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Investment. In 3 vol. Vol. 3. Lifting the burden: Tax reform, the cost of capital and U.S economic growth

Опубликовано на портале: 25-10-2003
Cambridge, Mass: MIT Press, 2001, V. 3, 474 с.
This book presents a comprehensive treatment of the cost-of-capital approach for analyzing the economic impact of tax policy. This approach has provided an intellectual impetus for reforms of capital income taxation in the United States and around the world. The most dramatic example is the Tax Reform Act of 1986 in the United States. In this landmark legislation the income tax base was broadened by wholesale elimination of tax preferences for both individuals and corporations. Revenues generated by base broadening were used to finance sharp reductions in tax rates at corporate and individual levels.

The cost-of-capital approach presented in this book shows that important opportunities for tax reform still remain. This approach suggests two avenues for reform. One would retain the income tax base of the existing U.S. tax system, but would equalize tax burdens on all forms of assets as well as average and marginal rates on labor income. Elimination of differences in the tax treatment of all forms of assets would produce gains in efficiency comparable to those from the Tax Reform Act of 1986. Equalization of marginal and average tax rates on labor income would more than double these gains in efficiency.

Proposals to replace income by consumption as a tax base were revived in the United States during the 1990's. The Hall-Rabushka Flat Tax proposal would produce efficiency gains comparable to those from equalizing tax burdens on all forms of assets under the income tax. However, a progressive National Retail Sales Tax, collected on personal consumption expenditures at the retail level, would generate gains in efficiency exceeding those from the Flat Tax by more than 50 percent! Equalizing marginal and average rates of taxation on consumption would double the gains from the Flat Tax.


A comprehensive treatment of the cost-of-capital approach for analysis of the economic impact of tax policy. Explains why this particular approach should be the first choice, and which avenues for tax reforms are suggested by this approach.

The cost of capital and the marginal effective tax rate are combined with estimates of substitution possibilities by businesses and households in analyzing tax and spending programs. This makes it possible to evaluate tax reforms and changes in government spending. Studies of the economic impact of tax policies have taken two forms. First, the cost of capital has been incorporated into investment functions in macroeconomic models, which are used to model the short-run responses to tax policy changes. Second, the cost-of-capital approach has been integrated into applied general-equilibrium models used in evaluating the long-run economic effects of tax reforms. The cost-of-capital approach suggests two avenues for tax reform. One would retain the income tax base of the existing U.S. tax system, but would equalize tax burdens on all forms of assets as well as average and marginal tax rates on labor income. The other would substitute consumption for income as a tax base, while equating average and marginal tax rates on labor income.
    List of Tables

    List of Figures

    Preface

  1. Introduction

  2. Taxation of Income from Capital
      2.1 Cost of Capital
      2.2 Capital as a Factor of Production
      2.3 Rates of Return
      2.4 Capital Income Taxation
      2.5 Households
      2.6 Noncorporate Business
      2.7 Corporate Business
      2.8 Alternative Approaches

  3. U.S. Tax System
      3.1Tax Rates
      3.2 Distribution of Assets
      3.3 Vintage Price Functions
      3.4 Capital Cost Recovery
      3.5 Financial Structure
      3.6 Alternative Approaches
      Appendix

  4. Effective Tax Rates
      4.1Economic Impact of U.S. Tax Law
      4.2 Effective Tax Rates
      4.3 Differences in Effective Tax Rates
      4.4 Alternative Approaches

  5. Dynamic General Equilibrium Model
      5.1 Commodities
      5.2 Producer Behavior
      5.3 Consumer Behavior
      5.4 Government and Rest of the World
      5.5 Market Equilibrium

  6. Estimating the Parameters
      6.1Consumer Behavior
      6.2 Producer Behavior
      6.3 Elasticities
      6.4 Other Parameters
      Appendix

  7. Economic Impact of Tax Reform
      7.1 Perfect Foresight Dynamics
      7.2 Comparison of Welfare Levels
      7.3 Computational Algorithm
      7.4 Welfare Effects of Tax Reform
      7.5 Efficiency Costs of Taxation
      7.6 Efficiency Costs under the 1996 Tax Law
      7.7 Alternative Approaches
      Appendix

  8. Fundamental Tax Reform
      8.1Tax Reform Proposals
      8.2 Modeling the Tax Reform Proposals
      8.3 Welfare Impacts of Fundamental Tax Reform
      8.4 Equivalence of Consumption and Labor Income Taxes
      8.5 Efficiency Costs of Taxation
      8.6 Alternative Approaches
      Appendix

  9. Marginal Cost of Public Spending
      9.1Determinants of the MCS
      9.2 Dynamic General Equilibrium Model
      9.3 Estimation of the MCS
      9.4 MCS under the 1996 Tax Law
      9.5 MCS under Fundamental Tax Reform
      9.6 Welfare Impact of the End of the Cold War
      9.7 Alternative Approaches

    References

    Index


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