This study uses tax return data for U. S. nonfinancial corporations for the period 1971–1982 to estimate the importance of restrictions on the ability of firms to use tax credits and to obtain refunds for tax losses. Our results suggest that the incidence of such unused tax benefits increased substantially during the early 1980s, though we do not find these increases attributable to increased investment incentives during that period. We present estimates of the marginal tax rate on interest payments which take into account unused tax benefits and emphasize the importance of distinguishing current tax payments from marginal tax rates in estimating the incentive to invest.

In his influential book, Capital in the Twenty-First Century, Thomas Piketty argues forcefully that rising wealth and wealth inequality is an inherent characteristic of capitalist economies and calls for strong policy responses, in particular a substantial wealth tax implemented globally. This paper takes issue with the facts, logic, and policy conclusions in Piketty's book, suggesting that the factors needed to support the inexorable rise in capital's share and concentration are lacking and that among tax policy reforms aimed at dealing with economic inequality a wealth tax finds little support either in Piketty's own work or elsewhere in the literature.

This paper explores the portfolio behavior of investors differing with respect to both tax rates and risk aversion, emphasizing the role of constraints on individual and firm behavior in ensuring the existence of and characterizing portfolio equilibrium. Under certain conditions on the securities available in the market, which also are necessary for shareholders to be unanimous in supporting firm value maximization, investors will be segmented by tax rate into two groups, one specialized in equity and the other in debt. Though the relative wealths of the two groups determine the aggregate debt-equity ratio, each firm will be indifferent to its financial policy.

I. Introduction, 571. — II. The two-part tariff, 573. — III. Disconnection, 575. — IV. Specific functions and simulation, 577. — V. Conclusion, 583. — Appendix A, 584. — Appendix B, 585.

Dividend Taxes and Firm Valuation: New Evidence By Alan J. Auerbach and Kevin A. Hassett * The Jobs and Growth Tax Relief Act of 2003 (JGTRA03) reduced the tax rates on dividends, with the highest statutory tax rate of 35 percent falling to 15 percent. An interesting twist on the dividend tax cut was its temporary nature; the provision as passed was effective only through 2008, and (as recent Congressional deliberations have illustrated), the extension its supporters envisioned was by no means certain. This large dividend tax reduction, along with its sunset provision, offers an unusual natural research experiment on the effects of dividend taxation. The theory of dividend taxation suggests three possible scenarios for the effects of the dividend tax reduction. Under the “tax irrelevance” view, the marginal shareholder is a tax-free entity (or a taxable investor who ignores or can offset incremental taxes), and the dividend tax reduction has no effect on equity values or firm behavior. Under the “traditional” view the marginal source of equity finance is new share issuance, and the tax reduction feeds through to the firm’s user cost and stimulates extra capital formation. Share values rise in the short run but, after full adjustment, the higher capital level reduces the marginal revenue product of capital enough to offset the dividend tax reduction, leaving equity prices the same. Under the “new” view, the marginal source of finance is retained earnings and the dividend tax cut is capitalized into the share price of the firm but has no investment effect. Understanding the economic consequences of the dividend tax reduction requires knowledge of the empirical relevance of these competing views. Our previous paper (Auerbach and Hassett 2005) performed an event-study analysis of a large panel of firms to determine how firm attributes affected the valuation response over eight key event dates leading up to the 2003 legislation. Our results, taken together, rejected outright

In this paper, we propose a new measure of horizontal equity that overcomes many of the shortcomings of previous proposed measures. Our starting point is the observation that a well-behaved social welfare function need not evaluate global' (vertical equity) differences in after-tax income using the same weights it applies to local' (horizontal equity) differences, even though this constraint has been applied in the past. Following work on the structure of individual preferences, we show that a social welfare function can imply different preferences toward horizontal and vertical equity. Adopting the general approach to the measurement of inequality developed by Atkinson (1970), we use such a social welfare function to derive measures of inequality that are decomposable into components naturally interpreted as indices of horizontal and vertical equity. In particular, the former index measures deviations from the fundamental principle that equals be treated equally. Finally, we apply our new measure to two tax-return data sets, evaluating the degree to which the horizontal equity of the US personal income tax has changed over time, and how horizontal equity would be altered by one version of recent proposals to do away with the so-called marriage penalty.'

In simple economic models, it is relatively easy to describe how to impose a value-added tax at a uniform rate on all consumption goods, and to demonstrate that this tax is equivalent to a proportional labor-income tax, plus a tax on existing assets. The equivalence involves little more than the national income identity relating the sources and uses of income. Once one attempts to incorporate the costs of financial intermediation, however, tax analysis becomes more complicated. In attempting to determine how a VAT should treat financial transactions, various authors have attempted to apply results from simpler models. Unfortunately, these results can lead to conflicting, ambiguous, and misleading prescriptions. In this paper, we argue that one needs to rely more on the fundamental objectives of a VAT to decide how it should treat financial transactions. Adopting this approach, we find that, in principle, the VAT should apply to resources devoted to financial transactions in the same manner that it does in other sectors. However, as discussed below, there are real problems in implementing such a tax on the financial sector which we do not attempt to address in this paper.

This paper attempts to bring theoretical and empirical research on capital gains realization behavior closer together by considering whether investors who appear to engage more in strategic tax avoidance activity also respond differently to tax rates. We find that such investors exhibit significantly smaller responses to permanent tax rate changes than other investors. Put another way, a larger part of their response to capital gains tax rates reflects timing, consistent with their closer adherence to tax avoidance strategies emphasizing arbitrage based on tax rate differentials. This finding holds for two alternative specifications of realization behavior, one of which suggests larger permanent responses to capital gains tax rates than those of previous panel studies.

Those schooled in the shifting curves of static and steady-state macro models may not fully appreciate the dynamic nature of fiscal policy. Simple blackboard models can convey neither the timing nor the magnitude of responses to shortand intermediate-term fiscal policies, nor can they isolate the impact of fiscal policies on transitional generations. There is also a range of issues, such as deficit finance and the relative efficiency of alternative tax structures, that cannot be properly addressed without solving for the economy's transition path. Recent experience has provided several experiments in dynamic fiscal policy, including the accumulation of large amounts of official government debt, expected future changes in the level of social security benefits, shifts in the tax structure, and increases and then reductions in investment incentives. Each of these policies has important transitional as well as long-term effects. The analysis of these effects is possible using a dynamic general equilibrium numerical simulation model.