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Abstract:
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.

Mutual funds, capital gains taxes, and exchange traded funds

Abstract:
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.

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively- managed funds that they are mimicking, but they miss the opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively-managed funds that they are mimicking opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

Abstract:
Mutual funds must disclose their portfolio holdings to investors semiannually. The costs and benefits of such disclosures are a long-standing subject of debate. For actively managed funds, one cost of disclosure is a potential reduction in the private benefits from research on asset values. Disclosure provides public access to information on the assets that the fund manager views as undervalued. This paper tries to quantify this potential cost of disclosure by testing whether "copycat" mutual funds, funds that purchase the same assets as actively-managed funds as soon as those asset holdings are disclosed, can earn returns that are similar to those of the actively-managed funds. Copycat funds do not incur the research expenses associated with the actively-managed funds that they are mimicking, but they miss the opportunity to invest in assets that managers identify as positive return opportunities between disclosure dates. Our results for a limited sample of high expense funds in the 1990s suggest that while returns before expenses are significantly higher for the underlying actively managed funds relative to the copycat funds, after expenses copycat funds earn statistically indistinguishable, and possibly higher, returns than the underlying actively managed funds. These findings contribute to the policy debate on the optimal level and frequency of fund disclosure.

mutual funds, disclosure regulation, intellectual property, patents

Abstract:
This paper investigates the importance of deferred tax assets and liabilities for a sample of large U.S. corporations between 1993 and 2004 and documents substantial heterogeneity in the deferred tax positions of different firms. In 2004, 25 firms in a sample of 73 reported net deferred tax assets and 48 reported net deferred tax liabilities. Firms differ substantially in the composition of their deferred tax assets and liabilities. The largest components of deferred tax assets for sample firms are Loss and Credit Carryforwards and Employment and Post-employment Benefits. The largest components of deferred tax liabilities are Property, Plant & Equipment and Leases. Total deferred tax assets for sample firms with net deferred tax assets in 2004 were $61.9 billion, while total deferred tax liabilities for sample firms with net deferred tax liabilities were $223.8 billion. A five percentage point decline in the federal statutory corporate tax rate could reduce net income at sample firms with net deferred tax assets by as much as $8.8 billion, since a statutory rate cut would reduce the value of deferred tax assets and this change would be reflected on the income statement. We use data on the sales, market value, and assets of sample firms, relative to aggregate data for the U.S. corporate sector, to estimate the aggregate value of deferred tax assets and liabilities.

Abstract:
The widening of the gap between pretax book earnings and tax earnings during the last two decades has drawn attention to accounting for income taxes. Book-tax differences can arise from either “permanent” or “temporary” differences. Although the two have different implications for several tax policy issues, there has been little systematic analysis of their respective contributions to the rise in the book-tax gap. We compile deferred tax positions between 1993 and 2004 for a sample of large U.S. firms. In our sample, temporary differences regularly contribute more than half of the divergence between pretax book and tax income. Growth in both temporary and permanent differences appear to contribute to widening of the book-tax gap. We attribute a large part of the growth in temporary differences to increases in deferred tax positions related to property and mark-to-market adjustments. We also find substantial heterogeneity in the size of deferred tax positions. While half of our sample firms report a deferred tax position of less than three percent of assets, approximately ten percent report a position in excess of ten percent of assets. For firms with large deferred tax positions, a change in the statutory corporate income tax rate, which requires revaluation of these positions, may have substantial effects on net income and may also create incentives for income shifting. In our sample, we estimate that if the federal corporate tax rate had been reduced from 35 to 30 percent in 2004, the resulting deferred tax revaluation would have increased net income for firms with a net deferred tax liability by 16.5 percent on average but would have lowered net income for firms with a net deferred tax asset by 11.4 percent.

deferred tax, book-tax differences, revaluation, tax policy

Abstract:
The rapid growth of assets in self-directed tax-deferred retirement accounts has generated a new set of financial decisions for many households. In addition to deciding which assets to hold, households with substantial assets in both taxable and tax-deferred accounts must decide where to hold them. This paper uses data from the Survey of Consumer Finances to assess how many households have enough assets in both taxable and tax-deferred accounts to face significant asset location choices. It also investigates the asset location decisions these households make. In 1998, 45 percent of households had at least some assets in a tax-deferred account, and more than ten million households had at least $25,000 in both a taxable and a tax-deferred account. Many households hold equities in their tax-deferred accounts but not in their taxable accounts, while also holding taxable bonds in their taxable accounts. Most of these households could reduce their taxes by relocating heavily-taxed fixed income assets to their tax-deferred account. Asset allocation inside and outside tax-deferred accounts is quite similar, with about seventy percent of assets in each location invested in equity securities. For nearly three quarters of the households that hold apparently tax-inefficient portfolios, a shift of less than $10,000 in financial assets can move their portfolio to a tax-efficient allocation. Asset location decisions within IRAs appear to be sensitive to marginal tax rates; we do not find evidence for such sensitivity in other tax-deferred accounts.

Abstract:
The rapid growth of assets in self-directed tax-deferred retirement accounts has generated a new set of financial decisions for many households. In addition to deciding which assets to hold, households with substantial assets in both taxable and tax-deferred accounts must decide where to hold them. This paper uses data from the Survey of Consumer Finances to assess how many households have enough assets in both taxable and tax-deferred accounts to face significant asset location choices. It also investigates the asset location decisions these households make. In 1998, 45 percent of households had at least some assets in a tax-deferred account, and more than ten million households had at least $25,000 in both a taxable and a tax-deferred account. Many households hold equities in their tax-deferred accounts, but not in their taxable accounts, while also holding taxable bonds in their taxable accounts. Most of these households could reduce their taxes by relocating heavily-taxed fixed income assets to their tax-deferred account. Asset allocation inside and outside tax-deferred accounts is quite similar, with about seventy percent of assets in each location invested in equity securities. For nearly three quarters of the households that hold apparently tax-inefficient portfolios, a shift of less than $10,000 in financial assets can move their portfolio to a tax-efficient allocation. Asset location decisions within IRAs appear to be sensitive to marginal tax rates; we do not find evidence for such sensitivity in other tax-deferred accounts.

Asset Location, Retirement Saving, Capital Income Taxation, 401(k)

Abstract:
This paper explores the relationship between the after-tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds. Previous studies have documented that funds with high pretax returns attract greater inflows. This paper investigates the relative predictive power of pre-tax and after-tax returns for explaining annual fund inflows. The empirical results, based on a large sample of equity mutual funds over the period 1993-1998, suggest that after-tax returns have more explanatory power than pretax returns in explaining inflows. In addition, funds with large "overhangs" of unrealized capital gains experience smaller inflows, all else equal, than funds without such unrealized gains. By disaggregating net fund inflows into gross inflows and gross redemptions, the paper also provides some insight on how after-tax returns and prospective capital gain realizations affect investor behavior.

Abstract:
This paper explores the relationship between the after-tax returns that taxable investors earn on equity mutual funds and the subsequent cash inflows to these funds. Previous studies have documented that funds with high pretax returns attract greater inflows. This paper investigates the relative predictive power of pre-tax and after-tax returns for explaining annual fund inflows. The empirical results, based on a large sample of equity mutual funds over the period 1993-1998, suggest that after-tax returns have more explanatory power than pretax returns in explaining inflows. In addition, funds with large 'overhangs' of unrealized capital gains experience smaller inflows, all else equal, than funds without such unrealized gains. By disaggregating net fund inflows into gross inflows and gross redemptions, the paper also provides some insight on how after-tax returns and prospective capital gain realizations affect investor behavior.

Abstract:
This paper analyzes the statistical evidence bearing on whether transitory components account for a large fraction of the variance in common stock returns. The first part treats methodological issues involved in testing for transitory return components. It demonstrates that variance ratios are among the most powerful tests for detecting mean reversion in stock prices, but that they have little power against the principal interesting alternatives to the random walk hypothesis. The second part applies variance ratio tests to market returns for the United States over the 1871-1986 period and for seventeen other countries over the 1957-1985 period, as well as to returns on individual firms over the 1926- 1985 period. We find consistent evidence that stock returns are positively serially correlated over short horizons, and negatively autocorrelated over long horizons. The point estimates suggest that the transitory components in stock prices have a standard deviation of between 15 and 25 percent and account for more than half of the variance in monthly returns. The last part of the paper discusses two possible explanations for mean reversion: time varying required returns, and slowly-decaying "price fads" that cause stock prices to deviate from fundamental values for periods of several years. We conclude that explaining observed transitory components in stock prices on the basis of movements in required returns due to risk factors is likely to be difficult.

Abstract:
A number of financial market analysts have argued that the aging of the "Baby Boom" cohort contributed to the rise U.S. asset values during the 1990s, and that asset prices will decline when this group reaches retirement age and begins to draw down its wealth. This paper explores the importance of changing demographic structure for asset returns, asset prices, and the composition of household balance sheets in the United States. Standard models suggest that equilibrium returns on financial assets will vary in response to changes in population age structure. While the direction of the effect of demographic changes is not controversial, the quantitative importance of such changes for financial markets is open to debate. The paper presents several strands of empirical evidence that bear on this issue. First, it describes current age-specific patterns of asset holding in the United States, and finds that asset holdings rise sharply when households are in their 30s and 40s. Aside from the automatic decline in the value of defined benefit pension assets as households age, however, other financial assets decline only gradually during retirement. When these data are used to project asset demands in light of the future age structure of the U.S. population, they do not show a sharp decline in asset demand between 2020 and 2050. This finding calls into question the "asset market meltdown" view. Second, the paper considers the historical association between population age structure and real returns on Treasury bills, long-term government bonds, and corporate stock. The evidence suggests only modest effects, if any, of a changing demographic mix. Statistical tests based on the few effective degrees of freedom in the historical record of age structure and asset returns have limited power to detect such effects. There is a stronger historical correlation between asset levels, as measured for example by the price-dividend ratio, and summary measures of the population age structure. Once again, however, the results are sensitive to choices about econometric specification. These empirical findings provide modest support, at best, for the view that asset prices could decline as the share of households over the age of 65 increases.

Abstract:
This paper examines the impact of the Alternative Minimum Tax on the weighted average marginal tax rates that apply to various components of taxable income. It also considers the impact of several AMT reform proposals on the number of AMT taxpayers, the total revenue collected from the AMT, and the weighted average marginal tax rates that apply to wages, capital income, and deductions such as state and local taxes and charitable gifts. The paper uses the NBER TAXSIM model to project federal personal income tax liabilities as well as AMT liabilities between 2003 and 2013. The AMT has only a modest impact on the average marginal tax rates for most sources of income because some AMT taxpayers face higher marginal tax rates, and others lower tax rates, as a result of the tax. The projections show that modest increases in the AMT exclusion level have substantial effects on the number of AMT taxpayers, and that indexing the AMT parameters would reduce the number of AMT payers in 2010 by more than sixty percent. These changes would also reduce the AMT's impact on average marginal tax rates.

Income taxation, alternative minimum tax

Abstract:
This paper examines the impact of the Alternative Minimum Tax on the weighted average marginal tax rates that apply to various components of taxable income. It also considers the impact of several AMT reform proposals on the number of AMT taxpayers, the total revenue collected from the AMT, and the weighted average marginal tax rates that apply to wages, capital income, and deductions such as state and local taxes and charitable gifts. The paper uses the NBER TAXSIM model to project federal personal income tax liabilities as well as AMT liabilities between 2003 and 2013. The AMT has only a modest impact on the average marginal tax rates for most sources of income because some AMT taxpayers face higher marginal tax rates, and others lower tax rates, as a result of the tax. The projections show that modest increases in the AMT exclusion level have substantial effects on the number of AMT taxpayers, and that indexing the AMT parameters would reduce the number of AMT payers in 2010 by more than sixty percent. These changes would also reduce the AMT's impact on average marginal tax rates.

Abstract:
Between 1990 and 2000, total sales of variable annuities in the U.S. grew from just over $5 billion to nearly $140 billion. These products now account for approximately half of all private market annuity sales. Variable annuities resemble mutual funds, but they qualify for special tax treatment as insurance products because they provide an option to convert to a life annuity. This paper describes the tax treatment of variable annuities and presents summary information on the ownership patterns for variable annuities. It also explores the relative importance of several distinct motives for household purchase of variable annuities. We use household data from the 1998 and 2001 waves of the Survey of Consumer Finances to examine ownership patterns and to test for the importance of tax and insurance considerations in variable annuity demand. We find that variable annuity ownership is highly concentrated among high income and high net wealth sub-groups of the population, although the concentration is lower than for several other categories of financial assets. We find mixed support for the role of tax considerations in generating variable annuity demand, and we outline a set of research issues that focus on household annuity purchases.

Abstract:
This paper estimates the fraction of the variance in aggregate stock returns that can be attributed to various kinds of news. First, we consider macroeconomic news and show that it is difficult to explain more than one third of the return variance from this source. Second, to explore the possibility that the stock market responds to information that is omitted from our specifications, we also examine market moves coincident with major political and world events. The relatively small market responses to such news, along with evidence that large market moves often occur on days without any identifiable major news releases, casts doubt on the view that stock price movements are fully explicable by news about future cash flows and discount rates.

Abstract:
Discusses the connection between conventional models of business investment and the literature on the imperfections in capital markets and the differences in individual firms' abilities to access these markets. Financing methods considered in this analysis include short-term bank debt, long-term bank debt, other long-term debt, and retained earnings. The financing methods used by manufacturing firms between 1970 and 1984 are summarized in the aggregate. The cost of internal financing is often less than external financing because of transaction costs, tax advantages, agency problems, and asymmetric information. This cost premium for external financing is integrated into an existing model of firm financial and investment decisions that has been developed in previous literature in order to create a financing hierarchy model. Data used in the empirical analysis were collected from 422 manufacturing firms. These firms are divided into three classes based on their dividend to income ratio. Results show that firms that retain most of their income have a greater sensitivity of investment to cash flow and liquidity. Firms that were young and had low dividends were most affected. The differences across firms are consistent with financial constraints arising from capital market imperfections. The impact that economic fluctuations and tax policy have on investment are also considered. (SRD)

Capital investment, Tax policies, Investment policies, Financial markets, Market constraints, Debt financing, Earnings, Manufacturing industries, Financial constraints, Access to capital, Firm financing

Abstract:
This paper uses data on actual returns on taxable bonds, tax-exempt bonds, and a small sample of equity mutual funds over the 1962-1998 period to compare two asset location strategies for retirement savers. The first strategy gives priority to holding equities, through equity mutual funds, in a saver's tax-deferred account, while the second strategy gives priority to holding fixed-income investments in the tax-deferred account. We consider high-income taxable individual investors who saved in each year and invested in one of actively-managed funds in our sample. Over the thirty-seven year span that we consider, such savers would have accumulated a larger stock of wealth if they had held their equity mutual fund in their tax-deferred account than if they had held the fund in a conventional taxable form. The explanation for this apparent contradiction of the often-stated bonds in the tax-deferred account' prescription has two parts. First, many equity mutual funds impose substantial tax burdens on their investors. This raises the effective tax rate on investing in equities through mutual funds rather than in a buy-and-hold personal portfolio. Second, taxable investors who wish to hold fixed income assets can do so by holding tax-exempt bonds as well as by holding taxable bonds. The interest rate differential between taxable and tax-exempt bonds suggests that the effective tax rate on fixed income investments may be lower than the statutory tax rate for high-income investors.

Abstract:
To encourage individuals to save for retirement, federal tax policy provides various tax advantages for investments in self-directed accounts, such as traditional and Roth IRAs, and 401(k) plans. However, the differential tax treatment of these accounts and traditional taxable accounts can make it difficult for individuals to choose where to put their money and, once they have begun to accumulate assets, to evaluate how much they will have available in retirement.

This Issue in Brief begins with a brief description of the types of accounts that individuals may consider for retirement saving. It then analyzes two separate issues that are relevant to different stages of the investment process: 1) where to invest; and 2) how to value existing investments. The first issue involves what type of account individuals should choose in order to maximize their after-tax rate of return, assuming that each account offers the same pre-tax return. The analysis of this fundamental saving decision considers both taxes that are paid up-front on contributions and taxes that are paid when funds are withdrawn. The second issue involves how to determine the after-tax value of existing assets in order to assess progress toward meeting a retirement saving target. Since, once the investments are made, up-front taxes are no longer relevant, this analysis looks only at taxes that are paid when funds are withdrawn or, in the case of taxable accounts, taxes that are due along the way.

Abstract:
Capital gain distributions by mutual funds generate tax liability for taxable shareholders, thereby reducing their after-tax returns. Taxable investors who are considering purchasing fund shares around distribution dates have an incentive to delay their purchase until after the distribution, since this will reduce the present value of their tax liability. Non-taxable shareholders, such as those who invest through IRAs and other tax-deferred accounts, face no such incentive for delaying purchase. This paper compares daily shareholder transactions by taxable and non-taxable investors in the mutual funds of a single no-load fund complex around distribution dates. Gross inflows to taxable accounts are significantly lower in the weeks preceding distribution dates than in the weeks following them, but gross inflows to tax-deferred accounts do not change around these dates. This finding suggests that some taxable shareholders time their purchase of mutual fund shares to avoid the tax acceleration associated with distributions. Taxable shareholders who purchase shares just before distribution dates also have shorter holding periods, on average, than those who buy after a distribution. The cost of the distribution-related tax acceleration for pre-distribution buyers is therefore somewhat less than that for those who buy after the distribution.

mutual funds, taxes, capital gains distributions

Abstract:
This paper summarizes the development of private annuity markets in the United States. Annuities constituted a small share of the U.S. insurance market until the 1930s, when two developments contributed to their growth. First, concerns about the stability of the financial system drove investors to products offered by insurance companies, which were perceived to be stable institutions. Flexible payment deferred annuities, which permit investors to save and accumulate assets as well as draw down principal, grew rapidly in this period. Second, the group annuity market for corporate pension plans began to develop in the 1930s. The group annuity market grew more rapidly than the individual annuity market for several decades after World War II. The most recent development in the annuity marketplace has been the rapid expansion of variable annuities. These annuity products combine the investment features of mutual funds with the tax deferral available for life insurance products. Variable annuity premium payments increased by a factor of five in the most recent five years for which data are available.

Abstract:
Assets in retirement saving plans have become an important component of net worth for many households. While many studies compare household balances in tax-deferred retirement accounts such as 401(k) plans with the financial assets held outside these accounts, these different asset components are not directly comparable. Taxes and in some cases penalties are due when assets are withdrawn from some retirement saving plans. These factors can make a dollar held inside a retirement account less valuable than a dollar held in a similar asset outside these accounts, particularly for those who are considering withdrawing assets from the tax-deferred accounts in the near future. For younger households who do not plan to withdraw tax deferred assets for many years, the opportunity for tax-free compound returns in retirement accounts can make a dollar inside such an account more valuable than a dollar outside such accounts from the standpoint of providing retirement resources, even though the principal from the retirement account will be taxed at the time of distribution, while the principal outside such accounts is untaxed. This paper illustrates the potential differences in the value of a dollar of invested in a bond, or in corporate stock, inside and outside tax-deferred accounts. It draws on a range of data sources to calibrate the value of the tax burden, and the benefit of compound growth, for assets held in retirement accounts, and describes the differences in relative valuation for households of different ages.

Abstract:
Many studies compare household balances in tax-deferred retirement accounts such as 401(k) plans with financial assets held outside these accounts, but these different asset components are not directly comparable. Taxes and in some cases penalties are due when assets are withdrawn from some retirement saving plans. These factors imply that a dollar held inside a retirement account may be less valuable in supporting retirement income than a dollar held in a similar asset outside these accounts. This is particularly important for households that are considering withdrawing assets from the tax-deferred accounts in the near future. For households with long deferral horizons, the opportunity for tax-free compound returns in retirement accounts can permit a dollar inside such an account to support more retirement consumption than a dollar outside such accounts, even though the account principal will be taxed on distribution. This paper illustrates the potential differences in the retirement support value of a dollar of invested in a bond, or in corporate stock, inside and outside tax-deferred accounts. It draws on a range of data sources to calibrate the value of the tax burden, and the benefit of compound growth, for assets held in retirement accounts, and describes the differences in relative valuation for households of different ages.

Abstract:
Nearly two thirds of U.S. families currently pay more in payroll taxes than they pay in federal personal income taxes. In the lower strata of the family income distribution, payroll taxes exceed income taxes for nearly ninety percent of all tax-paying families. This paper documents the relative magnitude of income and payroll tax burdens on families of different types. It considers the differential importance of these taxes for married couples, single individuals, and single-parent families. The paper considers total tax payments as well as the marginal payroll and personal income tax rates facing families, and presents an exploratory analysis of how accounting for ?tax benefit linkage? alters relative marginal payroll and income tax rates. The percentage of families for whom the marginal payroll tax rate exceeds the marginal personal income tax rate falls from 54 percent to 9 percent when the effective payroll tax rate is measured net of the present discounted value of future Social Security benefits.

Abstract:
This paper explores the effect of discretion in estate valuation techniques on the effective estate tax burden on different asset classes. For some assets, such as liquid securities, there is relatively little discretion in valuation. For other assets, such as partial interests in closely-held businesses, family limited partnerships, and real assets or collectibles that are traded in thin markets, estate valuations may be more difficult to establish. Estate tax filers may therefore be able to select valuations that reduce the reported value of the estate assets, and therefore the effective estate tax burden. In 1998, estates that invoked the doctrine of "minority discounts" in valuing non-controlling interests in limited partnerships claimed an average discount of 36 percent for these assets, relative to their estimated market value. More than half of all limited partnership assets reported on estate tax returns were valued using this doctrine. This suggests that for a given statutory estate tax rate, the effective estate tax burden may be greater on assets that are easily valued than on difficult-to-value assets. A comparison of the mix of assets reported on estate tax returns, and the mix the estate tax returns would be predicted to hold, given data from the Survey of Consumer Finances, is consistent with lower relative valuations for difficult-to-value assets.

Estate Taxation, Bequests, Tax Avoidance

Abstract:
This paper explores the effect of discretion in estate valuation techniques on the effective estate tax burden on different asset classes. For some assets, such as liquid securities, there is relatively little discretion in valuation. For other assets, such as partial interests in closely-held businesses, family limited partnerships, and real assets or collectibles that are traded in thin markets, estate valuations may be more difficult to establish. Estate tax filers may therefore be able to select valuations that reduce the reported value of the estate assets, and therefore the effective estate tax burden. In 1998, estates that invoked the doctrine of 'minority discounts' in valuing non-controlling interests in limited partnerships claimed an average discount of 36 percent for these assets, relative to their estimated market value. More than half of all limited partnership assets reported on estate tax returns were valued using this doctrine. This suggests that for a given statutory estate tax rate, the effective estate tax burden may be greater on assets that are easily valued than on difficult-to-value assets. A comparison of the mix of assets reported on estate tax returns, and the mix the estate tax returns would be predicted to hold, given data from the Survey of Consumer Finances, is consistent with lower relative valuations for difficult-to-value assets.

Abstract:
As growing numbers of retirees reach retirement age with substantial balances in self-directed retirement plans, annuities are likely to become increasingly important instruments for drawing down retirement savings. This study explores recent trends in the pricing of single-premium annuity products in the United States. Virtually all of the annuity products currently available in the United States offer fixed nominal payouts, rather than an inflation-linked payout stream. After describing the money's worth' of the various types of nominal annuity products, this study considers the extent to which existing U.S. private annuity markets provide retirees with inflation-protected retirement income flows. Although there is effectively no market yet for inflation-indexed annuities in the United States, such products are available in other countries. The paper concludes by summarizing recent data on the pricing of both nominal and inflation-linked annuities in the United Kingdom and several other nations.

Abstract:
Retirement saving has changed dramatically over the last two decades. There has been a shift from employer-managed defined benefit pensions to defined contribution retirement saving plans that are largely controlled by employees. In 1980, 92 percent of private retirement saving contributions were to employer-based plans and 64 percent of these contributions were to defined benefit plans. Today, about 85 percent of private contributions are to plans in which individuals decide how much to contribute to the plan, how to invest plan assets and how and when to withdraw money from the plan. In this paper we use both macro and micro data to describe the change in retirement assets and in retirement saving. We give particular attention to the possible substitution of pension assets in one plan for assets in another plan such as the substitution of 401(k) assets for defined benefit plan assets. Aggregate data show that between 1975 and 1999 assets to support retirement increased about five-fold relative to wage and salary income. This increase suggests large increases in the wealth of future retirees. The enormous increase in defined contribution plan assets dwarfed any potential displacement of defined benefit plan assets. In addition, in recent years the annual "retirement plan contribution rate," defined as retirement plan contributions as a percentage of NIPA personal income, has been over 5 percent. This is much higher than the NIPA total personal saving rate, which has been close to zero. Retirement saving as a share of personal income today would likely be at least one percentage point greater had it not been for legislation in the 1980s that limited employer contributions to defined benefit pension plans, and the reduction in defined benefit plan contributions associated with the rising stock market of the 1990s. It is also likely that the "retirement plan contribution rate" would be much higher today if it were not for the 1986 retrenchment of the IRA program.

Abstract:
In this paper, we analyze the relationship between age and portfolio structure for households in the US. We focus on both the probability that households of different ages own particular portfolio assets and the fraction of their net worth allocated to each asset category. We distinguish between age and cohort effects using data from the repeated cross-sections of the Federal Reserve Board's Surveys of Consumer Finances. We present two broad conclusions. First, there are important differences across asset classes in both the age-specific probabilities of asset ownership and in the portfolio shares of different assets at different ages. The notnion that all assets can be treated as identical from the standpoint of analyzing household wealth accumulation is not supported by the data. Institutional factors, asset liquidity, and evolving investor tastes must be recognized in modeling asset demand. These factors could affect analyses of overall household saving as well as the composition of this saving. Second, there are evident differences in the asset ownership probabilities of different birth cohorts. Currently, older households were more likely to hold corporate stock, and less likely to hold tax-exempt bonds, than younger households at any given age. These differences across cohorts are important to recognize when analyzing asset accumulation profiles.

Abstract:
This paper tests several competing hypotheses about the economic effects of dividend taxation. It employs British data on security returns, dividend payout rates, and corporate investment, because unlike the United States, Britain has experienced several major dividend tax reforms in the last three decades. These tax changes provide an ideal natural experiment for analyzing the effects of dividend taxes. We compare three different views of how dividend taxes affect decisions by firms and their shareholders. We reject the"tax capitalization" view that dividend taxes are non-distortionary lump sum taxes on the owners of corporate capital. We also reject the hypothes is that firms pay dividends because marginal investors are effectively untaxed. We find that the traditional view that dividend taxes constitute a "double-tax" on corporate capital income is most consistent with our empirical evidence. Our results suggest that dividend taxes reduce corporate investment and exacerbate distortions in the intersectoral and intertemporal allocation of capital.

Abstract:
Over the past two and a half decades there has been a fundamental change in saving for retirement in the United States, with a rapid shift from employer-managed defined benefit pensions to defined contribution saving plans that are largely controlled by employees. To understand how this change will affect the well-being of future retirees, we project the future growth of assets in self-directed personal retirement plans. We project the 401(k) assets at age 65 for cohorts attaining age 65 between 2000 and 2040. We also project the total value of assets in 401(k) accounts in each year through 2040 and we project the value of 401(k) assets as a percent of GDP over this period. We conclude that cohorts that attain age 65 in future decades will have accumulated much greater retirement saving (in real dollars) than the retirement saving of current retirees.

Abstract:
No abstract is available for this paper.

Abstract:
This paper examines how different asset allocation strategies over the course of a worker's career affect the distribution of retirement wealth and the expected utility of wealth at retirement. It considers both rules that allocate a constant portfolio fraction to various assets at all ages, as well as "lifecycle" rules that vary the mix of portfolio assets as the worker ages. The analysis simulates retirement wealth using asset returns that are drawn from the historical return distribution. The results suggest that the distribution of retirement wealth associated with typical lifecycle investment strategies is similar to that from age-invariant asset allocation strategies that set the equity share of the portfolio equal to the average equity share in the lifecycle strategies. There is substantial variation across workers with different characteristics in the expected utility from following different asset allocation strategies. The expected utility associated with different 401(k) asset allocation strategies, and the ranking of these strategies, is very sensitive to three parameters: the expected return on corporate stock, the worker's relative risk aversion, and the amount of non-401(k) wealth that the worker will have available at retirement. At modest levels of risk aversion, or in the presence of substantial non-401(k) wealth at retirement, the historical pattern of stock and bond returns implies that the expected utility of an all-stock investment allocation rule is greater than that from any of the more conservative strategies. Higher risk aversion or lower expected returns on stocks raise the expected utility of following lifecycle strategies or other strategies that reduce equity exposure throughout the lifetime.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
This papers examines the relationship between demographic structure and the level of government spending on K-12 education. Panel data for the U.S. states over the 1960-1990 period suggests that an increase in the fraction of elderly residents in a jurisdiction is associated with a significant reduction in per child educational spending. This reduction is particularly large when the elderly residents and the school-age population are from different racial groups. Variation in the size of the school-age population does not result in proportionate changes in education spending, so students in states with larger school-age populations receive lower per-student spending than those in states with smaller numbers of potential students. These results provide support for models of generational competition in the allocation of public sector resources. They also suggest that the effect of cohort size on government-mediated transfers must be considered in analyzing how cohort size affects economic well-being.

Abstract:
No abstract is available for this paper.

Abstract:
This paper summarizes the current state of research on how taxation affects household decisions with respect to portfolio structure and asset trading. It discusses long-standing issues, such as the impact of differential taxation of income flows from stocks and bonds on the incentives for households to invest in these assets, and the effect of capital gains taxation on asset sales. It also addresses a range of emerging issues, such as the impact of taxation on the behavior of mutual funds and their investors, and the effect of tax changes and tax uncertainty on investor behavior. It concludes that taxation exerts a systematic influence on the nature of risk-taking and the structure of household portfolios. Research on the effects of taxation on portfolio structure is more advanced than work on the welfare costs of portfolio distortions.

Abstract:
This paper presents new information on the expected present discounted value of payouts on individual life annuities. The annuity we examine is the single premium immediate life annuity, an insurance product that pays out a nominal level sum as long as the covered person lives, in exchange for an initial lump-sum premium. This annuity offers protection against the risk of someone outliving his saving, given uncertainty about longevity. For reasonable estimates of behavioral parameters, we calculate that individual annuities are currently priced so that retirees without bequest motives should find these policies of substantial value in configuring their portfolios to smooth retirement consumption. We also find that the expected present discounted value of payouts, relative to the initial cost of the annuity, has increased over the last decade. These findings bear on the policy debate regarding the role of individual choice and self-reliance in retirement planning.

Abstract:
This paper presents new evidence on the effect of state fiscal institutions, particularly balanced-budget rules and restrictions on state debt issuance, on the yields on state general obligation bonds. We analyze information from the Chubb Relative Value Survey, which contains relative tax-exempt yields on the bonds issued by different states over the period 1973-1996. We find that states with tighter anti-deficit rules, and more restrictive provisions on the authority of state legislatures to issue debt, pay lower interest rates on their bonds. The interest rate differential between a state with a very strict anti-deficit fiscal constitution, and one with a lax constitution, is between fifteen and twenty basis points. States with binding revenue limits tend to face higher borrowing rates by approximately the same amount, while states with expenditure limits face lower borrowing costs. Thus fiscal restraints that control expenditures are viewed favorably by bond market participants, while those that restrict taxes, and therefore might interfere with the state's ability to repay interest, result in higher borrowing costs. The effect of strict fiscal institutions is particularly evident when a state's economy is weak. These results provide important evidence that bond market participants consider fiscal institutions in assessing the risk characteristics of tax-exempt bonds, and further support the view that fiscal institutions have real effects on fiscal policy outcomes.

Abstract:
Education and health care are the two largest government expenditure items in the United States. The public sector directly provides the majority of educational services, through the public school bureaucracy, while most public support for health care is channelled through a system of tax-supported government payments for services provided by private providers. The contrast between public policies in these markets raises a host of questions about the scope of government in a mixed economy, and the structure of policies for market intervention. This paper examines how two standard arguments for government intervention in private markets, market failure and redistribution, apply to the markets for education and medical care. It then considers the 'choice of instrument' problem, the choice between intervention via price subsidies, mandates, and direct public provision of services in these markets. Economic arguments alone seem unable to explain the sharp divergence between the nature of public policies with respect to education and medical care. Moreover, there is virtually no evidence on the empirical magnitudes of many of the key parameters needed to guide policy in these areas, such as the social externalities associated with primary and secondary education or the degree to which adverse selection in the insurance market prevents private insurance purchase.

Abstract:
The difference between reported price-earnings ratios in the United States and Japan is not as puzzling as it appears at first glance. Nearly half the disparity is caused by differences in accounting practices with respect to consolidation of earnings from subsidiaries and depreciation of fixed assets. If Japanese firms used U.S. accounting rules, we estimate that the P/E ratio for the Tokyo Stock Exchange would have been 32.1, not the reported 54.3, at the end of 1988. Accounting differences are unable, however, to explain the sharp rise in the Japanese stock market during the mid-1980s. Changes in required returns on equities, or in investor expectations of future growth for Japanese firms, must be invoked to explain this phenomenon. Real interest rates declined during the period of rapid price increase, but there is little evidence that growth expectations because more optimistic. The real interest rate changes do not, however, appear large enough to fully account for the change in stock prices.

Abstract:
We explore four issues concerning annuitization options that retirees might use in the decumulation phase of an individual accounts' retirement saving system. First, we investigate the operation of both real and nominal annuity individual annuity markets in the United Kingdom. The widespread availability of real annuities in the U.K. dispels the argument that private insurance markets could not, or would not, provide real annuities to retirees. Second, we consider the current structure of two inflation-linked insurance products available in the United States, only one of which proves to be a real annuity. Third, we evaluate the potential of assets such as stocks, bonds, and bills, to provide retiree protection from inflation. Because equity real returns have been high over the last seven decades, a retiree who received income linked to equity returns would have fared very well on average. Nevertheless we cast doubt on the inflation insurance' aspect of equity, since this is mainly due to stocks' high average return, and not because stock returns move in tandem with inflation. Finally, we use a simulation model to assess potential retiree willingness to pay for real, nominal, and variable payout equity-linked annuities. For plausible degrees of risk aversion, inflation protection appears to have only modest value. People would be expected to value a variable payout equity-linked annuity more highly than a real annuity because the additional real returns associated with common stocks more than compensate for the volatility of prospective payouts. These finding are germane to concerns raised in connection with Social Security reform plans that include individual accounts.

Abstract:
This paper presents new evidence on the costs of purchasing private annuity contracts to spread a given stock of assets over an uncertain future lifetime. It also describes the operation of individual annuity arrangements within two large group retirement saving plans. First presents information on life annuity contracts that are now available in the individual single-premium-immediate annuity marketplace. For a 65-year-old male annuity buyer present discounted value of the payouts offered by the average policy available in June 1998 was approximately 85 percent of the purchase price. This assumes that the individual faces the mortality risks of the average individual in the population, and that the payouts are discounted at a riskless interest rate. The expected present value of payouts rises if we assume that the buyer faces the mortality rates of the typical annuitant, while it declines if we assume a higher riskier, interest rate for discounting. Second, the paper considers individual annuity policies available to participants in the government's Thrift Savings Plan. Because these annuities are purchased through a large group retirement saving program, some of the administrative costs are lower than those in the national individual annuity market. The expected present value of payouts is correspondingly higher than that in the public' market. Third individual annuity products offered by TIAA-CREF, the retirement system for college and university employees. TIAA offers annuities with non-guaranteed elements the highest payouts in the individual annuity market, mainly due to superior investment returns and low expenses. CREF annuities offer valuable payouts that reflect basis, the investment experience of the accounts.

Abstract:
Claims of the regressivity of gasoline taxes typically rely on annual surveys of consumer income and expenditures which show that gasoline expenditures are a larger fraction of income for very low income households than for middle or high-income households. This paper argues that annual expenditure provides a more reliable indicator of household well-being than annual income. It uses data from the Consumer Expenditure Survey to reassess the claim that gasoline taxes are regressive by computing the share of total expenditures which high-spending and low-spending households devote to retail gasoline purchases. This alternative approach shows that low-expenditure households devote a smaller share of their budget to gasoline than do their counterparts in the middle of the expenditure distribution. Although households in the top five percent of the total spending distribution spend less on gasoline than those who are less well-off, the share of expenditure devoted to gasoline is much more stable across the population than the ratio of gasoline outlays to current income. The gasoline tax thus appears far less regressive than conventional analyses suggest.

Abstract:
We use a unique data set of annuities in the United Kingdom to test for adverse selection. We find systematic relationships between ex post mortality and annuity characteristics, such as the timing of payments and the possibility of payments to the annuitants' estate. These patterns are consistent with the presence of asymmetric information. However, we find no evidence of substantive mortality differences by annuity size. These results suggest that the absence of selection on one contract dimension does not preclude its presence on others. This highlights the importance of considering detailed features of insurance contracts when testing theoretical models of asymmetric information.

Abstract:
This paper presents new evidence on the importance of adverse selection in insurance markets. We use a unique data set, consisting of all annuity policies sold by a large U.K. insurance company since the early 1980s, to analyze mortality differences across groups of individuals who purchased different types of policies. We find systematic relationships between ex-post mortality and annuity policy characteristics, such as whether the annuity will make payments to the estate in the event of an untimely death and whether the payments from the annuity rise over time. These mortality patterns are consistent with models of asymmetric information in insurance markets. We find no evidence of mortality differences, however, across annuities of different size, as measured by the initial annual payment from the annuity. We also study differences in the pricing of different annuity products, and find that the pricing of various features of annuity contracts is consistent with the self-selection patterns we find in mortality rates. Our results therefore suggest that many specific features of insurance contracts can serve as screening mechanisms. This implies that insurance markets may be characterized by adverse selection, even when stratifying policyholders by the amount of payment in case of a claim does not support the existence of selection effects.

Abstract:
This paper explores the value of purchasing joint life annuities for married couples. It describes the existing market for joint life annuities, and summarizes the range of annuity products that are currently available to couples. It then considers the value that married couples would place on access to an actuarially fair annuity market, and defines a measure of willingness-to-pay for annuities. This calculation differs from the analogous one for a single individual for two reasons. First, joint-and-survivor life tables differ from individual life tables. The life expectancy of the second-to-die in a married couple is substantially greater than that for a single individual. Second, joint life annuities provide time-varying payouts, because survivor benefit options permit the payout when both members of a couple are alive to differ from that when one member has died. The paper develops a new annuity valuation model and applies it to evaluate a married couple's utility gain from annuitization. The findings suggest that previous estimates of the utility gain from annuitization, which applied to individuals, overstate the benefits of annuitization for married couples. Since most potential annuity buyers are married, these findings may help to explain the limited size of the private market for single premium annuities.

Abstract:
This paper presents new evidence on the rate of return on tangible assets in the United" States, incorporating the recently-revised national accounts as well as new estimates of the" replacement cost of the reproducible physical capital stock. The pretax return on capital in the" nonfinancial corporate sector has averaged 8.5 percent over the 1959-1996 period. The paper" also presents new estimates of the total tax burden on nonfinancial corporate capital averages 54.1 percent over this time period. For the 1990s, this tax rate corporate income taxes, corporate property taxes, and taxes on stock- and bondholders 42.1 percent of pretax profits. The average pretax rate of return for the 1990-1996 period is 8.6" percent, and the average after-tax return is 5.0 percent. Although the accounting return to" corporate capital has been higher in the mid-1990s than at any previous point in the last two" decades, the substantial volatility in the return series makes it premature to conclude that these" years represent a departure from past experience.

Abstract:
This paper provides an overview of how taxation affects household portfolio structure. It begins by outlining six aspects of portfolio behavior that may be influenced by the tax system. These are asset selection, asset allocation, borrowing, asset location in taxable and tax-deferred accounts, asset turnover, and whether to hold assets directly or through financial intermediaries. The analysis considers how ignoring tax considerations may bias estimates of how other variables, such as income or net worth, affect the structure of household portfolios. The paper then describes the tax rules that apply to various portfolio instruments in a range of major industrialized nations. This illustrates the wide variation in the potential impact of tax rules on portfolio choice. Finally, the paper selectively reviews the existing evidence on how taxation affects portfolio choice. A small but growing literature, primarily based on the analysis of U.S. data, suggests that taxes have important effects on several aspects of portfolio choice. There remain a number of decisions, however, for which it appears difficult to reconcile household choices with tax-efficient behavior.

Abstract:
Demographic change can have an important effect on the stock of assets held in defined benefit pension plans. This paper projects the impact of changes in the age structure of the U.S. population between 2005 and 2040 on the stock of assets held by these plans. It projects the contributions to and withdrawals from these plans. These projections are combined with estimates of the future evolution of assets in 401(k)-like plans to describe the prospective impact of demographic change on the stock of assets in retirement plans. Information on demography-linked changes in asset demand is a critical input to evaluating the potential impact of population aging on asset returns.

Abstract:
The private pension structure in the United States, once dominated by defined benefit (DB) plans, is currently divided between defined contribution (DC) and DB plans. Wealth accumulation in DC plans depends on the participant's contribution behavior and on financial market returns, while accumulation in DB plans is sensitive to a participant's labor market experience and to plan parameters. This paper simulates the distribution of retirement wealth, as well as the average level of such wealth, under representative DB and DC plans. The analysis considers the role of asset returns, earnings histories, and retirement plan characteristics using data from the Health and Retirement Study (HRS). To simulate wealth in DC plans, individuals are randomly assigned a share of wages that they and their employer contribute to the plan. The analysis considers several possible asset allocation strategies, with asset returns drawn from the historical return distribution. The DB plan simulations draw earnings histories from the HRS, and randomly assign each individual a pension plan drawn from a sample of large private and public defined benefit plans. The simulations yield distributions of both DC and DB wealth at retirement as well as estimates of the certainty-equivalent wealth associated with representative DB and DC pension structures. The results suggest that average retirement wealth accruals under current DC plans exceed average accruals under private sector DB plans, although the heterogeneity in both types of plans implies many deviations from this rule. The comparison of current DC plans with more generous public sector DB plans is less definitive, because public sector DB plans are more generous on average than their private sector counterparts. The ranking of the expected value of retirement wealth accruals, and the certainty equivalent of those accruals, for these two classes of plans is sensitive to assumptions about the asset allocation rules of the DC plan participant.

Abstract:
This paper proposes an alternative to the traditional model for explaining the spread between taxable and tax-exempt bond yields. This alternative model is a special case of a general class of clientele models of portfolio choice and asset market equilibrium. In particular, we consider a setting with two types of investors, a taxable investor and a tax-exempt investor, who hold specialized bond portfolios. The tax-exempt investor holds only taxable bonds, and the taxable investor holds only tax-exempt bonds. Both investors hold equity, and the taxable and tax-exempt bond markets are linked through the equilibrium conditions governing equity holding and bond holding for each type of investor. In contrast to the traditional model, this alternative model has the potential to explain the small observed spread between taxable and tax-exempt yields. In addition, this model predicts that the yield spread between taxable and tax-exempt bonds should be an increasing function of the dividend yield on corporate stocks. Although the substantial changes in the tax code during the last four decades complicate the testing of this model, we find some support for the predicted relationship between the equity dividend yield and the yield spread between taxable and tax-exempt bonds.

Abstract:
This paper investigates the association between population age structure, particularly the share of the population in the saving years is motivated by the claim that the aging of the in the United States is a key factor in explaining the recent rise in asset values. It also addresses the associated claim that asset prices will decline when this large cohort reaches retirement age and begins to reduce its asset holdings. This paper begins by considering household age-asset accumulation profiles. Data from the Survey of Consumer Finances suggest that while cross-sectional age-wealth profiles peak for households in their early 60s, cohort data on the asset ownership of the same households show a much less pronounced peak. Wealthy households with substantial asset holdings appear to decumulate slowly, if at all, after retirement. This casts doubt on the (excluding defined benefit pension assets) that households control directly. The paper then considers the historical relationship between demographic structure and real returns on Treasury bills, long-term government bonds, and corporate stock. The results do not suggest any robust relationship between demographic structure and asset returns. This is partly due to the limited power of statistical tests based on the few structure and asset returns in the United States and other developed economies. The paper concludes by discussing factors such as international capital flows and forward-looking behavior on the part of market participants that could weaken the relationship between age structure and asset returns in a single nation.

Abstract:
This paper examines the potential influence of changing volatility in stock market prices on the level of stock market prices. It demonstrates that volatility is only weakly serially correlated, implying that shocks to volatility do not persist. These shocks can therefore have only a small impact on stockmarket prices, since changes in volatility affect expected required rates of return for relatively short intervals. These findings lead us to be skeptical of recent claims that the stock market`s poor performance during the 1970`s can be explained by volatility-induced increases in risk premia.

Abstract:
The bull market of the last year has raised the total value of corporate stock in the United States by nearly a trillion dollars. While many analysts have tried to explain or interpret the recent movements of the stock market, there has been less attention to the link between rising stock prices and real economic activity. How are the gains from and increase in share prices distributed across households? What fraction of these gains accrues to a small set of wealthy investors? How do rising stock prices affect consumer spending?

Abstract:
This paper describes a new household-level data file based on merged information from the IRS Individual Tax File, the Current Population Survey, the National Medical Expenditure Survey, and the Consumer Expenditure Survey. This new file includes descriptive data on household income as well as consumption. The data file can be linked to the NBER TAXSIM program and used to evaluate the distributional effects of changing the federal income tax code, as well as the distributional effects of replacing the individual income tax with a consumption tax. We use this data file to analyze the long-run distributional effects of adopting a national retail sales tax that raises enough revenue to replace the current federal individual income tax and corporation income tax, as well as federal estate and gift taxes. Our results highlight the sensitivity of the change in distributional burdens to provisions such as lump sum transfers, sometimes called "demogrants," the retail sales tax plan, and to the choice between income and consumption as a basis for categorizing households in distribution tables.

Abstract:
The design of budget rules and institutions, long a neglected area in public finance and macroeconomics, has recently been thrust to center stage by the debate over a balanced budget amendment and other deficit-reduction measures in the United States. This paper describes the existing evidence on how budget rules affect fiscal policy outcomes. It contrasts the `institutional irrelevance view,' which holds that budget rules can be circumvented by modifying accounting practices and changing the nominal timing or other classification of taxes and expenditures, with the `public choice view' in which fiscal institutions represent important constraints on the behavior of political actors. Several distinct strands of empirical evidence, from the U.S. federal experience with anti-deficit rules, from U.S. state experience with balanced budget rules, and from international comparisons of budget outcomes in nations with different fiscal institutions, suggest that fiscal institutions do matter. These results reject the institutional irrelevance view. The existing evidence is not refined enough, however, to provide detailed advice on how narrowly-defined changes in budget rules might affect policy outcomes.

Abstract:
The shift from defined benefit to defined contribution plans in the United States has drawn new attention to the effect of participants' asset allocation decisions on their financial resources for retirement. This paper develops a stochastic simulation algorithm to evaluate the effect of holding a broadly diversified portfolio of common stocks, or a portfolio of index bonds, on the distribution of 401(k) account balances at retirement. We compare the alternative distributions of retirement wealth both by showing the empirical distribution of potential wealth values, and by computing the expected utility of these outcomes under standard assumptions about the structure of household preferences. Our analysis highlights the critical role of other sources of wealth, such as Social Security, defined benefit pension annuities, and saving outside retirement plans in determining the expected utility cost of holding equities in the retirement account. Our findings also demonstrate the importance of the equity premium in affecting investors' utility from different retirement asset allocations. Viewed from the beginning of a working career, and given the historical pattern of returns on stocks and bonds, a household that does not have extremely high risk aversion would achieve a higher expected utility by holding a portfolio of stocks rather than bonds.

Abstract:
This paper summarizes state balanced budget requirements, and the available empirical evidence on the effect of these rules on state fiscal policies. Existing state rules differ from many current proposals at the federal level. They are typically restricted to part of the state budget, they frequently permit short term borrowing, and they lack formal enforcement mechanisms. The paper also surveys previous research on how anti-deficit provisions affect state fiscal policy. The available evidence indicates that stringent anti-deficit provisions lead to more rapid adjustment of state taxes and expenditures when fiscal deficits emerge. This suggests that changing the federal budget process has the potential to affect federal fiscal policy.

Abstract:
No abstract is available for this paper.

Abstract:
The 1998 Survey of Consumer Finances provides information on household wealth ownership that can be used to estimate the effect of changing the Unified Estate and Gift Tax Credit on estate tax revenues. The survey also includes data on the prices at which assets were purchased, along with information on their market values. This makes it possible to compare the revenue yield and the distributional consequences of taxing estates with those of taxing unrealized capital gains on assets held by individuals who die. This paper uses data from the Survey of Consumer Finances to estimate the revenue effects of changes in both estate tax provisions and capital gains tax rules. It finds that among those with small estates ($1 million or less), taxing capital gains at death would collect more revenue than the current estate tax from roughly half of the decedents. For those with larger estates, replacing the estate tax with a tax on unrealized gains at death would result in a substantial reduction in total tax payments. The revenue estimates and distributional analyses assume no change in the current capital gains realization behavior of taxpayers, even if the tax law changes. This is an important limitation, and the paper notes several directions for further research that might help to relax this assumption.

Abstract:
This paper explores the relationship between household marginal income tax rates, the set of assets that households own, and the portfolio shares accounted for by each of these assets. It analyzes data from the 1983, 1989, 1992, and 1995 Surveys of Consumer Finances and develops a new algorithm for imputing federal marginal tax rates to households in these surveys. The empirical findings suggest that a household's marginal tax rate has an important effect its asset allocation decisions. The probability that a household owns tax-advantaged assets is strongly related to its tax rate on ordinary income. In addition, the amount of investment through tax-deferred accounts such as 401(k) plans and IRAs is an increasing function of the household's marginal tax rate. Holdings of corporate stock, which is taxed less heavily than interest bearing assets, and of tax-exempt bonds are also increasing in the household's marginal tax rate. Holdings of heavily taxed assets, such as corporate bonds and interest-bearing accounts, decline as a share of wealth as a household's marginal tax rate increases.

Abstract:
Proposals for mandatory private saving accounts differ in the degree of investment discretion that they provide to individual savers, and in their provisions for annuitization of accumulated assets. With respect to investment choices, some argue that individuals must be prevented from investing too conservatively, and earning low returns over their accumulation period, while others argue that individuals should be protected from recklessly investing their retirement assets. With respect to annuitization, there is concern that individuals might not choose annuities and would thereby expose themselves to a risk of outliving their assets in a privatized system. This paper draws on the existing experience with 401(k) plans and other defined contribution pension plans to provide evidence on each of these issues. We find that the share of 401(k) plan assets held in corporate equities has increased substantially in recent years. We are only able to provide limited evidence on participant asset management, since many 401(k) plans have limited options in this regard. We do find, however, that a participant's education and income levels are related to asset allocation decisions, with less educated and lower income participants less inclined to invest in equity securities. We also analyze a unique data base on TIAA-CREF participants and find several attributes of annuitization behavior that seem inconsistent with standard behavior in the lifecycle model.

Abstract:
This paper presents new evidence on the level and distribution of income and payroll tax burdens for U.S. families over the 1979-1999 period. During this period, payroll taxes have become an increasingly important component of the tax burden for many low- and middle-income families. This paper uses a new and expanded version of the NBER TAXSIM program to analyze the impact of legislative changes in income and payroll taxes. Averaged over all families, the combined 1999 payroll and income tax burden was quite similar to what it would have been if the 1979 income and payroll tax laws had remained in force for the last two decades, with only inflation-based adjustments to tax brackets. The mix of income and payroll taxes has changed, however. As a result of the expansion of the Earned Income Tax Credit in the late 1980s and early 1990s, as well as other changes in the federal personal income tax, payroll tax liabilities now exceed income tax liabilities for nearly two thirds of families. In 1979, payroll taxes exceeded income taxes for 44 percent of families.

Abstract:
Variable annuities have been one of the most rapidly growing financial products of the last two decades. Between 1996 and 2004, nominal sales of variable annuities in the U.S. more than doubled, from $51 billion to $130 billion. Variable annuities now account for approximately nearly two thirds of annuity sales. The investment returns associated with variable annuities resemble those from mutual funds, and variable annuity buyers can select among a range of asset allocation options. Variable annuities are considered insurance products under the tax law, so buyers are not taxed on their investment returns until they make withdrawals from their variable annuity accounts. This paper describes the tax treatment of variable annuities, presents summary information on their ownership patterns, and explores the importance of several distinct motives for household purchase of variable annuities. The discussion of tax treatment examines the impact of the 2001 and 2003 tax bills on the relative tax treatment of variable annuities and other financial products. Household data from the 1998 and 2001 Survey of Consumer Finances shows that variable annuity ownership is highly concentrated among high income and high net wealth sub-groups of the population. Variable annuity ownership is less concentrated, however, than ownership of several other types of financial assets. Evidence on the role of tax incentives in encouraging ownership of variable annuities is mixed. The probability of owning a variable annuity rises with the marginal tax rate throughout most of the income distribution, but it is lower for households in the top tax bracket than for those with slightly lower tax rates.

Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

Abstract:
No abstract is available for this paper.

Abstract:
This paper presents new evidence on the importance of adverse selection in individual annuity markets. It focuses on the individual annuity market in the United Kingdom, which provides an excellent empirical setting for studying selection effects. In addition to a voluntary annuity market, the U.K. also has a compulsory annuity market in which individuals in some types of retirement plans are effectively required to purchase retirement annuities. Two empirical regularities support standard models of adverse selection. First, annuitants as a group are longer-lived than randomly selected individuals in the population at large. The expected present value of the annuity payout stream from a typical voluntary annuity is thirteen percent higher for a typical 65-year-old male voluntary annuitant than for a typical 65-year-old male in the U.K. population. This is simply the result of differential mortality between the annuitant population and the population at large. Selection effects are more pronounced in the voluntary than in the compulsory annuity market, but even compulsory annuitants are not a random sample from the U.K. population. In the compulsory annuity market, the cost of adverse selection is between one third and one half of that in the voluntary annuity market. Second, annuitants select across different types of annuity products with different payout profiles, even within the compulsory market. The expected present values of payouts from inflation-indexed annuities and from nominal escalating annuities are lower than those from nominal annuities. This is consistent with longer-lived individuals choosing annuity products with greater payouts in the distant future. We find some puzzling evidence, however, in the relative pricing of nominal escalating annuities and inflation-indexed annuities. In addition to providing evidence on adverse selection, the U.K. annuity market can also be used to study how the price of an insurance product is related to the quantity of insurance purchased. Prices per annuity unit are lower for larger annuity policies than for smaller policies. Some theoretical models of insurance demand, which suggest that poorer risks should purchase more insurance and do not consider the fixed costs of issuing annuity or insurance policies, are inconsistent with this result.

Abstract:
Saving through private pensions has been an important complement to Social Security in providing for the financial needs of older Americans. In the past twenty five years, however, there has been a dramatic change in private retirement saving. Personal retirement accounts have replaced defined benefit pension plans as the primary means of retirement saving. It is important to understand how this change will affect the wealth of future retirees. The personal retirement account system is not yet mature. A person who retired in 2000, for example, could have contributed to a 401(k) for at most 18 years and the typical 401(k) participant had only contributed for a little over seven years. Nonetheless, current 401(k) assets are quite large. We consider in this paper the implications of rising 401(k) saving through the year 2040. In particular, we emphasize the growth of the sum of Social Security wealth and 401(k) assets for families in each decile of the Social Security wealth distribution. Our projections show a substantial increase between 2000 and 2040 in the sum of these retirement assets in each wealth decile. We also consider the accumulation of 401(k) assets by families in different deciles of the distribution of lifetime earnings.

Abstract:
At the end of 1989, Japanese investors held just over 1% of the U.S. stock market, while U.S. investors held less than 1% of the Tokyo market. This pattern of very limited cross-holding has persisted for nearly two decades, despite the diversification gains from cross-border investment. None of the standard explanations for limited international equity holding, such as capital controls on Japanese investors or limits on the international exposure of institutional portfolios, appears satisfactory. To justify these patterns, investors in both the United States and Japan must believe, inconsistently, that expected returns are substantially higher in their own market than in foreign markets.

Abstract:
No abstract is available for this paper.

Abstract:
This paper explores the current tax treatment of non-qualified immediate annuities and distributions from tax-qualified retirement plans in the United States. First, we describe how immediate annuities held outside retirement accounts are taxed. We conclude that the current income tax treatment of annuities does not substantially alter the incentive to purchase an annuity rather than a taxable bond. We nevertheless find differences across different individuals in the effective tax burden on annuity contracts. Second, we examine an alternative method of taxing annuities that would avoid changing the fraction of the annuity payment that is included in taxable income as the annuitant ages, but would still raise the same expected present discounted value of revenues as the current income tax rule. We find that a shift to a constant inclusion ratio increases the utility of annuitants, and that this increase is greater for more risk averse individuals. Third, we examine how payouts from qualified accounts are taxed, focusing on both annuity payouts and minimum distribution requirements that constrain the feasible time path of nonannuitized payouts. We describe briefly the origins and workings of the minimum distribution rules and we also provide evidence on the fraction of retirement assets potentially affected by these rules.

Abstract:
No abstract is available for this paper.

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No abstract is available for this paper.

Abstract:
This paper presents new evidence on the potential importance of 401(K) assets in contributing to the retirement resources of future retirees. We use data on past 401(k) participation rates by age and imcome decile, along with information on average 401(k) contribution rates, to project the future 401(k) contribution trajectories of households that are currently headed by individuals between the ages of 29 and 39. We allow for the possibility of pre-retirmenet withdrawal of 401(k) assets when individuals experience employment transistion. By combining data from the Health and Retirement Survye on the likelihood of 'cashing out' a 401(k) account conditional on a job change, with data from other sources on the probability of job change, it is possible to estimate the prospective pre-retirement 'leakage' from 401(k) accounts. Our central findings are that for households reaching retirement age between 2025 and 2035, 401(k) balances are likely to be a much more important factor in financial preparation for retirement than they are today. We estimate that average 401(k) balances in 2025 will be between five and ten times as large as they are today, and would represent one-half to twice Social Security wealth (depending on investment allocation and based on current Social Security provisions). For persons retiring in 2035 we estimate that 401(k) balances will be three-quarters to two and one-half times Social Security wealth. Moreover, we find that pre-retirement withdrawals have a small effect on the balance in 401(k) accounts. We estimate that these withdrawals typically reduce average 401(k) assets at age 65 by about five percent. This is largely because most households who are eligible for a lump sum distribution when they change jobs choose to keep their accumulated 401(k) assets in the retirement saving system. These households either leave their assets in their previous employer's 401(k) plan, or they roll the assets over to another retirement saving account, such as a new 401(k) or an Individual Retirement Account. Most of those who do withdraw assets have very small accumulated balances. By comparison, the expense ratio charged by the financial institutions administering 401(k) accounts has a larger effect on retirement resources than the possibility of pre-retirement withdrawal.

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This paper provides clear evidence that the yield spread between long-term taxable and tax-exempt bonds responds to changes in expected individual tax rates, a finding that refutes theories of municipal bond pricing that focus exclusively on commercial banks or other financial intermediaries. The results support the conclusion that in the two decades prior to 1986, the municipal bond market was segmented, with different investor clienteles at short and long maturities. The Tax Reform Act of 1986 is likely to affect this market, however, since it has restricted tax benefits from tax-exempt bond investment by commercial banks. Individual investors are increasingly important suppliers of capital to states and localities, and their tax rates are likely to be the primary determinant of the yield spread between taxable and tax-exempt interest rates in the future.

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This paper uses tax return data for the period 1951-1990 to investigate the rising share of adjusted gross income (AGI) that is reported on very high income tax returns. We find that most of the increase in the share of AGI reported by high-income taxpayers is due to an increase in reported income for the one quarter of one percent of taxpayers with the highest AGIs. The share of total AGI reported by these taxpayers rose slowly in the early 1980s, and increased sharply in 1987 and 1988. This pattern suggests that at least part of the increase in the income share of high-AGI taxpayers was due to the changing tax incentives that were enacted in the 1986 Tax Reform Act. By lowering marginal tax rates on top-income households from 50% to 28%, TRA86 reduced the incentive for these households to engage in tax avoidance activities. We also find substantial differences in the growth of the income share of the highest one quarter of one percent of taxpayers, and the share of other very high income taxpayers. This suggests that the increasing inequality of reported incomes at very high levels may not be driven by the same factors that have generated widening wage inequality throughout the income distribution and over a longer time period.

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This paper explores adverse selection in the voluntary and compulsory individual annuity markets in the United Kingdom. Two empirical regularities support standard models of adverse selection. First, annuitants are longer-lived than non-annuitants. These mortality differences are more pronounced in the voluntary than in the compulsory annuity market. We estimate that the amount of adverse selection in the compulsory market is about one half of that in the voluntary market. Second, the pricing of different types of annuity products within each annuity market is consistent with individuals selecting products based, in part, on private information about their mortality prospects.

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No abstract is available for this paper.

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401(k) plans have been the most rapidly growing type of employer- provided pension plan during the last decade. This paper utilizes employee-level data from the 401(k) plan at a medium-sized U.S. manufacturing firm to analyze the participation and contribution decisions of workers eligible for this plan. Our analysis reveals two important features of 401(k) participant behavior. First, contribution decisions of eligible employees are relatively insensitive to the rate of employer matching on worker contributions. Most employees maintain the same participation status and contribution rate year after year, despite substantial changes in the employer's match rate at the firm we study. This suggests that employer matching may not be a critical factor in explaining the growth of 401(k) plans. Second, we find that institutional constraints on contributions, imposed either by the employer or by the IRS, are an extremely important influence on contributor behavior. About three quarters of eligible employees contributed at rates that place them at one of the 'corners' or 'kinks' in the 401(k) opportunity set. This finding must be recognized in any analysis of how changes in 401(k) plan provisions are likely to affect contribution levels.

Abstract:
The pension landscape in the U.S. has changed dramatically over the past 25 years. Saving through personal retirement accounts has become the principal form of retirement saving. We document the transition from a defined benefit system to a personal account system and show the effect it has had on wealth at retirement. We summarize results from other research we have done to project the growth of retirement assets over the next three decades. Our projections suggest that the advent of personal account saving will increase wealth at retirement for future retirees across the lifetime earnings spectrum.

Abstract:
One of the central issues in evaluating the ongoing shift from defined benefit (DB) to defined contribution (DC) pension plans is the degree to which assets in DC plans will be withdrawn before plan participants reach retirement age. The annual flow of withdrawals from such plans, which are known as lump sum distributions and which are frequently but not always associated with employment changes, has exceeded $100 billion in recent years. This flow is substantially greater than the flow of new contributions to IRAs and other targeted retirement saving programs. This paper draws on data from the 1993 Current Population Survey and the Health and Retirement Survey to summarize the incidence and disposition of lump sum distributions. We find that while less than half of all lump sum distributions are rolled over into IRAs or other retirement saving plans, large distributions are substantially more likely to be saved than smaller ones are. Consequently, more than half of the dollars paid out as lump sum distributions are reinvested. We also explore the correlation between various individual characteristics and the probability of rolling over a lump sum distribution. This is a first step toward developing a model that can be used to evaluate the long- term effects of lump sum distributions, or policies that might affect them, on the financial status of elderly households.

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This paper explores the effect of estate and gift taxes on the after-tax rate of return earned by savers. The estate tax affects only a small fraction of households -- taxable decedents represented only 1.4 percent of all deaths in 1995 -- but the affected households account for a substantial fraction of household net worth. The estate tax can be viewed as a tax on capital income, with the effective rate depending on the statutory tax rate as well as the potential taxpayer's mortality risk. Because mortality rates rise with age, the effective estate tax burden is therefore greater for older than for younger individuals. The estate tax adds approximately 0.3 percentage points to the average tax burden on capital income for households headed by individuals between the ages of 50 and 59. For households headed by individuals between the ages of 70 and 79, however, the estate tax increases the tax burden on capital income by approximately 3 percentage points. The effects are even larger for older households. The paper also explores the fraction of the net worth held by households that are subject to the estate tax that could be transferred to the next generation with a program a per donee exemption from gift tax. While roughly one quarter of potentially taxable assets could be transferred in this way, actual levels of inter vivos giving are much lower than the levels that would one would expect if households were taking full advantage of this tax avoidance strategy.

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This paper reports the results of surveys of specialists in labor economics and public economics at 40 leading research universities in the United States. Respondents provided opinions of policy proposals; quantitative best estimates and 95% confidence intervals for economic parameters; answers to values questions regarding income redistribution, efficiency versus equity, and individual versus social responsibility; and their political party identification. We find considerable disagreement among economists about policy proposals. Their positions on policy are more closely related to their values than to their estimates of relevant economic parameters or to their political party identification. Average best estimates of the economic parameters agree well with the ranges summarized in surveys of relevant literature, but the individual best estimates are usually widely dispersed. Moreover, economists, like experts in many fields, appear more confident of their estimates than the substantial cross-respondent variation in estimates would warrant. Finally although the confidence intervals in general appear to be too narrow, respondents whose best estimates are farther from the median tend to give wider confidence intervals for those estimates.

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This paper describes the current estate and gift tax rules that apply to intergenerational transfers in the United States. It summarizes the incentives for 'inter vivos' giving as a strategy for reducing estate tax liability. It shows that the current level of intergenerational transfers is much lower than the level that would be implied by simple models of dynastic utility maximization. Moreover, it demonstrates that even among elderly households with net worth in excess of $2.5 million, roughly four times the net worth at which the estate tax takes effect, only about forty-five percent take advantage of the opportunity for tax-free inter vivos giving. Cross-sectional regressions using the 1995 Survey of Consumer Finances suggest that transfers rise with household net worth, possibly reflecting the impact of progressive estate taxes. In addition, households with a preponderance of their net worth in illiquid forms, such as a private business, are less likely to make transfers than their equally wealthy counterparts with more liquid wealth. Households with substantial unrealized capital gains, for whom the benefits of capital asset basis step-up at death are greatest, are less likely to make large inter vivos transfers than similarly wealthy households with higher basis assets. Nevertheless, the aggregate flow of intergenerational transfers is much smaller than the level that would result if all households that were likely to face the estate tax attempted to transfer resources through inter vivos gifts.

Abstract:
Owner-occupied housing receives favorable treatment under current tax law for several reasons. A homeowner's imputed rent is not taxed, and mortgage interest payments are tax deductible. Many past studies have analyzed the effects of these provisions. Inflation's importance in determining the implicit subsidy to owner-occupied housing has received less attention. Since homeowners can deduct their nominal mortgage payments, they do not bear the full cost of higher interest rates. They also receive essentially untaxed capital gains on their homes during periods of high inflation. The after-tax capital gains on their homes during periods of high inflation. The after-tax capital gains outweigh the higher after-tax interest payments, so inflation reduces the effective cost of homeownership.

This paper develops a simple model to estimate the effect of higher expected inflation rates on the real price of houses and the equilibrium housing stock. Simulation results suggest that the inflation-tax interactions can have a substantial impact on the housing market. The increases in expected inflation during the 1970s could have accounted for as much as a thirty percent increase in real house prices. Over time, builders should respond to higher home prices and increase the amount of new construction. The persistence of current inflation rates could lead ultimately to a twenty percent increase in the housing stock.

Abstract:
We use data on the stock trades of a large number of individual investors to study how tax incentives affect the realization of capital gains and losses. We compare investors' realizations in their taxable and tax-deferred accounts, which allows us to identify tax-motivated trading. We reach three conclusions. First, we find a strong lock-in effect for capital gains in taxable accounts relative to tax-deferred accounts. The capital gains lock-in effect is stronger for large than for small transactions, and it intensifies at longer holding periods. Second, we find tax-loss selling throughout the calendar year, though it is most pronounced in December, particularly if the investor has realized capital gains elsewhere in the portfolio during the year. Third, we observe substantial heterogeneity in individual investors' propensity to trade. Controlling for this heterogeneity, however, does not alter the relationship between a stock's past performance and the realization decision.

Abstract:
This paper documents the changing pattern of wage differentials between state and local government employees and their private sector counterparts during the 1979-1992 period. While the relative wages of women employed in the two sectors changed very little during this period, the relative wages of men employed in the state and local sector rose nearly 8%. There is substantial heterogeneity in the changes in relative wages of public and private sector employees during the 1980s. For highly educated workers, private sector wages rose significantly faster than public sector wages, while for those with at most a high school education, the public sector wage premium increased. We present both least squares and quantile regression estimates of the public sector premium. While the level of this premium is sensitive to our choice of quantile, the change in the premium, and the estimated pattern across skill levels, is not substantially affected by varying the quantile.

Abstract:
This paper proposes a new test for adverse selection in insurance markets based on observable characteristics of insurance buyers that are not used in setting insurance prices. The test rejects the null hypothesis of symmetric information when it is possible to find one or more such "unused observables" that are correlated both with the claims experience of the insured and with the quantity of insurance purchased. Unlike previous tests for asymmetric information, this test is not confounded by heterogeneity in individual preference parameters, such as risk aversion, that affect insurance demand. Moreover, it can potentially identify the presence of adverse selection, while most alternative tests cannot distinguish adverse selection from moral hazard. We apply this test to a new data set on annuity purchases in the United Kingdom, focusing on the annuitant's place of residence as an unused observable. We show that the socio-economic status of the annuitant's place of residence is correlated both with annuity purchases and with the annuitant's prospective mortality. Annuity buyers in different communities therefore face different effective insurance prices, and they make different choices accordingly. This is consistent with the presence of adverse selection. Our findings also raise questions about how insurance companies select the set of buyer attributes that they use in setting policy prices. We suggest that political economy concerns may figure prominently in decisions to forego the use of some information that could improve the risk classification of insurance buyers.

Abstract:
This paper presents evidence on the characteristic speculative dynamics of a wide range of asset returns. It highlights three stylized facts. First, returns tend to be positively serially correlated at high frequency. Second, returns tend to be negatively serially correlated over long horizons. Third, deviations of asset values from proxies for fundamental value have predictive power for returns. These patterns emerge repeatedly in our analyses of stocks, bonds, foreign exchange, real estate, collectibles, and precious metals, and they appear too strong to be attributed only to small sample biases. The pervasive nature of these patterns suggests that they may be lie to inherent features of the speculative process, rather than to variation in risk factors which affect particular markets.

Abstract:
This paper uses time-series data to investigate how changes in capital gains tax rates affect taxpayer compliance. It finds that a one percent increase in the marginal tax rate reduces voluntary compliance by between one half and one percent. These results confirm the findings of previous studies based on individual household data. They also suggest that at least one quarter of the observed capital gain realization response to changes in marginal tax rates is due to changes in reporting behavior, rather than portfolio behavior.

Abstract:
This paper presents new information on the fraction of adjusted gross income, and of wages and salaries, that is reported by taxpayers in the top one half of one percent of the income distribution. This corresponds to roughly five hundred thousand households in the late 1990s. This paper relies on data from the Treasury's Individual Income Tax Model for the period 1960-1995. The definition of adjusted gross income is standardized, so that changes in the tax law do not affect the measured concentration of AGI. The results suggest that the share of AGI reported by the highest income households increased significantly between the early 1980s and the mid-1990s, with most of the increase taking place in the years immediately following the Tax Reform Act of 1986. While we find some evidence of transitory changes in the concentration of income around major tax changes, which may be the result of income retiming by high income taxpayers, re-timing does not seem to explain most of the changes since 1986.

Abstract:
Over the past several years, we have undertaken a series of analysies of the effect of IRA and 401(k) contributions on net personal saving. Saver heterogeneity is the key impediment to determining the saving effect of these plans We emphasize that no single method can provide sure control for all forms of heterogeneity. Taken together, however, we believe that the analyses address the key complications presented by heterogeneity. In our view, the weight of the evidence, based on the many non-parametric approaches discussed here provides strong support for the view that contributions to IRA and 401(k) represent largely new saving. Some of the evidence is directed to the IRA program, some to the 401(k) plan, and some to both plans. Several other investigators have used different methods to consider the effect of these retirement saving programs on personal saving and in some cases have reached very different conclusions from ours. Thus we have devoted particular effort to trying to reconcile the results, explaining why different approaches, sometimes based on the same data, have led to different conclusions. In some instances, we believe the limitations of the methods used by others have undermined the reliability of the results. Particular attention is devoted to a recent paper by Gale and Scholz [1994] that is widely cited as demonstrating that IRAs have no saving effect. Based on our analysis of the data used by Gale and Scholz, we find that their conclusions are inconsistent with the raw data and their formal model does not provide reliable information on the extent of substitution.

Abstract:
This paper uses British data to examine the effects of dividend taxes on investors` relative valuation of dividends and capital gains. British data offer great potential to illuminate the dividends and taxes question, since there have been two radical changes and several minor reforms in British dividend tax policy during the last twenty-five years. Studying the relationship between dividends and stockprice movements during different tax regimes offers an ideal controlled experiment for assessing the effects of taxes on investors` valuation of dividends. Using daily data on a small sample of firms, and monthly data on a much broader sample, we find clear evidence that taxes change equilibrium relationships between dividend yields and market returns. These findings suggest that taxes are important determinants of security market equilibrium, and deepen the puzzle of why firms pay dividends.

Abstract:
Several recent and provocative studies have described portfolio trading strategies which permit investors to avoid all taxes on capital gains and to shelter a substantial part of their ordinary income as well. Other studies adopt the more traditional view that the capital gains tax raises the effective tax burden on capital income. This paper uses capital gain realization data from the 1982 IRS Individual Tax Model in an effort to distinguish between these views. It shows that for about one-fifth of the investors who realize gains or losses, the ordinary income loss-offset limitations are binding constraints. Since additional gain realizations do not affect these investors' current tax liability, they may be effectively untaxed on capital gains. Another significant group escapes taxation by not reporting realized gains. However, the largest group of investors trades in a less elaborate and more honest manner, realizing and reporting gains without offsetting losses. The capital gains tax may reduce the after-tax return earned by these investors.

Abstract:

This paper develops an algorithm for analyzing discrete events, such as labor market transitions, when some of these transitions are spurious because of measurement errors. Our algorithm extends the standard multinominal logit model, although our basic approach could be used with other stochastic models as well. We apply this algorithm to study the effect of unemployment insurance (UI) on transitions from unemployment to employment and out of the labor force. Our results suggest that UI lengthens unemployment spells by reducing both transition rates, and show that correcting for measurement error strengthens the apparent effect of UI on spell durations.

Abstract:
No abstract is available for this paper.

Abstract:
This paper evaluates the effects of the 1986 Tax Reform Act on household labor supply and savings. It describes the tax bill`s effects on incentives to work and to save, and uses recent econometric estimates of labor supply and savings elasticities to describe the reform`s impact on household behavior. Two factors lead us to conclude that the new law will have small aggregate effects. First, most households experience only small changes in their marginal tax rates. Forty-one percent of the taxpaying population will face marginal tax rates as high, or higher, under the new law as under the previous tax code. Only eleven percent of taxpayers receive marginal tax rate reductions of ten percentage points or more. Second, plausible estimates of both the labor supply and savings elasticities suggest that even for those households that receive rate reductions, behavioral changes will be small. Our analysis suggests that the tax reform will increase labor supply by about one percent, and slightly reduce private savings.

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This paper examines the recent United States experience with sustained budget deficits and concludes that the events of the last five years cast significant doubt on the proposition that the timing of taxes does not affect national savings. Rather than raising private saving, the recent deficits have if anything coincided with reduced saving and increased consumption. These findings suggest that realistic analysis of fiscal policies must recognize that consumers are liquidity constrained and/or myopic.

Abstract:
This paper develops a procedure for adjusting the Current Population Survey gross changes data for the effects of reporting errors. The corrected data suggest that the labor market is much less dynamic than has frequently been suggested. Conventional measures sy understate the duration of unemployment by as much as eighty percent and overstate the extent of movement into and out ofthe labor force by several hundred percent. The adjusted data also throw demographic differences in patterns of labor market dynamics into sharp relief.

Abstract:
This paper reports the findings from a new survey of firms that provide 401(k) plans for their employees. Our results suggest that few 401(k) plans replaced pre-existing defined benefit pension plans, although a substantial fraction replaced previous defined contribution thrift and profit sharing plans. Our survey results also provide new evidence on patterns of 401(k) participation. We find significant persistence in firm-level participation rates from one year to the next, which supports the view that 401(k) participants are not making marginal decisions of whether or not to contribute to the plan in a given month, or even year, but rather make long-term commitments to participate in these plans.

Abstract:
The present paper examines the reservation wages reported by a largesample of unemployed individuals in the United States in May 1976. The majorityof unemployedindividuals report reservation wages that are at least as highas the wage they were paid on their last job. Approximately one-fourth of alljob seekers required a wage that is at least 10 percent higher than the wage ontheir previous job.Our econometric evidence shows that the level of unemployment benefitsrelative to previous wages has a powerful effect on the individual`s reservation wage. A ten percent increase in the U.I. replacement ratio increases the reservation wage by about percent for job losers who are not on layoff and bysomewhat less for other unemployed groups. Separate regressions to analyze the high reservation wage per se show that a ten percent increase in the U.I. replacement ratio also increases by about four percentage points the probability that an unemployed individual will require a wage increase of 10 percent or more.These estimates imply that reducing net unemployment insurance benefits (by lowering gross benefits or by taxing unemployment benefits) could significantly lower the average duration of unemployment and the relative number of long duration spells of unemployment. Because of the non-linear response of the unemployment duration to the reservation wage, reducing a high unemployment insurance ratio by ten percentage points is likely to have a greater impact on unemployment than reducing a low unemployment insurance ratio by ten percentage points.

Abstract:
Although states and localities collect a substantial amount of revenue from corporate profits taxes and property taxes on corporate capital, these taxes have been inadequately reflected in previous calculations of the effective corporate tax rate and the pretax rate of return to corporate capital. The present study focuses on non-financial corporations and begins by estimating the profits taxes and property taxes which these corporations pay to state and local governments. These estimates are then used to calculate the pretax rate of return on non-financial corporate capital; the results suggest that the conventional omission of state-local property taxes leads to an understatement of this rate of return by about one percentage point. The effective tax rate on non-financial corporate profits is also computed, taking account of state-local taxes. These taxes amount to approximately sixteen percent of the pretax profits of non-financial corporations. The total effective tax rate on these corporations is shown to have risen substantially during the past two decades; it averaged more than seventy percent in the most recent five-year period. The series for the rate of return and effective tax rate are used to compute the real after-tax rate of return on non-financial corporate capital. The calculations show that this number has declined recently, reaching 2.3 percent in 1979. This is to be contrasted with after-tax returns of over five percent which prevailed during the mid-1960s.