This article reexamines the incidence and efficiency cost of the discriminatory taxation of capital income in the United States. It is argued that Harberger's 1966 estimates of the static welfare loss were subject to two important mistakes. Their correction lowers the efficiency cost estimates approximately 38 percent. The paper also compares the corrected results of the Harberger model with those achieved with an algorithmic solution procedure for a general equilibrium model. When the latter approach is used with the same two-sector division of production, the results are very similar to those of Harberger's model. With disaggregation to 12 production sectors, however, the loss estimates increase by an average of 40 percent.

This article reexamines the incidence and efficiency cost of the discriminatory taxation of capital income in the United States. It is argued that Harberger's 1966 estimates of the static welfare loss were subject to two important mistakes. Their correction lowers the efficiency cost estimates approximately 38 percent. The paper also compares the corrected results of the Harberger model with those achieved with an algorithmic solution procedure for a general equilibrium model. When the latter approach is used with the same two-sector division of production, the results are very similar to those of Harberger's model. With disaggregation to 12 production sectors, however, the loss estimates increase by an average of 40 percent.

We wish to acknowledge the help of three referees and of John Pencavel on several earlier drafts, as well as the assistance of the modelers, whose work is referred to in the paper. They corrected our lack of understanding of their work and provided many other helpful comments. Excellent research and bibliographical assistance have been provided by Debbie Fretz, Radwan Shaban, and Janet Stotsky. Helpful comments have been made by Charles Ballard, Michael Boskin, Lans Bovenberg, Sylvester Damus, Harvey Galper, Glenn Harrison, Gordon Lenjosek, Jack Mutti, Serena Ng, T. N. Srinivasan, Charles Stuart, and Eric Toder. The authors also acknowledgefinancial support from the National Bureau of Economic Research, the National Science Foundation, International Business Machines, and the Social Sciences and Humanities Research Council: Ottawa, Canada.

This paper examines the amount of precautionary savings and wealth inequality arising from life-span uncertainty by comparing saving behavior under perfect insurance arrangements with that arising under imperfect arrangements, namely, when longevity risk can be pooled only with members of one's own family. The central findings of the paper are that (1) perfecting insurance arrangements can sharply lower savings in both intergenerationally altruistic and life-cycle economies and that (2) in altruistic economies perfecting annuity insurance can greatly influence inequality; indeed, in the long run in our model, switching from imperfect family insurance to perfect insurance can mean the difference between absolute inequality and absolute equality.

Comparing the Risks of Social Security with and without Individual Accounts by Sita Nataraj and John B. Shoven. Published in volume 93, issue 2, pages 348-353 of American Economic Review, May 2003

This paper examines the amount of precautionary savings and wealth inequality arising from life-span uncertainty by comparing saving behavior under perfect insurance arrangements with that arising under imperfect arrangements, namely, when longevity risk can be pooled only with members of one's own family. The central findings of the paper are: (1) perfecting insurance arrangements can lower savings in intergenerationally altruistic and life-cycle economies and (2) in altruistic economies perfecting annuity insurance can influence in-equality; indeed, in the long run in the model, switching from imperfect family insurance to perfect insurance can mean the difference between absolute inequality and absolute equality.

Exchange traded funds (ETFs) are a new variety of mutual fund that first became available in 1993. ETFs have grown rapidly and now hold nearly $80 billion in assets. ETFs are sometimes described as more 'tax efficient' than traditional equity mutual funds, since in recent years, some large ETFs have made smaller distributions of realized and taxable capital gains than most mutual funds. This paper provides an introduction to the operation of exchange traded funds. It also compares the pre-tax and post-tax returns on the largest ETF, the SPDR trust that invests in the S&P500, with the returns on the largest equity index fund, the Vanguard Index 500. The results suggest that between 1994 and 2000, the before- and after-tax returns on the SPDR trust and this mutual fund were very similar. Both the after-tax and the pre-tax returns on the fund were slightly greater than those on the ETF. These findings suggest that ETFs offer taxable investors a method of holding broad baskets of stocks that deliver returns comparable to those of low-cost index funds.