Knowledge that Transforms

The poor performance of U.S. productivity in recent years has renewed interest in the relationship between tax incentives, capital formation, and economic growth. Particular attention has been given to the impact of inflation on effective tax rates, and to the possibility that an inflation-induced increase in tax burdens contributed to the productivity slowdown through a reduction in the rate of capital formation. Attention has also focused on the role of relative tax burdens in explaining international differences in savings rates and economic growth, and on the extent to which differences in relative tax treatment of various types of capital results in an inefficient allocation of resources. These issues are the subject matter of the emerging doctrine of economics, which may be loosely defined as the application of microeconomic principles to macroeconomic problems. While supply-side economics is concerned with the response of all inputs to a change in tax policy, I shall restrict attention to the response of investment spending to changes in business tax incentives. I shall first consider how business tax incentives in the U.S. Internal Revenue Tax Code have changed over time, and then provide an overview of the recently developed cost of capital literature on marginal effective tax rates. I will then turn to the question of how these tax incentives have influenced investment behavior. A concluding section offers comments on the relative importance of supply-side effects on economic growth. I. Marginal Effective Corporate Tax Rates

In a recent work Mark Rosenzweig and T. Paul Schultz...developed a model of intrafamily resource allocation and provided evidence from Indian data suggesting that differences in male-female child survival rates are partly attributable to the economic opportunity differentials for the two sexes....The objective of this paper is to extend the evidence in two directions. First instead of looking at only sex-specific child survival rates one may consider the overall survival rates for males and females since the structure of intrafamily resource allocation for adults should also follow the same basic logic as that toward children. Second it seems useful to conduct the study for countries covering a wider range than the Indian sub-continent. The present study uses three data sets. One is a cross section of 118 countries for 1970; the second consists of a cross section of states in the United States around 1970; and the third contains 32 annual observations for the United States covering the period 1947-78. The main conclusion is that market opportunity differentials as proxied by participation rates do seem to affect the allocation of resources as measured by survival rates in the direction suggested by economic theory; in particular an increase in the market participation rates of females enhances the survival differential in their favor. (EXCERPT)