It has been three years since the last report on the NBER Program on Public Economics. During that brief period, substantial federal budget deficits have been replaced by surpluses. There has been a significant tax reform (the Taxpayer Relief Act of 1997) and discussion of Social Security reform has moved from the outskirts to the center of national policy debate. As the questions that attract the most attention in public policy debates have changed, so too have the issues studied by NBER researchers associated with the Program on Public Economics. These researchers have been carrying out important work on a wide range of topics related to taxation, social insurance, and the economic impact of government expenditure programs. This report highlights several strands of this research but, since there have been more than 250 Public Economics working papers during this period, it necessarily excludes some interesting and significant work.
The economic effects of the current Social Security system and the potential consequences of modifying that system in the United States and other nations have been active research topics for the past three years. The current Social Security system is a pay-as-you-go, defined-benefit system. A substantial body of NBER research has focused on the consequences of shifting to alternative systems, possibly with greater reliance on a defined-contribution structure. Several studies, using a range of theoretical and computational models, have investigated the efficiency effects of replacing part or all of the current system with a system of individual accounts [WP 5281, 5330, 5413]. Among the related questions that have been studied are: the nature of the transition from the current system to a modified system; the funding of existing but unfunded liabilities; and the length of time needed to reach a new steady state [WP 5761, 5776, 6055, 6149, 6229, 6540]. Some research has also considered the distributional effects of potential Social Security reforms [WP 6428, 6430].
Another topic of interest in both public economics and labor economics is the effect of defined-benefit Social Security programs on labor market behavior. A number of recent studies have explored the impact of Social Security on retirement in the United States [WP 6097, 6534, 6548]. Also, NBER researchers have participated in a major international comparative study of Social Security programs and labor supplied by older workers [WP 6134].
In addition to research directed specifically at the effects of the Social Security system, many studies have looked at the provision of retirement income security. The research findings in these studies provide important background for discussions of reform. Two examples of such research are work on the determinants of household saving [WP 5568, 5571, 5609, 5655, 5667, 6085, 6227] and research on the functioning of annuity markets [WP 6001, 6002, 6525].
In the recent past, there have been major Social Security reforms in Chile, Australia, and a number of other nations. A substantial volume of NBER research has investigated the effects of Social Security reform in these and other nations [WP 5780, 5799, 5811, 6316]. Additional work has focused on the historical development of Social Security in the United States [WP 5949].
Taxation of Individuals and Firms
How taxation affects individual decisions about work, saving, and many other behaviors is one of the central questions in public economics. The impact of corporate and investor taxes on firm behavior is a similarly critical issue. During the last three years, NBER researchers have carried out a wide range of studies on these issues.
One of the most important questions that has arisen in recent discussions of income tax reform is how changing marginal tax rates will affect reported taxable income. Understanding the magnitude of this behavioral response is essential for revenue estimation, and it is also a potentially important determinant of the efficiency costs of income taxation. …