Martin Feldstein

Temporary Layoffs in the Theory of Unemployment

The typical worker who is laid off is soon rehired by his original employer. This important and generally unnoticed fact requires a major reevaluation of our current theories of unemployment. This paper develops a theory of temporary layoffs. Specific attention is given to the question of why employment is reduced instead of hours. The role of unemployment insurance and of taxes is examined in detail.

The Welfare Loss of Excess Health Insurance

American families are in general overinsured against health expenses. If insurance coverage were reduced, the utility loss from increased risk would be more than outweighted by the gain due to lower prices and the reduced purchase of excess care. The first part of the paper develops and estimates a structural equation for the demand for health care and then examines the dynamic interaction between the purchase of insurance and the demand and supply for health care. The second part estimates the welfare gains that would result from decreasing insurance by raising the average coinsurance rate from 0.33 to 0.50 and 0.67 percent. The most likely values imply net gains in excess of

Domestic saving and international capital movements in the long run and the short run

4 billion.

On the theory of tax reform

The evidence and analysis in this paper support the earlier findings of Feldstein and Horioka (1980) that sustained increases in domestic savings rates induce approximately equal increases in domestic rates of investment. New estimates for the post-OPEC period 1974-79 imply that each extra dollar of domestic saving increases domestic investment by approximately 85 cents in a sample of 17 OECD countries. An explicit analysis of the problems of identification and simultaneous equations bias suggests that the regression estimates are more relevant as a guide to the long-run response of international capital flows than to their short-run behavior. Coefficient estimates based on annual variations in savings and investment are subject to potentially severe simultaneous equations bias that is not present when annual observations are averaged over a decade or more and the regression is estimated with a cross-country sample of these averages. A portfolio model of international capital allocation that is presented in the paper indicates that the short-run change in the rate of net foreign investment in response to a sustained increase in domestic saving is likely to be substantially greater than the ultimate steady state response.

Tax incentives and charitable contributions in the United States: A microeconometric analysis

Abstract This paper focuses on the difference between de novo tax design and the reform of existing tax laws. Issues of efficiency and equity in optimal tax reform are discussed. Principles for balancing horizontal equity and efficiency are discussed. The paper also examines critically the utilitarian criterion of social choice that has been the basis of recent theoretical studies of optimal tax design. The Haig-Simons standard, as a principle of either design or reform, is criticized as both inefficient and inequitable in the light of optimal tax theory and the theory of tax incidence.

The effective tax rate and the pretax rate of return

The American public sector relies substantially more on private nonprofit institutions than is common in most other countries. Higher education, health care, the visual and performing arts, and general community services are produced by voluntary institutions. Even when these institutions receive most of their income from user charges and public funds, they depend on private contributions to provide the basic ‘equity capital’ and to support new ventures.’ The federal income tax law allows the value of contributions to be deducted in calculating taxable income. The ‘price’ of one dollar’s contribution to a philanthropic organization, measured in terms of foregone income after tax, therefore varies inversely with the individual’s marginal tax rate. There are today a number of widely discussed proposals for changing the tax treatment of charitable contributions. These include the complete abolition of the deduction, the substitution of a system of tax credits, the,introduction of a ‘floor’ with a deduction or credit only for contributions above that level, and various modifi-

Towards an Economic Theory of Replacement Investment

This paper presents new estimates of the taxes paid on nonfinancial corporate capital, on the pretax rate of return to capital, and on the effective tax rate. The basic time series show that both the pretax rate of return and the effective tax rate have varied substantially in the past quarter century. An explicit analysis indicates that, after adjusting for different aspects of the business cycle, pretax profitability was between one and 1.5 percentage points lower in the 1970s than in the 1960s. The rate of profitability in the 1960s was also about one-half of a percentage point greater than the profitability in the 7 years of the 1950s after the Korean war. Changes in productivity growth, in inflation, in relative unit labor costs, and in other variables are all associated with changes in profitability. None of these variables, however, can explain the differences in profitability between the 1950Ts, 1960s and 1970s. Looking at broad decade averages, the effective tax rate and the pretax rate of return move in opposite directions, higher pretax profits occurring when the tax rate is high. There thus appears to have been no tendency for pretax profits to vary in a way that offsets differences in effective tax rates.

THE INCOME TAX AND CHARITABLE CONTRIBUTIONS

This paper develops an economic theory of replacement investment that can provide a basis for specifying an econometric model of investment behavior. The long-run and short-run effects of changes in the interest rate and in tax laws are examined. The paper also investigates several reasons why the common assumption of a technologically constant rate of replacement is incorrect even as an asymptotic limit. LARGE VARIATIONS in capital spending continue to motivate econometric studies of investment behavior. The past decade has seen the development of attempts to model net investment as the adjustment of the capital stock to a desirable level. Building on earlier work by Lutz [35], Haavelmo [21], and others, Jorgenson and his collaborators (e.g. [24, 28, 31, and 33]) have provided an operational model of net capital accumulation that relates desired capital to the cost of capital services. Although serious objections have been raised about the specification of the optimal capital stock (including [5, 9, 13, and 15]) and about the arbitrary nature of the adjustment dynamics [37], it is likely that some form of this general model will continue to provide a framework for future investment studies. In contrast to these developments of a theory of capital expansion, replacement investment continues to be analyzed in terms of a non-economic model of technical necessity. Jorgenson and others have adopted the simplifying assumption that replacement investment is a constant proportion of the capital stock.2 This assumption has been challenged and contrary evidence has been offered by Feldstein and Foot [14] and Eisner [10]. The purpose of the current paper is to examine several aspects of a theory of replacement investment. We hope not only to show that a model with a constant replacement rate is implausible and unsatisfactory but also to provide a basis for better empirical work in the future. The magnitude of replacement investment (the annual rate of replacement investment generally exceeds expansion investment) makes this issue a matter of substantial importance.

The Surprising Incidence of a Tax on Pure Rent: A New Answer to an Old Question

Charitable contributions are an important source of basic finance for a wide variety of private nonprofit organizations that perform quasi-public functions. The tax treatment of charitable contributions substantially influences the volume and distribution of these gifts. The current study presents new estimates of the price and income elasticities of charitable giving. The parameter estimates are then used with the United States Treasury Tax File to simulate the effects of several possible alternatives to the current tax treatment of charitable giving. INDIVIDUAL CHARITABLE CONTRIBUTIONS are an important source of basic finance for a wide variety of private nonprofit organizations. Higher education, research, health care, the visual and performing arts, welfare services, and community and religious activities rely heavily on the voluntary institution. In 1970, American families contributed more than

Social Security and Household Wealth Accumulation: New Microeconomic Evidence

17 billion for their support. The volume and distribution of charitable gifts is influenced by the personal income tax treatment of charitable contributions. There are today a number of widely discussed proposals for changing these rules. The appropriate tax treatment of such gifts involves a complex series of economic issues. Critical to a resolution of these issues is an understanding of the likely quantitative effects of alternative tax rules: the effects on the total volume of charitable gifts and its distribution among the different types of donees; the effects on the distribution of tax burdens