Kul B. Bhatia

Real Estate Assets and Consumer Spending

In an interesting contribution to this Journal, Elliott [1980] shows that consumer spending is better explained if permanent income is estimated from explicit measures of wealth (the wealth approach) rather than current and past incomes (the income approach). In the income approach, permanent income (Yp,) is computed as a distributed lag mechanism. In the wealth approach this procedure is followed for labor income, but permanent nonhuman income is specified as a constant multiple (72) of actual nonhuman wealth at the beginning of a period (Ant,-). The distinction between income and wealth approaches is intuitively appealing and has been tried before: Elliotts equation (12) is the same as equation (5) in Bhatia [1972] except that Elliott uses actual wealth instead of Bhatias expected wealth. The novelty in Elliotts specification lies in considering different components of wealth, which is also appealing, because measures of wealth ranging from real money balances to broad aggregates of human and nonhuman wealth have been used in the literature. Elliotts most striking result that real assets (mainly real estate and durable goods) have no significant effect on consumer spending, however, is disturbing because real estate is a major household asset, in fact, the largest one in many years, according to FRB balance sheets [1983], and accrued gains on real estate have often been larger than gains on corporate equities during the last decade or two. Also, there is some recent empirical evidence that gains on real assets significantly reduce personal saving [Peek, 1983]. The main purpose of this note is to reexamine and rehabilitate the role of real assets. One can question Elliotts specification, which does not adequately allow for expected gains, or his use of undistributed corporate profits as a contemporaneous proxy for all capital gains (tenuous, at best), but the heart of the matter is the residential value series derived by Elliott from perpetual inventory benchmarks [pp. 533-34], which, being accumulations of construc-

Corporate taxation, retained earnings, and capital formation

Abstract How retained corporate profits affect capital formation is the subject of the paper. A distributed-lag model is set up to relate corporate saving to household consumption, rather than saving, because of deficiencies in saving data. Alternative equations, estimated from aggregate U.S. data for 1948-74, strongly suggest that undistributed corporate profits have no independent influence on consumption. Their effect, if any, works via expected capital gains which are treated as a component of wealth by households in making spending decisions. Implications of these results for tax policy, especially for integrating personal and corporate taxation, are also discussed.

Intermediate goods and the incidence of the corporation income tax

Abstract Intermediate goods are introduced into a general equilibrium model of the incidence of the corporation income tax. Several theoretical conclusions about the role of such goods are established. Many well-known propositions about the incidence of the corporation income tax, emanating from models with only final goods, need to be modified. Estimates from U.S. data suggest that if intermediate goods are left out results will be misleading, especially if these goods are a relatively large sector in the economy and possibilities of substituting capital for labor in their production, and of substituting them for other productive factors in the final-good industries, are rather limited.

Value-added tax and the theory of tax incidence

Abstract A value-added tax is examined in a general-equilibrium model of tax-incidence incorporating primary factors and intermediate goods. Production coefficients are variable and demand is elastic. The principal result is that under assumptions of fixed coefficients and inelastic demand which have been commonly employed in the literature, VAT as well as the corporation income tax will be neutral. In the more general setting of this paper, only VAT, applied to every industry at equal rates, will not affect relative factor and commodity prices. Incidence and other economic effects of a partial VAT are also discussed.

Specific Inputs, Value-Added, and Production Linkages in Tax-Incidence Theory

Factors of production that cannot be moved from one activity to another due to their intrinsic nature, location preferences, mobility restrictions, or licensing requirements were featured prominently in the tax literature of the 1970s. Immobile factors, however, often produce inputs for other sectors. Several examples of this type that enhance and enrich some well-known existing models are presented. The value-adding process and cross-sector connections are explicitly specified. The new tax-incidence results often resemble those in mobile-factors-only (mfo) models in spite of one or more sector-specific inputs. Numerical examples, based on stylized U.S. data, illustrate the results and highlight the difficulties that arise in defining equivalent specifications. Goods mobility offsets some effects of factor immobility, but the computed tax elasticities are rarely the same as in mfo models. The Marshallian short-run/long-run distinction, blurred somewhat by production linkages, does not disappear.

TAX INCIDENCE IN A HIERARCHICAL MODEL

Abstract Production hierarchies are common in input–output tables but have not been used much in analytical work on tax incidence. A general equilibrium model with two mobile factors and flexible production coefficients is set up for this purpose. Earlier studies generally assumed one factor and fixed coefficients. There is one intermediate good, a final good, and one with both final and intermediate uses. Some features of existing models with intermediate and final goods carry over to hierarchical technology, but results about incidence of factor and commodity taxes differ markedly even under severe restrictions on elasticities of substitution and other parameters.

The USDA Series on Net Investment in Farm Real Estate—A Critique

Abstract This article documents and appraises the methodology and data sources used in deriving the USDA series on net investment in farm real estate. The series has been used in many studies dealing with the farming sector of the U. S. economy, but the USDA procedures are shown to be highly questionable on theoretical grounds. Several likely sources of bias and measurement error are pointed out. Suggestions for improving the series, and some alternative methods of estimation are also presented.

A Price Index for Nonfarm One- Family Houses, 1947-64

Abstract Construction cost indices have often been used to represent changes in house prices because no data on housing transactions, suitable for computing a broad-based index of house prices are available. In this article a technique for isolating price changes from estimates of market value is developed and used to derive a price index for nonfarm one-family houses of all types (excluding mobile homes) in the United States for the years 1947-64. Theoretical and empirical evidence is also presented to show that, in general, an index of construction cost would not reflect house prices accurately.

Capital Gains and Inequality of Personal Income: Some Results from Survey Data

Abstract This paper deals with income distribution of capital gains and their effect on measures of income inequality for 1962. Aggregate accrued gains are allocated to various income classes by using microdata from the Survey of Financial Characteristics of Consumers. The results show that accrued gains are distributed more unevenly than money income. The Gini coefficient drops from 0.41 to 0.35 when accrued losses for 1962 are subtracted from income, but it increases to 0.43 when average gains for 1960–64 are added to income. Variance of natural logarithms, the other measure of inequality used, also shows a similar pattern.

Taxes, intermediate goods, and relative prices: The case of variable coefficients

Abstract Price effects of an output tax in sector 1 and an equivalent production subsidy in the second industry are analyzed in a general equilibrium model. Each commodity satisfies final demand and uses two primary inputs and the other good as an intermediate product. Production coefficients are variable and demand is elastic. In a Leontief model with fixed coefficients, Metzler showed that price of the taxed good will rise and price of the subsidized good will fall. This result generally holds under less restrictive conditions also although it is sometimes reversed. How the topic relates to the tax-incidence literature is also discussed.