Laurence S. Seidman

Conversion to a Consumption Tax: The Transition in a Life-Cycle Growth Model

This paper examines the transitional losses that may follow conversion from an income tax to a consumption tax, even when conversion eventually raises steady-state lifetime welfare. Two recent studies have left the impression that the transitional losses would be large. Using a life-cycle growth model, this paper examines two reasons why these studies have probably overestimated the transitional losses. The model computes the welfare gains and losses of each age cohort along the transition path. It is shown that the greater the bequest motive and subjective discount rate generating the particular initial income tax steady state, the smaller would be the transitional losses. Similarly, a policy of age phasing would reduce the losses. The results demonstrate the importance of examining the transition path whenever a policy change alters capital accumulation.

A New Design for Automatic Fiscal Policy

We offer a new design for automatic fiscal policy that can strengthen its role as a complement to counter-cyclical monetary policy, and analyse it in the Fair macroeconometric model that has been estimated using quarterly data for the US economy. Our automatic fiscal policy consists of the triggering of a transfer (or income tax rebate) whenever real GDP is at least X% below normal, the amount of the transfer varying with the size of the GDP gap. The size of the transfer is set with the sole purpose of effectively combating a recession. By contrast, the magnitudes of current automatic stabilizers are unintended by-products of setting the ratio of tax revenue to GDP, the degree of progressivity of the tax system and the level of unemployment benefits. We generate a severe recession using historical data and simulate the impact of our automatic fiscal policy. We assume that the Federal Reserve adheres to a counter-cyclical monetary policy governed by the interest rate (Taylor) rule estimated from historical data. We find that the interest rate rule alone mitigates the severe recession only modestly, whereas our automatic fiscal policy (together with the interest rate rule) substantially reduces the severity of the recession while generating only a relatively small rise in the government debt/GDP ratio. Copyright 2002 by Blackwell Publishers Ltd.

Math—time capital matters: A cross-country analysis

Abstract We compute and compare the rate of accumulation of one component of educational capital — “math-time capital” — through eighth grade in a sample of countries that includes Japan and the US, and measure the impact on math achievement of raising the rate of accumulation of US math-time capital. We examine the 1982 IEA math exam administered to 13-year olds on which the US mean score was substantially below Japan. We find that Japan is the highest math-time country — the Japanese 8th grader has accumulated 30% more math time than the American 8th grader — and that math-time capital matters for math achievement. We estimate that if the US lengthened its school year by three weeks and assigned required summer math homework, it would close 26% of the gap between the US and Japanese mean scores, and move the US from 13th to 8th in score rank.

Did the 2008 Rebate Fail? A Response to Taylor and Feldstein

Did the 2008 rebate fail to stimulate consumer spending? In their influential American Economic Review articles, John Taylor and Martin Feldstein each claim that Bureau of Economic Analysis (BEA) aggregate time series data show that the 2008 rebate failed. Reexamining the BEA data, we find that the data instead show there is a high probability that the rebate stimulated consumption. Moreover, the hypothesis that a rebate has half the impact of ordinary disposable income cannot be rejected. Thus, we find that analysis of the BEA aggregate time series data is consistent with the conclusion from the microdata studies that the 2008 rebate stimulated consumer spending.

The Impact of Converting to a Consumption Tax When Saving Propensities Vary: An Empirical Analysis

It has been recognized that conversion of an income tax to a consumption tax can increase aggregate saving even if each household maintains a constant propensity to save. The reason is heterogeneity: the variation in the propensity to save among households. How much of an increase in saving is an empirical question. Using the best available (but not wholly adequate) U.S. data, we estimate that the increase may be as much as 10% of saving. New data stratified by age would be necessary to obtain a more reliable estimate.

Taxes and capital intensity in a two-class disposable income growth model

Abstract By analyzing the incentive effects of taxes, previous studies may give the impression that the impact on capital intensity of converting an income tax to either a consumption or wage tax depends solely on the difference in such incentive effects on the representative person. This paper shows that tax conversion may also alter capital intensity by shifting disposable income from low to high savers. In a two-class, disposable income growth model that eliminates the incentive effects of taxes, converting an income tax to a wage or consumption tax that would raise equal steady-state revenue per worker would raise the steady-state capital intensity of the economy.

Learning About Bernanke

The new Federal Reserve chairman, Ben Bernanke, has inherited a hot seat. This economist analyzes four of his key speeches in recent years to try to explain his theoretical view of fiscal and monetary policy. Bernankes writings are far more lucid than Alan Greenspans. Seidman concludes that after Bernanke has established his anti-inflation credentials, he will adopt a policy that balances concerns over unemployment and inflation.

A Temporary Tax Rebate in a Recession: Is it Effective and Safe?

Is a temporary tax rebate effective and safe as an antirecession policy? Simulations with an empirically tested macroeconometric model are used to estimate the impact of the actual one-time 2001 tax rebate in the United States and of a hypothetical rebate twice as large, injected four times (quarterly). The results of the simulations are interpreted in light of two important recent empirical studies of the spending of the 2001 rebate by households. We estimate that a rebate equal to three percent of quarterly GDP (roughly the size of the 2001 rebate) repeated four times (quarterly) would reduce the unemployment rate at the end of a year by one percentage point (for example, from six percent to five percent). As along as a tax rebate is detriggered when the recession ends, its use during a recession does not pose a significant debt or inflation problem.

Is a Consumption Tax Equivalent to a Wage Tax

Is a consumption tax equivalent to a wage tax? This article examines this question in a two-period life-cycle model with Cobb-Douglas production and utility functcons. Three taxes are compared: income, wage, and consumption. The article shows how equivalence depends crucially on government debt policy. If the government varies the government-debt/capital-stock ratio so that each tax achieves the same steady-state capital per worker, then the consumption tax is equivalent to the wage tax: The representative individual chooses the same consumption path and attains the same lifetime utility. However, if the government maintains the same debt/capital ratio under the three taxes, then the consumption tax is not equivalent to the wage tax: The consumption tax achieves a higher capital per worker than the income tax, while the wage tax achieves a lower capital per worker, and the representative individual chooses a different consumption path under all three taxes. Economists should therefore indicate the crucial role of government debt policy in any discussion of tax equivalence.

Stimulus Without Debt

The persistent argument against Keynesian stimulus is that it will require government borrowing and therefore raise debt levels. But the stimulus should also increase incomes, easing any debt burden. The author argues there is another strategy to create stimulus but with no additional debt. He analyzes a wide range of monetary alternatives as well.