Tax Policy and the Economy: Volume 4

Recent political and economic events, such as the U.S.-Canada free-trade agreement and the generally increasing integration of world capital markets, have strengthened the already close ties between the economies of the United States and Canada. These close ties, along with the two countries' shared cultural and economic characteristics, have provided researchers with good justification for using the experience of one country to draw inferences about the effects of potential policy changes in the other (e.g., . In this paper, however, we are concerned less with the lessons of policy differences than with their potential spillover effects. In particular, we consider how demographics and fiscal structure are likely to interact over the next several decades in influencing each country's rate of capital accumulation, and the implications of differences in projected saving with respect to patterns of trade and capital flows between the two countries. A U.S.-Canada comparison on this issue promises to be particularly interesting because the countries' future demographic characteristics are projected to be quite different, and their fiscal systems for providing public expenditures for the elderly are also quite different. Moreover, the great difference in size between two countries should lead to very different macroeconomic effects of changes in national saving. Whereas increases in U.S. saving might significantly spur U.S. domestic investment through reduction in interest rates, the

This paper presents a set of generational accounts that can be used to assess the fiscal burden current generations are placing on future generations. The generational accounts indicate, in present value, the net amount that current and future generations are projected to pay to the government now and in the future. These accounts can be understood in terms of the government's intertemporal (long-run) budget constraint. We thank Jinyong Cai, Ritu Nayyar, and Bash Hardeo for excellent research assistance and

2000

postwar Americans. This paper uses CORSIM (a dynamic micro simulation model) and SOCSIM (a detailed social security benefit calculator) to study this treatment. The study finds that Americans born in the postwar period will, under current law, lose roughly 5 cents of every dollar they earn to the OASI program in taxes net of benefits. Measured as a proportion of their lifetime labor incomes, the middle class are the biggest losers, surrendering about 7 cents per dollar earned. But measured in absolute dollars, the rich lose the most. Out of every dollar that postwar Americans contribute to the OASI system, 67 cents represent a pure tax. The system treats women better than men, whites better than non-whites, and the collegeeducated better than the non-college-educated. While the system has been partially effective in pooling risk across households, it offers postwar cohorts internal rates of return on their contributions that are quite low-1.86 percent. This is half the real rate currently being paid on inflationindexed long-term U.S. government bonds. If taxes are raised or benefits cut by the amounts needed, under intermediate assumptions, to achieve intertemporal budget balance in the OASI program, postwar Americans wifi end up receiving a 1 percent real return on their contributions.

2000

SSRN Electronic Journal

We investigate the consequences of demographic change for the propagation of exogenous tax changes in the U.S. labor market. We document that the responsiveness of unemployment rates to tax changes largely varies across age groups: the unemployment rate response of the young is nearly twice as large as that of prime-age workers. Such heterogeneity is the channel through which shifts in the age composition of the labor force impact the responsiveness of the aggregate U.S. unemployment rate to tax changes. We then present a model with frictional unemployment and learning about match quality that quantitatively accounts for the estimated aggregate unemployment semi-elasticity to tax cuts. We use the calibrated model to quantify the impact of an aging labor force on the propagation of tax shocks. The results indicate that the aging of the Baby Boomers reduces the aggregate unemployment semi-elasticity to tax cuts by approximately 50 percent.

Cet article donne un aperçu personnel des grands changements, théoriques et pratiques, qui se sont produits en politique fiscale au cours des dernières décennies. Il présente également certaines hypothèses sur les tendances à venir dans ce domaine.

Only a few years ago, the future of tax policy seemed clear to all. The rhetoric, and to some extent the reality, of tax policy was dominated by the image of "levelling the playing field," and the much-touted phenomenon of "globalization" was taken to mean that the field was likely to be levelled at something close to the lowest common denominator. Governments were no longer growing, the "welfare state" was increasingly seen as obsolete, and only the occasional out-of-touch crank seemed at all concerned about the redistributive consequences of reducing taxes on wealth and high incomes. Not only political fashion and economic reality but also the growing intellectual capital built up by economists about the "deadweight" losses of progressive taxes added weight to these trends. Income tax rates were coming down, the value-added tax (VAT) was sweeping the world, the use of tax measures for non-fiscal ends such as encouraging investment in favoured industries was out of fashion everywhere, and intellectual enthusiasm for consumption and flat-rate taxes was at a new high. In the fashion of prophets at all times, most fiscal pundits at the end of the 1980s assured us that the future would be like the immediate past, only more so.

Most tax revenue and tax policy research papers discuss historical developments and the current challenges of raising tax revenue. This paper takes a long term view and addresses the possible futures of tax revenue using the Three Horizons model. With the help of this model, it outlines possible futures for raising tax revenue in an environment of rapidly evolving technology, automation, globalization, the rising power of powerful interest groups, and the trend of increased accumulation of wealth in the hands of fewer taxpayers. By analyzing possible futures, the assumptions of key stakeholders are tested.

1995

SSRN Electronic Journal, 2000

The aging of the U.S. population will be a critical public policy issue in the years ahead. This paper surveys the recent literature on the economics of aging, with a special emphasis on government spending on the aged. The U.S. Census Bureau projects that the proportion of the elderly in the total population will increase while the proportion of the working-age population will decline. This demographic shift implies a significant growth in the number of beneficiaries of major federal entitlement programs. Existing rules and escalating health care costs are expected to lead to fiscal pressures and to pose challenges for economic growth. The paper offers the author's assessment of the forces that determine government spending on retirees. It also examines how the retirement and health care of older citizens might be financed, and measures the potential impact of different reform proposals. Finally, it provides an introduction to an edited volume, Government Spending on the Elderly.