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A regular feature of the debate over changes in the tax code is who benefits and who doesn’t. Most of this debate hinges on federal government statistical tables, which employ distributional analysis to measure the effects of changes in the tax code. MORE>>>
[Download Report in PDF format] Top of PageWASHINGTON, D.C. - The inflation targeting policy used by many central banks around the world maintains low inflation, increases financial market stability, and reduces risk, all factors that tend to lower interest rates, according to a new study released today by Chairman Jim Saxton of the Joint Economic Committee (JEC). The new JEC study, Economic Effects of Inflation Targeting, examines the empirical evidence on the impact of inflation targeting as it has been implemented in a number of countries. Inflation targets typically define a range of acceptable increases in a broad inflation measure such as a core price index.
[Download Research Report 109-15 in PDF format] Top of PageWASHINGTON, D.C. - Hurricanes Katrina and Rita will temporary reduce economic and employment growth through the end of 2005, but economic and employment growth are likely to rebound in 2006. Oil and natural gas production and distribution are recovering from severe disruptions. The U.S. economy has displayed remarkable resilience in absorbing the effects of these two hurricanes.
[Download Research Report 109-15 in PDF format] Top of PageWASHINGTON, D.C. - This fall Congress is likely to set a definite date for the transition from analog to digital television. One of the most important reasons for setting a firm date is the need to devote additional spectrum to public safety uses. More spectrum will allow enhanced communications, including greater interoperability, faster transmission of needed information, and greater coverage. Poor communications can increase the loss of life and property associated with a disaster and delay recovery.
[Download Research Report 109-15 in PDF format] Top of PageWASHINGTON, D.C. - In the near future Congress will consider legislation that sets a definite date for the transition from analog to digital television. This paper examines: 1) the benefits of making the transition, 2) the issue of providing subsidies to viewers impacted by the transition, and 3) whether legislation should also adjust the transmission requirements imposed on cable and satellite broadcasters.
[Download Research Report 109-15 in PDF format] Top of PageWASHINGTON, D.C. - Katrina will temporarily reduce economic and employment growth through the end of 2005, but economic and employment growth is likely to rebound in 2006. Despite significant infrastructure damage, maritime commerce is being restored. Oil and natural gas production are continuing to recover from severe disruptions. The U.S. economy has displayed remarkable resilience in absorbing the effects of this catastrophe.
[Download Research Report 109-14 in PDF format] Top of PageWASHINGTON, D.C. - Economic growth in the second quarter continued at a healthy pace. Sustained by robust consumption and business investment, economic activity is, and looks to remain, strong. Inflation is also restrained and employment continues to expand.
[View Press Release] Top of PageWASHINGTON, D.C. - The economy of the People’s Republic of China is strongly influenced by the Chinese government through its extensive ownership, control, and financing of major businesses, according to a new Joint Economic Committee (JEC) study released today by Chairman Jim Saxton. The new study, Overview of the Chinese Economy, examines the evolution of Chinese economic policy in recent decades and its impact on the structure of the Chinese economy.
[Download Research Report 109-12 in PDF format] Top of PageWASHINGTON, D.C. - For three decades, OPEC has manipulated the oil market. The Persian Gulf countries sit on huge reserves of oil and are able to produce oil cheaply. The major ones, together with several non-Persian Gulf countries included in the cartel (Algeria, Libya, Nigeria, Indonesia, Venezuela), openly collude to restrict the output of oil and raise the price far above their cost. From the end of World War II until the oil embargo of 1973, Arabian Light crude oil sold for less than $2.50 per barrel; then the price shot up.
[Download Research Report 109-11 in PDF format] Top of PageWASHINGTON, D.C. - As President Bush and many in the Congress and across the country have recognized, our current malpractice liability system does not serve the needs of patients and is in need of reform. It is not simply an issue of lowering insurance premiums for physicians. It is particularly about patient safety and quality of care, as well as reducing unnecessary health care spending.
[Download Research Report in PDF format] Top of PageWASHINGTON, D.C. - The economy continued to expand and add jobs at a healthy rate in the first quarter of 2005. The indicators of economic activity for the months of April and May are, generally speaking, also positive. Over the last two months, government statistical agencies, the Federal Reserve Bank and research institutions released key indicators showing that the health of the economy is robust.
[Download Press Release] Top of PageWASHINGTON, D.C. - A new study released today shows that the debt owed by poor nations to the international financial institutions (IFIs) can and should be written off immediately, Chairman Jim Saxton said. The study demonstrates that existing financial reserves of the International Monetary Fund (IMF) and the other major IFIs are already more than sufficient to write off in full the multilateral debt owed by poor countries. The study, The Debt of the Poorest Nations: A Gold Mine for Development Aid, was written by Adam Lerrick of the Gailliot Center for Public Policy at Carnegie Mellon University and the American Enterprise Institute.
[Download Press Release] Top of PageWASHINGTON, D.C. - China should take steps to revalue its currency, according to a new Joint Economic Committee (JEC) study released today by Chairman Jim Saxton, and fellow JEC members Congressman Phil English and Congressman Thaddeus McCotter. The new JEC study, PRC's Pegged Exchange Rate Contributes to Global Imbalances, examines the operation of the Chinese currency peg, its economic effects, and its relationship to economic distortions in China as well as other countries.
[Download Research Report] Top of PageWASHINGTON, D.C. - The existing U.S. corporate tax laws have grown into a patchwork of overly complex, inefficient and unfair provisions that impose large costs on corporate business. U.S. corporations seeking to minimize the costs imposed by the counterproductive provisions in the U.S. corporate tax system have adopted strategies to reduce overall tax exposure and increase profits.
[Download Study in PDF] Top of PageWASHINGTON, D.C. - The U.S. corporate income tax is overly complex and counterproductive, according to a new Joint Economic Committee (JEC) study released today by Chairman Jim Saxton. The new study, Reforming the U.S. Corporate Tax System to Increase Tax Competitiveness, identifies several different ways the tax could be improved. These options include territorial taxation, individual and corporate income tax integration, movement toward consumption taxation, and elimination of the corporate alternative minimum tax or the corporate income tax altogether.
[Download Research Report] Top of PageWASHINGTON, D.C. - Recent headlines reporting that the U.S. dollar fell to an all-time low against the euro prompted fears about the economic consequences of the declining value of the U.S. dollar in terms of foreign currencies. A review of the facts shows that fluctuations in the value of the U.S. dollar are not unusual and its current value is well within historical norms.
[Download Research Report] Top of PageWASHINGTON, D.C. - The Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) was designed to encourage balanced economic growth. In addition to stimulating consumer spending and short-term economic growth, the JGTRRA was intended to promote investment, capital formation and long-term growth. The efficacy of the JGTRRA has been the subject of debate in recent policy disputes and in academic and popular publications. Many of the criticisms have questioned the adequacy of the economic stimulus to increase consumer spending. The key issue, however, is whether the JGTRRA stimulated investment.
[Download Research Report] Top of PageWASHINGTON, D.C. - Economic theory gives policymakers solid support for resisting tax increases and preferring spending reductions as a method of reducing the federal deficit.
[Download Research Report] Top of PageWASHINGTON, D.C. - A regular feature of the debate over changes in the tax code is who benefits and who doesn't. Most of this debate hinges on federal government statistical tables, which employ distributional analysis to measure the effects of changes in the tax code.
[Download Research Report] Top of PageWASHINGTON, D.C. - Social Security has a serious financial problem that will deteriorate if policymakers do not act to prevent it. While Social Security's income from payroll taxes currently exceeds its outgo in benefit payments, Social Security's trustees project that outgo will exceed income in 2017.
[Download Research Report] Top of PageWASHINGTON, D.C. - It is commonly assumed that the medical liability system works as advertised: injured patients sue negligent doctors for compensation for their injuries. This assumption is the basis for arguments defending the current system. However, medical liability in practice differs greatly from theory because the system is ineffective at deterring negligent injuries and fails to justly compensate those truly harmed by negligent injuries, thereby providing compelling grounds for serious medical liability reform.
[Download Research Report] Top of PageWASHINGTON, D.C. - Key economic information, critical in assessing the overall economic outlook, was released by government agencies in recent days. Specifically, the Commerce Department’s Bureau of Economic Analysis released the “advance” fourth quarter real GDP number, the Labor Department’s Bureau of Labor Statistics reported on labor market conditions in its January Employment Report, and the Federal Reserve reported on the monetary policy decisions made at its February FOMC meeting.
[Download Press Release] Top of PageWASHINGTON, D.C. - Senator John Kerry's health plan would significantly increase the government's role in financing and managing health care, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton. The new study, An Analysis of Senator Kerry's Health Plan, evaluates the likely impact of the proposed health plan.
[Download Press Release] Top of PageWASHINGTON, D.C. - Foreign investment in the U.S. and international trade in services together account for over 6 million U.S. jobs, according to a new study released today by Vice Chairman Jim Saxton. The new Joint Economic Committee study, Insourcing Jobs, examines the employment effects of foreign investment in the U.S., and the employment impact of exports of U.S. services. The study also finds that the annual compensation of insourced jobs tended to be above average.
[Download Press Release] Top of PageWASHINGTON, D.C. - The tax relief enacted since 2001 has pushed after-tax median income for married-couple families with two children to historic highs, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton. The new study, Family Income and Income Taxes During the Economic Recovery, examines the impact of the 10 percent tax bracket, expanded child credit, and marriage penalty relief on the after-tax income of such families between 2001 and 2003.
[Download Press Release] Top of PageWASHINGTON, D.C. - An International Monetary Fund (IMF) proposal to provide hidden subsidies to a variety of countries, including some hostile to the U.S., was exposed today in a new study released by Joint Economic Committee Vice Chairman Jim Saxton. The study examining this proposal, Opening a Back Door to Foreign Aid: The SDR Department at the IMF, was authored by Adam Lerrick of the Gailliot Center for Public Policy at Carnegie Mellon University.
[Download Press Release] Top of PageWASHINGTON, D.C. - Congressional interest in price stability legislation goes back many decades to the early years of the Federal Reserve, according to a new study released today by Vice Chairman Jim Saxton. The study, Price Stability and Inflation Targets: A Legislative History, examines the history of Congressional efforts to mandate price stability in monetary policy, culminating in the development of the first inflation targeting legislation, which was introduced by Saxton in 1997.
[Download Press Release] Top of PageWASHINGTON, D.C. - The strength of the U.S. economy is documented in a new report released today by Vice Chairman Jim Saxton. The report, Current Economic Conditions and Outlook, examines the health of the economy using a wide variety of standard measures of output, employment, financial markets, manufacturing, housing, and inflation. Over the last three quarters, output (GDP) has grown 5.6 percent after adjustment for inflation, manufacturing has rebounded, and employment has surged.
[Download Press Release] Top of PageWASHINGTON, D.C. - The bursting of the stock market bubble in 2000 was the primary factor sowing the seeds of economic weakness for several subsequent years, according to a new Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. The new study, Macroeconomic Performance Since 2000, analyzes how the impact of the bursting stock market bubble undermined investment and economic growth, and aggravated ongoing problems in the manufacturing sector.
[Download Press Release] Top of PageWASHINGTON, D.C. - The federal tax cuts of the last few years have put the United States near or at the top among advanced large economies in offering incentives to work, save, and invest, according to a new Joint Economic Committee (JEC) study released by Vice Chairman Jim Saxton.
The new study, How Competitive Is the U.S. Tax System?, compares major tax rates in 2003 in the United States versus those in the world's eight other largest advanced economies: Australia, Canada, France, Germany, Italy, Japan, Spain, and the United Kingdom.
[Download Press Release] Top of PageTaxes, not fees and expenses, remain the biggest cost to mutual fund shareholders, according to a new study released today by Vice Chairman Jim Saxton. A most serious tax impact comes from how income taxes on capital gain distributions significantly reduce investment returns, according to the new JEC study, Providing Tax Equity for Mutual Fund Investors: Changing the Tax Treatment of Capital Gain Distributions. This tax liability occurs when mutual funds realize capital gains that then must be passed on to mutual fund shareholders, even if the investors sold none of their mutual fund shares.
[Download Press Release] Top of PageThe pattern of economic slowdown following the bursting of the stock market bubble in 2000 has been very similar in the major advanced economies, according to a new study released today by Vice Chairman Jim Saxton. After the sharp decline in the stock markets of the advanced economies, investment slowed dramatically, industrial production fell, and unemployment increased in all, according to the new Joint Economic Committee study, International Economic Performance Since the Stock Market Bubble. The study also shows that in the subsequent expansion period, the U.S. economy has performed relatively well compared to the other advanced economies. The study examines the macroeconomic performance of the U.S., European Union, Japan, and Canada.
[Download Press Release] Top of PageVice Chairman Jim Saxton released a new Joint Economic Committee report today showing the strength of the economy as reflected in a wide variety of standard macroeconomic measures. The report, Current Economic Conditions and Outlook, examines recent trends in economic growth, investment, consumption, housing, the stock market, employment, inflation, interest rates, and other economic indicators.
[Download Press Release] Top of PageThe tax relief legislation passed in recent years has provided thousands of dollars in tax savings to typical families and should not be tampered with, Vice Chairman Jim Saxton said today in releasing a new study on the topic. The study, Income Tax Savings for Middle-Income Families, focuses on the impact of recent tax changes on four person, married couple families.
[Download Press Release] Top of PageTax distribution tables are often incomplete, biased and misleading and thus should not drive U.S. tax policy, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton. The new study, A Comparison of Tax Distribution Tables: How Missing or Incomplete Information Distorts Perspectives, is the latest product of a JEC research program on tax distribution issues. Tax distribution tables are typically used to project and allot changes in taxation to specific income groups, but often omit basic information such as the share of taxes paid by such groups before and after a given tax measure takes effect.
[Download Press Release] Top of PageThe existence of budget deficits does not have a major impact on interest rates, according to a new Joint Economic Committee study released today by Vice Chairman Jim Saxton.
[Download Press Release] Top of PageThe U.S. economy is currently growing strongly and the economic outlook has improved significantly, according to a new report released today by Vice Chairman Jim Saxton. The new Joint Economic Committee report, Current Economic Conditions and Outlook, examines recent macroeconomic trends using a wide variety of economic indicators.
[Download Press Release] Top of PageComparisons of the effects of tax legislation on taxpayers in various income groups often misrepresent the impact of the tax system on most taxpayers, according to a Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. According to the study, The Misleading Effects of Averages in Tax Distribution Analysis, such comparisons are often misleading because the average tax liabilities commonly used are very different from the income tax liabilities actually borne by most taxpayers in each income group. The study is a statistical analysis of Internal Revenue Service income tax data from its Statistics of Income division.
[Download Press Release] Top of PageThe bursting of the stock market bubble in 2000 has had long-lasting negative effects on business investment and economic growth, according to a new study released today by Joint Economic Committee (JEC) Vice Chairman Jim Saxton. The soaring stock market had encouraged and facilitated increases in business investment up to its peak in early 2000, but the popping of the bubble reversed this process. For most of the period since 2000, business investment has been a drag on economic growth. The new study, Economic Repercussions of the Stock Market Bubble, examines the relationship between the stock market bubble, business investment, and economic growth.
[Download Press Release] Top of PageThe positive effects of repealing the estate tax should be made permanent, Vice Chairman Jim Saxton said today in releasing a new study on this tax with Rep. Jennifer Dunn. The study, The Economics of the Estate Tax: An Update, documents the damage inflicted by the estate tax on capital formation, thrift, continuity of small businesses, and the environment. Under current law, the damaging effects of the estate tax are reduced, and the tax would be repealed in 2010, only to come back to 2001 levels in the next year.
[Download Press Release | Download a longer background paper (in pdf)] Top of PageArgentina's depression of 1998 to 2002, whose effects linger today, was not a failure of free markets, as some observers have claimed. Rather, it resulted from blunders in economic policy that impeded economic growth, explains a new Joint Economic Committee study titled Argentina's Crisis: Causes and Cures.
[Download Press Release] Top of PageLoans from the International Monetary Fund (IMF) and World Bank should not be used to bail out Iraq's creditors, said Joint Economic Committee Vice Chairman Jim Saxton. Saxton made his remarks in connection with the release of a new Joint Economic Committee (JEC) report, The Role of the IMF and World Bank in Reconstructing Iraq. Saxton has also introduced H.R. 2080, a bill that would block the use of IMF loans to bail out Iraq's creditors, and thereby encourage a write-down of Iraq's foreign debt.
[Download Press Release] Top of PageFederal Reserve monetary policy remains a potent force even when short-term interest rates are very low, according to a Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. The study, Monetary Policy in Low Inflation/Deflation Environments, examines the options available to the Federal Reserve to ease monetary policy even when the short-term Federal Funds rate is barely positive.
[Download Press Release] Top of PageThe new tax legislation recently reported by the House Ways and Means Committee would improve economic growth by addressing a major soft spot in the economic expansion - investment - according to a study released today by Joint Economic Committee (JEC) Vice Chairman Jim Saxton. The study, Near-Term Stimulus and Long-Term Economic Growth, analyzes the economic impact of the Jobs and Growth Tax Reconciliation Act of 2003.
[Download Press Release] Top of PageThe shortcomings of the medical liability system have driven up health insurance premiums and reduced access to medical care, according to a new Joint Economic Committee (JEC) study released today by Vice Chairman Jim Saxton. The new study, Liability for Medical Malpractice: Issues and Evidence, examines the current status of the malpractice system, documents the numerous flaws in the system, and discusses the need for and benefits of reform.
[Download Press Release] Top of PageCentral banks should maintain their focus on price stability and generally not attempt to influence asset prices, according to a new study released today by Joint Economic Committee (JEC) Vice Chairman Jim Saxton. The new JEC study, Monetary Policy and Asset Prices, examines the arguments for and against monetary intervention to influence sharp asset price movements, including stock market "bubbles."
[Download Press Release] Top of PageThe federal budget deficit is a manageable problem and should not preclude pro-growth tax relief, Joint Economic Committee (JEC) Vice Chairman Jim Saxton said today. He made his remarks in connection with the release of a new JEC study, "Deficits, Taxation, and Spending."
[Download in PDF format] Top of PageThe tax relief plan proposed by President Bush would reduce the excessive burden of taxation on the U.S. economy, according to a new JEC study released by Vice Chairman Jim Saxton today. The study examines the extra costs imposed by current levels of taxation, which average about 40 cents on the incremental dollar collected in federal revenue. The study, Federal Tax Policy, Near-Term Stimulus, and Long-Term Growth, analyzes the main components of the Administration plan.
[Download in PDF format] Top of PageLegislation passed by Congress in 1998 mandated that, in return for an increased U.S. contribution to the International Monetary Fund (IMF), the IMF charge interest rates that reflect an adjustment for risk to countries that borrow from it when they are experiencing monetary crises. The IMF has not charged such interest rates in some cases where circumstances have clearly seemed to require them. The IMF’s normal interest rates and even its “risk-adjusted” rates are below the rates at which many of its member countries can borrow from the private sector. In effect, borrowers are being subsidized by taxpayers in the United States and a small number of other countries that provide most of the IMF’s usable resources. Increasing IMF interest rates would reduce the cost of U.S. participation in the IMF and promote better economic policies in countries that borrow from the IMF.
[Download in PDF format] Top of PageFor many senior citizens, individual retirement plans, such as IRAs and 401(k)s, are a primary saving vehicle for retirement. Along with Social Security, individual retirement plans (“IRPs”) represent a major source of money for retirement. However, even though IRPs are a valuable saving vehicle for many seniors, many IRPs have one major drawback: the forced distribution of assets and the associated taxation of those assets for senior citizens at age 70½ for traditional IRAs and the later of age 70½ or the year in which the account holder retires for 401(k)s. This requirement forces many seniors to take distributions when they do not need them Worse, in cases of a down market, the forced distributions may require seniors to sell assets at depressed prices to pay taxes, even if investment losses have been incurred.
This study addresses the minimum distribution requirement that effectively forces senior citizens to withdraw funds from IRPs or face a 50 percent excise tax, the reasoning behind the requirement, and the economic harm it can have on seniors, and some policy alternatives to this requirement that would help mitigate the bias against seniors and their retirement that this requirement creates.
[Download GAO report in PDF format] Top of PageA new analysis of the U.S. Patent and Trademark Office by the General Accounting Office (GAO) was released today by Joint Economic Committee (JEC) Chairman Jim Saxton and Congressman Lamar Smith. The GAO study, Intellectual Property: Information on the U.S. Patent and Trademark Office's Past and Future Operations, documents the growing backlog of patent applications in recent years and reviews some of the options proposed to improve the situation.
[Download in PDF format] Top of PageFor the most part, macroeconomic activity continues to expand, albeit at a reduced, modest-to-moderate pace, slower than the typical post World War II recovery. Despite recent data revisions, the general pattern of key economic events during the period remains unchanged. In particular, the current economic advance follows the sharp mid-2000 slowdown, a mild recession beginning early in 2001, as well as the infamous terrorist events of September 2001. Several sectors (e.g., consumption and housing) consistently contribute to the economy’s forward momentum, while other data (e.g., investment and employment) remain sluggish.
[Download in PDF format] Top of PageInvestment is widely recognized as a key to long-term economic growth. Marginal individual income tax rate reductions clearly stimulate aggregate consumption and labor force participation, but their stimulative effects on aggregate investment have been disputed. Based on the empirical evidence available a decade and a half ago, marginal individual income tax reductions were thought to have slight and indirect effects on aggregate investment. Even marginal corporate income tax rate reductions were thought to boost aggregate investment only modestly. To stimulate aggregate investment, many economists recommended asset-specific tax relief such as accelerated depreciation, investment tax credits, and lower differential tax rates on the income from specific capital assets. But, empirical progress in aggregate investment modeling during the last decade and a half suggests that marginal income tax rate reductions is more effective than previously thought in stimulating aggregate investment.
In the three decades prior to 1988, aggregate investment models assumed that all firms operated in a close approximation of a perfect financial market. Beginning in 1988, empirical studies have found that some large businesses in new, rapidly changing industries, many medium-sized businesses, and virtually all small businesses and farms are financing constrained. When financing constrained firms cannot fund their investments through their cash flow or liquid asset stocks, such firms must pay substantial external finance premia over the opportunity costs of internal funds to contract debt or issue equity. As a result, financing constraints force some businesses and farms to forgo some profitable investments.
Incorporating financing constraints into aggregate investment models has profound implications for U.S. tax policy. Aggregate investment models that assume a perfect financial market favor asset-specific tax relief. In contrast, aggregate investment models that incorporate financing constraints favor marginal income tax rate reductions. Marginal income tax rate reductions would increase a business' or a farm's cash flow from its portfolio of existing assets and should stimulate investment. Since many financing constrained businesses and farms are proprietorships, partnerships, or Subchapter S corporations whose income and expenses flow-through to individual tax returns, marginal individual income tax rate reductions rather than asset-specific tax relief are critically important to stimulating investment among these "flow-through" businesses and farms.
[Download in PDF format] Top of PageTechnology advancements and the information revolution have provided enormous benefits to our economy. At the same time, they have also exposed our nation to new vulnerabilities and security threats. Recent terrorist attacks against America have demonstrated the importance of understanding potential threats and developing strategies to counter them.
Computer networks create new avenues for those with malicious intent. Because many critical activities rely upon telecommunications and computer systems, our economy can be crippled as a result of information warfare and mass disruption of these systems. Physically securing buildings with guards and gates isn't enough to protect systems that can be accessed via cyberspace from anywhere in the world. Infrastructures providing energy, transportation, communications, water, human services, banking and finance, civilian government services, and military services are all at risk.
We need a better understanding of security and our critical infrastructure, in particular the vulnerabilities resulting from our growing reliance on networked technology. This report represents a range of perspectives on infrastructure protection, from definitions and strategies to business challenges and policy options.
[Download in PDF format] Top of PageRecently, growing support has emerged endorsing the concept of price stability as the principal policy objective for Federal Reserve monetary policy. After outlining current monetary institutional arrangements and related congressional responsibilities, this paper details the reasons for and benefits from stabilizing the purchasing power of money. This objective has been endorsed not only by many of the world’s most esteemed monetary economists but also by many Federal Reserve officials. Evidence demonstrates that price stability in the form of inflation targets can work quite well. Under such an approach, the central bank would set upper and lower bounds of inflation target ranges defined as percentage increases in a broad price index. Furthermore, the approach allows for ample monetary policy flexibility and there are several reasons why now is an opportune time to adopt this approach. Finally, certain market price indicators appear to be especially well-suited to serve as policy guides in such a price stabilizing monetary policy strategy.
[Download in PDF format] Top of PageThis study examines the market for terrorism insurance in the United States, discusses the economic implications of the cost and availability of terrorism insurance and considers the proposed federal role in terrorism insurance. Among the study’s principal findings:
The market for terrorism insurance remains limited.
Only a small number of insurers are actively providing stand-alone terrorism insurance policies. When available, coverage for terrorism losses is expensive, terms of coverage are restrictive and policy limits are often insufficient. The problems associated with terrorism insurance pose a significant threat to sustained economic growth.
The lack of terrorism insurance is stopping some business deals, such as real estate and construction projects where terrorism insurance may be necessary to obtain financing. The high cost of terrorism insurance (when available) diverts resources from other more productive uses, negatively affecting investment and jobs. Low coverage limits in terrorism insurance policies mean that businesses are bearing a huge amount of risk themselves. In the event of another attack similar to that of September 11th, insurance payments will not be available to the same degree to rebuild.
[Download in PDF format] Top of PageIn the Federal budget process, the pay-as-you-go (PAYGO) principle as set forth in the Budget Enforcement Act (BEA) requires that all enacted direct spending and tax legislation for a fiscal year must be deficit-neutral in the aggregate. PAYGO rules have been generally praised by proponents for restraining new spending and for encouraging legislators to provide reasons for their budget decisions. Opponents have pointed to unconstrained federal spending, and frequent budget artifices as examples of the failure of PAYGO. In addition, the PAYGO rules raise excessive procedural hurdles for tax relief legislation. Numerous scholars and practitioners in the field have addressed the pros and cons of PAYGO, including the need for changing PAYGO rules or eliminating them altogether. The current PAYGO provisions are set to expire with the BEA after fiscal year 2002.
This paper concludes that if the PAYGO requirements as set forth in the Budget Enforcement Act are to be extended, then at a minimum a compromise approach be adopted to reform PAYGO: to permit dynamic revenue analysis of tax legislation, or at the very least allow legislation providing appropriate tax deferrals (such as contributions to IRAs) to be exempt from PAYGO requirements. This paper discusses budget enforcement and the PAYGO concept, then identifies the problems associated with PAYGO and how PAYGO often leads to counterproductive tax policy decisions. The paper also reviews the mixed success of PAYGO in controlling federal spending. The paper then demonstrates how a reform that would allow legislation providing appropriate tax deferral to be exempt from PAYGO rules would allow both fiscal responsibility and good tax policy by promoting incentives for taxpayers to save and invest, and potentially increasing revenue to the government.
[Download in PDF format] Top of PageThere is body of research and analysis, which began in the 17th and 18th centuries and continues to today, that has examined the benefits of international trade and investment. At the government level, faith in these benefits has encouraged many countries to adopt international economic policies that promote greater trade and investment. This paper examines these benefits. A key feature of government policies that promote greater international trade and investment is a commitment to reducing global barriers to trade and investment. This paper will also examine the benefits from reducing these barriers.
The organization of the paper is as follows. Section I outlines the scope of the paper. Section II provides a brief history of international trade relations in the last century. The section introduces some key terms used later and records the motives of U.S. officials instrumental in furthering international trade and investment after World War II. Section III reviews economic research that has established various correlations between international trade and investment and increases in economic growth and income. Section IV considers four ways international trade and investment can increase economic growth and income. These four consist of the following:
Growth of international trade and investment from trade liberalization. Gains in economic welfare from lower trade barriers. Changes in the pattern of international trade and investment from comparative advantage. Gains in total factor productivity and technology diffusion from greater international trade and investment. Section V concludes the paper with some observations on international economic policy.
[Download in PDF format] Top of PageThe events of September 11 stunned Americans not only because of the heinousness of the attacks themselves, but also because of the underlying vulnerability they revealed. The toll such attacks take on open, unprepared, and unsuspecting nations is severe; particularly significant are the economic effects of such acts and the responses they elicit. These effects need to be understood in order to prescribe appropriate economic policy remedies. This study categorizes and briefly summarizes both the short- and long-term economic effects and costs of such terrorist attacks. Prominent among the long-term effects are: (1) the increased transaction costs and inefficiencies imposed on the economy by terrorism, and (2) the fact that increased spending on security necessarily diverts labor and capital resources away from productive private sector activities and toward necessary, but less productive, anti-terrorist activity. Several estimates of the magnitudes of the various costs are briefly summarized. In general, the estimates of the costs surrounding the September 11 terrorism suggest that these costs are significant, but not inordinately large relative to GDP. While these complex estimates of the long-term costs are commendable, there are a number of reasons to be skeptical of their conclusions. In particular, they fail to consider multiple forms of terrorism, important measurement problems, or the cost-related behavior of terrorists. Consequently, terrorism’s long-term costs may be more severe than suggested by many existing estimates. Some timely monetary and fiscal policy responses to such terrorist activity are appropriate.
[Download in PDF format] Top of PageThe permanency of the federal tax code is an issue currently before Congress. President George W. Bush is seeking to accelerate the implementation of the individual income tax rate reductions in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and to make all of its provisions, including the rate reductions, the expansion of the child tax credit, and the repeal of the estate tax, which are currently scheduled to expire on December 31, 2010, permanent.
According to the available evidence, individuals respond more strongly to a permanent federal tax rate reduction or other permanent tax incentives than to a temporary federal tax reduction or a federal tax rebate. Thus, the duration of a federal tax reduction affects how much it can stimulate economic growth.
Empirical studies generally show that many individuals (between 50 percent and 80 percent) smooth their consumption over their lifetime based upon their expectations of permanent income (i.e., lifetime average income excluding any one-time income gains or losses) while liquidity constraints, myopia, and other limitations compel other individuals (between 20 percent and 50 percent) to limit their consumption to current after-tax income.
Because only a permanent federal tax reduction can increase permanent income, a permanent federal tax reduction elicits higher near-term consumption and GDP growth than a temporary federal tax reduction or a federal tax rebate. A survey of relevant empirical studies using a variety of statistical models and data sets suggests that a permanent federal tax reduction affecting individuals will increase first-year aggregate consumption and GDP twice as much as a temporary federal tax reduction of the same amount and at least three times as much as federal tax rebate of the same amount, all other things being equal.
Instead of finding that individuals anticipate how announced federal tax changes affect their after-tax income and alter their consumption even before such changes are implemented, empirical studies generally find that the most of the economic benefits from federal tax reductions affecting individuals when such reductions are implemented. Lengthy phase-ins and implementation delays minimize the near-term boost to consumption and GDP growth from federal tax reductions affecting individuals.
[Download in PDF format] Top of PageWhile economists have published many empirical studies on the macroeconomic effects of a large supply of U.S. Treasury debt securities (Treasuries) relative to U.S. gross domestic product (GDP), economists have only recently begun to examine its microeconomic effects.
Because liquidity constraints may cause firms to terminate otherwise profitable investments, asset liquidity is valuable. As a result, financial market practitioners pay liquidity premia over net present value to obtain liquid financial assets, especially Treasuries.
As the world’s most liquid debt security, Treasuries lubricate global financial markets. A large supply of Treasuries relative to U.S. GDP allows financial market practitioners to develop a true credit-risk free yield curve, fund their portfolios efficiently through repos, and hedge interest rate risk effectively.
During an economic expansion, Treasuries enhance the efficiency of financial markets and lower the financing costs for making investments. During a recession or a financial crisis, Treasuries provide financial markets with a unique, exogenous source of liquidity that the privately generated debt securities cannot duplicate. The liquidity provided by Treasuries is qualitatively different than the liquidity provided by privately generated debt securities because Treasuries are ultimately based upon the coercive taxing power of the U.S. government. Thus, a large, liquid Treasury market ameliorates the contraction of U.S. employment, investment, and output that would otherwise occur during a recession or a financial crisis.
The microeconomic liquidity benefits associated with a large supply of Treasuries relative to U.S. GDP provides serendipitous macroeconomic benefits as well. Within limits, increasing the supply of Treasuries alleviates private sector liquidity constraints, increases private investment, and accelerates long-term real GDP growth.
International comparisons with Hong Kong and Singapore confirm the efficiency benefits accruing to the United States from a large, liquid Treasury market. Though neither Hong Kong nor Singapore had any fiscal need to borrow, both deliberately chose to issue government debt securities to increase the efficiency of their financial markets and lower financing costs for firms borrowing in local currencies.
[Download in PDF format] Top of PageOver the last 30 years, the mutual fund industry has grown tremendously to its current size of almost $7 trillion in funds managed. It has been characterized by rapid innovation and strong competition. The variety of mutual fund types has grown, offering average Americans opportunities to invest money and diversify assets. Mutual fund costs have fallen, driven down by economies of scale and advances in computers and communications. Mutual fund investors have benefited from falling costs, which competition has passed along to them.
[Download in PDF format] Top of PageMajor currency crises have been frequent in the last 10 years. Currency crises are caused, or at least enabled, by inconsistent monetary policy. There is a basis in economic theory for the "bipolar view" of exchange rates, which contends that the extremes of fixed and floating exchange rates are less likely to suffer currency crises than the middle ground of pegged exchange rates. Countries can reduce their chances of suffering currency crises by avoiding pegged rates.
[Download in PDF format] Top of PageWhen thinking about government spending, often people only consider its benefits. But government spending has costs, too, because the resources government uses have to come from somewhere and could be put to other uses. Research indicates that when these factors are taken into account, it turns out that the cost of raising an additional $1 in taxes is not $1, but closer to $1.40. On the other hand, reducing government spending by $1 can benefit the economy by $1.40, leading to higher economic growth.
[Download in PDF format] Top of PageIn the Trade Act of 1974, Congress sought to create a mechanism that would allow the President to negotiate meaningful reductions in non-tariff barriers while preserving the pre-eminent role of Congress in domestic legislation. This mechanism is called Trade Promotion Authority (TPA). TPA was used to negotiate the Free Trade Agreement with Canada, the North American Free Trade Agreement (NAFTA), and the Uruguay Round Agreements (URA). However, TPA lapsed in 1994 and has not subsequently been renewed.
Since TPA is an authorization to negotiate trade agreements rather than a trade agreement, the economic benefits of TPA are dependent upon what agreements the President may use TPA to negotiate. To overcome this problem, economists must look forward and project possible outcomes of future trade negotiations.
Using a variety of statistical models and data sets, economists have consistently found large GDP gains from international trade liberalization. A survey of relevant empirical studies of possible outcomes suggests that a conservative estimate for the maximum potential benefits from full international trade liberalization under TPA would be a $750 billion increase in global GDP. Of course, the actual benefits from TPA will depend upon the precise terms of any international trade liberalization agreements negotiated under TPA.
[Download in PDF format] Top of PagePrior to the events of September 11, 2001, the U.S. government expected to run large recurring budget surpluses during this decade. The aftermath of the terror attacks has substantially changed the fiscal outlook. In this new economic and security environment, a bipartisan consensus has emerged that reducing federal net debt as rapidly as possible is not the exclusive objective of fiscal policy. Instead, both the Bush administration and Congress agree that additional tax reductions are needed to stimulate economic growth.
This study evaluates the economic trade-offs between federal tax relief, and a more rapid reduction of federal net debt. This study employs the concept of opportunity cost (i.e., the highest valued alternative that must be sacrificed when choosing one option over others) to evaluate the federal debt reduction and federal tax relief options in terms of their expected effects on real GDP growth.
Empirical studies consistently find that additional federal tax reductions, particularly of marginal federal income tax rates, would accrue large macroeconomic benefits. The marginal excess burden from federal taxation is about 40 percent. Reducing such deadweight losses through additional federal tax relief would enhance overall economic welfare and stimulate long-term real GDP growth. On the other hand, empirical studies do not indicate that a more rapid reduction of federal net debt would necessarily yield commensurate benefits. Under current circumstances and given the range of feasible fiscal policy options, the provision of federal tax relief is an appropriate objective for fiscal policy.
[Download in PDF format] Top of PageFor twenty years, American households have increased their holdings of mutual funds and other financial assets despite periods of inflation, disinflation, booms, bankruptcies, commodity price shocks, and financial crises at home and abroad. During the last ten years, lower inflation, lower interest rates and demographic factors have further boosted the demand for mutual funds.
Mutual funds are the primary financial assets of many middle-income households. More than 80 percent of mutual fund owners have annual household incomes below $100,000; their median financial assests are $80,000. Mutual fund assets make up 21 percent of all retirement assets.
Now is the right time to re-examine the taxation of investment returns on mutual funds. This study describes who owns mutual funds, what forces underlie growth in mutual fund ownership, and what effects changes in the capital gains taxation of mutual fund distributions could have.
[Download in PDF format] Top of PageThe ongoing economic slowdown, exacerbated by the terrorist attacks of September 11, makes changes in economic policy necessary. While there is bipartisan agreement on the desirability of tax relief, the composition and scale of tax legislation are both matters of contention. This paper examines current economic conditions, the primary features of several options for tax relief under consideration in Congress, and their potential effects on the economy.
Current and ongoing Joint Economic Committee (JEC) research on major tax issues indicates that measures to reduce income tax rates and reduce the cost of capital would have positive short- and long-term effects on the economy. This study is divided into several sections: the economic impact of taxation, the recent historical record, and certain major provisions for tax relief under consideration. Among the findings are the following:
[Download in PDF format] Top of PageThe economy has been in an economic slowdown since the middle of 2000, led by a sharp decline in investment growth. The rebound previously projected by many macroeconomic forecasters for the last half of 2001 will probably be delayed or undermined by the terrorist attacks of September 11, 2001. Tax incentives for capital formation are especially appropriate given the important leading role of weakening investment in the economic slump. After the attacks, the extra security costs in the short run as well as in the long run will have effects similar to imposing a “security tax” on an already vulnerable economy. This security tax should be offset by tax policy, such as the relief provided under several core components of the Economic Security and Recovery Act of 2001 (H.R. 3090). The current tax code penalizes work, saving, investment, and entrepreneurship. Tax changes that reduce these penalties will improve long-term economic growth. According to an important and growing body of economic research, the current level of taxation imposes a large excess burden at the margin; 40 cents in lost economic welfare per dollar of tax would be a reasonable estimate. There is no reason for policymakers to accept such counterproductive results. If the tax bill increases the GDP growth rate by only one-tenth of one percentage point annually, it would produce enough additional revenue over 10 years to offset a significant portion of the estimated static revenue losses. The dynamic economic impact of properly designed tax legislation, and the high degree of income mobility in the United States, lead to broadly shared economic benefits that are often ignored in conventional revenue and distributional analysis.
Features and Policy Implications of Recent Currency Crises (JEC Study -- November 2001)
[Download in PDF format] Top of PageMajor currency crises have been frequent in the last ten years. This report describes what currency crises are, why they are imprtant, what features recent major currency crises have shared, and what the implications are for U.S. participation in international monetary affairs.
Federal Debt: Market Structure and Economic Uses for U.S. Treasury Debt Securities (JEC Study -- August 2001)
[Download in PDF format] Top of PageThis study provides an overview of federal debt – its history, its composition, its management, its economic uses, and a discussion of recent trends.
The Continental Congress began issuing debt securities in 1776, and the United States has had outstanding debt ever since. The first Secretary of the Treasury Alexander Hamilton established sound goals and principles for debt management that transformed U.S. government debt from highly speculative and illiquid securities into the world’s safest and most liquid investment. Because of Hamilton’s visionary leadership, Treasuries developed a unique set of characteristics – default risk-free, a seamless yield curve, high liquidity, a deeply integrated market, and extremely low bid-ask spreads – that let Treasuries perform many economic functions other than financing past federal budget deficits. For example, the Federal Reserve uses Treasuries to conduct U.S. monetary policy. Foreign central banks hold Treasuries as a store of value and a means to intervene in foreign exchange markets. Treasuries are the premier “safe haven” investment during economic turbulence. Wall Street uses the Treasury yield curve as the default risk-free pricing benchmark, while Washington indexes its loans to students and farmers to Treasury yields. Treasuries collateralize approximately four-fifths of the transactions in the $2.5 trillion a day repurchase agreement (repo) market. Portfolio managers employ Treasuries for interest rate hedging or speculation and for improving risk-return trade-off in their portfolios. As a regulatory tool, the Pension Benefit Guaranty Corporation (PBGC) utilizes the 30-year Treasury bond yield to determine the funding adequacy of private defined-benefit pension plans, the payout amount if an employee leaves an employer sponsoring a defined-benefit pension plan before the normal retirement age, and the insurance premiums that sponsoring employers pay to the PBGC.
As of March 31, 2001, the U.S. government had a gross debt of $5.8 trillion, of which $3.4 trillion or 59.5 percent was net debt held by the public and $2.3 trillion or 40.5 percent was held in intragovernmental accounts. Economists consider net debt rather than gross debt as the proper measure for federal debt. By March 31, 2001, budget surpluses beginning in fiscal year 1998 have reduced the net debt to GDP ratio to 33.5 percent. Consequently, the gross issuance of Treasury notes and bonds fell by 54 percent from 1996 to 2000. As the supply of Treasuries shrinks, the characteristics that made Treasuries the ideal financial instruments for so many economic functions are deteriorating.
Little research has been published to date on the economic consequences of federal net debt reduction. Yet, during the next few years, the sharp decline in the supply of Treasuries may compel the Federal Reserve System, international official entities, and market participants to find substitutes that are, by definition, inferior in some way to Treasuries. Given the importance of Treasuries to the U.S. economy, and the projected reduction in federal net debt during the next decade, the following questions face U.S. policymakers:
What are the opportunity costs for federal debt reduction? Which provides greater benefits to the U.S. economy: a larger tax cut or a faster reduction in net debt? Could excessive federal debt reduction decrease the efficiency of the American financial market and increase systemic risk? Could excessive federal debt reduction hamper the Federal Reserve System’s execution of monetary policy? Will substituting other securities for Treasuries have unintended negative economic consequences? Information Technology and the New Economy (JEC Study -- July 2001)
[Download in PDF format] Top of PageThe superior performance of the U.S. economy in the late 1990s has led many commentators to speculate that a "New Economy" has emerged in which heavy investment in information technology (IT) has led to an era of sustained economic growth. Although the recent economic slowdown has dampened some of the enthusiasm for the idea of a New Economy, a fundamental question remains: can the output growth experienced in the late 90's, which was significantly higher than that observed in previous decades, be traced back to IT?
This paper addresses this question by looking at the behavior of labor productivity, a key measure of economic well-being that grew at a significantly faster rate in the late '90s. The New Economy hypothesis to be examined is whether investment in IT caused the acceleration in productivity. The evidence suggests a growing consensus on two conclusions:
Information technology is an important factor in the recent acceleration in productivity growth. Both the production and the use of IT contributed to the productivity revival. Recent Bailouts and Reform of the International Monetary Fund (JEC Study -- July 2001)
In October 1998 the Federal Reserve Bank of Chicago and the International Monetary Fund (IMF) co-sponsored a conference entitled "Asia: An Analysis of Financial Crisis." Karin Lissakers, one of 24 directors representing 182 IMF member countries, proffered "A View from the Executive Board." Noting that, while the IMF's annual surveillance reviews-or Article IV consultations-are "supposed to provide an early warning of trouble ahead", the board concluded that the pre-crisis "macroeconomic fundamentals in Asia by conventional definition looked strong." Moreover, Ms. Lissakers acknowledges that (Lissakers, 1999, p. 4):
As we discussed the Asian performance, some on the board questioned the sustainability of twenty-five to thirty percent or more rates of private credit expansion year after year and wondered about the soundness of the underlying investments....the weight of opinion was that this had worked well so far, and....seemed to be the norm for Asia, the standard for the 'Asian model'.While stipulating that "There were, nevertheless, warning signs in Thailand....", Ms. Lissakers suggests that the IMF "did not pay sufficient attention to other indicators...most notably the rapid build-up of foreign short-term obligations by banks and the nonbank private sector, especially in Korea and Thailand." And, finally, Ms. Lissakers acknowledges that (Lissakers, 1999, pp. 4-5):
The IMF "did not worry enough about the incentives pegged or managed exchange rates give to both borrowers and creditors to accumulate unsustainable cross-border, cross-currency exposures"; The IMF "was unaware of the extraordinary leverage of Korean companies...[and] did not focus on the weak accounting and disclosure practices of banks and nonbanks; or the loose loan loss provisioning and generous rollovers of banks to their key clients"; The IMF "underestimated the impact of the Japanese government's contractionary fiscal stance," and The IMF "also underestimated the effect of political factors. 'Political risk is unfashionable in the sophisticated financial world of the 1990s. Private sector financial analysts, too, largely discounted the fragility of the political underpinnings of the Asian economies and did not fully comprehend the extent to which rampant corruption was discrediting regimes...as well as weakening economies directly...."
[Download in PDF format] Top of PageAfter experiencing a remarkably extended period of economic expansion lasting nearly 18 years, the U.S. economy’s growth suddenly slowed substantially in mid-2000. The speed and significance of this slowdown surprised most economists. Some analysts believe this slowdown will be brief; the economy’s growth should turn around and return to healthy growth quite rapidly. Generally, explanations suggested by economists endorsing this view indicate the factors causing the slowdown are temporary, short-lived, and readily reversible. Once policymakers take remedial action to reverse these factors, economic recovery will readily ensue and the slowdown-recovery can be characterized as “V-shaped” in nature.
Other economists argue that the factors causing the slowdown are longer-term or structural in nature. These explanations portend a longer, more drawn-out slowdown period followed by a significantly weaker, more sluggish recovery. The slowdown-recovery character of the later view is associated with asset price deflation as well as burdensome debt and can be characterized as “U-shaped” in nature. If this set of conditions best characterizes current circumstances, policymakers should undertake faster, more forceful policy responses using reliable indicators to prevent a more serious, protracted downturn while ensuring no meaningful resurgence of inflation.
[Download in PDF format] Top of PageThe alternative minimum tax (AMT) for individuals is a separate system of income taxation that operates in parallel to the regular income tax. Taxpayers who may be affected by the AMT must recalculate their taxes using rules about income and deductions different from those that apply to regular income tax. If they owe more under the AMT than they would under regular income tax, they pay the AMT amount.
Unlike the regular income tax, the AMT is not indexed for inflation. Over time, inflation and economic growth have made the AMT affect more and more taxpayers. In 1990, the AMT financially affected only about 132,000 taxpayers. In 2000, it affected an estimated 1.3 million taxpayers, and in 2010, it is projected to affect 17 million taxpayers.
The huge increase in taxpayers who will soon be affected by the AMT has led to Congressional proposals to overhaul or eliminate it. This paper examines the main options for dealing with the AMT.
[Download in PDF format] Top of PageThere are compelling arguments for promoting moderation in the growth of governmental expenditures over time. A potentially politically viable policy for promoting economic growth would be to allow government expenditures to rise modestly over time, but by less than the growth rate in GDP, leading in time to some reduction in governmental expenditures as a percent of GDP. In effect, this has been the experience of the past several years. In addition, the benefits of moderating inflation observed in recent times are arguments for the Federal Reserve continuing to follow its stated objective of promoting price stability. Since taxes tend to automatically rise over time as a percent of GDP (in large part, because of the progressive nature of the income tax), and since tax reduction also tends to reduce the propensity of policy-makers to increase expenditure, a very strong case can be made for a tax cut. Current softness in the economy further supports the case for tax reduction.
[Download in PDF format] Top of PageIn order to increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by mutual fund shareholders should be modified. The current policy of taxing mutual fund capital gain distributions unfairly discriminates against taxpayers seeking the investment benefits of diversification through mutual funds instead of through direct ownership of stocks. Therefore, the practice of taxing forced distributions of capital gains to mutual fund shareholders should be changed to allow for a deferral of taxation on reinvested capital gain distributions. Until shareholders realize a capital gain through the sale of an asset, no tax liability should incur. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their after-tax rate of return.
A tax deferral on mutual fund capital gain distributions as proposed in H.R. 168, sponsored by Rep. Jim Saxton (R-NJ), could increase the after-tax return by almost 15 percent over a 30-year period for many mutual fund shareholders. For a hypothetical taxpayer with an initial $10,000 investment in a mutual fund that returns 10 percent a year, the deferral on capital gain distributions as proposed in H.R. 168 would amount to $15,055 over a 30-year period after taxes. This amounts to approximately 150 percent of the original $10,000 investment.
A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year -- 81% of households owning mutual funds, with 39% of households owning mutual funds earning less than $50,000 a year.
A deferral mechanism, as proposed under H.R. 168, is relatively simple and would not result in a significant paperwork burden for mutual funds or their shareholders.
[Download in PDF format] Top of PageWith large and growing federal budget surpluses, and with the federal tax burden at a peacetime high, a broad spectrum of policymakers are supporting substantial income tax rate cuts. Tax rate cuts would not only provide tax relief to every income taxpayer, they would also spur economic growth by reducing the distortions created by income taxes. This report provides background on marginal tax rate levels, describes the economic costs created by high marginal rates, and summarizes tax rate trends in other industrial countries. The report finds:
The combination of statutory income tax rates, income tax phase-out provisions, state income taxes, and payroll taxes can create excessive marginal rates for families at all income levels. Over 20 million small businesses that pay tax under the personal income tax system would also benefit from rate reductions. Recent research finds a strong link between marginal tax rates and small business hiring and investment behavior. High marginal tax rates distort work and savings decisions, and promote unproductive tax avoidance and evasion activities. These tax distortions create "deadweight losses" which lower the nation's standard of living. Each $1 of marginal tax rate cuts would save the private economy at least $1.25 as deadweight losses fall and economic efficiency increases. The harmful effects of high marginal tax rates have persuaded dozens of countries to reduce rates in recent years. The average top personal income tax rate in the G-7 major economies has fallen 18 percentage points since 1980. In an increasingly competitive world, lowering our marginal rates would reduce the burden of our tax system and help sustain our economic leadership.
[Download in PDF format] Top of PagePrice stability is currently a central focus of U.S. monetary policy. Because of well-known policy lags and the need for preemptive policy action, the Federal Reserve necessarily uses intermediate indictors to help attain its inflation goals. Currently, there is disagreement among economists as well as Federal Reserve policy makers as to the proper set of intermediate indictors to use in conducting a price stabilizing monetary policy.
Some analysts, for example, use models that typically embody a “Phillips curve” relationship relating inflation positively to an “output gap,” typically using the gap between actual unemployment and NAIRU or the gap between actual GDP and potential GDP as inflation guides. In recent years, however, these models have not performed well; their inflation forecasts have persistently been higher than actual inflation. There are a number of problems associated with the use of NAIRU or potential GDP as policy guides in a price stabilizing monetary policy strategy. These problems, together with the recent poor inflation forecasting record of these variables, suggest that alternative policy guides should be considered.
Market price indicators are such an alternative useful set of guides to a price stabilizing monetary policy. These indicators -- commodity price indices, the foreign exchange value of the dollar, and long-term bond yields -- have a number of advantages as policy guides, especially when they are jointly assessed in conjunction with one another. Recently, these indicators consistently provided reliable signals as to the direction of and to future movements in core general prices. The inflation signals of these indicators were consistent with the actual benign core inflation that characterized the period. In this sense, these indicators provided more reliable inflationary signals than the above-described “gap” models that consistently predicted higher than actual inflation.
[Download in PDF format]Federal Reserve monetary policy has traditionally focused on the domestic economy. Over time, however, a number of significant trends have underscored the potential importance of the international dimensions of contemporary monetary policy. Such trends include the following:
- Financial markets continue to become increasingly integrated internationally; capital is evermore mobile.
- The U.S. dollar continues to remain the world’s principal international currency despite evolving exchange rate arrangements.
- Official and unofficial dollarization has continued in several emerging market economies.
These trends suggest that monetary policy may have differing transmission mechanisms increasingly involving international variables than was earlier the case. In addition to these trends, empirical evidence recently has accumulated showing that changes in U.S. monetary policy can significantly impact emerging market economies in a number of ways. For example, changes in U.S. monetary policy can (1) dominate capital flows in emerging market economies, (2) be associated with financial crises in these countries, and (3) significantly impact interest rates and financial markets in emerging economies under differing exchange rate arrangements. Furthermore, experience shows that the Federal Reserve can successfully assume international lender-of-last-resort responsibilities and stabilize world financial markets in situations of international liquidity crises.
The Federal Reserve should increasingly recognize these international considerations when conducting monetary policy.
[Download in PDF format]To increase personal saving and investment and to promote tax neutrality among various investment vehicles, the tax treatment of capital gains unrealized by shareholders should be modified. The current practice of forcing distributions of capital gains to mutual fund shareholders should be changed. Until the shareholder realizes a capital gain through the sale of an asset, no tax liability should incur. With respect to regulated investment companies, the realization point that triggers a capital gains tax liability should be moved from the corporate level down to the individual shareholder level. Since mutual funds are a popular vehicle for saving and investment of middle-income households, this tax reform would greatly increase the incentives for these people to invest and save for their future by increasing their pre-liquidation rate of return.
The current tax treatment of mutual funds causes the average mutual fund investor to lose between 10 percent and 20 percent a year of their pre-liquidation rate of return. On a $10,000 investment earning a 10 percent annual rate of return, a 2.3 percentage point reduction in the pre-liquidation rate of return would cost a mutual fund investor almost $82,000 over a 30 year period -- on a $26,000 investment a mutual fund investor would forego approximately $213,000 over a 30 year period.
A change in the tax treatment of mutual funds would have a beneficial impact on all owners of mutual funds, but the benefits would primarily help those making less than $100,000 a year, with 43% of households owning mutual funds earning less than $50,000 a year.
Abstract The analysis of tax data is a time intensive and complicated process. Much time and effort are spent collecting income and tax data, compiling data sets and running statistical analyses. However, it appears that relatively little time and effort are spent actually understanding the data and how best to present results to the public of analyses of using tax data. This is evident in the overuse of averages and the simplistic classification of taxpayers into income ranges and quintiles by tax distribution tables that are often highly publicized. This study shows that the link between income and tax liability is much more tenuous that that often presumed and that a variety of other factors can greatly affect tax liability. Specifically, this report finds that, among other things:
This analysis examines recent trends in stock ownership and explains the reasons for the dramatic increase in stock ownership among a broader and increasingly diverse number of Americans. The key reasons for this democratization of the stock market include:[Download in PDF format]
- The popularization of the mutual fund.
- The general reduction in the multiple taxation of savings and investment that resulted from the genesis of the IRA and 401(k) plan.
- The emphasis of the Federal Reserve on price stability which has lowered interest rates, stabilized financial markets, and acted as a de facto tax cut.
The current economic expansion is remarkably resilient, sustained and has set longevity records. One of the remarkable features of the expansion is the simultaneous achievement of low rates of inflation and unemployment together with relatively robust rates of economic growth. A key reason for the durability of the expansion owes to the maintenance of macroeconomic policies promoting long-run efficiency and growth without inflation. Appropriate macroeconomic policies evolved from the gradual recognition that monetary and fiscal policies should be directed at different and independent objectives; monetary policy should focus on achieving price stability whereas fiscal policy should focus on open market, growth-promoting tax and spending restraint policies encouraging entrepreneurial activity (i.e., policies promoting aggregate supply). More specific reasons for the economy's remarkable sustainability all promote growth without inflation and include the following:The Administration offers an alternative explanation. It contends that its 1993 policy of raising tax rates worked to reduce budget deficits and interest rates and thus fostered sustained recovery. This view proves inadequate for a number of reasons including the following:
- The growth-enhancing effects of a gradual, credible anti-inflationary Federal Reserve monetary policy.
- The growth-promoting effects of credible government spending restraint.
- The long-term growth effects of an efficiency-promoting incentive structure embedded in the tax code.
- The effects on aggregate supply and capacity of substantial investment in equipment as well as in productivity-enhancing new technologies.
- The specialization and efficiency-promoting effects of increased international integration and open markets (globalization).
The prospects for continued expansion look favorable so long as appropriate macroeconomic policies are maintained and no serious policy errors are made. [Download in PDF format]
- Raising taxes does not promote economic growth without inflation.
- The current expansion began well before President Clinton's inauguration.
- The budget deficit began contracting well before Clinton Administration policy could have been implemented.
- The timing of interest rate movements contradicts the Administration's explanation.
- The Clinton Administration's own economic projections were not consistent with its after-the-fact explanation.
- The Clinton Administration provides an inaccurate explanation of the disappearance of budget deficits.
The analysis of tax policy and tax legislation can be "highly conjectural" and consequently more art than science. Tables and figures detailing revenue effects and distribution of burdens associated with projected outcomes of proposed tax legislation are often presented in ways that distort or fail to disclose information regarding the economic outcomes. Additionally, some of these tables are based on data sources that are statistically compromised and for which statistical measures of accuracy are impossible to calculate. Furthermore, the public is often not informed as to the limitations inherent in the information. Members of Congress, students of tax analysis, the media and ordinary citizens seeking to understand the economic effects of proposed tax legislation are inundated with revenue estimates and distributional tables that often obscure the economic issues and hinder the policy process. [Download in PDF format]
There is a strong consensus among economists that formal education is an important determinant of individual earnings as well as economic growth. The importance of formal education has been magnified by recent economic trends underlying U.S. labor market demand for skilled workers. The following is an analysis of the importance of education to both the individuals acquiring education and of the benefits received by society resulting from increased educational attainment. [Download in PDF format]
Evidence of widespread corruption in several countries receiving IMF assistance raises questions about the relationship between such assistance and corruption. While some degree of corruption is present in all countries and is often "home-grown," there are a number of reasons to believe that under certain conditions, government-to-government assistance can actually promote corruption.Research suggests that the more pervasive is the public sector's role in the economy, the more likely is corruption to flourish. Foreign assistance, however well-intentioned, can promote the very conditions fostering corruption. Such aid can strengthen existing public sector bureaucracy, result in larger government spending and a larger public sector (relative to the private sector), entrench a corrupt status quo elite, and foster delay in reforming existing corruption.
All of this is directly relevant to current IMF operations. IMF funds currently can be distributed to corrupt public bureaucracies and elites and are often (unwittingly) used to promote those conditions fostering additional corruption. Despite widespread evidence of corruption, IMF lending generally has not been associated with adequate safeguards, controls, or pre-conditions to prevent corrupt misuse of borrowed funds. This lapse suggests IMF lending may work to foster corruption. Reducing or reforming IMF lending, imposing strict conditionalities, and/or establishing reliable monitoring methods appear to be alternative remedies available at this time. [Download in PDF format]
Over the last two years, the Joint Economic Committee (JEC) has promoted essential transparency through hearings, research papers and press statements. This paper reviews some of the key conclusions of JEC research concerning IMF financial structure and costs of U.S. IMF participation.
The lack of IMF transparency makes many dimensions of the costs of U.S. participation in the IMF unclear to policymakers and the taxpaying public. These costs include a disproportionate U.S. burden in financing the IMF, subsidized interest rates, absorption of risk, and cost-shifting and other aspects of non-restituted IMF gold sales. Conservative estimates of the costs of U.S. participation in the IMF indicate that these costs are substantial. The evidence shows that the U.S. is shouldering a significantly greater proportion of the IMF's financial burden than the oft-cited 17.7 percent quota share suggests. Instead, the U.S. contributes about 26 percent of usable IMF resources.
In addition to these costs, it is important to highlight the changing nature of the IMF financial structure. The IMF's portfolio has become riskier in a number of ways over the last two decades. Further, the IMF has evolved into an organization that relies on a narrow base of donors to provide the funds borrowed by a separate group of borrowers. More specifically, financial support is increasingly supplied by a small number of industrialized countries while borrowers are for the most part developing countries facing long-term structural problems. Furthermore, IMF lending is highly concentrated. The five largest borrowers from the IMF account for 70 percent of outstanding loans.
This information, while essential for informed Congressional decisionmaking, has not been readily available to Congressional policymakers or the taxpaying public. Much of the reason policymakers and the public are not fully informed on these matters is a documented lack of transparency on the part of the IMF. [Download in PDF format]
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- Although the exact form of the proposal is not yet clear, there are several reasons for Congress to critically examine this proposal and review the potential for negative consequences:
- The proposal is not transparent in that its content and full ramifications are unclear, and it may ultimately facilitate financing for certain IMF operations without conventional authorization and oversight.
- The proposed gold sales would tap a hidden IMF gold reserve that can be viewed as belonging to member countries. The cost of the proposal to the U.S. would amount to half a billion dollars, relative to restitution to member countries.
- Continued gold sales may weaken the IMF's balance sheet. With one-third of its outstanding credits from its main account owed by Russia and Indonesia, it is reasonable to question whether potential weakening of the IMF's financial position is desirable at this time. The money contributed by the taxpayers of the U.S. and other nations is exposed in IMF lending, and IMF gold sales would increase this exposure further by reducing the capital cushion of the IMF.
- Gold sales may deepen already serious moral hazard problems by leading to expectations by other distressed borrowers of further gold sales for debt relief. The volume of proposed gold sales already has expanded significantly in recent months.
- The proposal could help perpetuate and reinforce the IMF's drift toward becoming another development bank similar in many respects to the World Bank.
- The proposal may encourage the IMF to continue its policy of deeply subsidized interest rates, including the IMF's reluctance to fully comply with the Congressional reforms mandated in 1998. The proposal has put downward pressure on gold prices and harmed poor nations that are also gold producers
Transparency has multiple dimensions, involving not only the clarification of dollar policy objectives, but also the timely and complete disclosure of policy decisions and their underlying rationale.
Current dollar policy violates conventional transparency guidelines or parameters in a number of ways. Policy objectives are unclear, intervention policy is non-transparent from several perspectives, Treasury and Federal Reserve dollar relations are ambiguous, and Exchange Stabilization Fund (ESF) financing methods are obscure. Further, the ESF is overly secretive and current informational reporting is not nearly as transparent as it could be.
A number of specific recommendations for improving dollar policy transparency include the following:
- Establish clear, understandable dollar policy objectives that are consistent with monetary policy goals.
- Promote clear, understandable procedures for intervention activity.
- Require more transparent dollar policy reporting from institutions charged with foreign exchange management responsibilities.
- Clarify dollar policy responsibilities of Treasury vis-à-vis the Federal Reserve.
- Insist on a more transparent and reformed ESF.
- Establish rigorous oversight procedures for these reforms.
[Download in PDF format]
This study argues that tax reduction
would have very significant positive welfare effects on the American economy.
Based on previous research by a large number of scholars, it is reasonable
to foresee the equivalent of tens of billions of dollars of new output
being created with a significant reduction in taxes. While it is true that
from a Keynesian, demand-side perspective, the case for a tax reduction
is rather weak, there are compelling arguments that suggest that lowering
taxes would promote economic welfare. A tax reduction that approximates
the magnitude of the 1998 or projected 1999 budget surplus would provide
benefits to Americans measured in tens of billions of dollars annually.
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Unemployment rates once were higher in the United States than other major nations, but are now significantly lower than all other major nations except Japan; A larger proportion of the working age population is employed in the United States than in other major nations; the proportion working in America has increased over time, while it has fallen in most of Europe and in Japan; Variations in the unemployment rate over time are largely explainable by changing real unit labor costs; when the cost of hiring workers rises, employment opportunities decline and unemployment increases; Longer term levels in unemployment, or the "natural rate" of unemployment, are influenced by structural and institutional factors, including the size of governmental involvement; the bigger the relative size of government, the higher the natural rate of unemployment; If high-taxed European and other nations were to lower their tax burden as a percentage of output by 10 points (e.g., from 45 to 35 percent), it is predicted that this would lower the natural rate of unemployment by 3 percentage points (e.g., from 9 to 6 percent); and The American success in maintaining relatively low unemployment is at least in part due to the relatively free labor markets in the United States and the smaller size of the U.S. welfare state.[Download in PDF format]
Under existing institutional arrangements, the IMF cannot serve as a genuine LOLR. Specifically, the IMF cannot create reserves, cannot make essential decisions quickly, and does not act in a transparent manner in order to qualify as an authentic international LOLR. The Federal Reserve, on the other hand, does meet essential requirements of an international LOLR. It can quickly create international reserves and money, although it has not openly embraced international LOLR responsibilities. The Federal Reserve can easily implement this function by employing several readily available market price indicators and global prices measure without jeopardizing longer-term price stability objectives. [Download in PDF format]
Applying econometric analysis to federal budgetary data extending back to the George Washington administration but emphasizing the post-war era, the authors conclude:
Since that time, however, the economic landscape has changed dramatically. The international monetary system has been transformed and capital mobility has substantially increased. No reliable, credible standard has anchored the price system and replaced the once reliable commodity standards of earlier periods. Dollar policy remains ill-defined and overly secretive. These new circumstances make the earlier, fragmented delegation of monetary power contradictory and inconsistent.
These inconsistencies need to be recognized and corrected. Congress should consider reorganizing monetary responsibilities to provide a more consistent, transparent, and credible overall monetary authority. Congress could reassert its constitutional authority and:
Section II outlines the problems the proposal is meant to address. Section III describes the principles that should guide reform. Section IV discusses details of how to implement those principles, including specific rules governing domestic bank safety nets, IMF membership and IMF lending policy. These would replace not only the current IMF, but other lending programs including the Exchange Stabilization Fund (ESF) and ad hoc emergency lending by the World Bank the InterAmerican Development Bank. Section V discusses the political economy of the new set of rules and whether enforcement would be credible. Section VI concludes.
This same combination is present in even more virulent form in many of today's emerging market economies. Recent IMF lending and prospects for additional IMF lending not only reinforce these risk-promoting incentives in emerging economies, but also foster additional risky lending by international financial institutions.
Recognizing these circumstances underscores a number of important policy implications and suggestions for policy action to minimize these adverse incentives. [Download in PDF format]
Transparent monetary policy is characterized by openness and a lack of secrecy and ambiguity. Transparency is multi-dimensional and includes the clarification of policy goals, of policy procedures, and the timeliness in reporting policy decisions.
More transparent monetary policy has a number of advantages. It can work to (1) clarify policy objectives, (2) improve the workings of financial markets, (3) enhance central bank credibility, (4) reduce the chances of monetary policies manipulation for political purposes, (5) foster better monetary policymaking, and (6) complement congressional monetary policy oversight responsibilities.
Recently, many central banks have recognized these advantages and have moved toward making their monetary policies more transparent. The Federal Reserve has made some progress on this front but generally has lagged behind some other central banks. The Federal Reserve could move toward a more transparent policy by:
His review of the key concept of Excess Burden (the net loss in economic well-being to the taxpayer from a tax) demonstrates that even when higher tax rates increase government revenue, economic offsets include reduced taxpayer well being, a shrinking tax base, and a lower economic output.
Lindsey strongly urges the Congress to recognize
this explicit trade off, to change its analytic approach to taxation by
taking into account the degree of burden imposed at the margin to collect
an additional dollar of Federal revenue, and to consider the cost of maintaining
today's high rate structure. This approach, he concludes, would allow Congress
to do the best job it can at maximizing economic welfare. Please Note:
This report was presented as written testimony to the Joint Economic Committee
on March 13, 1997.
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A JEC reconstruction of an undisclosed set of Treasury data shows that, although tax relief is provided for all income groups, their shares of the tax burden are unchanged before and after the Congressional tax reduction is taken into account. The results of this JEC analysis demonstrate the misleading effects of an incomplete release of data and illustrate why the Treasury Department should be more open and less selective in providing information to the public. [Download in PDF format]
Although inflation has receded, and hence price stability is no longer a "headline-grabbing" issue, the paper highlights several important reasons why now is the opportune time to adopt such a strategy. The U.S. legislative history of this approach is summarized and essentials of current price stability legislation presented. [Download in PDF format]
This study estimates that Auto-Choice would reduce auto insurance premiums 32 percent nationwide, or $45 billion in 1997. Over five years, Auto-Choice would make available a total of $246 billion in savings. On the individual level, Auto-Choice would save the average policy $243. Low-income drivers would realize substantially greater savings -- 48 percent on average. [Download in PDF format]
The key reasons for this sustained recovery include:
This paper provides a brief overview of what Members of Congress should know about the Federal Reserve. It is intended to lay the groundwork for several forthcoming papers involving issues related to congressional oversight of Federal Reserve monetary policy and the goal of price stability. [Download in PDF format]
