For more than a decade, there has been a great debate in the profession concerning the proper base for personal and business taxation. This debate has focused on the choice of the base versus the (or consumption) base. The concept of used in these debates is a comprehensive accretion measure often referred to as HaigSimons income, after the work of Robert M. Haig (1921) and Henry C. Simons (1938). This is the standard concept of income that has been used (with several variations) in tax policy analysis in the postwar period. However, it appears not to be widely recognized that, although Haig did ultimately settle on accretion income as the best feasible tax base, he definitely saw this as a second-best measure of true income. As will become clear, reexamination of Haig's famous article reveals that Haig actually felt that consumption expenditure would be a better measure of true income than accretion income, and he would have preferred a tax on this base-that is, he preferred what today would be called a consumption tax. He felt that

This paper presents a general-equilibrium model where human capital investment increases specialization and exposes skilled workers to region-specific earnings risk. Interjurisdictional mobility of skilled labor mitigates these risks; state-contingent migration of skilled labor also improves efficiency. With perfect capital markets, labor-market integration raises welfare and reduces ex post earnings inequality. If instead human capital investment can only be financed through local taxes, labor-market integration leads to interjurisdictional fiscal competition, shifting the burden of taxation to low-skilled immobile workers. Decentralized public provision of human capital investment creates earnings inequalities and is inefficient.

When households are mobile among jurisdictions, income redistribution by individual jurisdictions creates fiscal externalities. A model of interjurisdictional migration is used to study the nature of this redistributive externality. Analysis of optimal redistribution and optimal corrective subsidies from higher-level governments shows that benefit levels for the recipients of income transfers and tax rates on mobile taxpayers should be equalized across jurisdictions. A system of jurisdictions with a common labor market can achieve welfare improvements through coordination of "domestic" redistributive policy or through the intervention of a higher-level government.

When households are mobile among jurisdictions, income redistribution by individual jurisdictions creates fiscal externalities. A model of interjurisdictional migration is used to study the nature of this redistributive externality. Analysis of optimal redistribution and optimal corrective subsidies from higher-level governments shows that benefit levels for the recipients of income transfers and tax rates on mobile taxpayers should be equalized across jurisdictions. A system of jurisdictions with a common labor market can achieve welfare improvements through coordination of "domestic" redistributive policy or through the intervention of a higher-level government.

As is widely known, the EEC has gone through some troubling budgetary difficulties in recent years. Disputes have revolved around the growth of agricultural subsidies and about the contributions to be made to the EEC by various member countries; in particular, the U.K. These problems have been brought under control for the short run. However, the implementation of the Single European Act could be greatly complicated, and might falter, if policymakers again became intensely involved in acrimonious budgetary disputes. Maintaining budgetary control for the next several years, and for that matter in the longer term as well, is thus a matter of considerable tactical importance within the context of the overall progress of European economic affairs. In view of the fact that the threat of acute budgetary crisis has receded somewhat, and in view of the prospect of a significant step forward toward more complete economic integration associated with the 1992 initiative, it seems appropriate to give some thought to the budgetary problems that the EEC is likely to confront in the medium term. At a time of enormous political change in Eastern Europe, it is exceptionally hazardous to attempt projections about economic affairs in the EEC. It is easy to visualize scenarios in which significant amounts of resources, whether from the EEC itself or from individual member states, are directed toward promoting economic and other reform in the East, forcing new choices with respect to the commitment of resources by member countries to the EEC. However, to limit the scope of this paper, attention is restricted to developments within the EEC itself. The major trends in the EEC budget are easily delineated, since only a few main initiatives account for the bulk of EEC expenditures. First, agricultural subsidies through the European Agricultural Guidance and Guarantee Fund (EAGGF) have entailed large expenditures. Through the 1980s, these outlays accounted for about two-thirds of EEC expenditures. Another major category of EEC expenditures are for the so-called funds, in particular the European Regional Development Fund (ERDF) and the European Social Fund (ESF). The ERDF funds economic development projects in specially targeted low-income regions. The ESF funds programs that promote the training and employment of workers, especially youth and long-term unemployed persons. These and related expenditures have accounted for about 10-15 percent of expenditures during the 1980s. Altogether, then, agricultural and structural expenditures account for about 85 percent of the total budget. The U.K. has repeatedly protested against what it regards as excessive contributions to the EEC relative to the return that it gets in the form of structural fund outlays, and it has garnered a partial rebate of its contributions to the EEC, equal to two-thirds of the difference between the U.K. VAT contribution and EEC expenditures allocable to the U.K. These rebates account for roughly 5 percent of the EEC budget. As a result of decisions taken in 1988, the outline of the EEC budget for the next sevtDiscussants: Paul Courant, University of Michigan; Rudolph Penner, The Urban Institute; John Yinger, Syracuse University.

The theory of investment, which relates investment to the ratio of market to replacement value of capital, has attracted considerable attention in a recent series of papers. For instance, a q variable has been used as an independent variable in empirical investment equations estimated by George von Furstenberg (1977), von Furstenberg et al. (1980), Burton Malkiel et al. (1979), and others. These papers, however, leave somewhat unclear the theoretical rationale for using q as an investment determinant. This has motivated work by Hiroshi Yoshikawa (1980), Lawrence Summers (1981), Michael Salinger and Summers (1981), and Fumio Hayashi (1982), who show that under certain conditions the rate of investment of a sharevalue-maximizing firm is indeed a function of q. This is an important result because it shows that investment equations with q an independent variable are not ad hoc constructions. Rather, they are grounded in a theory of the firm with an appealing behavioral hypothesis, viz, value maximization. An important assumption underlying this research is that capital can be treated as a homogeneous good. Of course, this is an extremely common assumption in the analysis of investment, and is not particularly more bothersome in the q theory context than elsewhere. Nonetheless, there are certain situations where it may be desirable or even essential to be able to study investment disaggregated by type of capital good. Thus, the purpose of this paper is to examine whether and how the q theory can be extended to this more general case.1 Intuitively, one would expect some difficulty with the q theory in the many-capitalgood context, as already noted by James Tobin and William Brainard (1977, p. 243) and by Salinger and Summers (p. 12). One way to see why is to recall the Tobin-Brainard distinction between marginal and average q. As Hayashi writes,