States could reduce the capital cost differential with Japan by more than 60%.

The financial feasibility of delaying Social Security: evidence from administrative tax data

We examine the connection between taxes paid and benefits accrued under the Social Security Disability Insurance (SSDI) program on both the intensive and extensive margins. We perform these calculations for stylized workers given the existing benefit structure and disability hazard rates. On the intensive margin, we examine the effect of an additional dollar of earnings on the marginal payroll taxes contributed and future benefits earned. We find that the present discounted value of disability benefits received from an additional dollar of earnings, net of the SSDI payroll tax, generally declines with age, becoming negative around age 40 and reaching almost zero at age 63. On the extensive margin, we determine the effect of working an additional year on the additional payroll taxes and future benefits as a percentage of income. The return to working an additional year at an income level just large enough to earn Social Security credits for the year is large and positive through age 60. However, the return to working an additional full year is substantially smaller and becomes negative at approximately age 57. Thus, older workers face strong incentives to earn enough to obtain creditable coverage through age 60, but they face disincentives for additional earnings. In addition, workers ages 61 and older face work disincentives at any level of earnings. We repeat this analysis for stylized workers at different levels of earnings and find that, while the program transfers resources from high earners to low earners, the workers experience similar patterns in the returns to working.

Should the United States Privatize Social Security

Despite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age, currently age 66. In this paper, we use a panel of administrative tax data on likely primary earners to explore some potential hypotheses of why individuals fail to delay claiming Social Security, including liquidity constraints and private information regarding one’s expected future lifetime. We find that approximately 31-34% of beneficiaries who claim prior to the full retirement age have assets in Individual Retirement Accounts (IRAs) that would fund at least 2 additional years of Social Security benefits, and 24-26% could fund at least 4 years of Social Security deferral with IRA assets alone. Our analysis suggests that these percentages would be considerably higher if other assets were taken into account. We find evidence that those who claim prior to the full retirement age have higher subjective and actual mortality rates than those who claim later, suggesting that private information about expected future lifetimes may influence claiming behavior.

Applying general equilibrium

The two papers that make up the core of this book address what is perhaps the most fundamental question in the current debate over Social Security: whether to shift, in part or even entirely, from todays pay-as-you-go system to one that is not just funded but also privatized in the sense that individuals would retain control over the investment of their funds and, therefore, personally bear the associated risk. John Shoven argues yes, Henry Aaron no. Theoretical issues such as the likely effects on saving behavior and capital formation figure importantly in this discussion. But so do a broad array of practical considerations such as the expense of fund management and accounting, questions about how the public would regard the fairness of any new system, and the impact of recent developments in the federal budget and the U.S. stock market.