Public Economics

Article excerpt

In the three years since the last report on the NBER's public economics program, national policy debates have drawn attention to a number of questions that are central to the research of program members. The tax policy debate of 1993 resulted in substantial increases in marginal tax rates for some households, raising new questions about the incentive effects of tax rates. The emerging debate on a flat tax or a consumption-based alternative to the federal income tax is sure to result in far-reaching discussion of both equity and efficiency issues in the design of tax policy. The recent debate on health care reform generated a host of new research questions concerning the role of government intervention in the marketplace, and the efficacy of particular social insurance policies. Current discussion of proposals to change the level and structure of federal spending on entitlement programs, including Medicare and a variety of programs for low-income, nonelderly households, is also certain to draw heavily on past research, and to stimulate further research, in public economics.

This report summarizes recent work by NBER researchers on a wide range of subjects in public economics. It begins with a survey of work that bears on some of the recent and current federal policy debates, and then proceeds to describe research on a variety of other issues.

Empirical Studies of Taxation and Individual Behavior

The substantial changes in tax rates during the last decade have provided an extraordinary research opportunity for studying the effect of taxation on individual behavior. Researchers have exploited this "natural experiment" in tax policy to analyze behavioral responses. Several widely cited studies suggest that the 1986 reductions in marginal tax rates on high-income households led to substantial increases in their reported taxable income.[1] This effect is important both because it affects revenue estimation, and because the effect of tax rates on taxable income can be an important determinant of the efficiency cost of the tax system.[2] While the source of tax-rate-related increases in taxable income is not yet clear, there is evidence of a significant increase in labor supply among married women who experienced large reductions in their households' marginal tax rates.[3] Other empirical studies have considered the effect of marginal tax rates on the decision to realize capital gains,[4] and on the choice between receiving income as taxable wages rather than as fringe benefits.[5] Identifying the channels through which tax rate changes affect individual behavior remains a central item on the program's research agenda.

Several NBER researchers have done related work on individual taxation that is relevant to discussions of tax reform. This includes analyzing the changing nature of the "marriage penalty" in the federal income tax;[6] developing a theory of income taxation when income cannot be measured precisely;[7] and evaluating the efficiency and distributional effects of replacing the current income tax with a value-added tax.[8]

Tax Policy and Saving

NBER researchers also have studied personal saving and how it is affected by tax rates. Several NBER affiliates participated in a project comparing personal saving rates in industrial nations, and summarizing the tax incentives and other public policies that could affect personal saving in these nations.[9]

A number of other studies have described or modeled household saving behavior. One documents the stylized patterns of saving across ages and cohorts in the United States;[10] others focus on the precautionary motives for household saving;[11] and a third set is concerned with the effects of targeted retirement saving plans, such as Individual Retirement Accounts and 401(k) plans, on personal saving.[12]

Another strand of research on private saving has considered the implications of the ongoing demographic transition in the United States. …