How Taxes Affect Economic Behavior

By Henry J. Aaron; Joseph A. Pechman | Go to book overview

Appendix B: Derivation of Estimates

This appendix presents the sources and methods used to derive the time series that were developed especially for this study.


Household Net Worth and Social Insurance Wealth

The concept of household net worth used in this study is broader than many but narrower than some.68. It includes the market value of land other than farmland and the replacement cost of nonfarm structures, as well as the market value of corporate equities. All other financial assets are entered at face value from the flow-of-funds tabulations, so that the resulting estimate of net worth does not depend directly on interest rates. The concept excludes the replacement cost of the net stock of consumer durables (now available from the Bureau of Economic Analysis) and consumer and installment credit attributed to such assets (around 27 percent of the total financial liabilities of the household sector and 30 percent of the monetary interest paid by it). This was done to maintain consistency with the national income and product accounts and to avoid having to impute a net rate of return on these leveraged consumer assets. To eliminate the cyclical element, the ratio of net worth to disposable income was multiplied by a cyclical adjustment factor derived from a regression of the log of the net worth ratio on the log of the ratio of actual to potential GNP in 1972 dollars.69 The adjusted ratios are shown in table 10, column 7.

Net social insurance wealth includes not only the net assets of the old

____________________
68.
For example, only a stock price index is used to represent wealth in Robert E. Hall , "Stochastic Implications of the Life Cycle-Permanent Income Hypothesis: Theory and Evidence," Journal of Political Economy, vol. 86 ( December 1978), p. 984. Only net stocks of fixed, nonresidential business capital (valued at the national income accounts estimate of replacement cost and not at market) and non- governmental residential housing are added to form the wealth measure used in Tanner, "Fiscal Policy." On the other hand, consumer durables and owners' equity in unincorporated farms and businesses are included in the household net worth concept used in the MIT-Penn-SSRC model. For a detailed discussion, see David F. Seiders , Household Sector Economic Accounts, Staff Paper 83 (Board of Governors of the Federal Reserve System, 1974). Since changes in owners' equity in unincorporated enterprises affect only a small group of households with a high propensity to save accrued capital gains, this component was omitted from the estimate of net worth that is supposed to affect personal consumption expenditures and saving.
69
Cyclical adjustment is called for because household saving is unlikely to be affected by variations in the net worth ratio that are expected to be transitory. The

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