Modern empirical work on the choice between renting and owning focuses on the concept of the of housing, which integrates into a single measure the various components of housing costs. The standard approach implicitly assumes that households know the user cost of housing with certainty. However, the ex post user cost measure exhibits substantial variability over time, and it is highly unlikely that individuals believe themselves able to forecast these fluctuations with certainty. In this paper, we construct and estimate a model of the tenure choice that explicitly allows for the effects of uncertainty. The results suggest that previous work which ignored uncertainty may have overstated the effects of the income tax system upon the tenure choice.

The authors examine survival rates of entrepreneurial enterprises and their growth, conditional on surviving. Their focus is on whether liquidity constraints increase the likelihood of entrepreneurial failure. The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then entrepreneurs with substantial personal financial resources will be more successful than those without. The authors examine the behavior of a group of sole proprietors who received substantial inheritances. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises.

We examine why some individuals survive as entrepreneurs and others do not. In addition, we analyze the growth of entrepreneurial enterprises, conditional on surviving. Our focus is on the role of access to capital: To what extent do liquidity constraints increase the likelihood of entrepreneurial failure? The empirical strategy is based on the following logic: If entrepreneurs cannot borrow to attain their profit-maximizing levels of capital, then those entrepreneurs who have substantial personal financial resources will be more successful than those who do not. The data consist of the 1981 and 1985 federal individual income tax returns of a group of people who received inheritances. These data allow us to identify those individuals who were sole proprietors in 1981 and to determine the extent to which the decision to remain a sole proprietor was influenced by the magnitude of the inheritance-induced increase in liquidity. The results are consistent with the notion that liquidity constraints exert a noticeable influence on the viability of entrepreneurial enterprises. For example, a $150,000 inheritance increases the probability than an individual will continue as a sole proprietor by 1.3 percentage points, and if the enterprise survives, it receipts increase by almost 20 percent.

Critics argue that the estate tax prevents the owners of family businesses from passing their enterprises to heirs because it is difficult to pay estate taxes without liquidating the business. Why don't owners purchase enough life insurance to meet their estate tax liabilities? We examine whether and how people use life insurance to deal with the estate tax. We find that, ceteris paribus, business owners purchase more life insurance than do other individuals. However, on the margin, their insurance purchases are less responsive to estate tax considerations, and they are less likely to have the wherewithal to meet estate tax liabilities out of liquid assets plus insurance.

In recent months, the governors of several states have suffered major political embarrassments because actual revenues fell, substantially short of the predictions in their respective budgets. Such episodes focus attention on the question of whether states do a good " job of forecasting revenues. In modern economics, forecasts are evaluated on the basis of whether or not they are rational " do the forecasts optimal] y incorporate all information that is available at the tune they are made? This paper dr:vel ops a method for testing the rat i.onal t.y of state revenue forecasts, and applies it. to the aria lysi s of data from New Jersey, Massachusetts, arid Maryland. (ne of our main findtri'i; u,; that in all three states, the I orerats of own revenues are yystematically biased dowriward

TFhe last few years have seen a resurgence of interest in the old question of how best to raise tax revenue. Roughly speaking, two different problems have been studied. TFhe first is to find a set of commodity taxes that is optimal given certain efficiency and (sometimes) equity considerations. In a second strain of the literature, it is assumed that the revenue system is based upon income rather than commodity taxation, and the problem is to determine the optimal degree of progressivity (or regressivity) .1,2 TI he principal motivation of some writers in the optimal taxation literature seems to be the discovery of fairly simple rules which policy makers actually can implement. Others are more interested in theoretical exploration of the implications of alternative economic assumptions than in developing usable policy recommendations. Practically all the contributions, however, have been quite mathematical and thus inaccessible to many practitioners in the public finance area. The purpose of this essay is to discuss in a nontechnical way the methodology and principal conclusions of the optimal taxation literature.3 In Sections 1 and II are discussed the optimal commodity and income tax literatures, respectively. Following this are some observations on the accomplishments of optimal taxation research and on some open questions.

We investigate the effect of entrepreneurs' personal taxes on their use of labor, analyze the tax returns of sole proprietors before and after the Tax Reform Act of 1986, and determine how the substantial reductions in marginal tax rates affected their hiring decisions and wage bills. Individual income taxes exert a statistically and quantitatively significant influence on the probability of hiring workers. Raising the entrepreneur's “tax price” by 10% raises the mean probability of hiring by about 12%. Further, taxes influence total wage payments to workers. The tax‐price elasticity of the median wage bill is about .37.

We develop a technique to assess the impact of changes in mortgage markets on households, exploiting an implication of the permanent income hypothesis: The higher a household's expected future income, the higher its desired consumption, ceteris paribus. With perfect credit markets, desired consumption matches actual consumption and current spending forecasts future income. Because credit market imperfections mute this effect, the extent to which house spending predicts future income measures the “imperfectness” of mortgage markets. Using micro‐data, we find that since the early 1980s, mortgage markets have become less imperfect in this sense, and securitization has played an important role.