Knowledge that Transforms

HE personal income tax has risen in imT portance in many state and local tax systems over the past two decades and has become the mainstay of the American federal tax structure. The shape of the present federal structure effected through the revolutionary modifications of World War II contrasts sharply with that of state structures, which arose in response primarily to depression fiscal problems. This sharp increase in relative and absolute size of yield fromn the personal income tax coupled with the current collection of a substantial fraction of it through withholding has endowed it with major significance as an automatic fiscal stabilizer. Such a position warrants a more precise appraisal of its automatic contribution to economic stability. The automatic contribution to stability of even a fairly simple personal income tax rests in the first instance on the way tax liabilities respond to income changes a function of the tax base and the rate structure. The income sensitivity of the tax base depends on the distribution of income changes, on the manner in which gross taxable income is defined, on the kind and amount of deductions that are permitted in arriving at net taxable income, and on the system of exemptions for the income earner and his dependents. Tax liabilities are then determined by applying to this base either a single bracket or multiple bracket rate structure. Consumer spending decisions as based on disposable income may, however, be more responsive to tax yields than to tax liabilities, and it is obvious that it is consumer reaction to the tax that determines ultimately its automatic effects. Tax yields may, of course, differ markedly from tax liabilities. Their sensitivity to income changes will be determined by payment requirements by the speed with which liabilities are liquidated. We restrict ourselves in this paper to the measurement of the liability response of a simple personal income tax to changes in personal income. The simple tax considered is one imposed at a proportional rate on income after exemptions (similar to the first bracket of the federal income tax). While a major portion of the agrgregate response of the existing multiple bracket personal income tax is contained in this first bracket,2 a complete picture of the tax must include an analysis of the higher brackets as well.3 Moreover, while we here relate tax liabilities to personal income, ultimately they must be related to changes in national income or product. We are simply developing here one of the several building blocks needed to get a complete picture. In the next section we consider the conclusions of existing studies; in the subsequent section we present our data and findings; in the last section some of their implications.

just as proponents of a new theoretical approach speak in enthusiastic terms, so those who reject their approach often appear ready to condemn it on inadequate evidence. The purpose of this note is to discuss Tobin's statistical findings rather than to analyze differences in the theoretical approach. The reinterviews incorporated in the I952-53 Surveys of Consumer Finances, which Tobin uses, are adequate to warrant his conclusion that in that year expressed buying intentions did have predictive value (even though the buying intentions questions in those surveys are far too brief). But those data are insufficient and irrelevant for any test of the predictive value of attitudinal questions other than buying intentions. Therefore Tobin's assertion denying such predictive value (page iO) has no bearing on the Survey Research Center's position regarding the relation of consumer expectations to consumer demand for durable goods. Tobin tries to achieve the impossible by constructing an attitude index out of four questions, (i) the evaluation of past changes in personal financial conditions, (2) information about past income changes, (3) the evaluation of current marketing conditions, and (4) income expectations for the next year. Two of the questions used by Tobin (i and 3) are also contained in the six-question index constructed from the Center's Periodic Surveys. By adding question 2, Tobin loads his index with material about past changes in personal finances. Regarding Tobin's fourth question, Katona and Mueller showed six years ago (in Consumer Attitudes and Demand, pages 69-70), that it is realityoriented and insensitive rather than reflecting people's hopes and fears; the Center has therefore substituted other questions to measure personal financial expectations in its Periodic Surveys. There is not a single question in Tobin's index which reflects the more volatile expectations (the Center's six-question index contains four such questions). It is not at all surprising that Tobin's index duplicates to a large extent the predictive information contained in financial data and has no independent forecasting value. Our position, as it will be set forth soon again in detail, is that both buying intentions and other attitudes should be used to supplement (not to supplant) financial information. The tests of the predictive value of certain consumer expectations are being continued. It may be mentioned that in 1957 consumer expectations other than buying intentions became pessimistic earlier than buying intentions and in I958 they turned optimistic well before buying intentions. In spite of this evidence, Tobin is right in arguing that more observations are needed before conclusions can be based on rigorous statistical tests. There are many other points of disagreement, for instance, regarding the conclusions drawn by Tobin from Eva Mueller's article in the I957 American Economic Review, or regarding Tobin's notion that adding to liquid assets is a sign of pessimism. I wish to contradict particularly Tobin's statement that our treatment of price expectations is arbitrary (see his footnote 7). This treatment has been derived from the theory of psychological economics; additional empirical data supporting the treatment are being published in the May I959 issue of the Quarterly Journal of Economics. * James Tobin, On the Predictive Value of Consumer Intentions and Attitudes, this REVIEW, xui (February I959),

Paul A. Samuelson, Alvin Hansen and the Interactions between the Multiplier Analysis and the Principle of Acceleration, The Review of Economics and Statistics, Vol. 41, No. 2, Part 1 (May, 1959), pp. 183-184

SOVIET bloc spokesmen assert that trade among their countries is governed by market prices. Prices prevailing on the capitalistic market, or some relevant section of it, supposedly serve as standards for set in the trade agreements between communist countries. Statements to this effect have been particularly emphatic since the I956. rebellions in Poland and Hungary. Extensive market research has sprung up in the foreign trade administrations of the smaller communist countries to discover charged in comparable transactions outside the bloc (particularly in the London market) and between bloc countries. Up to this time, data have not been available to test whether the charged in intra-bloc trade agree with in free markets. Even if there was an intent to make the terms of intra-bloc trade reflect those of free markets, this might not have been accomplished for various reasons. The trade officials are looking for appropriate to commodity transactions that will be spread out over a year or more, covered by a trade agreement under negotiation. Free-market do not stand still. We do not know how well the bloc traders would forecast if they tried to; but supposedly they are not forecasting at all. Instead, they are reported to select some historically observed free market price, e.g. last year's price, for their purpose. Such a price may of course differ from the free market that develop during the period of the agreement. Official statements make it appear that the problem of finding tomorrow's true market price can be solved by subjecting yesterday's observed market price to some corrective manipulation. They emphasize the need to eliminate undesirable fluctuations due to business cycles, speculation, or sharp competition and contend that in this fashion the fair price can be determined objectively and impartiallv.1 The existence of bargaining among communist traders is usually denied. But bargaining undoubtedly takes place. The trade negotiators of the various countries are known to bring a variety of world market prices to their meetinfgs. So there are alternatives to choose from. The choosing is done by haggling.2 Where there is bargaining, the bargaining power and strategy of the parties matter. Undoubtedly, the bargaining power of the Soviet Union is much superior to that of her satellite trade partners. She is their principal customer and raw material supplier, mentor and protector. If the Soviet Union wished to use this power to fix relatively high for her exports to and low for her imports from the satellites, she could do so even while accepting the market standard, by making corrections. The bargaining strategy of the Soviet Union, however, cannot be assumed to be fixed. The Soviet Union can derive great economic advantages from division of labor with the satellites, without price discrimination. She can benefit from their varied resource endowment while conducting trade at fair prices. The satellite regimes, moreover, are power positions for the Soviet Union; their maintenance may at times demand economic sacrifices, and these could take the form of price concessions. When rebellions or other pressures threaten the regimes, Soviet policy might well call for restraint in

IN the examination of economic relations one frequently encounters circumstances in which a general effect may be observed to flow from some action; but frequently the means have not been developed to the point where the major variables may be satisfactorily understood or the effects adequately measured. In the investigation of cause and effect relations in small geographical areas which are interdependent parts of a larger area this appears to be the case. Here one senses, and can observe to some extent, the disturbances accompanying or following some activity, such as a shift in the schedule of local exports (e.g., due to a newly located plant), but techniques have not generally been developed to the point which would bring some exactness and accuracy to the measurement of such changes. It is this problem with which this paper is concerned. An examination will be made of some statistical evidence of the local employment multiplier in Lancaster County, Nebraska. Attention will be focused upon the relationship of changes in employment (i.e., employment sustained by an inflow of external receipts) to changes in total employment in this area. Some attention has been given by investigators to factors affecting regional income and employment and economic growth. The most fruitful approach seems to lie in the application of aggregate income and multiplier techniques to the area under investigation. However, data on local income, expenditures, and money-flows are meager and exceedingly difficult to measure. Additionally, the complex interrelationships of income, investment, exports, and imports make examination of causal relationships among these variables extremely precarious. The first difficulty seems to have led some investigators to use the more accessible employment data. The latter obstacle, of course, is not removed by this means. The original Kahn multiplier was an employment multiplier; and Keynes's income multiplier would tend to be identical with the employment multiplier under certain conditions.' Colin Clark's studies of the relationship of foreign trade and national income led to an analysis and estimate of the foreign trade multiplier.2 Local employment multiplier analysis narrows the scope to an examination of the total local employment effects of changes in employment in nonlocalized (export) industries. Put most simply, the hypothesis states that an increase in nonlocalized employment will increase total local employment by an amount greater than the initial increase in employment (thus a multiplier coefficient greater than i.oo).3 The area examined for veidence of a local employment multiplier was theLincoln, Nebraska metropolitan area. The limits of the