Macroeconomics

Our goal in this paper is to challenge the following popular argument: projected returns to Social Security are low relative to expected returns on stocks and bonds, and therefore everyone would receive higher returns and be better off if the United States moved to a privatized system where individuals could directly invest their contributions in stocks and bonds. We argue that for household with access to diversified capital markets, privatization without prefunding would not increase Social Security returns, when properly measured.

The effects of tax reform on corporate financial decisions help determine whether reform will increase capital formation and simplify the tax system. This paper describes the effects of fundamental tax reform on corporate tax planning and summarizes economists' knowledge of the magnitude of these effects. We analyze both income tax reform, consisting of integrating the corporate and personal income taxes, and moving to a broad-based consumption tax. As prototypes of reform, we use the U.S.

It is argued that, with respect to efficiency gains, the distinction between reform toward a broad-based income tax and reform toward a broad-based consumption tax is relatively minor. This is not to say that there are not important efficiency and distributional consequences of moving from the current tax system to a broad-based consumption tax. Most such consequences can be traced to reform of the income tax.

As a tax base, 'consumption' is sometimes argued to be less fair than 'income' because the benefits of not taxing capital income accrue to high-income households. We argue that, despite the common perception that consumption taxation eliminates all taxes on capital income, consumption and income taxes actually treat similarly much of what is commonly called capital income. Indeed, relative to an income tax, a consumption tax exempts only the tax on the opportunity cost of capital. In contrast to a pure income tax, a consumption tax replaces capital depreciation with capital expensing.

We develop a simulation algorithm for estimating the prices of American-style securities, i.e., securities with opportunities for early exercise. Our algorithm provides both point estimates and error bounds for the true security price. It generates two estimates, one biased high and one biased low, both asymptotically unbiased and converging to the true price. Combining the two estimators yields a confidence interval for the true price.

This article suggests that the introduction of bank branching restrictions and federal deposit insurance in the United States likely was motivated by political considerations. Specifically, we argue that these restrictions were instituted for the benefit of the small unit banks that were unable to compete effectively with large, multiunit banks. We analyze this "political hypothesis" in two steps.

We use firm-level panel data to explore the extent to which fixed investment responds to tax reforms in 14 OECD countries. Previous studies have often found that investment does not respond to changes in the marginal cost of investment. We identify some of the factors responsible for this finding, and employ an estimation procedure that sidesteps the most important of them. In so doing, we find evidence of statistically and economically significant investment responses to tax changes in 12 of the 14 countries.

The U.S. Social Security system is in need of reform. Its trustees forecast that, absent changes, contributions will fall below benefits in 2012, and the system's trust fund will be exhausted in 2030. Many have discussed achieving system solvency by raising taxes and cutting benefits, but recently a more fundamental reform has been proposed, namely, privatization of some or all aspects of Social Security. This article identifies key economic issues that must be addressed in the debate over a privatized system in the U.S.