Does the Tax System Favor Investment in High-Tech or Smoke-Stack Industries?

When tax rates vary by asset, a "hidden" industrial policy may aid industries that invest in a certain mix of assets. In this paper, we examine whether differential use of depreciable assets gives rise to differential tax treatment of high technology industries relative to other industries. First, we calculate the total effective tax rate on a marginal investment in each of 34 assets. Next, using these asset-specific tax rates and weighting by the use of these assets in each of 73 different industries, we calculate total effective tax rates at the industry level. We find considerable variation within the high-tech sector and within the more traditional sector, but for the case of a taxable firm with a given debt/equity ratio, we do not find any systematic differences between overall rates in the two sectors.

Tax Neutrality and Intangible Capital

Many studies measure capital stocks and effective tax rates for different industries, but they consider only tangible assets such as equipment, structures, inventories, and land. Some of these studies also have estimated that the welfare cost of tax differences among these assets under prior law is about 10 billion per year or 13 percent of all corporate income tax revenue. Since the investment tax credit was available only for equipment, its repeal raises the effective rate of taxation of equipment toward that of other assets and virtually eliminates this welfare cost. However, firms also own intangible assets such as trademarks, copyrights, patents, a good reputation, or general production expertise. This paper provides alternative measures of the intangible capital stock, and it investigates implications for distortions caused by taxes. The existence of intangible capital markedly alters welfare cost calculations. Investments in advertising and R&D are expensed, so the effective rate of tax on these assets is less than that on equipment under prior law. With large differences between these assets and other tangible assets, we find that the welfare cost measure under prior law increases to 13 billion per year. Repeal of the investment credit taxes equipment more like other tangible assets but less like intangible assets. The welfare cost still falls, to about $7 billion per year, but it is no longer "virtually eliminated." With additional sources of intangible capital, credit repeal could actually increase welfare costs. Finally, however, the Tax Reform Act of 1986 not only repeals the investment tax credit but reduces rates as well. Efficiency always increases in this model because the taxation of tangible assets is reduced toward that of intangible assets.

Uncertain Parameter Values and the Choice Among Policy Options

In this paper, we use tax policy choices to illustrate and investigate the more general problem of using uncertain parameter values in models to evaluate policy choices. We show, for this tax example, how debate on an elasticity parameter translates into a debate about policy choices, andvice versa. To construct this example, we suppose that the choice among four particular tax reform options is based on a single measure of efficiency gain. We show how this gain from each reform depends upon the elasticity of saving with respect to the net rate of return. Within quite narrow and reasonable bounds for the elasticity parameter, we find regions in which each of three different tax reforms turns out to dominate the others.

A Comparison of Methodologies in Empirical General Equilibrium Models of Taxation

Computational general equilibrium models have proven useful in the area of long run analysis of alternative tax policies. A sizable number of studies have been completed which examine policies such as a value-added tax, corporate and personal income tax integration, a consumption or expenditure tax, housing subsidies, and inflation indexation.. This paper reviews the methodologies used in these models. We focus on eight specific models and review in turn: levels of disaggregation, specification of the foreign sector, financial modeling, the measurement of effective tax rates, heterogeneity and imperfect mobility, factor supply, treatment of the government budget, and technical issues associated with implementation. The paper includes some new experiments in connection with simulations of integration of the personal and corporate income tax systems in the United States. We compare the resulting welfare gains in models with different levels of disaggregation, and we discuss alternative justifications for specific disaggregations. We also examine the sensitivity of results to alternative specifications of households' endowments of labor and leisure. Our survey underscores the importance of the assumed elasticities of labor supply with respect to the net of tax wage, and of saving with respect to the net of tax rate of return. Unfortunately, these are also parameters for which there is not a consensus in the economics profession. The survey finds that there are several aspects of modeling that are especially ripe for further progress: the roles of government and business financial decisions, the dynamics of a life-cycle approach, and the measurement of incentive tax and transfer rates.

The natural resources of Carpinteria Marsh: their status and future

The purpose of this report is: 1) to document the natural resources of Carpinteria Marsh, 2) outline the uses those resources receive, 3) enumerate the problems and conflicts of use that affect those resources, and 4) recommend measures that will protect and enhance the marsh and its resources. It is intended as a guide for citizens, planners and administrators of all private and public entities interested in the status and future of the marsh. This report has been prepared under contract to and fully funded by the Office of Biological Services of the U.S. Fish and Wildlife Service. The goals and purpose of this federal office are to review the impact on fish and wildlife resources of land, mineral and water development practices, such as offshore oil and gas exploration, development and production; construction of inshore pipeline canals and refineries; power plant construction/operation and urban development. This report, and five other southern California reports, covering Agua Hedionda (San Diego County), Anaheim Bay-Huntington Harbor (Orange County), Mugu Lagoon (Ventura County), the Northern Santa Barbara County Coastal Wetlands and the Nipomo Dunes and Wetlands (San Luis Obispo County), are scheduled to be part of the Department's "Coastal Wetland Series" that includes reports on the natural resources of Upper Newport Bay (Orange County), Goleta Slough (Santa Barbara county), Bolinas Lagoon (Marin County), Elkhorn Slough (Monterey County), San Diego Bay and Los Penasquitos Lagoon (San Diego County), Morro Bay (San Luis Obispo County), Humboldt Bay and the Eel River Delta (Humboldt County), Lake Earl and the Smith River Delta (Del Norte County) and Bodega Harbor (Sonoma County). (103pp.

Economic Efficiency in Recent Tax Reform History: Policy Reversals or Consistent Improvements?

The Economic Recovery Tax Act of 1981 reduced personal marginal tax rates and provided significant business tax breaks. Subsequent changes through 1985 cut back on business allowances. The Tax Reform Act of 1986 reduced marginal rates again, but added significantly to business taxes. Was there any unifying theme to these tax changes, or do they represent frequent changes in course for tax policy? This paper uses a general equilibrium model capable of second- best analysis to investigate the net effects on efficiency of each of these changes in capital income taxation. Under the new view that dividend taxes are unimportant investment disincentives, there is no set of other parameters in the model for which these changes generate improvements in efficiency. Under the old view that dividend taxes are important, however, these changes all increase efficiency for a wide range of values for other parameters in the model.