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Fiscal policies, capital formation, and capitalism

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  • Feldstein, Martin

Abstract

This lecture examines the effects of tax policy and social security retirement benefits on capital accumulation and economic welfare. The paper begins by examining how capital income taxes reduce the real return to savers and then discusses the welfare loss of capital income taxation relative to the alternatives of taxing consumption and labor income.The second part deals with social security retirement benefits. In 1994, older Americans will receive cash and medical benefits that cost the government $530 billion or $16,000 per person over 65. A final section discusses the implications of international capital flows for this analysis. As capital flows become more important, the response of government policy may be to compete for foreign capital inflows and to tax domestic savers more heavily; leading to a smaller total volume of capital. The sharp decline in the net national saving rate-from over 8% of GDP in the U.S. in the 1970s to only 4.5% in the 1980s & from over 14% of GDP in Europe in the 1970s to 9.9% in the 1980s -- may not only create lower real incomes and slower growth but may weaken capitalism itself. In the US a decade of slow growth has increased protectionist tendencies in international trade and led to a new interest in industrial policies that expand the role of the government in guiding the direction of technology of private investment. Government policies that discourage saving might make the Schumpeterian vision of a shift from private capitalism to government-dominated economy more likely

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 39 (1995)
Issue (Month): 3-4 (April)
Pages: 399-420

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Handle: RePEc:eee:eecrev:v:39:y:1995:i:3-4:p:399-420

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References

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  1. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
  2. Gale, W.G. & Scholtz, J.K., 1992. "IRAs and household saving," Discussion Paper 1992-44, Tilburg University, Center for Economic Research.
  3. Venti, Steven F & Wise, David A, 1990. "Have IRAs Increased U.S. Saving? Evidence from Consumer Expenditure Surveys," The Quarterly Journal of Economics, MIT Press, vol. 105(3), pages 661-98, August.
  4. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
  5. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  6. Blinder, Alan S, 1975. "Distribution Effects and the Aggregate Consumption Function," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 447-75, June.
  7. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  8. N. Gregory Mankiw, 1987. "Consumer Spending and the After-Tax Real Interest Rate," NBER Chapters, in: Taxes and Capital Formation, pages 97-100 National Bureau of Economic Research, Inc.
  9. Steven F. Venti & David A. Wise, 1992. "Government Policy and Personal Retirement Saving," NBER Chapters, in: Tax Policy and the Economy, Volume 6, pages 1-42 National Bureau of Economic Research, Inc.
  10. Feldstein, Martin & Pellechio, Anthony, 1979. "Social Security and Household Wealth Accumulation: New Microeconometric Evidence," The Review of Economics and Statistics, MIT Press, vol. 61(3), pages 361-68, August.
  11. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  12. Martin Feldstein & Lawrence H. Summers, 1979. "Inflation and the Taxation of Capital Income in the Corporate Sector," NBER Working Papers 0312, National Bureau of Economic Research, Inc.
  13. Paul M. Romer, 1987. "Crazy Explanations for the Productivity Slowdown," NBER Chapters, in: NBER Macroeconomics Annual 1987, Volume 2, pages 163-210 National Bureau of Economic Research, Inc.
  14. Martin Feldstein, 1994. "The Effects of Outbound Foreign Direct Investment on the Domestic Capital Stock," NBER Working Papers 4668, National Bureau of Economic Research, Inc.
  15. French, Kenneth R. & Poterba, James M., 1990. "Japanese and U.S. cross-border common stock investments," Journal of the Japanese and International Economies, Elsevier, vol. 4(4), pages 476-493, December.
  16. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
  17. Barro, Robert J. & MacDonald, Glenn M., 1979. "Social security and consumer spending in an international cross section," Journal of Public Economics, Elsevier, vol. 11(3), pages 275-289, June.
  18. Martin Feldstein, 1994. "Taxes, Leverage and the National Return on Outbound Foreign Direct Investment," NBER Working Papers 4689, National Bureau of Economic Research, Inc.
  19. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  20. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  21. Martin Feldstein, 1997. "Tax Policy and International Capital Flows," NBER Working Papers 4851, National Bureau of Economic Research, Inc.
  22. David, Paul A & Scadding, John L, 1974. "Private Savings: Ultrarationality, Aggregation, and "Denison's Law."," Journal of Political Economy, University of Chicago Press, vol. 82(2), pages 225-49, Part I, M.
  23. Martin Feldstein & Philippe Bacchetta, 1992. "National Saving and International Investment," NBER Working Papers 3164, National Bureau of Economic Research, Inc.
  24. Daniel Feenberg & Jonathan Skinner, 1989. "Sources of IRA Saving," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 25-46 National Bureau of Economic Research, Inc.
  25. Kotlikoff, Laurence J, 1979. "Testing the Theory of Social Security and Life Cycle Accumulation," American Economic Review, American Economic Association, vol. 69(3), pages 396-410, June.
  26. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  27. Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
  28. Martin Feldstein, 1983. "Inflation, Tax Rules, and Capital Formation," NBER Books, National Bureau of Economic Research, Inc, number feld83-1.
  29. Roger H. Gordon & James R. Hines Jr., 2002. "International Taxation," NBER Working Papers 8854, National Bureau of Economic Research, Inc.
  30. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
  31. Poterba, J.M. & Venti, S.F. & Wise, D.A., 1992. "401(k) Plans and Tax-Deferred Savings," Working papers 92-14, Massachusetts Institute of Technology (MIT), Department of Economics.
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Citations

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Cited by:
  1. Uhlig, Harald & Yanagawa, Noriyuki, 1996. "Increasing the capital income tax may lead to faster growth," European Economic Review, Elsevier, vol. 40(8), pages 1521-1540, November.
  2. Tausch, Arno & Heshmati, Almas, 2011. "Migration, Openness and the Global Preconditions of 'Smart Development'," IZA Discussion Papers 6169, Institute for the Study of Labor (IZA).
  3. Martin S. Feldstein, 1999. "Capital Income Taxes and the Benefit of Price Stability," NBER Chapters, in: The Costs and Benefits of Price Stability, pages 9-46 National Bureau of Economic Research, Inc.
  4. Qureshi, Zia, 1995. "Do we face a global"capital shortage"?," Policy Research Working Paper Series 1526, The World Bank.
  5. Douglas W. Elmendorf, 1996. "The effect of interest-rate changes on household saving and consumption: a survey," Finance and Economics Discussion Series 96-27, Board of Governors of the Federal Reserve System (U.S.).
  6. Häcker, Jasmin & Raffelhüschen, Bernd, 2005. "Internal rates of return of the German statutory long-term care insurance," FZG Discussion Papers 5, Research Center for Generational Contracts (FZG), University of Freiburg.
  7. Gilles Le Garrec & Stéphane Lhuissier, 2011. "Life expectancy, heavy work and return to education ; lessons for the social security reform," Documents de Travail de l'OFCE 2011-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  8. Palle Andersen & David Gruen, 1995. "Macroeconomic Policies and Growth," RBA Research Discussion Papers rdp9507, Reserve Bank of Australia.
  9. Arno Tausch & Almas Heshmati, 2013. "Worker remittances and the global preconditions of ‘smart development’," Society and Economy, Akadémiai Kiadó, Hungary, vol. 35(1), pages 25-50, April.
  10. Martin Feldstein, 2005. "Structural Reform of Social Security," Journal of Economic Perspectives, American Economic Association, vol. 19(2), pages 33-55, Spring.
  11. Gilles Le Garrec, 2012. "Social security and growth in an agin economy: the case of actuarial fairness," Documents de Travail de l'OFCE 2012-18, Observatoire Francais des Conjonctures Economiques (OFCE).
  12. Gilles Le Garrec, 2005. "Social security, inequality and growth," Documents de Travail de l'OFCE 2005-22, Observatoire Francais des Conjonctures Economiques (OFCE).
  13. Peeters, Marga, 1996. "The public-private savings mirror and causality relations among private savings, investment and (twin) deficits: A full modelling approach," MPRA Paper 29630, University Library of Munich, Germany.
  14. Polackova, Hana, 1997. "Population aging and financing of government liabilities in New Zealand," Policy Research Working Paper Series 1703, The World Bank.
  15. Gilles Le Garrec & Stéphane Lhuissier, 2011. "Life expectancy, heavy work and the return to education: lessons for the social security reform," Sciences Po publications 2011-18, Sciences Po.

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