Knowledge that Transforms

Young Chin Kim, The Cross-Sectional, Inter-Industry Structure of Capital Utilization in a Developing Economy: The Case of S. Korean Manufacturing, The Review of Economics and Statistics, Vol. 64, No. 1 (Feb., 1982), pp. 84-89

Aaron (ed.), Inflation and the Income Tax (Washington, D.C.: Brookings Institution, 1976). Tanzi, Vito, Measuring the Sensitivity of the Federal Income Tax from Cross-section Data: A New Approach, this REVIEW 51 (2) (1969), 206-209. , 'The Sensitivity of the Yield of the U.S. Individual Income Tax and the Tax Reforms of the Past Decade, International Monetary Fund Staff Papers 23 (2) (1976), 441-454. United States Statistical Abstract (annually), U.S. Government Printing Office, Washington, D.C. Verway, David I., 'A Ranking of States by Inequality Using Census and Tax Data, this REVIEW 48 (3) (1966), 314-321.

JN working with various data sets for the United States in the 19th century, it has come to my attention that pronounced patterns emerge which depict the relationship between increases in wealth of individuals as they become older. When we abstract from long-run growth, by examining age-specific wealth averages in a given year such as 1850, 1860, or 1870 or even a century later, this wealth-age gradient appears to rise about 4% a year. The increase is usually attributed to savings and capital gains of individuals rather than to transfers from inheritance. If such is the case, the reason for taxing wealth is less compelling since wealth is, in part, a reward for current effort and can not easily be identified as the cumulative effort of past generations. John Brittain has recently publicized and criticized this particular way of measuring and factoring the influence of individual endowment, that is, the effort of activity of the present generation as contrasted to that which is the product of past generations. He has suggested that specialized studies be made of inheritance in an endeavor to better determine whether the wealth of one's parents might explain, in some statistical sense, 1/10, or 1/3, or even 2/3 of the wealth of the present generation. ' It is the purpose of this paper to study some of the relationships between wealth, number of children, and age of fathers, as related to the inheritances and ages of sons, by using data from the 1870 U.S. census of wealth. Statistics will be presented which describe the possible amounts of wealth that are passed on from generation to generation in any given year during the life cycle of the son. I shall argue that a 4% wealth-age gradient can appear within one generation which duplicates any original wealth-age configuration; incentive implications of any current patterns are less cogent in this sense even though only 1/3 of all current aggregate wealth may be considered a transfer from the past. The patterns to be described are of significance not only for the general cultural historian, but also for anyone trying to understand an economic model of inheritance since the extent of parental domination, the influence of family size, and, more generally, the degree of wealth inequality imposed from one generation to the next all contribute some sense of the quantitative impact of inheritance factors even if the model is very elementary.

Paul D. McNelis, , Policy-Dependent Parameters in the Presence of Optimal Learning: An Application of Kalman Filtering to the Fair and Sargent Supply-Side Equations, The Review of Economics and Statistics, Vol. 64, No. 2 (May, 1982), pp. 296-306

IN an earlier study, Hodgson and Holmes (1977) provided empirical evidence on the structural stability of short-term capital flow using the case of U.S.-Canadian net bank claims for the period 1955-I to 1974-I.1 Their findings indicated that the short-term capital flow underwent a significant structural change, and that the instability in the short-term capital flow may have been due to changes in interest rate sensitivity over time. However, as Garbade (1977) shows, the test procedure used by Hodgson and Holmes, labeled the cusum of squares test, has limitations for detecting structural change in the coefficients. The primary purpose of this paper is to present additional empirical evidence on the stability of U.S.-Canadian capital flow, obtained not only from the cusum of squares test, but also from the variable parameter regression technique. The use of the latter test is well justified in that it is somewhat more powerful and has the advantage of being able to isolate instability in individual regression coefficients. In section I we develop an analytical framework for short-term capital flow based on the portfolio balance approach. Section II presents the regression results for the U.S.-Canadian short-term capital flow. In section III we present a brief and heuristic description of the two stability test procedures as well as the results of these tests. Major conclusions are presented in section IV.

Daniel L. Thornton, Maximum Likelihood Estimates of a Partial Adjustment-Adaptive Expectations Model of the Demand for Money, The Review of Economics and Statistics, Vol. 64, No. 2 (May, 1982), pp. 325-329

URRENT research interest in school finance stems from reforms aimed at narrowing the range of expenditure variations among school districts. These reforms have attempted to compensate for tax base differences by providing state matching aid inversely proportional to tax base.' While expressed in different forms in different states and variously termed Percentage Equalization,' District Power Equalization (DPE), or Guaranteed Tax Base (GTB), these formulas, in their basic form, amount to the state guaranteeing all districts the same tax base per pupil, call it v*. Districts taxing themselves at a tax rate, r (adjusted at the state level to compensate for assessment variations so that r reflects the rate on true market value), are guaranteed revenue equal to rv*. The difference between what is raised locally in a district, rv, and the guarantee at that tax rate is provided through the state aid formula.2 In practice, legislative limitations on aid formulas in most states have led to richer districts maintaining a tax base advantage. For example, districts with a tax base above v* can raise more revenue at the same tax rate than districts at vor below. Also, placing limits on reimbursable expenses (e.g., not to exceed E* = r*v*) means that beyond a certain point, even in districts with tax bases below v*, raising tax rates will not engender any additional state matching aid, as would be required under a strict guarantee. Hence, while the introduction of GTB formulas provided a theoretical improvement, these limits made them equivalent to the foundation aid formulas they were intended to replace, effective improvement coming only when the limits were made more generous.3 In studying these reforms, research has concentrated on models relating current operating expenditures to the following: tax base, some price term reflecting the local share in the matching formula, block grants, and demographic variables. The most popular form has been the single equation log-linear model4 where coefficients are elasticities, which allows for easy comparability of the effects of the independent variables. However, the assumption of constant elasticities and the lack of interaction terms can be misleading in capturing behavioral responses and in making projections. This may be especially true when one is using data from less than equalized systems, where districts are operating in a tax and expenditure range different from what would occur under a fully (tax base) equalized system and when there are different responses to the state aid formula depending upon relative tax burden and educational need. For example, the expenditure response to state aid in poorer districts may be high for small increments in state aid, but, as district expenditures move beyond minimal requirements, increases in state aid may go increasingly into tax relief, depending upon the tax burden. The richer districts, in terms of property, generally face a price of one, i.e., no matching aid at the margin. However, most legislation guarantees some minimal funding for these districts. In order to make aid formulas fully effective, either poorer disReceived for publication October 1, 1981. Revision accepted for publication April 16, 1982. * The American University. This work was supported by National Science Foundation Grant Number SES-8013080. I am indebted to Anthony Boardman for getting me interested in the topic, to Robert Summers, Anita Summers, Janet Pack and Ralph Ginsberg for moral and intellectual support, to numerous people in the Michigan state government, especially Bob Witte and Bob Bosscher, for their expertise and cooperation, and to the School of Public and Urban Policy, University of Pennsylvania, for its encouragement of this research. I Usually property per pupil, which we denote by v. 2 I.e., state aid per pupil is r(v* v). The local share, or net price that the district pays per dollar of educational expenditure, denoted a, is a = v/P*. Under GTB, districts control expenditure levels through their choice of tax rate. 3For a detailed analysis of aid formulas see Reilly (1982). 4 Initially postulated by Feldstein (1975). Park and Carroll of Rand (1979), Black et al. (1979, 1980), and Johnson and Collins (1978, 1979) also use the same model. Other models of local expenditures have been used by Akin and Auten (1976), Barro (1972), Gatti and Tashman (1976, 1978), Grubb and Michelson (1974), Inman (1971, 1978), Ladd (1975), Lovell (1978), Slack (1980), Stem (1973), Welch (1981), and Wentzler (1980).