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Tax policy and the economy.

The NBER's Sixth Annual Conference on "Tax Policy and the Economy" was held in Washington on November 19. The program was organized by NBER Tax Program Director James M. Poterba of MIT. Five papers were discussed:

Steven F. Venti, NBER and Dartmouth College, and

David A. Wise, NBER and Harvard University,

"Government Policy and Personal Retirement Saving"

James M. Poterba, "Corporate Tax Revenues Since

the Tax Reform of 1986: What Explains the


Lawrence H. Goulder, NBER and Stanford University,

"The Distribution of Industry Burdens from Carbon


Joel B. Slemrod, NBER and University of Michigan,

"Taxation and Inequality: A Time Exposure


Alan J. Auerbach, NBER and University of

Pennsylvania; Jagadeesh Gokhale, Federal Reserve Bank

of Cleveland; and Laurence J. Kotlikoff, NBER and

Boston University, "Social Security and Medicare

Policy from the Perspective of Generational

Accounting" (NBER Working Paper No. 3915)

Venti and Wise review the data on IRAs and saving in new ways, and confirm their earlier findings that IRAs represent new saving. While IRA saving increases with age and income, it is fairly widespread: they find, for example, that more than half of IRAs in 1986 were held by families with incomes of $50,000 or less. Further, from 1980-9, saving outside of IRAs held fairly stable, as IRA saving first rose and then, after the 1986 tax changes, fell.

The Tax Reform Act of 1986 was projected to raise corporate taxes by more than $120 billion during 1986-91, but actual federal corporate tax receipts have fallen far short of those projections. Poterba finds that the most important factor contributing to this shortfall is lower-than-expected corporate profits. There are three principal causes of the underperformance of corporate profits: a lower-than-expected return on corporate capital; an increase in interest payments as a share of corporate operating income; and an increase in income to Subchapter S corporations subject to the individual income tax.

Goulder examines the effects of a U.S. carbon tax on U.S. industries. He considers alternative tax designs that differ according to the tax treatment of internationally traded goods and the use of tax revenues. Goulder finds that the decline in profits and output for most affected industries is much lower when the tax is based on carbon emissions associated with the consumption or use of fuels than when it is based on emissions associated with the production or supply of fuels. A tax on domestic production and on a selected number of carbon-intensive imports has little effect on international competitiveness and avoids the substantial administrative costs of a carbon tax based on use. Using carbon tax revenues to finance cuts in preexisting distortionary taxes reduces, but does not eliminate, the adverse consequences of the carbon tax policy for industry profits and investment, Goulder concludes.

Slemrod notes that most estimates of trends in income inequality, and the role of the tax system, have been based on cross-sectional snapshots of annual income. Yet conclusions based on snapshots can give a misleading picture. Therefore, to reassess some of the conclusions about taxation and inequality, he uses tax return data that has extensive information on property income, and in particular data on an unchanging sample of taxpayers from 1979 to 1986, and a distinct set of taxpayers from 1967 to 1973. He finds that 16 percent of the increase in one measure of inequality--the Gini coefficient--was caused by changes in federal policy. Taxes have increased the trend toward inequality slightly in the 1980s, he concludes.

Auerbach, Gokhale, and Kotlikoff revisit their concept of "generational accounting," a method of determining how the burden of fiscal policy falls on different generations. In this paper, they simulate the effects of realistic paths for Social Security and Medicare. They conclude that if the accumulation of a Social Security trust fund does not continue, or if Medicare costs rise as a share of GNP, then the unbalance in generational policy could greatly increase. Future generations, and current young Americans, would pay significantly more to the government. For example, continued expansion of Medicare in this decade alone could double the 21 percent imbalance between current and future generations if the bill for this Medicare growth is shifted primarily to future generations.

A conference volume will be published by the MIT Press; its availability will be announced in a future issue of the NBER Reporter.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Dec 22, 1991
Previous Article:Political economy.
Next Article:Economics of the environment.

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