UNIVERSIDADE NOVA DE LlSRO4 F aculdade de poundwfwmia

SURVEY OF DYNAMIC COMPU1ATIONAt

GENERA EQUILIBRIUM MODELS FOA

TAX POLICY BVAUAlIOI

Alfredo M Pereira o Working paper N81

i i

UNIVERSIDADE NOVA DE LISBOA

Faculdadc de Economia

Trav EamptGvio Pillto

CampoliJ~

1000 LSBOA Outlbro I 1987

Ocober1987

SURVEY OF DYNAMIC COMPUTATIONALGENERAL EQUILIBRIUM MODELS

FOR TAX POLICY EVALUATION()

Alfredo M Pereira

University of California San Diego and

Faculdade de Economia Universidade Nova de Lisboa

and

John B Shoven

Stanford University and NBER t

r) We would like to thank the participants of the NBER Applied General Equilibrium Workshop

Sianford May 1987 the International Symposium on The Social Accounting Matrix Methods and

Applications Naples Italy June 1987 and of the II World Basque Congress Donolla - San

Sebastian SpaIn September 1987 for helpful comments and suggestions The usual disclaimers

apply

bull

1

Survey cl Dynamic Ccmputational General Equilibrium Models

for Tax Pelley Evaluation

1 Introduction

There is a well established and fast growing body of literature focusing on tax policy evaluation

using disaggregated computational general equilibrium (CGE) models That such models have become

so popular Is hardly uPrling In fact the CGE approacih has several advantages over more macro

orienled aggregated models or analytical parllal equilibrium analysis First ttre CGE methodology

allows the study 01 differential impacts acnoss sectors of production andocnossconsumer groups

Second U allows one to consider the int~ractions among different sectors and agents so that the

policy evaluation is not biased by ceteris paribus assumptions Third and in a more technical vein

it makes use of flexible computational numerical techniques Analytical tools often become

intractable for disaggregated models Fur1hermore the CGE modeller does not have to be confined to

small changes in parameters This i an Important feature because large changes In policy

parameters ere often nremplaled in most tax reform proposals

Historically the field was fostered by Ihe early pioneering work of Harberger (1959 1962

9SG) Herberger uses a highly aggregated analytical model to focus on the taxation of capital

Income The first fully dlsaggregated computational general equilibrium model was introduced by

ShavenWhalley (1972) to evaluate the effects of differentiallaxalio of Inceme from capital in the

us

Until the early eighties most empir[cal general equiiibrium work for tax policy evaluation

i I I

I I I

I I r

bull

2

static tnvestment passively actjusts to saving The typical instruments in the US tax system are

modelled and the government budget Is balanced This state of affairs Is discussed and surveyed In

Shovn (1983) Fullerton-Henderson-Shoven (1984 and Shoven-WhaJ)ey (19S4) t I

Integration etc - has Induced Important developments There have been attempts to Incorporate

life-eyce behavior intergenerational issues allocation of savings investment decisions and

adjustment costs corporate financial decisions and government deficits In to the CGE models Underlying all of these features is the need to endow the models with a dynamic structure w~houl I which most of the above issues cannot be adequately addressed

IThe first efforts to incorporate dynamics into the CGe tax models are associated with bull

Fullerton-Shoven-Whalley (1978 middot1981 1993) Consumption decisions incorporale some t I

int~rtemporal aspects and an Intertemporal equilibrium path for the economy Is obtained by Ihe 1

Isequencing of static short-nm equilibria The equHibna are connected through the evolution of the I

capital endowments which_ tn turn depend on saving middotbehavior A compr~1e discussion of a recent I i Iversion of Ihis model is provided in BallardmiddotFulierton-Shoven-Whaney (19SS) I

More recently a whole new generation of models has been developed by Andersson (19S7) Auerbach-Kotlikoff (1983 1984 1987) Ballard (1983) Ballard-Goulder (laeS) Bovenberg I (1984 1985 19B5) ErlichmiddotGinsburgh-Heyden (laB7) Fellonstoin (19B4 ISBS) Goulder I (19BS) Jorgenson-Yun (1984) Pereira (leaSh 19B7e ta87d) and Goulder-Summers

(1987)

tThis article focuse~ on slJch efforts Our scope is narrow By concentrating on decentralized i

I i

Mo~e recently j the ~hrust towards better descrIptive power together with the nature of the tax

policy issues under analysis effects of a ponsumption tax capital taxation corporate tax

3

numerical W~ieral equilibrium modelling designed 10 addresS tax polic issues we abstract from

several ether related areas and approaches First we abstract from analytle models along the lines

of Abel-Blanchard (1983) and Judd (1985) Second we abslract from centralized growth-type

megels of laxation like Charnley (1981 1982) Third we abstract from eentralielti models

I

associated with World Bank researchers See for example Adelman-Robinson (1978) and

Dervis-de Mele-Robinson (1981) Finally we abstract from other CIl fields See for example

ShovenVlcalley (1984) for a sUlVey ollotematlonal trade applications DecaluwmiddotMartens

(1985) ane Robinson (1986) for applications In the area of development James (1985) for a bull I I

survey of economic history applications and A Manne (1986) and BOrges (1988) far all I encompassing surveys

The models included in our comparfsion are I

I 1 8allardFuliertan-ShavenmiddotWhalley (198S) l 2 Andersson (1987)

3 AuerbachmiddotKotlikoff (1963 1987)

4 Bailarcl (1983) and BallardmiddotGould (19aS)

5 Bovenbeg (1985 1985)

6 ErlichmiddotGinsburgh-Heyden (1987)

7 FeltenSleln (1984 1985)

S Goulde (1985)

9 GouldermiddotSummers (1987)

10 Jorgenson Yun (19B4)

11 Pereira (1986b 19870)

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

Ocober1987

SURVEY OF DYNAMIC COMPUTATIONALGENERAL EQUILIBRIUM MODELS

FOR TAX POLICY EVALUATION()

Alfredo M Pereira

University of California San Diego and

Faculdade de Economia Universidade Nova de Lisboa

and

John B Shoven

Stanford University and NBER t

r) We would like to thank the participants of the NBER Applied General Equilibrium Workshop

Sianford May 1987 the International Symposium on The Social Accounting Matrix Methods and

Applications Naples Italy June 1987 and of the II World Basque Congress Donolla - San

Sebastian SpaIn September 1987 for helpful comments and suggestions The usual disclaimers

apply

bull

1

Survey cl Dynamic Ccmputational General Equilibrium Models

for Tax Pelley Evaluation

1 Introduction

There is a well established and fast growing body of literature focusing on tax policy evaluation

using disaggregated computational general equilibrium (CGE) models That such models have become

so popular Is hardly uPrling In fact the CGE approacih has several advantages over more macro

orienled aggregated models or analytical parllal equilibrium analysis First ttre CGE methodology

allows the study 01 differential impacts acnoss sectors of production andocnossconsumer groups

Second U allows one to consider the int~ractions among different sectors and agents so that the

policy evaluation is not biased by ceteris paribus assumptions Third and in a more technical vein

it makes use of flexible computational numerical techniques Analytical tools often become

intractable for disaggregated models Fur1hermore the CGE modeller does not have to be confined to

small changes in parameters This i an Important feature because large changes In policy

parameters ere often nremplaled in most tax reform proposals

Historically the field was fostered by Ihe early pioneering work of Harberger (1959 1962

9SG) Herberger uses a highly aggregated analytical model to focus on the taxation of capital

Income The first fully dlsaggregated computational general equilibrium model was introduced by

ShavenWhalley (1972) to evaluate the effects of differentiallaxalio of Inceme from capital in the

us

Until the early eighties most empir[cal general equiiibrium work for tax policy evaluation

i I I

I I I

I I r

bull

2

static tnvestment passively actjusts to saving The typical instruments in the US tax system are

modelled and the government budget Is balanced This state of affairs Is discussed and surveyed In

Shovn (1983) Fullerton-Henderson-Shoven (1984 and Shoven-WhaJ)ey (19S4) t I

Integration etc - has Induced Important developments There have been attempts to Incorporate

life-eyce behavior intergenerational issues allocation of savings investment decisions and

adjustment costs corporate financial decisions and government deficits In to the CGE models Underlying all of these features is the need to endow the models with a dynamic structure w~houl I which most of the above issues cannot be adequately addressed

IThe first efforts to incorporate dynamics into the CGe tax models are associated with bull

Fullerton-Shoven-Whalley (1978 middot1981 1993) Consumption decisions incorporale some t I

int~rtemporal aspects and an Intertemporal equilibrium path for the economy Is obtained by Ihe 1

Isequencing of static short-nm equilibria The equHibna are connected through the evolution of the I

capital endowments which_ tn turn depend on saving middotbehavior A compr~1e discussion of a recent I i Iversion of Ihis model is provided in BallardmiddotFulierton-Shoven-Whaney (19SS) I

More recently a whole new generation of models has been developed by Andersson (19S7) Auerbach-Kotlikoff (1983 1984 1987) Ballard (1983) Ballard-Goulder (laeS) Bovenberg I (1984 1985 19B5) ErlichmiddotGinsburgh-Heyden (laB7) Fellonstoin (19B4 ISBS) Goulder I (19BS) Jorgenson-Yun (1984) Pereira (leaSh 19B7e ta87d) and Goulder-Summers

(1987)

tThis article focuse~ on slJch efforts Our scope is narrow By concentrating on decentralized i

I i

Mo~e recently j the ~hrust towards better descrIptive power together with the nature of the tax

policy issues under analysis effects of a ponsumption tax capital taxation corporate tax

3

numerical W~ieral equilibrium modelling designed 10 addresS tax polic issues we abstract from

several ether related areas and approaches First we abstract from analytle models along the lines

of Abel-Blanchard (1983) and Judd (1985) Second we abslract from centralized growth-type

megels of laxation like Charnley (1981 1982) Third we abstract from eentralielti models

I

associated with World Bank researchers See for example Adelman-Robinson (1978) and

Dervis-de Mele-Robinson (1981) Finally we abstract from other CIl fields See for example

ShovenVlcalley (1984) for a sUlVey ollotematlonal trade applications DecaluwmiddotMartens

(1985) ane Robinson (1986) for applications In the area of development James (1985) for a bull I I

survey of economic history applications and A Manne (1986) and BOrges (1988) far all I encompassing surveys

The models included in our comparfsion are I

I 1 8allardFuliertan-ShavenmiddotWhalley (198S) l 2 Andersson (1987)

3 AuerbachmiddotKotlikoff (1963 1987)

4 Bailarcl (1983) and BallardmiddotGould (19aS)

5 Bovenbeg (1985 1985)

6 ErlichmiddotGinsburgh-Heyden (1987)

7 FeltenSleln (1984 1985)

S Goulde (1985)

9 GouldermiddotSummers (1987)

10 Jorgenson Yun (19B4)

11 Pereira (1986b 19870)

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

bull

1

Survey cl Dynamic Ccmputational General Equilibrium Models

for Tax Pelley Evaluation

1 Introduction

There is a well established and fast growing body of literature focusing on tax policy evaluation

using disaggregated computational general equilibrium (CGE) models That such models have become

so popular Is hardly uPrling In fact the CGE approacih has several advantages over more macro

orienled aggregated models or analytical parllal equilibrium analysis First ttre CGE methodology

allows the study 01 differential impacts acnoss sectors of production andocnossconsumer groups

Second U allows one to consider the int~ractions among different sectors and agents so that the

policy evaluation is not biased by ceteris paribus assumptions Third and in a more technical vein

it makes use of flexible computational numerical techniques Analytical tools often become

intractable for disaggregated models Fur1hermore the CGE modeller does not have to be confined to

small changes in parameters This i an Important feature because large changes In policy

parameters ere often nremplaled in most tax reform proposals

Historically the field was fostered by Ihe early pioneering work of Harberger (1959 1962

9SG) Herberger uses a highly aggregated analytical model to focus on the taxation of capital

Income The first fully dlsaggregated computational general equilibrium model was introduced by

ShavenWhalley (1972) to evaluate the effects of differentiallaxalio of Inceme from capital in the

us

Until the early eighties most empir[cal general equiiibrium work for tax policy evaluation

i I I

I I I

I I r

bull

2

static tnvestment passively actjusts to saving The typical instruments in the US tax system are

modelled and the government budget Is balanced This state of affairs Is discussed and surveyed In

Shovn (1983) Fullerton-Henderson-Shoven (1984 and Shoven-WhaJ)ey (19S4) t I

Integration etc - has Induced Important developments There have been attempts to Incorporate

life-eyce behavior intergenerational issues allocation of savings investment decisions and

adjustment costs corporate financial decisions and government deficits In to the CGE models Underlying all of these features is the need to endow the models with a dynamic structure w~houl I which most of the above issues cannot be adequately addressed

IThe first efforts to incorporate dynamics into the CGe tax models are associated with bull

Fullerton-Shoven-Whalley (1978 middot1981 1993) Consumption decisions incorporale some t I

int~rtemporal aspects and an Intertemporal equilibrium path for the economy Is obtained by Ihe 1

Isequencing of static short-nm equilibria The equHibna are connected through the evolution of the I

capital endowments which_ tn turn depend on saving middotbehavior A compr~1e discussion of a recent I i Iversion of Ihis model is provided in BallardmiddotFulierton-Shoven-Whaney (19SS) I

More recently a whole new generation of models has been developed by Andersson (19S7) Auerbach-Kotlikoff (1983 1984 1987) Ballard (1983) Ballard-Goulder (laeS) Bovenberg I (1984 1985 19B5) ErlichmiddotGinsburgh-Heyden (laB7) Fellonstoin (19B4 ISBS) Goulder I (19BS) Jorgenson-Yun (1984) Pereira (leaSh 19B7e ta87d) and Goulder-Summers

(1987)

tThis article focuse~ on slJch efforts Our scope is narrow By concentrating on decentralized i

I i

Mo~e recently j the ~hrust towards better descrIptive power together with the nature of the tax

policy issues under analysis effects of a ponsumption tax capital taxation corporate tax

3

numerical W~ieral equilibrium modelling designed 10 addresS tax polic issues we abstract from

several ether related areas and approaches First we abstract from analytle models along the lines

of Abel-Blanchard (1983) and Judd (1985) Second we abslract from centralized growth-type

megels of laxation like Charnley (1981 1982) Third we abstract from eentralielti models

I

associated with World Bank researchers See for example Adelman-Robinson (1978) and

Dervis-de Mele-Robinson (1981) Finally we abstract from other CIl fields See for example

ShovenVlcalley (1984) for a sUlVey ollotematlonal trade applications DecaluwmiddotMartens

(1985) ane Robinson (1986) for applications In the area of development James (1985) for a bull I I

survey of economic history applications and A Manne (1986) and BOrges (1988) far all I encompassing surveys

The models included in our comparfsion are I

I 1 8allardFuliertan-ShavenmiddotWhalley (198S) l 2 Andersson (1987)

3 AuerbachmiddotKotlikoff (1963 1987)

4 Bailarcl (1983) and BallardmiddotGould (19aS)

5 Bovenbeg (1985 1985)

6 ErlichmiddotGinsburgh-Heyden (1987)

7 FeltenSleln (1984 1985)

S Goulde (1985)

9 GouldermiddotSummers (1987)

10 Jorgenson Yun (19B4)

11 Pereira (1986b 19870)

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

bull

2

static tnvestment passively actjusts to saving The typical instruments in the US tax system are

modelled and the government budget Is balanced This state of affairs Is discussed and surveyed In

Shovn (1983) Fullerton-Henderson-Shoven (1984 and Shoven-WhaJ)ey (19S4) t I

Integration etc - has Induced Important developments There have been attempts to Incorporate

life-eyce behavior intergenerational issues allocation of savings investment decisions and

adjustment costs corporate financial decisions and government deficits In to the CGE models Underlying all of these features is the need to endow the models with a dynamic structure w~houl I which most of the above issues cannot be adequately addressed

IThe first efforts to incorporate dynamics into the CGe tax models are associated with bull

Fullerton-Shoven-Whalley (1978 middot1981 1993) Consumption decisions incorporale some t I

int~rtemporal aspects and an Intertemporal equilibrium path for the economy Is obtained by Ihe 1

Isequencing of static short-nm equilibria The equHibna are connected through the evolution of the I

capital endowments which_ tn turn depend on saving middotbehavior A compr~1e discussion of a recent I i Iversion of Ihis model is provided in BallardmiddotFulierton-Shoven-Whaney (19SS) I

More recently a whole new generation of models has been developed by Andersson (19S7) Auerbach-Kotlikoff (1983 1984 1987) Ballard (1983) Ballard-Goulder (laeS) Bovenberg I (1984 1985 19B5) ErlichmiddotGinsburgh-Heyden (laB7) Fellonstoin (19B4 ISBS) Goulder I (19BS) Jorgenson-Yun (1984) Pereira (leaSh 19B7e ta87d) and Goulder-Summers

(1987)

tThis article focuse~ on slJch efforts Our scope is narrow By concentrating on decentralized i

I i

Mo~e recently j the ~hrust towards better descrIptive power together with the nature of the tax

policy issues under analysis effects of a ponsumption tax capital taxation corporate tax

3

numerical W~ieral equilibrium modelling designed 10 addresS tax polic issues we abstract from

several ether related areas and approaches First we abstract from analytle models along the lines

of Abel-Blanchard (1983) and Judd (1985) Second we abslract from centralized growth-type

megels of laxation like Charnley (1981 1982) Third we abstract from eentralielti models

I

associated with World Bank researchers See for example Adelman-Robinson (1978) and

Dervis-de Mele-Robinson (1981) Finally we abstract from other CIl fields See for example

ShovenVlcalley (1984) for a sUlVey ollotematlonal trade applications DecaluwmiddotMartens

(1985) ane Robinson (1986) for applications In the area of development James (1985) for a bull I I

survey of economic history applications and A Manne (1986) and BOrges (1988) far all I encompassing surveys

The models included in our comparfsion are I

I 1 8allardFuliertan-ShavenmiddotWhalley (198S) l 2 Andersson (1987)

3 AuerbachmiddotKotlikoff (1963 1987)

4 Bailarcl (1983) and BallardmiddotGould (19aS)

5 Bovenbeg (1985 1985)

6 ErlichmiddotGinsburgh-Heyden (1987)

7 FeltenSleln (1984 1985)

S Goulde (1985)

9 GouldermiddotSummers (1987)

10 Jorgenson Yun (19B4)

11 Pereira (1986b 19870)

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

3

numerical W~ieral equilibrium modelling designed 10 addresS tax polic issues we abstract from

several ether related areas and approaches First we abstract from analytle models along the lines

of Abel-Blanchard (1983) and Judd (1985) Second we abslract from centralized growth-type

megels of laxation like Charnley (1981 1982) Third we abstract from eentralielti models

I

associated with World Bank researchers See for example Adelman-Robinson (1978) and

Dervis-de Mele-Robinson (1981) Finally we abstract from other CIl fields See for example

ShovenVlcalley (1984) for a sUlVey ollotematlonal trade applications DecaluwmiddotMartens

(1985) ane Robinson (1986) for applications In the area of development James (1985) for a bull I I

survey of economic history applications and A Manne (1986) and BOrges (1988) far all I encompassing surveys

The models included in our comparfsion are I

I 1 8allardFuliertan-ShavenmiddotWhalley (198S) l 2 Andersson (1987)

3 AuerbachmiddotKotlikoff (1963 1987)

4 Bailarcl (1983) and BallardmiddotGould (19aS)

5 Bovenbeg (1985 1985)

6 ErlichmiddotGinsburgh-Heyden (1987)

7 FeltenSleln (1984 1985)

S Goulde (1985)

9 GouldermiddotSummers (1987)

10 Jorgenson Yun (19B4)

11 Pereira (1986b 19870)

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

bull 4 I

The kei features cf these models afe summarized in Table 1 which provides a structure for the

discussion Most of toe models Ihal we examine could be said to be In the Yale tradition That Is

they wer developped oy sudnts oi Herbert Scarf or students of the students of Herber1 Scar This

shyincludes BalladmiddotFuerM-Shoven-Whalley Andersson Ballard-Goulder ~)Venberg FellenSlein I

ibull Go-cider GouldermiddotSJmmers ard Pereira The exceptions from this heritage are Auerbachshybull

Kotlikoff Erllch-GinsburghHeyden and JorgensonmiddotYun I This survey is organized ltis follows rne second section provides a brief overview of I

Inon-dynamic CGE models The third seolion offers a discussion of modelling economic behavior and

equilibrium The fourth section focuses on model implemenlalion and policy ev~uatlon The fifth

Isection summarrzes empirical evidence en selected policy issues The sixth section illustrates the

power and wea~nesses of dynamic modelling with the issue of corporate laxintegration Finafly the last section summarizes the state~of-the-art in terms of dynamic modelling for lax policy

evalutlon and sugg-ess areas of future research

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

_

--

--- -~ ----- __-shy

_ _ - _- - Con~um9rs_ 8amphavlor

Bajla rd -Fulflonmiddot -Shaven-Whalley

1985 Anderaaon

1087

Auerba ch~ Ko1Uko 1983 1987

BaHElfdmiddotGouldor 1983 1905

Sovanborg 1985 198e

ErHchmiddotGlnaburghmiddot middotHeydeR

1987 Feltensteln 1984 1966

Gouldar 1985

GouldorSummor 1987

Jotgeneon-Yun 1984

Porelr 1966 1991

Count dynamlc dl9agg~ objecth lastes constraint ondog endog OvorlapBnqvMI of datil

year _seltlng labor no savings gonorst mollves

inlertsmporal 12 Income otility eel IntertempOfll1 yes yo no noLS 1973 Ymiddotmiddot

_ groups max ---_

0 Intertnmporal rllcufsivs

Swaden 1984 yes aggrogate utility CES eq of molion 00 yos na no consumer max for weaHh

tntortorrporal Isoeiastlc~ 00-1983

ill yo 55 poundtUS u~illy middot19831 In tcemporal yesmiddot 11El7 yes yo 00

cohorts rn~x CES-19C7 plauslblo

bYPothlC1 inlsrtamporal

19n yes 55 ago uliJity Isoelastlc Intertemporal ybullbull ye ye ysLS BFSWexpanOOd _ cohorts max

0118 inlertemporal recursivo LS plausible ye aggregate ollllly lsoolastic eq ot motion no yes no no

hYPOlhotic consumer max for weallh jnterlemporlll Boigium 1960 1983 ro aggrogate utility St()ne~Gearyjner1emporal no yo no no

consumer max Inlerl(lmporal two periodmiddot two yes

Austrs1i 1991middot1982 yes 2 income ulllly CD yeluly ybullbull tn the flrsl no no 2-perlod) groups max constraint porlod

Intertamporal LS 1973 ybullbull 55 aga utility eel intarhtmporal ye ybullbull ybullbull y

BFSW bullbullponded cohorts max

intert9mpor~1 W 1973 ves aggregate ullily 180085110 intertemporal no ybullbull no no

BFSW bullbulllMded consumer max (I~gt IntertempQ(a~

W 1955-80 ybullbull aggregate ulilily trenslog intertemporal ybullbull yes no no consumer max

Inlerlemporal recursive 1973LS yes a income ulllily CmiddotD eq of motion yos ybullbull 00 no

BFSWxpanded groups max for wealth

middot5middot

bull-- _---- -- _-----shy~ -~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

I AlJlt 1 - uynafllc (lIt MOOero fur all runey tVlIIVllllQlI

dynamic dluggI utllng

I Ba~ll-a rd-fullerton

-Shoven-Vlhalley I no 19 sectors 19S5

Andarsson 1987 ye 2 sectors

~ Auerbach~KotHkof no~1gB3

1983 1967 yesmiddot1g87 1 sector

Ballard~Go uld ar 1983 1985 no 19 sectors

Bovenborg 1965 1986 yes 2 sectors

Erllch~GIn5burg hshy-Heyden no 24 seclors

1957 1__ Feltenataln 1964 196e no 30 sectors

GoUldsr 1985 no 3 sectors

~ GoutdarmiddotSumrnamprs

1987 yes 5 sectors

_ Jorgen9ClIO-Yun ona sector

1984 no produces two goods

Poralr 19S~ 1987 yos 4 sectors

~bJecllve

Produc~rs

technology behavior InpIJ1 1-0

matrix adl costs opt Imal

capital stock

sialic cost min

CES in valu$ added

110

capital labor yes 00

np Invest adjusts

to sFvnns

max 01

interlempora flot rash flow

cnsl min-lOS) Imax of valul)

of the firm~1987

ill

CD-ISBa CES-1987

capital labor

captel labor

no

no

YA quadratic in

I nO-191)3J

qutldratic in Ilk-1gB

ye

YAS

static cost min

CES in vafl1oadded

10

capita labor yes no

no invest edjuss

10 savifQs max ot capita yas ~

value ot the CD labor 00 quadratic In yo Ilrm Ilk

static CD in several no global ltlost mln vaiue added

110 ltsp1al

Jabor Ves no Inves adjusts

to MVrHIS

statle oost min

____ slatio

cost min

max of value of the

firm equivalent 10 two~stage

~ost min me) of

CO in value ad~ed

110 CES In

value added 110

CESin shyvalue added

110 dual

trBRslog price function Cobb-Douglas

capUal labor

cepHal labor

capital labor

capital labor

capital

yes

yes

yes

no

no invost adjusts no to S8vinos net of

El-xog 9011 deflcitsl no

no invest adjusts to savings r

yes quadratic In Y

Ilk

no yo I

yes Intartamporal net cash flow

In V Added 110

labof Y quadratic In I

y bullbull

- 6 -

~ --- ~ ~- -- -~------ --- --- - --~--~ ---~ shy

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

_

- ---

--

--------

- - - --------

H n v I taxes

olllng allowed debt Ballardfullamprton~

dynamic objective constrfnt tupendlttire (IlleUs endogenous

aU major balanced trade yoarly ybullbull rly endogenous -f ~Shovon WtlitUy US taxes with C(in~Hlt00 pubHc uility balancod cQmposilon no no debt

eiasticllv junel l 1985 rnagt eCP-REV~d1 aU fn3jO[AndtH3Son vearly balanco small opan Gcon J Swodish inturn fa to cr raturn1987 no - inaia dlJn axogonolJs 00 Ini ITnininod poundgtPfUV

-I L)~ in~h~ --~ ~~ ~pound~~---1- ----shy

runrac h~KQllfkofi ai gulD

1963 1937 US m1l3syo - intertnmponl tixogancuamp yo ys cos~d ampConoroy bandmiddotfinanced flon-oppoundIla

B iii lIa fe-Gould 9r nil llltl1gtr balanced 1rndayearly yearly crcoge)Jus

US t)X6S wiih conslanl I

1963 1965 no public utility balanced cOlYlposWon~ no nD debt max budnt ExP~RCV alastlcHy lunct

Bovenberg simp~iriad 1985middotclosod econybullbull rl~ no - balanced exogenous no no debt US laxes 19a6~two counlry1985 1986 bodgel model

Ert leh~G tn aburghmiddot yeally simplified Inlert walt funet Ishorl~run ttads Heyden no balanced exogenous 00 no Belgium

taxes _ desloullbtium flltUensleln

1967 budaet EXP=REV 6-1mprifia-dmlm costs of yoarly yo rast of tho world

1984 1985 producing a ExTax Rev exogenous financed with yo Australian ~s a Ihlrd conSUmer public good money and bonds non-optimal taxes group

Goulder yaarly annual and endogenous aU maJor

laquo1()Sed economy1985 publlc utilily In1ertemporal composillon bull yes yes U~ taxesY rna versions IlEFElQgtfpoundV bond-financed (non-opllmal balanced trademiddotGoulder-Summer yeary yoarly endogonous bull all major

1987 00 public utility balMc composition no no US taxes with constant max budGel EXPREV alasticilY fund Jl)rgenaon~Yun yoarly aU major

no balanced exogenous no1964 US taxes closed economy budGet inteftemporal recurslve endogenousPereira all major

yo public utility eq of molion lovel and yo yos1995 1987 US laxes closed economy rna for debt composition bondmiddot financed oplloll

- 7 shy

bull - -__----- _ - ------ -- ------- _-----

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

---- ---

------

------

ll-ltiLt 1 uynamlc Lut MOOSS fOf I ax YOtlcy tv8luallon

Inanell ~ets and maf~9ts ojumLrtm- ----_ ----c_~

privata do btl GlvldtHlI pL~lc aliocalQflo rls shy

1rlc ypa expGct assets equity retention dobl 01 savlnq$ promlums path

Sal ra rd fu Barton phys cap1 used 10 buy soquence lt

Shavon-Wha1ley no financial exogenous oxogenous no physicBl 00 bull 01 sIalic 1E myopic 1985 assets capital flqrlil -

Andersson phys cap used 10 buy 1987 no financial no no yo physical no dynamic ~ perfect

assets capital Auerbach~KolUko If phys cap usod to buy

1983 1987 neo financial no no physical cap no dyoamlc ~ perfectYmiddotmiddotnSSf)ts and Qovt debt SailBrd-Goutder phys cap

1983 1985 no financ[al assets-shy -------

Bovenberg phys cap 1985 1986 no iinenclaf

asso1s Ertlch-Glnsburgh~ phys cap1

-Heyden no financlaJ 1987 assefs

FeltoRsteln phys cap 1984 1986 Invostment is

bondmiddotfinanced

used to buy

exogenous exogenous nObull physl~al no dynamic ~ perfllcl capital

used to buy

no no no physical capital

no dynamic ~onlinuos lima

PI perfect

used 10 buy no no no physical no dynamIc PF perfect

capital jllNt) porlod) bull used 10 buy

no no ye physical cap no dynamic PI p4)rfect and govt debt (Iwo Iods) bull

Goulder phys cap used to buy 1995 no financial exogenous exogenous yenbullbull physical cap no PFlfE bull IdynamIc perfoct~assels and am dabt slaUc

- -~ - shyGoulder-Summers phy$ cap

1987 bonds and no e)(oganOU$ no used 10 buy ye dynamic PF perfect _ bullbullultv bonds MullY (exoaenous

Jorgensonyun phys cap 1984 no financial

essels -~ - ------

Pereira phys cap 1986 1967 bonds end

equHy

________

no

8xogenoos

no

exogenous

no

ye

used to buy two type$ of physical

copltal used 10 buy

go dobl bonds equity

no

no

dynamIc

-

dynamlc

~

lE

perfect

fIbullbulllble (nonperlecB

middot6middot

~-- _middot~ ___~w_ - - ___ bullbullbull___ -------- shy~

-----

------

- ---

-

IlflpnUItll tit lun pVII-y PIlUAlIV

q6H1brla oqual fax polley ovnluaU-on efUclency derlvatton Ioorllhm

calibration param~hr computation COmelfed llold tndfcaHH eHecls

Bnl jard~FuU6rtQ n base year back soll1lion steady-sta1e yo inlsrgroup inerseel or Iii

VS transilion lump-sum with Interfemporai 1965

~Shovn Whallmiddotv replication wllh exog Morrills nmamo1ers alQorilhm _~ond~middotsta1$ ears Inc CVor EV

i~noerucn sleady-sfala no agg(ogaled lnlalsectora 1967

base year back sobHon SiMNON package replication wHn oxog valiant of VS Iransilion no Indicamptor lnlertamporal

paramelsrs multiple shoo ling 6~~~l~slat8

AU8rt)ach~Kotllkot steady-slato yo Inlerguna-r a lions

1893 1llH

quatitaUve by replication a$Sium~lkml Gauss-Soidel liS Uln1WOn any rule -lilh 1111ermpOrB

sonsililJ1y I _ ~poundI~Jjnnelill $t(lfdvmiddot~luiA J3djlt15S ~~ nnrilW ~--------

a ail r nimiddotGould or bas9 9tH bac~ solution Ballard~ staadymiddotslalo )05 kltHSclo(a~

1983 1985 VS Iransllinn lump~sum dynalTlk CV inlerlemporal steadY slafe parameters alaorlthm replicaUon+ with oxog Gourder

+stead~stato (ers loc inlareel10rat BCvonborg qunmaiive by dynamic version stoadY-$Igtto yes 1985 1985 YS transition some govt eN Inlortempora

S9rHltivilv OnearizaJian method ropllcaUon assumptionl of Johansons

+steady-sfata paoo palh Erllch-Glnsbu rgh~ actual vorsus no aootagalod inlersectoral2 bftse years back solu1ion variant of Negishis

Heyden replication wIth alltogbull optlmizaUon countorfaclUal no ~odjcator inlottempora 1987 paramlJters aocroach

faltonstaln baso yeat back solution actual versus no aggrampgalfld intersElclornl replication wilh exog Merrills counlerfaclutll no indlclltor middotlntamprlempOull1984 19B6

parameters al90rithm 1981middot1982

Gouldar staady~slala Inlar5ecioralbase year back souUon Variant or 1S lronsilion no dynamic CV inlortempora

stoady state parameters Newlon 1985 feplicalion+ with iUog Fair~Taylorl

+slaildy-sla1e Intargeoorat Gtlulder~Summers base year back solution varIant of stlJadymiddotstate fixed no aggregated fntersectoral

vs trarlsition government Indicator Intertempo1al steady state oatameters Newton

repticaUon+ with exog Fair-T aylQf 1967 +ste-adv-stata bullbullbullndlno financial

Jorgenon-Yun econometric steady-stale Money melfic In1ersecloral

- - 8slimalion vs traosUian no social weUare functton intertampotal1984 +~teadlmiddotstatl)

~ shy

qtJalitaUv8 by NPSCt optimal path ye generalized inlersectorai 1986 1987 Perelr

replication 8S$umptlonl optimizatIon V$ lumpmiddotsum dynamic lntertemporat se~~ttilitf ____Jllgorilhm opllmal pah pen inc CVoclV financial

- 9 shy

bull ~ ___ - _______ - ____ bull___ OM bullbull __ bullbull __~____ ~_

--

- - - --------

--------- - - - --------

---

1nltJ1 bull I ~ 1J11ltI1 v I ~

-

Sa Ita rd-Futlertonmiddot intargration consumption lax ~StHlven~Whall~y VAT capila~ or labor tax

Ch~mqflS1985 Andersson

consumpion tax neutral corporals lax system 1987

it ue rb a c h~ i(at II Sltotf COIlSUft1ptian lax (poundpird ItS hibor Mx~on ufocto of taxation on capital fOfrnJilti1

dvnamio fiscal policv effects af OQvernmanl defioit (3tlard-Goulder

1883 1987

allocts 01 the adoption of a 1ge3 1985 pure consumpHon lax

im~rtmce of cons fCreSClht -Bovenborg analytically orianiad approach

1985 1986 effects ot pure conumption tax capllal income taxation in Opo economies

Erllch-Glnburghshy-Heyden reat wage policios in Belgium

1987 Felter1steln 1984 - theorotical

1985 ~ linnncial crcwdlng out1984 1986

Goulder effects of tax- vs bond-financed 1985 chanQes In pubtlc expondllufe

~~--

Gouidr~SUmmampfI torpora1$ lax cvts reduced 1987 ITO increase 10 gasolioe taxes

Jorgenson-Yun

effects ot several programs of tax reform on the allocation of ~~ptai

1984

-- Purelra

corporate la)( Integration effects cf romiddotinlroducinQ imreslamnl tax credits

1986 1967

10 bull

bull -~- ~- --- _ - ---____--_ - -----_-_ --~ ---- ~

1 1

2 Brief overview of non-dynamic CGE models

The origin of most or the models we survey goes back to the work of Scarf (1967 1973) whlgt

first developed a reliablo algorithm to compute equilibrium price for a ArrowmiddotDebreu economy

HiS algorithm used simpicial Bubdivision techniques and can -be shown to be the computational analog

of the fixed point theorems previously used to prove the existence of equilibrium His technique

could soW a model with an arbitrary number of consumers and commodities as long as all agents

were price takers consumers were subject to budget constraints demands were continuous andmiddot

production did not display increasing returns to scale The alQorithm while guaranteed to converge I

I I I

was relatively slow for prcb1ems involving more than S1If 20 dimensions A maior improvement in

computational speed Woo offered by Merrills algorithm (1972) which used tpe same fundamental

ideagt as Scarfs procedure

Scarfs model (as is true for the standard Arrow-Debreu model) does not include a government

sector ~ neither taxes nor public goocs At one of the mosi promising appHciUions of the new

computational techniqu w~s in Iha area of tax policy evaluation Shoven and Whalley (1973)

exlended the general equilibrium model and computational approach to include a wide rry of taxes

and a governl11ampnt spending plan The original ShavenmiddotWhalley model was static (although the

different commodi~ies CQuid be considered simitar goods available at different datest as In

Arrow-Debrau) and government was aumad to run a balanced budget The data are arranged as a

social accounling matrix The models spacification and calibration is checked by solving it in the

presence of the base set of laxes The result should ba exactly tha initial social accounting matrix

After having pasd this replication check the model is solved for a counterlactua equilibrium In

the presence of a new tux design The result is once again a social accounting matrix The two

equilibria are compared in order to tSS($S the impact of the new tax plan The first uses ot this

bull

1 Z

model for lax policy evauajon were ShovenWhalley (1972) Whalley (1975) and Shoven

(1916)

Completely static models as Shaven-Whalleys are unsatisfactory for many tax reform ISsues

These include corporate lax Integration effects of investment tax credits effects of accelerated

depreciations consumer Or e)penditure tzxes~ importance of saving subsidies like IRAs etc These

are essentialy dynamiC ksues They involve not only the allocation of capital across sectQfsbut

perhaps more Important the capital intensity of the economy But the capital accumulation and

capital reallocation take time and may involve adjustment costs Because of these issues Ballardmiddot

Fulierton~Shoven~Whaloy took the first steps towards developing a dynamic model

In this conlexl the ShovenWhalley model has been extended and implemented for Ihe US

-economy In BuIIBrdmiddotFulienonmiddotShovenmiddotWhalley (1985) While Ihis book completely documents the

mo~el it was used in several publicalions beginning in 1978 Their mode) consists of nineteem

production sectors twelvo households and fifteen consumer goods It includes a very detailed set of

taxes including the federal and state personallncome taxes federal and state corporate income taxes

SOCial Security taxes pro1J0rty taxes unemployment Insurance excise taxes sales taxes etc It

has been calibl att-d to reproduce the 1973 US economy Recentty a version corresponding to the

1983 JS economy has been developed

wThe 8alard-Fullenon-Shoven Whalley model is dynamic In the sense that consumers face a

choice between current consumption and leisure versus future consumption (which can be

purchased via s wlngs) The consumer classes act as if they were maximizing a nested CES utility

function over the domain of a CES aggregate of contempo-raneous consumer goods and leisure and

future consumption subject to their income constraint The parameters of those funcHons

determine the shares of income devo1ed to each commodity to saving and to the purchase of leisure

They also determine the two key elasticities in the models ~ the elasticity of labor supply with

bull

13

respecl to tgte rbullbull1 aoer lax wage rae and the elasticity of saving with respecl 10 the real after lax- rate of retum to capital

In the model consumerS have myopic expectations regarding lulure prices and in particular

regarding the future rale of return 10 capilal Ballard (1983) and BallardmiddotGoulder (1985)

inco~ora1e both perfect foresight and limited foresight into this model Future consumption is

acquired by buying a fixed composition portfolio of real investments that offer an infinite annuity

of returns

The production side of Ihe model is compielely static The mod1 Incorporates a constantmiddot

olasicily 01 substitution betweeen prlmary inputs in production (capital and labor) and fixed I coefficients for intermediate inputs The model distinguIshes between Industrial outputs and

eonsumer goods for the simple reason Ihat tile data are classified differenUy Industrial sectol$ I I involve such categories as forestry and fisherle metal mino9 and publishing and printing while

consumers purchas-3 fUfHi1ure 2ulomoblles and books This fact is recognized in the model by Ibull

incorporatirg a secord stage Of production which converts industrial outputs intO consumer goods

This technology is uStally mod9-led as a flxed~coefficient conversion matrix

The BallardmiddotFINton-ShovenWhalley model assumeS that the private sector finance

marginai ioveslment with the same composition of debt and equity as currently exists in each sector

This is the same arsumrtion that Herberger originally used Investors all hold debt and equity in tile

same proportion Thampreiore this ownership can be aggregated into simply capital ownership For

tax purposes however the separate treatment of debt and equity is taken into account at both the

corporate and persofa Io=vel SimllarlYJ the dividend poIicies on corporale equitY are established

exogenously There are no government bonds in the model since there are no government deficits

The modol is solved for a sequence (as many as 100) of temporary equilibria wltll consumers

allocating income between present and future conumption at each point in time The palh for 1he

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

--

- - - --------

--------- - - - --------

---

1nltJ1 bull I ~ 1J11ltI1 v I ~

-

Sa Ita rd-Futlertonmiddot intargration consumption lax ~StHlven~Whall~y VAT capila~ or labor tax

Ch~mqflS1985 Andersson

consumpion tax neutral corporals lax system 1987

it ue rb a c h~ i(at II Sltotf COIlSUft1ptian lax (poundpird ItS hibor Mx~on ufocto of taxation on capital fOfrnJilti1

dvnamio fiscal policv effects af OQvernmanl defioit (3tlard-Goulder

1883 1987

allocts 01 the adoption of a 1ge3 1985 pure consumpHon lax

im~rtmce of cons fCreSClht -Bovenborg analytically orianiad approach

1985 1986 effects ot pure conumption tax capllal income taxation in Opo economies

Erllch-Glnburghshy-Heyden reat wage policios in Belgium

1987 Felter1steln 1984 - theorotical

1985 ~ linnncial crcwdlng out1984 1986

Goulder effects of tax- vs bond-financed 1985 chanQes In pubtlc expondllufe

~~--

Gouidr~SUmmampfI torpora1$ lax cvts reduced 1987 ITO increase 10 gasolioe taxes

Jorgenson-Yun

effects ot several programs of tax reform on the allocation of ~~ptai

1984

-- Purelra

corporate la)( Integration effects cf romiddotinlroducinQ imreslamnl tax credits

1986 1967

10 bull

bull -~- ~- --- _ - ---____--_ - -----_-_ --~ ---- ~

1 1

2 Brief overview of non-dynamic CGE models

The origin of most or the models we survey goes back to the work of Scarf (1967 1973) whlgt

first developed a reliablo algorithm to compute equilibrium price for a ArrowmiddotDebreu economy

HiS algorithm used simpicial Bubdivision techniques and can -be shown to be the computational analog

of the fixed point theorems previously used to prove the existence of equilibrium His technique

could soW a model with an arbitrary number of consumers and commodities as long as all agents

were price takers consumers were subject to budget constraints demands were continuous andmiddot

production did not display increasing returns to scale The alQorithm while guaranteed to converge I

I I I

was relatively slow for prcb1ems involving more than S1If 20 dimensions A maior improvement in

computational speed Woo offered by Merrills algorithm (1972) which used tpe same fundamental

ideagt as Scarfs procedure

Scarfs model (as is true for the standard Arrow-Debreu model) does not include a government

sector ~ neither taxes nor public goocs At one of the mosi promising appHciUions of the new

computational techniqu w~s in Iha area of tax policy evaluation Shoven and Whalley (1973)

exlended the general equilibrium model and computational approach to include a wide rry of taxes

and a governl11ampnt spending plan The original ShavenmiddotWhalley model was static (although the

different commodi~ies CQuid be considered simitar goods available at different datest as In

Arrow-Debrau) and government was aumad to run a balanced budget The data are arranged as a

social accounling matrix The models spacification and calibration is checked by solving it in the

presence of the base set of laxes The result should ba exactly tha initial social accounting matrix

After having pasd this replication check the model is solved for a counterlactua equilibrium In

the presence of a new tux design The result is once again a social accounting matrix The two

equilibria are compared in order to tSS($S the impact of the new tax plan The first uses ot this

bull

1 Z

model for lax policy evauajon were ShovenWhalley (1972) Whalley (1975) and Shoven

(1916)

Completely static models as Shaven-Whalleys are unsatisfactory for many tax reform ISsues

These include corporate lax Integration effects of investment tax credits effects of accelerated

depreciations consumer Or e)penditure tzxes~ importance of saving subsidies like IRAs etc These

are essentialy dynamiC ksues They involve not only the allocation of capital across sectQfsbut

perhaps more Important the capital intensity of the economy But the capital accumulation and

capital reallocation take time and may involve adjustment costs Because of these issues Ballardmiddot

Fulierton~Shoven~Whaloy took the first steps towards developing a dynamic model

In this conlexl the ShovenWhalley model has been extended and implemented for Ihe US

-economy In BuIIBrdmiddotFulienonmiddotShovenmiddotWhalley (1985) While Ihis book completely documents the

mo~el it was used in several publicalions beginning in 1978 Their mode) consists of nineteem

production sectors twelvo households and fifteen consumer goods It includes a very detailed set of

taxes including the federal and state personallncome taxes federal and state corporate income taxes

SOCial Security taxes pro1J0rty taxes unemployment Insurance excise taxes sales taxes etc It

has been calibl att-d to reproduce the 1973 US economy Recentty a version corresponding to the

1983 JS economy has been developed

wThe 8alard-Fullenon-Shoven Whalley model is dynamic In the sense that consumers face a

choice between current consumption and leisure versus future consumption (which can be

purchased via s wlngs) The consumer classes act as if they were maximizing a nested CES utility

function over the domain of a CES aggregate of contempo-raneous consumer goods and leisure and

future consumption subject to their income constraint The parameters of those funcHons

determine the shares of income devo1ed to each commodity to saving and to the purchase of leisure

They also determine the two key elasticities in the models ~ the elasticity of labor supply with

bull

13

respecl to tgte rbullbull1 aoer lax wage rae and the elasticity of saving with respecl 10 the real after lax- rate of retum to capital

In the model consumerS have myopic expectations regarding lulure prices and in particular

regarding the future rale of return 10 capilal Ballard (1983) and BallardmiddotGoulder (1985)

inco~ora1e both perfect foresight and limited foresight into this model Future consumption is

acquired by buying a fixed composition portfolio of real investments that offer an infinite annuity

of returns

The production side of Ihe model is compielely static The mod1 Incorporates a constantmiddot

olasicily 01 substitution betweeen prlmary inputs in production (capital and labor) and fixed I coefficients for intermediate inputs The model distinguIshes between Industrial outputs and

eonsumer goods for the simple reason Ihat tile data are classified differenUy Industrial sectol$ I I involve such categories as forestry and fisherle metal mino9 and publishing and printing while

consumers purchas-3 fUfHi1ure 2ulomoblles and books This fact is recognized in the model by Ibull

incorporatirg a secord stage Of production which converts industrial outputs intO consumer goods

This technology is uStally mod9-led as a flxed~coefficient conversion matrix

The BallardmiddotFINton-ShovenWhalley model assumeS that the private sector finance

marginai ioveslment with the same composition of debt and equity as currently exists in each sector

This is the same arsumrtion that Herberger originally used Investors all hold debt and equity in tile

same proportion Thampreiore this ownership can be aggregated into simply capital ownership For

tax purposes however the separate treatment of debt and equity is taken into account at both the

corporate and persofa Io=vel SimllarlYJ the dividend poIicies on corporale equitY are established

exogenously There are no government bonds in the model since there are no government deficits

The modol is solved for a sequence (as many as 100) of temporary equilibria wltll consumers

allocating income between present and future conumption at each point in time The palh for 1he

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

1 1

2 Brief overview of non-dynamic CGE models

The origin of most or the models we survey goes back to the work of Scarf (1967 1973) whlgt

first developed a reliablo algorithm to compute equilibrium price for a ArrowmiddotDebreu economy

HiS algorithm used simpicial Bubdivision techniques and can -be shown to be the computational analog

of the fixed point theorems previously used to prove the existence of equilibrium His technique

could soW a model with an arbitrary number of consumers and commodities as long as all agents

were price takers consumers were subject to budget constraints demands were continuous andmiddot

production did not display increasing returns to scale The alQorithm while guaranteed to converge I

I I I

was relatively slow for prcb1ems involving more than S1If 20 dimensions A maior improvement in

computational speed Woo offered by Merrills algorithm (1972) which used tpe same fundamental

ideagt as Scarfs procedure

Scarfs model (as is true for the standard Arrow-Debreu model) does not include a government

sector ~ neither taxes nor public goocs At one of the mosi promising appHciUions of the new

computational techniqu w~s in Iha area of tax policy evaluation Shoven and Whalley (1973)

exlended the general equilibrium model and computational approach to include a wide rry of taxes

and a governl11ampnt spending plan The original ShavenmiddotWhalley model was static (although the

different commodi~ies CQuid be considered simitar goods available at different datest as In

Arrow-Debrau) and government was aumad to run a balanced budget The data are arranged as a

social accounling matrix The models spacification and calibration is checked by solving it in the

presence of the base set of laxes The result should ba exactly tha initial social accounting matrix

After having pasd this replication check the model is solved for a counterlactua equilibrium In

the presence of a new tux design The result is once again a social accounting matrix The two

equilibria are compared in order to tSS($S the impact of the new tax plan The first uses ot this

bull

1 Z

model for lax policy evauajon were ShovenWhalley (1972) Whalley (1975) and Shoven

(1916)

Completely static models as Shaven-Whalleys are unsatisfactory for many tax reform ISsues

These include corporate lax Integration effects of investment tax credits effects of accelerated

depreciations consumer Or e)penditure tzxes~ importance of saving subsidies like IRAs etc These

are essentialy dynamiC ksues They involve not only the allocation of capital across sectQfsbut

perhaps more Important the capital intensity of the economy But the capital accumulation and

capital reallocation take time and may involve adjustment costs Because of these issues Ballardmiddot

Fulierton~Shoven~Whaloy took the first steps towards developing a dynamic model

In this conlexl the ShovenWhalley model has been extended and implemented for Ihe US

-economy In BuIIBrdmiddotFulienonmiddotShovenmiddotWhalley (1985) While Ihis book completely documents the

mo~el it was used in several publicalions beginning in 1978 Their mode) consists of nineteem

production sectors twelvo households and fifteen consumer goods It includes a very detailed set of

taxes including the federal and state personallncome taxes federal and state corporate income taxes

SOCial Security taxes pro1J0rty taxes unemployment Insurance excise taxes sales taxes etc It

has been calibl att-d to reproduce the 1973 US economy Recentty a version corresponding to the

1983 JS economy has been developed

wThe 8alard-Fullenon-Shoven Whalley model is dynamic In the sense that consumers face a

choice between current consumption and leisure versus future consumption (which can be

purchased via s wlngs) The consumer classes act as if they were maximizing a nested CES utility

function over the domain of a CES aggregate of contempo-raneous consumer goods and leisure and

future consumption subject to their income constraint The parameters of those funcHons

determine the shares of income devo1ed to each commodity to saving and to the purchase of leisure

They also determine the two key elasticities in the models ~ the elasticity of labor supply with

bull

13

respecl to tgte rbullbull1 aoer lax wage rae and the elasticity of saving with respecl 10 the real after lax- rate of retum to capital

In the model consumerS have myopic expectations regarding lulure prices and in particular

regarding the future rale of return 10 capilal Ballard (1983) and BallardmiddotGoulder (1985)

inco~ora1e both perfect foresight and limited foresight into this model Future consumption is

acquired by buying a fixed composition portfolio of real investments that offer an infinite annuity

of returns

The production side of Ihe model is compielely static The mod1 Incorporates a constantmiddot

olasicily 01 substitution betweeen prlmary inputs in production (capital and labor) and fixed I coefficients for intermediate inputs The model distinguIshes between Industrial outputs and

eonsumer goods for the simple reason Ihat tile data are classified differenUy Industrial sectol$ I I involve such categories as forestry and fisherle metal mino9 and publishing and printing while

consumers purchas-3 fUfHi1ure 2ulomoblles and books This fact is recognized in the model by Ibull

incorporatirg a secord stage Of production which converts industrial outputs intO consumer goods

This technology is uStally mod9-led as a flxed~coefficient conversion matrix

The BallardmiddotFINton-ShovenWhalley model assumeS that the private sector finance

marginai ioveslment with the same composition of debt and equity as currently exists in each sector

This is the same arsumrtion that Herberger originally used Investors all hold debt and equity in tile

same proportion Thampreiore this ownership can be aggregated into simply capital ownership For

tax purposes however the separate treatment of debt and equity is taken into account at both the

corporate and persofa Io=vel SimllarlYJ the dividend poIicies on corporale equitY are established

exogenously There are no government bonds in the model since there are no government deficits

The modol is solved for a sequence (as many as 100) of temporary equilibria wltll consumers

allocating income between present and future conumption at each point in time The palh for 1he

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

bull

1 Z

model for lax policy evauajon were ShovenWhalley (1972) Whalley (1975) and Shoven

(1916)

Completely static models as Shaven-Whalleys are unsatisfactory for many tax reform ISsues

These include corporate lax Integration effects of investment tax credits effects of accelerated

depreciations consumer Or e)penditure tzxes~ importance of saving subsidies like IRAs etc These

are essentialy dynamiC ksues They involve not only the allocation of capital across sectQfsbut

perhaps more Important the capital intensity of the economy But the capital accumulation and

capital reallocation take time and may involve adjustment costs Because of these issues Ballardmiddot

Fulierton~Shoven~Whaloy took the first steps towards developing a dynamic model

In this conlexl the ShovenWhalley model has been extended and implemented for Ihe US

-economy In BuIIBrdmiddotFulienonmiddotShovenmiddotWhalley (1985) While Ihis book completely documents the

mo~el it was used in several publicalions beginning in 1978 Their mode) consists of nineteem

production sectors twelvo households and fifteen consumer goods It includes a very detailed set of

taxes including the federal and state personallncome taxes federal and state corporate income taxes

SOCial Security taxes pro1J0rty taxes unemployment Insurance excise taxes sales taxes etc It

has been calibl att-d to reproduce the 1973 US economy Recentty a version corresponding to the

1983 JS economy has been developed

wThe 8alard-Fullenon-Shoven Whalley model is dynamic In the sense that consumers face a

choice between current consumption and leisure versus future consumption (which can be

purchased via s wlngs) The consumer classes act as if they were maximizing a nested CES utility

function over the domain of a CES aggregate of contempo-raneous consumer goods and leisure and

future consumption subject to their income constraint The parameters of those funcHons

determine the shares of income devo1ed to each commodity to saving and to the purchase of leisure

They also determine the two key elasticities in the models ~ the elasticity of labor supply with

bull

13

respecl to tgte rbullbull1 aoer lax wage rae and the elasticity of saving with respecl 10 the real after lax- rate of retum to capital

In the model consumerS have myopic expectations regarding lulure prices and in particular

regarding the future rale of return 10 capilal Ballard (1983) and BallardmiddotGoulder (1985)

inco~ora1e both perfect foresight and limited foresight into this model Future consumption is

acquired by buying a fixed composition portfolio of real investments that offer an infinite annuity

of returns

The production side of Ihe model is compielely static The mod1 Incorporates a constantmiddot

olasicily 01 substitution betweeen prlmary inputs in production (capital and labor) and fixed I coefficients for intermediate inputs The model distinguIshes between Industrial outputs and

eonsumer goods for the simple reason Ihat tile data are classified differenUy Industrial sectol$ I I involve such categories as forestry and fisherle metal mino9 and publishing and printing while

consumers purchas-3 fUfHi1ure 2ulomoblles and books This fact is recognized in the model by Ibull

incorporatirg a secord stage Of production which converts industrial outputs intO consumer goods

This technology is uStally mod9-led as a flxed~coefficient conversion matrix

The BallardmiddotFINton-ShovenWhalley model assumeS that the private sector finance

marginai ioveslment with the same composition of debt and equity as currently exists in each sector

This is the same arsumrtion that Herberger originally used Investors all hold debt and equity in tile

same proportion Thampreiore this ownership can be aggregated into simply capital ownership For

tax purposes however the separate treatment of debt and equity is taken into account at both the

corporate and persofa Io=vel SimllarlYJ the dividend poIicies on corporale equitY are established

exogenously There are no government bonds in the model since there are no government deficits

The modol is solved for a sequence (as many as 100) of temporary equilibria wltll consumers

allocating income between present and future conumption at each point in time The palh for 1he

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

bull

13

respecl to tgte rbullbull1 aoer lax wage rae and the elasticity of saving with respecl 10 the real after lax- rate of retum to capital

In the model consumerS have myopic expectations regarding lulure prices and in particular

regarding the future rale of return 10 capilal Ballard (1983) and BallardmiddotGoulder (1985)

inco~ora1e both perfect foresight and limited foresight into this model Future consumption is

acquired by buying a fixed composition portfolio of real investments that offer an infinite annuity

of returns

The production side of Ihe model is compielely static The mod1 Incorporates a constantmiddot

olasicily 01 substitution betweeen prlmary inputs in production (capital and labor) and fixed I coefficients for intermediate inputs The model distinguIshes between Industrial outputs and

eonsumer goods for the simple reason Ihat tile data are classified differenUy Industrial sectol$ I I involve such categories as forestry and fisherle metal mino9 and publishing and printing while

consumers purchas-3 fUfHi1ure 2ulomoblles and books This fact is recognized in the model by Ibull

incorporatirg a secord stage Of production which converts industrial outputs intO consumer goods

This technology is uStally mod9-led as a flxed~coefficient conversion matrix

The BallardmiddotFINton-ShovenWhalley model assumeS that the private sector finance

marginai ioveslment with the same composition of debt and equity as currently exists in each sector

This is the same arsumrtion that Herberger originally used Investors all hold debt and equity in tile

same proportion Thampreiore this ownership can be aggregated into simply capital ownership For

tax purposes however the separate treatment of debt and equity is taken into account at both the

corporate and persofa Io=vel SimllarlYJ the dividend poIicies on corporale equitY are established

exogenously There are no government bonds in the model since there are no government deficits

The modol is solved for a sequence (as many as 100) of temporary equilibria wltll consumers

allocating income between present and future conumption at each point in time The palh for 1he

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

14

economy ~ a sel of connected equilibria The connectIon is pra~ided by capital accumulation

Capital accumulation is endogenous and determined by saving The model stans with a sociagt

accOunting mi1rix In the bzse case the economy is assumed to be in a steaqy state growth -path (along

which all relative prices ~fe constant) The madel solves for both the naw steady state growth path

and the transltion 10 it zf~er a policy intervention rhe authors have frequently addressed the

question-of howong rt tKes to effectively settle un10 a new steady S1ate growth path

The dynamics of the model are limited however in that future consumption is collapsed into a

composite commodity Aso the absence of government deficits and the lack ofproductlon dynamics

limits the realism of the BallardmiddotFuliertonmiddotShoven-Whatley model for the analysis of dynamic

policy issues (such as the adoption 01 a consumption tax or Ihe elimination of the investment tax

credit) The models we survey try to Improve upon Ihe Ballard-FlIiertonmiddotShaven-Whalley

dynamic modelling The models Jn~orporate more forward lookTng behavior They improve the

dynamics on the conampumrtkm side of the economy and some of them introduce true 1ynamlc behavior

on the part oI the producers We turn now to the issues inY9lv_ed in developing such dynamic models

15 I I ~3 ~ssues in the modelling Of dynamic behavior

We will 100k firt at the speclficalion of economic behavior of consume(s~ producers

goyemment and Ihe r~sl of Ihe world The modemog of corporale and household financial decisions

I is then addr5sed Finally Ihe eencept of equilibrium is discussed

I

i

I 1

31 Consumers behavior

Early efforts 10 build dynamic features into the economic behavior 01 consumers are due to

Ballard (1963) and Auerbach-Kotllkoff (1983 1984) Their work has been closely followed by

several subsequent authors In faet dynamic household behavior Is the single most pervasive aspect

amohg the models surveyed

All the models Inc-O1orale some loro of lila-cycle behavior Household behavior is dewmloed

by the maximization of an addWVely separable time invariant intertemporal utillty function The

utility lune1ion is defined oyer the domain of the consumption goods In the economy In most of the

models leisure is also an argument in utility so that labor supply is optimally determined

Utility maximi4ation is subject to a lifetime intertemporal budget constraint which equalizes

the presen1 value of consumers income and expenditure More reeentiy in Andersson (1987) bull

Bovenberg (1985) and Pereira (1986b 1987d) the constraint i$ defined as a sequence 01

recursive equations of motion on wealth This has the potential advantage 01 accomodating liquidity

constraints However It should be recognized that in the absence 01 liquidity constraints (ie when

consumers are free to completely borrow against future income) the two specificallons of the

househofd ccnstraint are essentiay equivatent Furthermore tn both versions saving is optimally

determined as a way of translaring wealth intertemporally

1 6

Some lodels now have a sophisticated dynamic specification of hoosehokl In Ballard (1983) -

BallardmiddotGoulder (1985) and Auerbach-Kotlikof (1983 1984 1987) consumers behavio is

embedded in an iterQEneraional setting Each of them has S5 age cohorts simulataneously alive

Som-e measure of jntergener1ional altruism is considered in the form of bequest motives In Ballard

(1983) and Ballard-Gouldr (1985) consumers derive utility directly from bequthing parl of

their wealth Therefore bequests assume 1he form of a scrap value of terminal wealth of a

generation In AuerbachmiddotKotlikof (1983 1984 1987) each generation empathyz bullbull with Ihe

utility of future generations ovar bequethd wealth In addition Ballard (1ge3) includes detailed

demographic poiections wfill the intent of incorporating in the policy analysis the effects of the

bull Post World War tI baby-boom

In the real world household decisions also include the optimat allo~atiOn of saving among

shyalternative physical or financial assets Theories of household portfolio behavior are relatively

Iwen~establshed However they involve uncertainty as a crucial element Accordingly they have

middotnot been incorpora~ed in the context of the determinIstic dynamic models we sutyey here We will 1 Come backt-O this Issue below

32 Producer behavior

The efforts to build dynamic features into the economic behavior of producers are more recellt

and less widely adopted The first attempts are due to Bovnberg (1984 1985) and Summers

(1965) Dynamic behavior has been more fully incorporated In the recent models of Andersson

(1987) Auerbach-Kotlikoff (19B7) GouldermiddotSummers (1987) and Pereira (1986b 1987d)

Part of the reason why production side dinamlcs has been more slowty adopted is the weak

supply of accepted theories referring to the dynamic behavior of the firms In the models referred

I 17

to above gynamlc producion and investment b~havior are middotinduced by the existence of capital

adjustment costs and linked to Tobins q theory Adjuslment costs are designed to capture both the

incomplete mobility of capital aoross industries and installation costs ~e the costs of adjusting

capital towards its cpHmai level)

Adjllstment costs can be conceived as internal to the firm and measured in terms of foregone

outpul along the lines of Lucas (1967) Alternatively adjustment costs can be viewed as actual

external cests incurred together with Ihe purchase costs along the Unes of Gould (1969) With the

exception of Pereira (198Gb 1937d) all of the CGE authors follow the former approach

The firms in the economy maximize their market value as the present discountad value of the

future stream of dividends In Andersson (1981) and Pereira (198Gb 1987d) firms are seen as

maximizing the present discounted value of net cash flow Maximization is constrained by Ihe

adjustmenl cosl lechnology and ~n equation of motion describing Ihe evolution of the capital stock

It should be noted that undereogenous divldendrelention rules the two problems are equivalent II

should also be nOled Ihat a salisfectory economic rational for th bullbullistoo of dMdonds with the

present tax code is missing in the profession (Shoven (1986))

The models with static formulation of producers behavior are characterized by passive

investment behavior Investment merely accomodates to saving in the eccnomy With a dynamic

formulation induced b adjustment costs real investmen decisions are forward looking Investmenl

Is endogenously and optimally determined by the firms A fundamental difference between the

shonmiddotrun in which capital stock is given and longmiddotrun in which Ihe level of capital is allowed to be

optimally determined is emphasized

This extra richness of produc1ion dynamics is not without costs A careful look at the summary

tables will clearly show an inverse relation between the adoptlon of dynamic features in production

and the level of disagreggation of the production side of the economy In fact with production

bull

j

1 6

dynamics $e dimension of the problems is immensly increased Let IS be more specific

In a static framework with constant returns to scale production technology the output level ismiddot

indeterminate The optimal aliocation of inputs can be obtained by cost minimization with any

feasible output level generatillg zero profits Such zero profit conditions are used to solve for the

output prices in terms of the factor prices and hencemiddot to reduce the dlmensionality of the problem

from the -number of commodities and factors to the number of factors Thus even if the model deals

with 30 production sectors the computation of an economic equilibrium can take place using only

the dimensionality of the primary inputs in the economy

Now under certain regularity conditions on the production and adjustment costs technologies

leading to enough concavity of the optimality objective the intertemporal output path for the firm is

endogenously optimally and uniquely determined even with constant relums to scale technologies

(see Pereira (1985 1987a) Accordin~y with adjustment costs in the model optimal profits

will in general be non-zero This result has crucial implications for the computatiQn of equilibrium

in the model~ with production dynamics With adjustment costs no reduction of dimensionality is

possible The curse of dimensionality returns as a binding constraint

The introduction of adjustment costs adds another significant complication to the model With

capital being less that perfectly mobile in the economy different rates of return on capital will

exist in different sectors This is a difficult problem to tackle conceptually in the absence of

uncertainty Also in the real world producer maximization choices include also its choice of

financial ratios (debVequity) and payout rates (dividendretained earnings) These financial

subjects are difficult and much Clf this behavior is still taken as exogenous by the modellers We

will come back to these issues below

middot i

19

bull 33 government behavior

middot

Two issues dominate the modelling of government behavIor First govemment behavior has

Ibeen typically seen in Ihe CGE liIerature for lax poliCY evaluation as constrained by yearly balanced

I budsets (see for example 8allard-Fullrton-S~ovn-Whafley 098Sraquo The analysis of

govemment defidlS and public debl in a CelE context requires a dynamic selling Second the level of

government expenditures is either exegenouty given as in Auerbach-KoUikofi (1984 1987)

6ovenbrg (1984 1985) Feltenstein (1984 1986) and Jorgenson-Yun (1984) or

endogenously (but no optimally) determined by the balanced budget conditions as in

6allard-Fullerton-Shoven-Whalley (1985) Andersson (1987) Erllch-Ginshurgh-Heyden

~

(1987) Gouder (19aS) and Gouder-Summers (1987) In the second case the composition of

bull public expenditures is often optimally determined However the leve~ of government expendi1ures

can only 00 endogenously and optimally determined if the government is seen as an optimizing agent

and is allowed to run deficits

The first attempts to deal wiU the government defiCits in CGE tax models are due to

Auerbach-Kollilltoff (1984) and Feensain (1984) In Auerbach-Kotlikof (1984) government

expenditures afe exogenous They grow at the rate of growth of population However given 1he tax

structure and tax revenues yearly deficits and surpluses are atTowed subject to an in1ertempond

constraint that the present value of future tax revenues equals the present value of future

expenditures

In Fellenstein (1984 1986) government expenditures are also exogenously given He also

allows the government to run deficits to finance expenditures in excess to 1ax revenues However

surpluses are returned to CQnsumars in the form cf transfers Accordingly government ts not

subject to any constraint regarding the future repayment of public debt

1 6

Some lodels now have a sophisticated dynamic specification of hoosehokl In Ballard (1983) -

BallardmiddotGoulder (1985) and Auerbach-Kotlikof (1983 1984 1987) consumers behavio is

embedded in an iterQEneraional setting Each of them has S5 age cohorts simulataneously alive

Som-e measure of jntergener1ional altruism is considered in the form of bequest motives In Ballard

(1983) and Ballard-Gouldr (1985) consumers derive utility directly from bequthing parl of

their wealth Therefore bequests assume 1he form of a scrap value of terminal wealth of a

generation In AuerbachmiddotKotlikof (1983 1984 1987) each generation empathyz bullbull with Ihe

utility of future generations ovar bequethd wealth In addition Ballard (1ge3) includes detailed

demographic poiections wfill the intent of incorporating in the policy analysis the effects of the

bull Post World War tI baby-boom

In the real world household decisions also include the optimat allo~atiOn of saving among

shyalternative physical or financial assets Theories of household portfolio behavior are relatively

Iwen~establshed However they involve uncertainty as a crucial element Accordingly they have

middotnot been incorpora~ed in the context of the determinIstic dynamic models we sutyey here We will 1 Come backt-O this Issue below

32 Producer behavior

The efforts to build dynamic features into the economic behavior of producers are more recellt

and less widely adopted The first attempts are due to Bovnberg (1984 1985) and Summers

(1965) Dynamic behavior has been more fully incorporated In the recent models of Andersson

(1987) Auerbach-Kotlikoff (19B7) GouldermiddotSummers (1987) and Pereira (1986b 1987d)

Part of the reason why production side dinamlcs has been more slowty adopted is the weak

supply of accepted theories referring to the dynamic behavior of the firms In the models referred

I 17

to above gynamlc producion and investment b~havior are middotinduced by the existence of capital

adjustment costs and linked to Tobins q theory Adjuslment costs are designed to capture both the

incomplete mobility of capital aoross industries and installation costs ~e the costs of adjusting

capital towards its cpHmai level)

Adjllstment costs can be conceived as internal to the firm and measured in terms of foregone

outpul along the lines of Lucas (1967) Alternatively adjustment costs can be viewed as actual

external cests incurred together with Ihe purchase costs along the Unes of Gould (1969) With the

exception of Pereira (198Gb 1937d) all of the CGE authors follow the former approach

The firms in the economy maximize their market value as the present discountad value of the

future stream of dividends In Andersson (1981) and Pereira (198Gb 1987d) firms are seen as

maximizing the present discounted value of net cash flow Maximization is constrained by Ihe

adjustmenl cosl lechnology and ~n equation of motion describing Ihe evolution of the capital stock

It should be noted that undereogenous divldendrelention rules the two problems are equivalent II

should also be nOled Ihat a salisfectory economic rational for th bullbullistoo of dMdonds with the

present tax code is missing in the profession (Shoven (1986))

The models with static formulation of producers behavior are characterized by passive

investment behavior Investment merely accomodates to saving in the eccnomy With a dynamic

formulation induced b adjustment costs real investmen decisions are forward looking Investmenl

Is endogenously and optimally determined by the firms A fundamental difference between the

shonmiddotrun in which capital stock is given and longmiddotrun in which Ihe level of capital is allowed to be

optimally determined is emphasized

This extra richness of produc1ion dynamics is not without costs A careful look at the summary

tables will clearly show an inverse relation between the adoptlon of dynamic features in production

and the level of disagreggation of the production side of the economy In fact with production

bull

j

1 6

dynamics $e dimension of the problems is immensly increased Let IS be more specific

In a static framework with constant returns to scale production technology the output level ismiddot

indeterminate The optimal aliocation of inputs can be obtained by cost minimization with any

feasible output level generatillg zero profits Such zero profit conditions are used to solve for the

output prices in terms of the factor prices and hencemiddot to reduce the dlmensionality of the problem

from the -number of commodities and factors to the number of factors Thus even if the model deals

with 30 production sectors the computation of an economic equilibrium can take place using only

the dimensionality of the primary inputs in the economy

Now under certain regularity conditions on the production and adjustment costs technologies

leading to enough concavity of the optimality objective the intertemporal output path for the firm is

endogenously optimally and uniquely determined even with constant relums to scale technologies

(see Pereira (1985 1987a) Accordin~y with adjustment costs in the model optimal profits

will in general be non-zero This result has crucial implications for the computatiQn of equilibrium

in the model~ with production dynamics With adjustment costs no reduction of dimensionality is

possible The curse of dimensionality returns as a binding constraint

The introduction of adjustment costs adds another significant complication to the model With

capital being less that perfectly mobile in the economy different rates of return on capital will

exist in different sectors This is a difficult problem to tackle conceptually in the absence of

uncertainty Also in the real world producer maximization choices include also its choice of

financial ratios (debVequity) and payout rates (dividendretained earnings) These financial

subjects are difficult and much Clf this behavior is still taken as exogenous by the modellers We

will come back to these issues below

middot i

19

bull 33 government behavior

middot

Two issues dominate the modelling of government behavIor First govemment behavior has

Ibeen typically seen in Ihe CGE liIerature for lax poliCY evaluation as constrained by yearly balanced

I budsets (see for example 8allard-Fullrton-S~ovn-Whafley 098Sraquo The analysis of

govemment defidlS and public debl in a CelE context requires a dynamic selling Second the level of

government expenditures is either exegenouty given as in Auerbach-KoUikofi (1984 1987)

6ovenbrg (1984 1985) Feltenstein (1984 1986) and Jorgenson-Yun (1984) or

endogenously (but no optimally) determined by the balanced budget conditions as in

6allard-Fullerton-Shoven-Whalley (1985) Andersson (1987) Erllch-Ginshurgh-Heyden

~

(1987) Gouder (19aS) and Gouder-Summers (1987) In the second case the composition of

bull public expenditures is often optimally determined However the leve~ of government expendi1ures

can only 00 endogenously and optimally determined if the government is seen as an optimizing agent

and is allowed to run deficits

The first attempts to deal wiU the government defiCits in CGE tax models are due to

Auerbach-Kollilltoff (1984) and Feensain (1984) In Auerbach-Kotlikof (1984) government

expenditures afe exogenous They grow at the rate of growth of population However given 1he tax

structure and tax revenues yearly deficits and surpluses are atTowed subject to an in1ertempond

constraint that the present value of future tax revenues equals the present value of future

expenditures

In Fellenstein (1984 1986) government expenditures are also exogenously given He also

allows the government to run deficits to finance expenditures in excess to 1ax revenues However

surpluses are returned to CQnsumars in the form cf transfers Accordingly government ts not

subject to any constraint regarding the future repayment of public debt

I 17

to above gynamlc producion and investment b~havior are middotinduced by the existence of capital

adjustment costs and linked to Tobins q theory Adjuslment costs are designed to capture both the

incomplete mobility of capital aoross industries and installation costs ~e the costs of adjusting

capital towards its cpHmai level)

Adjllstment costs can be conceived as internal to the firm and measured in terms of foregone

outpul along the lines of Lucas (1967) Alternatively adjustment costs can be viewed as actual

external cests incurred together with Ihe purchase costs along the Unes of Gould (1969) With the

exception of Pereira (198Gb 1937d) all of the CGE authors follow the former approach

The firms in the economy maximize their market value as the present discountad value of the

future stream of dividends In Andersson (1981) and Pereira (198Gb 1987d) firms are seen as

maximizing the present discounted value of net cash flow Maximization is constrained by Ihe

adjustmenl cosl lechnology and ~n equation of motion describing Ihe evolution of the capital stock

It should be noted that undereogenous divldendrelention rules the two problems are equivalent II

should also be nOled Ihat a salisfectory economic rational for th bullbullistoo of dMdonds with the

present tax code is missing in the profession (Shoven (1986))

The models with static formulation of producers behavior are characterized by passive

investment behavior Investment merely accomodates to saving in the eccnomy With a dynamic

formulation induced b adjustment costs real investmen decisions are forward looking Investmenl

Is endogenously and optimally determined by the firms A fundamental difference between the

shonmiddotrun in which capital stock is given and longmiddotrun in which Ihe level of capital is allowed to be

optimally determined is emphasized

This extra richness of produc1ion dynamics is not without costs A careful look at the summary

tables will clearly show an inverse relation between the adoptlon of dynamic features in production

and the level of disagreggation of the production side of the economy In fact with production

bull

j

1 6

dynamics $e dimension of the problems is immensly increased Let IS be more specific

In a static framework with constant returns to scale production technology the output level ismiddot

indeterminate The optimal aliocation of inputs can be obtained by cost minimization with any

feasible output level generatillg zero profits Such zero profit conditions are used to solve for the

output prices in terms of the factor prices and hencemiddot to reduce the dlmensionality of the problem

from the -number of commodities and factors to the number of factors Thus even if the model deals

with 30 production sectors the computation of an economic equilibrium can take place using only

the dimensionality of the primary inputs in the economy

Now under certain regularity conditions on the production and adjustment costs technologies

leading to enough concavity of the optimality objective the intertemporal output path for the firm is

endogenously optimally and uniquely determined even with constant relums to scale technologies

(see Pereira (1985 1987a) Accordin~y with adjustment costs in the model optimal profits

will in general be non-zero This result has crucial implications for the computatiQn of equilibrium

in the model~ with production dynamics With adjustment costs no reduction of dimensionality is

possible The curse of dimensionality returns as a binding constraint

The introduction of adjustment costs adds another significant complication to the model With

capital being less that perfectly mobile in the economy different rates of return on capital will

exist in different sectors This is a difficult problem to tackle conceptually in the absence of

uncertainty Also in the real world producer maximization choices include also its choice of

financial ratios (debVequity) and payout rates (dividendretained earnings) These financial

subjects are difficult and much Clf this behavior is still taken as exogenous by the modellers We

will come back to these issues below

middot i

19

bull 33 government behavior

middot

Two issues dominate the modelling of government behavIor First govemment behavior has

Ibeen typically seen in Ihe CGE liIerature for lax poliCY evaluation as constrained by yearly balanced

I budsets (see for example 8allard-Fullrton-S~ovn-Whafley 098Sraquo The analysis of

govemment defidlS and public debl in a CelE context requires a dynamic selling Second the level of

government expenditures is either exegenouty given as in Auerbach-KoUikofi (1984 1987)

6ovenbrg (1984 1985) Feltenstein (1984 1986) and Jorgenson-Yun (1984) or

endogenously (but no optimally) determined by the balanced budget conditions as in

6allard-Fullerton-Shoven-Whalley (1985) Andersson (1987) Erllch-Ginshurgh-Heyden

~

(1987) Gouder (19aS) and Gouder-Summers (1987) In the second case the composition of

bull public expenditures is often optimally determined However the leve~ of government expendi1ures

can only 00 endogenously and optimally determined if the government is seen as an optimizing agent

and is allowed to run deficits

The first attempts to deal wiU the government defiCits in CGE tax models are due to

Auerbach-Kollilltoff (1984) and Feensain (1984) In Auerbach-Kotlikof (1984) government

expenditures afe exogenous They grow at the rate of growth of population However given 1he tax

structure and tax revenues yearly deficits and surpluses are atTowed subject to an in1ertempond

constraint that the present value of future tax revenues equals the present value of future

expenditures

In Fellenstein (1984 1986) government expenditures are also exogenously given He also

allows the government to run deficits to finance expenditures in excess to 1ax revenues However

surpluses are returned to CQnsumars in the form cf transfers Accordingly government ts not

subject to any constraint regarding the future repayment of public debt

j

1 6

dynamics $e dimension of the problems is immensly increased Let IS be more specific

In a static framework with constant returns to scale production technology the output level ismiddot

indeterminate The optimal aliocation of inputs can be obtained by cost minimization with any

feasible output level generatillg zero profits Such zero profit conditions are used to solve for the

output prices in terms of the factor prices and hencemiddot to reduce the dlmensionality of the problem

from the -number of commodities and factors to the number of factors Thus even if the model deals

with 30 production sectors the computation of an economic equilibrium can take place using only

the dimensionality of the primary inputs in the economy

Now under certain regularity conditions on the production and adjustment costs technologies

leading to enough concavity of the optimality objective the intertemporal output path for the firm is

endogenously optimally and uniquely determined even with constant relums to scale technologies

(see Pereira (1985 1987a) Accordin~y with adjustment costs in the model optimal profits

will in general be non-zero This result has crucial implications for the computatiQn of equilibrium

in the model~ with production dynamics With adjustment costs no reduction of dimensionality is

possible The curse of dimensionality returns as a binding constraint

The introduction of adjustment costs adds another significant complication to the model With

capital being less that perfectly mobile in the economy different rates of return on capital will

exist in different sectors This is a difficult problem to tackle conceptually in the absence of

uncertainty Also in the real world producer maximization choices include also its choice of

financial ratios (debVequity) and payout rates (dividendretained earnings) These financial

subjects are difficult and much Clf this behavior is still taken as exogenous by the modellers We

will come back to these issues below

middot i

19

bull 33 government behavior

middot

Two issues dominate the modelling of government behavIor First govemment behavior has

Ibeen typically seen in Ihe CGE liIerature for lax poliCY evaluation as constrained by yearly balanced

I budsets (see for example 8allard-Fullrton-S~ovn-Whafley 098Sraquo The analysis of

govemment defidlS and public debl in a CelE context requires a dynamic selling Second the level of

government expenditures is either exegenouty given as in Auerbach-KoUikofi (1984 1987)

6ovenbrg (1984 1985) Feltenstein (1984 1986) and Jorgenson-Yun (1984) or

endogenously (but no optimally) determined by the balanced budget conditions as in

6allard-Fullerton-Shoven-Whalley (1985) Andersson (1987) Erllch-Ginshurgh-Heyden

~

(1987) Gouder (19aS) and Gouder-Summers (1987) In the second case the composition of

bull public expenditures is often optimally determined However the leve~ of government expendi1ures

can only 00 endogenously and optimally determined if the government is seen as an optimizing agent

and is allowed to run deficits

The first attempts to deal wiU the government defiCits in CGE tax models are due to

Auerbach-Kollilltoff (1984) and Feensain (1984) In Auerbach-Kotlikof (1984) government

expenditures afe exogenous They grow at the rate of growth of population However given 1he tax

structure and tax revenues yearly deficits and surpluses are atTowed subject to an in1ertempond

constraint that the present value of future tax revenues equals the present value of future

expenditures

In Fellenstein (1984 1986) government expenditures are also exogenously given He also

allows the government to run deficits to finance expenditures in excess to 1ax revenues However

surpluses are returned to CQnsumars in the form cf transfers Accordingly government ts not

subject to any constraint regarding the future repayment of public debt

middot i

19

bull 33 government behavior

middot

Two issues dominate the modelling of government behavIor First govemment behavior has

Ibeen typically seen in Ihe CGE liIerature for lax poliCY evaluation as constrained by yearly balanced

I budsets (see for example 8allard-Fullrton-S~ovn-Whafley 098Sraquo The analysis of

govemment defidlS and public debl in a CelE context requires a dynamic selling Second the level of

government expenditures is either exegenouty given as in Auerbach-KoUikofi (1984 1987)

6ovenbrg (1984 1985) Feltenstein (1984 1986) and Jorgenson-Yun (1984) or

endogenously (but no optimally) determined by the balanced budget conditions as in

6allard-Fullerton-Shoven-Whalley (1985) Andersson (1987) Erllch-Ginshurgh-Heyden

~

(1987) Gouder (19aS) and Gouder-Summers (1987) In the second case the composition of

bull public expenditures is often optimally determined However the leve~ of government expendi1ures

can only 00 endogenously and optimally determined if the government is seen as an optimizing agent

and is allowed to run deficits

The first attempts to deal wiU the government defiCits in CGE tax models are due to

Auerbach-Kollilltoff (1984) and Feensain (1984) In Auerbach-Kotlikof (1984) government

expenditures afe exogenous They grow at the rate of growth of population However given 1he tax

structure and tax revenues yearly deficits and surpluses are atTowed subject to an in1ertempond

constraint that the present value of future tax revenues equals the present value of future

expenditures

In Fellenstein (1984 1986) government expenditures are also exogenously given He also

allows the government to run deficits to finance expenditures in excess to 1ax revenues However

surpluses are returned to CQnsumars in the form cf transfers Accordingly government ts not

subject to any constraint regarding the future repayment of public debt

In GouJder (19851 the 9Vernmenl maximizes a static social welfare ~nctio subject to a-

bull

20 I i

I

I I I

I bull

balanced budget conSirtlL This follows the optimal alocatkm of government expenditures alpng

the lines of Baliard-FHeiton-Shoven-Whalley (1985) Ttle model Is generallzea to allow for

exogenous changes in HIe time path of government expenditures Two financing alternatives are

consjdeft~d and contr8s1ed EldditionaJ tax revenues and bond issuance

Pereira (198Gb 1137d) auempts to address both the incorporation of deficits and the

determination of govement expenditures The path of government expenditures and the path of

delicilSlsurpluses (ano therefore the path lor debt) are endogenously and optimally determined The

government is seen as mltJximizing n intertemporal social welfare function given the 13x structure

Optimization is subject to a sequence of recursive equations of motion reflecting the evolution of the

ptlbllc debt allowing fDr government budget imbalances It should be stressathat this specification

01 the government cOMtcalnt is equivalent to the specificaUon in Auerbaeh-Kotlikoff (1983 1987)

when no liquidity constraints affect -gove~nment behavior

The extra richness in the treatment of government behavior allows tfte examination of

government debt poices in a truly dynamic setting Also financial crowding out effects induced by

government deficits can be analyzed (see Auerbach-Kottlikoff (1987) Feltenstein (1986) and

Perer (198Gb 1987e))

34 Foreign sector

Most of the open economy models follow the assumptions of balanced trade with import and

export net demands characterized by constant elasticities along the line of Ballardmiddot

-Fullerton-Shaven-Whalley (1965) Such is the case of Salfard (1963) Ballard-Goulder

(19S5) and Goulder-Sllmmers (1987)_ In Feltenstin (1985) the rest of the world is treated as

21

an addjlion~ consumer group

Bovcoberg (1986) develops a model In which two economies lIr considered each following

intertempoml perlect foresight paths These economies meet in the international forum Their

trade relaroMhips are characterized by yearly balanced trade accounts

None of the new generation of dynamic cae tax models has yet IncorPorated the lnternational

capital flows as done in aoulder-Shoven-Whalley (1983) for the earlier Ballarrshy

-Fullertonmiddot Shaven-Whalley (1985) model This is unfortunate as there is an important

Intertmporal aspect to international lending The first al1empts along Ihese lines are due to

Andersson (1987) and Erlich-Glnsburgh-Heyden (1987) Andersson (1987) in his model of the

Swedish economy adopts a closed economy appraoch in which rates of return in the domesJic

economy are largely determined by the international capital markets Fidinterest rate induce

Intlnatlonal capital flows which determine and finance the International lrade imbalance In

lurn In ErlichGinsburghHeydenmiddot (1987) foreign trade Is generaled according to an

intertemporal Irade welfare lunction with constant import and export elasticities In the shortmiddotrun

they allow inlernational trade inbalances which generate capilal ftows to the domestic households In

the long run however trade balance is assumed

35 The need for financial markets

A dynamic economic Wucture not only provides the ideal environment 10 model many features of

economic behavior it also permits one to Incorporate the financial side of the economy If the

government is allowed to run deficits the question 01 deficll financing automatically follows If

investment is optimally dewmined and returns to capital are different aClOSS sectors problems of

investment financing arise If there are seeral final1cfal assets In the economymiddot government

4-

I i

ibull

I I I I

I

j

22

bonds privpte bonds and equity (or simply physical capital installed inmiddot different sectors) the

problem of allocation of saving among assets with potentially different returns arises

The papers surveyed var greatly with respect to l~e extent of their attention to the financial

side of the economy At Clne extreme are the models in ~anardmiddotFuliertonmiddotShoven-Whalley (1985)

Andersson (1987) Ballltld (1983) Ballard-Goulder (1985) Bovenberg (1985 1986) and

Erlich-Gjnsburgh-Heyden C19B which are devoted exclusively to the real side of the economy

In turn Auerbach-KotliKoff (1984 1987) Feltenstein (1984 1986) and Goulde (1985)

allow for government debt In these models saving finances changes in government debt and physical

capital Private and publlc 2ssets are perceived by the households as perfect substitutes The

allocation of saving merely adjusts to the relative demands for funds

Feltenstein (1984 1986) is the only model surveyed which introduces money Government deficits are financed by issuing money and bonds according to an exogenously given rule Money is

demanded by consumers for transaction motives and an exogenously given fraction as a store of value

On the other hand government bonds and physical capital are the vehicles for the intertemporal

transfer of wealth

Summers (1985) and GOlldermiddotSummers (1987) introduce a whole menu of financial assets shy

firm specific equity capital Different assets earn different rates of retum However such rates

are equal up to constant and exogenous sector speCific risk premia Therefore the introduction of

constant exogenous risk premia as helpful as it may be in the context of calibration does not solve

the main issue of the non-optimality of the allocation of saving Also talking about risk premia in a

deterministic context is somewhat unsatisfactory

Pereira (1986b 1987d) also introduces a whole menu of assets private and public bonds and

firm specific equity However all the assets are expected to yield the same rate of return and

therefore perc~jved as perfect substitutes The different asset types allow consideration of

23

exogenOU$~8tUequjty triO dividendlrc~enlion rufes and therefore seve-ral sources of investment

financing bond equity and retained earnings

The nonmiddotcptimalHy of the allocation of saving and the absence or exogenelty of corporate

financial rules is _a reftectlon of the limitations of the determInistic approach Either in a context of

perfect anticipation oi the future prices Of in general within the t$atm of point price

expectations all the papers follow a deterministic approach Under such circumstances consumers

either expect diHerent rales of return (inclusive of risk premium) across assets in which case

they wilt buy only one asset (that with highest rate) Of they expect equal rat~s of relurn in which

case Ihey are indifferent about the asset composition of Iheir portfoliO There is no way of

Iradingmiddotoff rales of return and risks to obtain an optimal interiof solution to the problem of the

allocation of saving

The most advanced contribution in the modelling of saving allocation in a CGE setting is due to

Slemrod (1980 1983) in the context of a static one-period model In his model consumers act

according to a two stage separable decision process They Hrsl decide on how much to save Then

they decide on the allocation of saving according to an Indirect uttlity function dependent on the rates

of ratum and variances offered by the different assets in the eoonomy The sourCe of riskiness in the

ampConory comes from an uncertain marginal product of capital On the other hand aside from

portfolio decisions the res of the economy is insulated from uncertainty

The most complete contribution in terms of the treatment of the corporate financial rules is

FulienonmiddotGordon (1983) In a variant 01 Ihe BailardmiddotFulienon-ShovenmiddotWhelley (1985) model

Fullerton and Gordon have capital intensity and optimal financial decisions Jointly deter~ined

through a two siage process The cosl of financing capital is minimized by trading off the tax

advantages of debt against the epected real bankrupcy coSls inherenl with high debVequity ratios

Given the optimal debtequity ratio the level of inveSlment Is chosen such that at Ihe margin the

24 l

bull

rerurn pn ~uity equas the return on bonds plus an exogenous risk premium

36 Market assumptions equilibrium and expectations

Virtually all of the papers arc characterized by Walrasian market clearing assumptions All

markets are perlect1y competi1ive Atomistic competition among agents 1s assumed even thoughmiddot only

a flnile number of agents is considered Virtually no mark~t disequilibria or price stickiness afe

considered The only exception is ErlichmiddotGinsburghmiddotHeyden (1987) bull In thei model of the Belgium

economy I the _wage rate is fixed in the short-run Therefore in the shOrlwrun desequilibrium in

the labor market will generate endogenous unemployment However in lh$ long-run all prices

Including the wage rata are Ilexible and accordingly ali markets ciear

Given the dynamic nature of behavlor in the economy markelmiddotcfearing prices in each period

depend on expectations of fture prices and on tax variables In the economy There are essentially

two ways at interpreting the economic equilibrium in such a dynamic conte~bull If future prices are

perfectly anticipated (io expectations are self-fulfilling) a perfect foresight equilibrium

prevaHs Then future actions are merely the implementation of current decisions for future

periods However jf ptica expecla110ns are not perfect (Le agents make mistakes w1th re$pect 10

future prices) then a temporary or shortrun equilibrium prevails Markets ciear and clearing

prices depend on fu1ure price expectations Current plans about the future are typically not

precisely implemented They will be revised as more or better information becomes available to the

economic agents See Grandmant (1982) for a comprehensive survey 01 the temporary equilibrium

literature

Wilh the exception of Gould (1985) and Pereira (19S6b 19S7d) all the models surveyed

adopt th~ concept of a perfect foresight equilibrium In turn BaliardmiddotGouldr (1965) considers a

J

2S

flexible am9unt of foresight In terms of the number of years over which price movements are ~

foreseen Pereiras model (1986b 1987b)) is flexible in a somewhat different way in that it can

indude any range of foresight from myopia to perfect foresight The choice between the perfct foresight and lemporary equilibrium is ultimately to be made on

philosophic grounds It can be argued that less than perfect expectations Imply that agents are

irralional in some way (see Auerbach-Kctiikoff (1987 p 10) However the reverse argument can

be made One can question wiether agents are reaHy rationar and perfectly knowledgable about

future prices

Recent evidene of Balird (1987) Ballard-Goulder (19851 Goulder (19851 and Pereira

(1986b 1987d) suggests that the choice in modemng expectations is an important one They show

that the degree of foresight inl0 thc future (ranging from perfect foresight to-myopic expectations)

may have dramatic impacts on the pollcy conclusions of Ihe model Accordingly the best research

strategy may b to design models which are flexible enough 10 allow for different rules regarding the

formation of expectations With the exception of the articles just mentioned sensitivity analysis

bullhave previously not been performed along this dimension

In terms of implementation the two concepts of equilibrium - perfect foresight and temporary

equilibrium have different implications The dimensionality of the equ1ibrium soll1ion algorIthm

is involved Suppose we have a model with ten markets to be run for a period of 50 years Aside

from normalization a perfect foresight model implies computing prices In 500 dimensions while a

-t~mporary equilibrium model requires sorving SO equilibria each in ten dimensions Given that

computational speed often varies with the cube of the number of dimensions the lemporary

equilibrium formulation is potentially strikingly more feasible However Ballard (1987) and

Goulder-Ballard (1985) have devoloped techniques to greatly speed the computation of a perfect

foresight equilibrium

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

j

22

bonds privpte bonds and equity (or simply physical capital installed inmiddot different sectors) the

problem of allocation of saving among assets with potentially different returns arises

The papers surveyed var greatly with respect to l~e extent of their attention to the financial

side of the economy At Clne extreme are the models in ~anardmiddotFuliertonmiddotShoven-Whalley (1985)

Andersson (1987) Ballltld (1983) Ballard-Goulder (1985) Bovenberg (1985 1986) and

Erlich-Gjnsburgh-Heyden C19B which are devoted exclusively to the real side of the economy

In turn Auerbach-KotliKoff (1984 1987) Feltenstein (1984 1986) and Goulde (1985)

allow for government debt In these models saving finances changes in government debt and physical

capital Private and publlc 2ssets are perceived by the households as perfect substitutes The

allocation of saving merely adjusts to the relative demands for funds

Feltenstein (1984 1986) is the only model surveyed which introduces money Government deficits are financed by issuing money and bonds according to an exogenously given rule Money is

demanded by consumers for transaction motives and an exogenously given fraction as a store of value

On the other hand government bonds and physical capital are the vehicles for the intertemporal

transfer of wealth

Summers (1985) and GOlldermiddotSummers (1987) introduce a whole menu of financial assets shy

firm specific equity capital Different assets earn different rates of retum However such rates

are equal up to constant and exogenous sector speCific risk premia Therefore the introduction of

constant exogenous risk premia as helpful as it may be in the context of calibration does not solve

the main issue of the non-optimality of the allocation of saving Also talking about risk premia in a

deterministic context is somewhat unsatisfactory

Pereira (1986b 1987d) also introduces a whole menu of assets private and public bonds and

firm specific equity However all the assets are expected to yield the same rate of return and

therefore perc~jved as perfect substitutes The different asset types allow consideration of

23

exogenOU$~8tUequjty triO dividendlrc~enlion rufes and therefore seve-ral sources of investment

financing bond equity and retained earnings

The nonmiddotcptimalHy of the allocation of saving and the absence or exogenelty of corporate

financial rules is _a reftectlon of the limitations of the determInistic approach Either in a context of

perfect anticipation oi the future prices Of in general within the t$atm of point price

expectations all the papers follow a deterministic approach Under such circumstances consumers

either expect diHerent rales of return (inclusive of risk premium) across assets in which case

they wilt buy only one asset (that with highest rate) Of they expect equal rat~s of relurn in which

case Ihey are indifferent about the asset composition of Iheir portfoliO There is no way of

Iradingmiddotoff rales of return and risks to obtain an optimal interiof solution to the problem of the

allocation of saving

The most advanced contribution in the modelling of saving allocation in a CGE setting is due to

Slemrod (1980 1983) in the context of a static one-period model In his model consumers act

according to a two stage separable decision process They Hrsl decide on how much to save Then

they decide on the allocation of saving according to an Indirect uttlity function dependent on the rates

of ratum and variances offered by the different assets in the eoonomy The sourCe of riskiness in the

ampConory comes from an uncertain marginal product of capital On the other hand aside from

portfolio decisions the res of the economy is insulated from uncertainty

The most complete contribution in terms of the treatment of the corporate financial rules is

FulienonmiddotGordon (1983) In a variant 01 Ihe BailardmiddotFulienon-ShovenmiddotWhelley (1985) model

Fullerton and Gordon have capital intensity and optimal financial decisions Jointly deter~ined

through a two siage process The cosl of financing capital is minimized by trading off the tax

advantages of debt against the epected real bankrupcy coSls inherenl with high debVequity ratios

Given the optimal debtequity ratio the level of inveSlment Is chosen such that at Ihe margin the

24 l

bull

rerurn pn ~uity equas the return on bonds plus an exogenous risk premium

36 Market assumptions equilibrium and expectations

Virtually all of the papers arc characterized by Walrasian market clearing assumptions All

markets are perlect1y competi1ive Atomistic competition among agents 1s assumed even thoughmiddot only

a flnile number of agents is considered Virtually no mark~t disequilibria or price stickiness afe

considered The only exception is ErlichmiddotGinsburghmiddotHeyden (1987) bull In thei model of the Belgium

economy I the _wage rate is fixed in the short-run Therefore in the shOrlwrun desequilibrium in

the labor market will generate endogenous unemployment However in lh$ long-run all prices

Including the wage rata are Ilexible and accordingly ali markets ciear

Given the dynamic nature of behavlor in the economy markelmiddotcfearing prices in each period

depend on expectations of fture prices and on tax variables In the economy There are essentially

two ways at interpreting the economic equilibrium in such a dynamic conte~bull If future prices are

perfectly anticipated (io expectations are self-fulfilling) a perfect foresight equilibrium

prevaHs Then future actions are merely the implementation of current decisions for future

periods However jf ptica expecla110ns are not perfect (Le agents make mistakes w1th re$pect 10

future prices) then a temporary or shortrun equilibrium prevails Markets ciear and clearing

prices depend on fu1ure price expectations Current plans about the future are typically not

precisely implemented They will be revised as more or better information becomes available to the

economic agents See Grandmant (1982) for a comprehensive survey 01 the temporary equilibrium

literature

Wilh the exception of Gould (1985) and Pereira (19S6b 19S7d) all the models surveyed

adopt th~ concept of a perfect foresight equilibrium In turn BaliardmiddotGouldr (1965) considers a

J

2S

flexible am9unt of foresight In terms of the number of years over which price movements are ~

foreseen Pereiras model (1986b 1987b)) is flexible in a somewhat different way in that it can

indude any range of foresight from myopia to perfect foresight The choice between the perfct foresight and lemporary equilibrium is ultimately to be made on

philosophic grounds It can be argued that less than perfect expectations Imply that agents are

irralional in some way (see Auerbach-Kctiikoff (1987 p 10) However the reverse argument can

be made One can question wiether agents are reaHy rationar and perfectly knowledgable about

future prices

Recent evidene of Balird (1987) Ballard-Goulder (19851 Goulder (19851 and Pereira

(1986b 1987d) suggests that the choice in modemng expectations is an important one They show

that the degree of foresight inl0 thc future (ranging from perfect foresight to-myopic expectations)

may have dramatic impacts on the pollcy conclusions of Ihe model Accordingly the best research

strategy may b to design models which are flexible enough 10 allow for different rules regarding the

formation of expectations With the exception of the articles just mentioned sensitivity analysis

bullhave previously not been performed along this dimension

In terms of implementation the two concepts of equilibrium - perfect foresight and temporary

equilibrium have different implications The dimensionality of the equ1ibrium soll1ion algorIthm

is involved Suppose we have a model with ten markets to be run for a period of 50 years Aside

from normalization a perfect foresight model implies computing prices In 500 dimensions while a

-t~mporary equilibrium model requires sorving SO equilibria each in ten dimensions Given that

computational speed often varies with the cube of the number of dimensions the lemporary

equilibrium formulation is potentially strikingly more feasible However Ballard (1987) and

Goulder-Ballard (1985) have devoloped techniques to greatly speed the computation of a perfect

foresight equilibrium

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

23

exogenOU$~8tUequjty triO dividendlrc~enlion rufes and therefore seve-ral sources of investment

financing bond equity and retained earnings

The nonmiddotcptimalHy of the allocation of saving and the absence or exogenelty of corporate

financial rules is _a reftectlon of the limitations of the determInistic approach Either in a context of

perfect anticipation oi the future prices Of in general within the t$atm of point price

expectations all the papers follow a deterministic approach Under such circumstances consumers

either expect diHerent rales of return (inclusive of risk premium) across assets in which case

they wilt buy only one asset (that with highest rate) Of they expect equal rat~s of relurn in which

case Ihey are indifferent about the asset composition of Iheir portfoliO There is no way of

Iradingmiddotoff rales of return and risks to obtain an optimal interiof solution to the problem of the

allocation of saving

The most advanced contribution in the modelling of saving allocation in a CGE setting is due to

Slemrod (1980 1983) in the context of a static one-period model In his model consumers act

according to a two stage separable decision process They Hrsl decide on how much to save Then

they decide on the allocation of saving according to an Indirect uttlity function dependent on the rates

of ratum and variances offered by the different assets in the eoonomy The sourCe of riskiness in the

ampConory comes from an uncertain marginal product of capital On the other hand aside from

portfolio decisions the res of the economy is insulated from uncertainty

The most complete contribution in terms of the treatment of the corporate financial rules is

FulienonmiddotGordon (1983) In a variant 01 Ihe BailardmiddotFulienon-ShovenmiddotWhelley (1985) model

Fullerton and Gordon have capital intensity and optimal financial decisions Jointly deter~ined

through a two siage process The cosl of financing capital is minimized by trading off the tax

advantages of debt against the epected real bankrupcy coSls inherenl with high debVequity ratios

Given the optimal debtequity ratio the level of inveSlment Is chosen such that at Ihe margin the

24 l

bull

rerurn pn ~uity equas the return on bonds plus an exogenous risk premium

36 Market assumptions equilibrium and expectations

Virtually all of the papers arc characterized by Walrasian market clearing assumptions All

markets are perlect1y competi1ive Atomistic competition among agents 1s assumed even thoughmiddot only

a flnile number of agents is considered Virtually no mark~t disequilibria or price stickiness afe

considered The only exception is ErlichmiddotGinsburghmiddotHeyden (1987) bull In thei model of the Belgium

economy I the _wage rate is fixed in the short-run Therefore in the shOrlwrun desequilibrium in

the labor market will generate endogenous unemployment However in lh$ long-run all prices

Including the wage rata are Ilexible and accordingly ali markets ciear

Given the dynamic nature of behavlor in the economy markelmiddotcfearing prices in each period

depend on expectations of fture prices and on tax variables In the economy There are essentially

two ways at interpreting the economic equilibrium in such a dynamic conte~bull If future prices are

perfectly anticipated (io expectations are self-fulfilling) a perfect foresight equilibrium

prevaHs Then future actions are merely the implementation of current decisions for future

periods However jf ptica expecla110ns are not perfect (Le agents make mistakes w1th re$pect 10

future prices) then a temporary or shortrun equilibrium prevails Markets ciear and clearing

prices depend on fu1ure price expectations Current plans about the future are typically not

precisely implemented They will be revised as more or better information becomes available to the

economic agents See Grandmant (1982) for a comprehensive survey 01 the temporary equilibrium

literature

Wilh the exception of Gould (1985) and Pereira (19S6b 19S7d) all the models surveyed

adopt th~ concept of a perfect foresight equilibrium In turn BaliardmiddotGouldr (1965) considers a

J

2S

flexible am9unt of foresight In terms of the number of years over which price movements are ~

foreseen Pereiras model (1986b 1987b)) is flexible in a somewhat different way in that it can

indude any range of foresight from myopia to perfect foresight The choice between the perfct foresight and lemporary equilibrium is ultimately to be made on

philosophic grounds It can be argued that less than perfect expectations Imply that agents are

irralional in some way (see Auerbach-Kctiikoff (1987 p 10) However the reverse argument can

be made One can question wiether agents are reaHy rationar and perfectly knowledgable about

future prices

Recent evidene of Balird (1987) Ballard-Goulder (19851 Goulder (19851 and Pereira

(1986b 1987d) suggests that the choice in modemng expectations is an important one They show

that the degree of foresight inl0 thc future (ranging from perfect foresight to-myopic expectations)

may have dramatic impacts on the pollcy conclusions of Ihe model Accordingly the best research

strategy may b to design models which are flexible enough 10 allow for different rules regarding the

formation of expectations With the exception of the articles just mentioned sensitivity analysis

bullhave previously not been performed along this dimension

In terms of implementation the two concepts of equilibrium - perfect foresight and temporary

equilibrium have different implications The dimensionality of the equ1ibrium soll1ion algorIthm

is involved Suppose we have a model with ten markets to be run for a period of 50 years Aside

from normalization a perfect foresight model implies computing prices In 500 dimensions while a

-t~mporary equilibrium model requires sorving SO equilibria each in ten dimensions Given that

computational speed often varies with the cube of the number of dimensions the lemporary

equilibrium formulation is potentially strikingly more feasible However Ballard (1987) and

Goulder-Ballard (1985) have devoloped techniques to greatly speed the computation of a perfect

foresight equilibrium

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

24 l

bull

rerurn pn ~uity equas the return on bonds plus an exogenous risk premium

36 Market assumptions equilibrium and expectations

Virtually all of the papers arc characterized by Walrasian market clearing assumptions All

markets are perlect1y competi1ive Atomistic competition among agents 1s assumed even thoughmiddot only

a flnile number of agents is considered Virtually no mark~t disequilibria or price stickiness afe

considered The only exception is ErlichmiddotGinsburghmiddotHeyden (1987) bull In thei model of the Belgium

economy I the _wage rate is fixed in the short-run Therefore in the shOrlwrun desequilibrium in

the labor market will generate endogenous unemployment However in lh$ long-run all prices

Including the wage rata are Ilexible and accordingly ali markets ciear

Given the dynamic nature of behavlor in the economy markelmiddotcfearing prices in each period

depend on expectations of fture prices and on tax variables In the economy There are essentially

two ways at interpreting the economic equilibrium in such a dynamic conte~bull If future prices are

perfectly anticipated (io expectations are self-fulfilling) a perfect foresight equilibrium

prevaHs Then future actions are merely the implementation of current decisions for future

periods However jf ptica expecla110ns are not perfect (Le agents make mistakes w1th re$pect 10

future prices) then a temporary or shortrun equilibrium prevails Markets ciear and clearing

prices depend on fu1ure price expectations Current plans about the future are typically not

precisely implemented They will be revised as more or better information becomes available to the

economic agents See Grandmant (1982) for a comprehensive survey 01 the temporary equilibrium

literature

Wilh the exception of Gould (1985) and Pereira (19S6b 19S7d) all the models surveyed

adopt th~ concept of a perfect foresight equilibrium In turn BaliardmiddotGouldr (1965) considers a

J

2S

flexible am9unt of foresight In terms of the number of years over which price movements are ~

foreseen Pereiras model (1986b 1987b)) is flexible in a somewhat different way in that it can

indude any range of foresight from myopia to perfect foresight The choice between the perfct foresight and lemporary equilibrium is ultimately to be made on

philosophic grounds It can be argued that less than perfect expectations Imply that agents are

irralional in some way (see Auerbach-Kctiikoff (1987 p 10) However the reverse argument can

be made One can question wiether agents are reaHy rationar and perfectly knowledgable about

future prices

Recent evidene of Balird (1987) Ballard-Goulder (19851 Goulder (19851 and Pereira

(1986b 1987d) suggests that the choice in modemng expectations is an important one They show

that the degree of foresight inl0 thc future (ranging from perfect foresight to-myopic expectations)

may have dramatic impacts on the pollcy conclusions of Ihe model Accordingly the best research

strategy may b to design models which are flexible enough 10 allow for different rules regarding the

formation of expectations With the exception of the articles just mentioned sensitivity analysis

bullhave previously not been performed along this dimension

In terms of implementation the two concepts of equilibrium - perfect foresight and temporary

equilibrium have different implications The dimensionality of the equ1ibrium soll1ion algorIthm

is involved Suppose we have a model with ten markets to be run for a period of 50 years Aside

from normalization a perfect foresight model implies computing prices In 500 dimensions while a

-t~mporary equilibrium model requires sorving SO equilibria each in ten dimensions Given that

computational speed often varies with the cube of the number of dimensions the lemporary

equilibrium formulation is potentially strikingly more feasible However Ballard (1987) and

Goulder-Ballard (1985) have devoloped techniques to greatly speed the computation of a perfect

foresight equilibrium

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

J

2S

flexible am9unt of foresight In terms of the number of years over which price movements are ~

foreseen Pereiras model (1986b 1987b)) is flexible in a somewhat different way in that it can

indude any range of foresight from myopia to perfect foresight The choice between the perfct foresight and lemporary equilibrium is ultimately to be made on

philosophic grounds It can be argued that less than perfect expectations Imply that agents are

irralional in some way (see Auerbach-Kctiikoff (1987 p 10) However the reverse argument can

be made One can question wiether agents are reaHy rationar and perfectly knowledgable about

future prices

Recent evidene of Balird (1987) Ballard-Goulder (19851 Goulder (19851 and Pereira

(1986b 1987d) suggests that the choice in modemng expectations is an important one They show

that the degree of foresight inl0 thc future (ranging from perfect foresight to-myopic expectations)

may have dramatic impacts on the pollcy conclusions of Ihe model Accordingly the best research

strategy may b to design models which are flexible enough 10 allow for different rules regarding the

formation of expectations With the exception of the articles just mentioned sensitivity analysis

bullhave previously not been performed along this dimension

In terms of implementation the two concepts of equilibrium - perfect foresight and temporary

equilibrium have different implications The dimensionality of the equ1ibrium soll1ion algorIthm

is involved Suppose we have a model with ten markets to be run for a period of 50 years Aside

from normalization a perfect foresight model implies computing prices In 500 dimensions while a

-t~mporary equilibrium model requires sorving SO equilibria each in ten dimensions Given that

computational speed often varies with the cube of the number of dimensions the lemporary

equilibrium formulation is potentially strikingly more feasible However Ballard (1987) and

Goulder-Ballard (1985) have devoloped techniques to greatly speed the computation of a perfect

foresight equilibrium

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

26

j

I

4 Jrnplemenlalion and Issues on policy evaluallon

41 Calibration and equilibrium comparlslon

CGE models at typically parameterized by the use of a calibration procedure Some parameters

are exogenously given However some crucial parameters are determined in such a way that the

model replicates the data for a given base year See MansurmiddotWhalleY 11984) for an eXlensive

discussion of 1~i$ issue

CalibratIon in a dynamic context is generaliy interpreted as requiring two properties First

replication of base year data is required Second the model is parameterized to simulate an

intertemporal balanced growth path when Ihe base policy is maintaineq This Is the approach

followed by Ballard (1983) BallardmiddotGoulder (1985) Goulder (1985) and SummersmiddotGoulde

(1986) It follows the practice of BallardmiddotFuliertonmiddotShovenmiddotWhalley (1985) with their

sequential cquilibrium dynamics

Other authors Auerbach-Kotlikof (1983 1984 1987) Boyenberg (1984 1985 1986)

and Pereira (198Gb 1987d) follow whal we cali a qualitalive calibration The slructural

palametars are exogenously chosen so that lh economy follows a reasonable path into Ihe fulure

ThaI has 10 do wllh the fact thaI given the recursive nature 01 the dynamic economy and aside tom

such structural parameters only iniUa stock values are needed to run these models Given initial

conditions on the stocks of say private wealth capltal and government debt agents will optimize

and Ihereby generate a lirst round of net demands and equilibrium conditions In lurn the

equilibrium prices will determine the evolution of the stock variables into the next perIod

There are several potential problems with calibration in the conlext of dynamic models The

assumption of a steadymiddotstate growth ~ath in the base case can be questioned First while

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

27 I Ibullbull

steadymiddotstaU is a possibity it certainly is not the only meaningfull solution to dynamic models

Even in the case of a perfect foresight equilibrium the model implies an equilibrium path which i may or may not involve colanced growth The model not the modeller should dictate the nature 01 I themiddotbase case path Second in the context of a temporarY equilibrium path a steady state solutlcn is Inol a likely model QutcOn1tl In fact unlessmiddot expectations are stattc short run behavior consistent

with a steady-state evolution will in general not be generated On the other hand if static I expectations are self~fufjili[1g we have in fact a perfect foresight model Third even the base year

replication requirement may cause problems In Ihe cOntexl of temporary equilibrium Any

calibration parameter would be conditional on expectation rules which is probably an undesirable

feature

The nalur of the two-requirement calibration strategy is very muchin the spirit of the bull

traditional design of the comparision of alternative equilibria comparis_ion between a steady-state

base case on one hand and alternative paths including a transition period and a finat sleadyyenstate on

the other hand Pereira (198Gb 1987d) compare different (not necessarily steadystate)

equilibrium paths The arguments against such a procedure are based on the idea that the impact of

policy changes can be observed most easily since all departures from the steadymiddotstate can be

attributed to the altemalive polioy On the other hand the base case so dEfined as a steadymiddotstate is

consist~nl with previous work in a less dynamtc setting and Iherefore allows a common standard

for comparing model results

42 Computation algorithms

We are still al a stage in which basically each author uses a different computational technique

Th development of dynamic models - in parlicular wilh adjustment costs andior perfect foresight

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

bull

28

has corresponded with the decline in the use of fixed point algorithms In -fact given the relative

arge dimensions inevitably involved such algorithms lend to be very inefficient at the best and

chen prohibitively stow See Stone (1985) and Preckel (1965) for a comparative assessment of

different computation techniques Among the models surveyed only Ball1rdFulle(ton~

-ShavenmiddotWhalley (1985) and Feltensteln 1985 use Merrills variant of the fixed point

algorithm 1echnique

AuerbachmiddotKoHikoff (1963 1984 1967) follow a three stage procedure They first compute a

base case steady-state then a revised case steady state and finally transition path for the economy

berveen these two steady-states tn all stages a Gauss-Seidel iterative procedure is used

Ballard (1982) Ballard-Goulder (1965) Goulder (HiSS) and Summers-Goulder (1986)

~

use a method developed by Ballard and Goutder which is similar in many awects to the FairmiddotTaylQr bull

(1983) algorl1hm Short-run equilibria are calculated (using Merrills algorithm) parametric on

nrice expeC~lions The model is then iterated to generate self-fulfilling intertemporaf expectations

and the corresponding perfect foresight equilibrium In a relatively similar approach Andersson

1987 uses a simulation program SIMNON developed In the University of Lund This program

can handle two-paint boundary problems In a fashion consistent with the multiple shooting

algcrlthm (see Lipton-Poterba-Sachs-Eummers (1982))

Boyenbergs computational approach (1985 1985) differs from the other models surveyed in

that he relies heavily on analytical techniques Computations are done by using a dynamic version of

Johansons linearization method Being essentially determined by the continuous time nature of the

I I

f

model thiS linearization model has the disadvantage of confining the analysls to infinltesinal changes

around the base case equilibrium (see Bovenberg (1985) p 53) Pereira (1986b 1987d) uses an optimization algorithm NPSOL - developped by

rGillMurray-Saunders-Wrlght (1986)) This algorithm is used 10 compute the sequence of

I

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

29

Shortmiddotrun temporary equilibrium which makes up the intertemporal equilibrium path The

equilibrium conditions are seen as nonlinear equality constraints in the minimization of an artlcial

objective function The prices are normalized to the unit simplex by an additional linear equality I I 1 bull constraint

II ErlichmiddotGinsburgh-Heyden (1987) follow a unique approach in that they use a variant of the

optimization technique introduced by Negishl (1960) The economic equilibrium can be generated i

as a solution of a mathemallcal program Ihe objective function of which is a weighted sum of the

utility functions of the various agents while tho constraints set consists of the market dearing 1

conditions Ginsburgh-Heyden (1985) have extended Negishis resulllO tho case of downward price

lrigidities I

Finally the paper by Jorgonson-Yun (1984) is also unique in tIlat it is the only I

econometrically estimated model Different blocks for the consumption and production Side of the

-

model are separately estimated to provide the necessary structural parameters i

I The diversity of computation techniques is yet another indicator of the exploratory nature of the

body of literature surveyed in this article

43 Equal yield comparisions

The link between a base case and counteriactual simulations Is usually provided by the concept of

equal yield Shaven-Whaley (1977) discuss the meaning 01 equal yield in a general equilibrium

context when government is not allowed to run defICits Equal yield is interpreted to moan constant

public utility Government base case utility is maintained in the counferfactual experiments With

balanced budgets the concepl of equal yield is unambiguous The new equUibrium prices and the

balanced budge condition will del ermine the minimal expendilure and taxes needed to maintain base

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

30

case publi~ utility Accordingly in general equal yield is inconsistent with equal nominal tax

revenue Some change in tax revenue Is necessary Different tax replacement schemes ate

considered to assure that enough tax revenue is collected This is the approach essentially followed

by most 01 the papers surveyed Only Feltenstein (1985) Goulder (198) and Jorgenson-Yun

(1984) chose not to follow an equal yield strategy

The question is of how to Interprete lila concept of equal yield when the government is alowed to

fUn deflcLts The optimal leve of expenditure for base ease public trliUty can now be taAinanced

bond financed or financed by a mix of bonds and taxation We have several versions of equal yield In

particular equal yield may now be consistent with equal tax revenUE Furthermore some meaSure

ltgtf financial crowding out effects of government deficns can be inferred from the comparislon of the

several equal yield alternatives These issues are extensively discussed ~Pereira (1987b)

44 Price expectations and the dynamic generalization of compensation

Indicators

The sum of equivalent and compensation variations over households is the most widely used

aggregated measure of efficiency gains or losses In the context of $teady~state eomparisions andor

when complete future markets exist andlor perfect foresighl is assumed there are no difficulties

associated with the use of the standard Hicksian indicators In fact correct future prices are known

in these cases

If expectations are not selfmiddot fulfilling andlor future markels are not available a dynamic

generalization is necessary 8allardmiddotGoulder (1985) provide some steps in that direction by

defining an indicator that accomodates periods far into the future when households do not have

perfect foresight but a steady~state prevails On he other hand this issue is more fundamental in

i

[

I

i I I I I [

I I

bullI

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

31

the contex~ of a Gner1 lemporary equilibrium ftamawor~ In such Circumstances Pereira

(1986a) dev~lops a cnamlc generalization which is obtained as the present discounted value of a i i

sequence of short-fUn optimal expenditure functions consistent with a base case expected future I stream of IlWities I

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

32

5 Empirical evidenee from selected policy Issues

Dynamic tax models have generated several important results which escaped Sialic modellers

The following is a seleCpoundd set of issuos whIch stress the marginal benefits of dynam~ modelHng of

economic behavior in innovltlttive areas of analysis The discussion of a consumption tax emphasizes

the benefits of dynamic tusehold behavior and intergenerational aspects The study of the

flliminatlon or the re~intToduction of the investsnemt tax credits is made meaningful by the dynamic

modelling of production betlavor Modelling governmenl in a dynamic conlexts allows the modeller

to study the irrrpact of government deflcits Finally a dynamic framework lets us appreCiate the I

relevance of consumer expectations in terms of the evaluation of policy alternatives

i

i

51 Consumption Tax

t

By Its very nature a consumption tax can not be adequately investigated with a static model bull

Fullerion-Shoven-Whaicy (1983) use Ihe model of the US economy s described in

Ballard-Fullerton-Shoven-Whalley (1935) to evaluate the movement from the currenl US tax Isys1em to a progressive consumption tax Since their modeJ Incorporates a Jaborleisure choice

where leisure is an untaxed commodlty their results reflect the fact that both the consumption tax

and Ihe present system are dslortionary

Concentrating on the rntertemporaf distortions they show that sheltering more saving from lhe

current US income tax could improve econornic efficiency even if marginal tax rate increases are

necessary in order to maintain government fevenue~ At first you have a revenue shortfall

However the economy moves to a higher sustatned growth path and uitimatefy lower tax rates

cangenerate the same revenue path Also wages increase in the long run with this policy The

bull

bullbull ~

33 shyt

i

I

I

present value of welfare gi[lS for a potiey of complete savin9 deduction wilh marginal tate

adjustments (consumption lax) is simulated to be around $500 billion to $600 billion 01 1973

dollars

They also investiga1e th 1ngth of ttme it takes th~ economy to adjust to these policy changes

Roughly they estimate the long run to b thirty years although this figure Is very sensitive to the

specification of the savings elasticity - a crucial parameler in this model

52 Investment T~x Credit

Goulder-$ummers (1 S87) address the impact of eliminating the lnvestmenl Tax Cradit (ITC) on

intersectoral capital formation and on economic growth Their model isYa1ticularly adequate to

addies$ this issu~ in that is postulates a forward looking investment m9we with adjustment costs

They show that the eliminating the ITC causes a reduction in the rale of investment Inveslment is

estimated to fall by about 7 in the short-run and by about 12 in Ihe new long run steady state

In lurn a previous policy anncuncement lowers Ihe overall al1ractiveness of Investment and leads 10

a downward shift of the Investrrent profile On the other hand the combined effect of a revenue

neutral simultaneous efimiraron of the ITC and reduction of the corporate tax rates is a long run

reduction ef the capital Sieck by 35 This pattern suggests that a revenue neutral increament in

both Ihe corporale tax rates and the inveSlment lax credits would be preferable 10 the formula

adopted in Ihe US Tax Reform Act of 1986

Pereira (1987d) addresses the impact of the ITe from Ihe oland point of Ihe curTenllax syslem

under the Tax Reform Act of 1986 Given Ihe concern over the potential depressiVe effects upon

savings and investment of the new tax system in conjunction with deficit reduC1ion mechanisms of

the GrammmiddotRudman type a pertinent question is should Ih lTC be e-introduced In the context

bull

34

-of his mod~1 of the US economy Pereira focuses on the trade-off between the distortion in the

intersectoral allocation of capital induced by the lTC the lower tax revenues it generates and

potential financial crowding-out effects on one hand and the positive effects of lowering the relative

price of new capital goods on the other hand Preliminary results confirm the qualitative results in

Goulder-Summers (1987) suggestting a welfare gain of about 2 of the present value of GNP in

the best scenario of absence of replacement taxes Furthermore preliminary results show an

important time pattern to welfare gains with the average benefits increasing the further you look

into the future This pattern is due to the presence of constraints to intersectoral mobility of capital

and inertia in the adjustment towards the optimal capital levels as reflected by the presence of

adjustment costs

I

I

bullAuerbach-Katlikaff (1gB) in the context of their intergenerational model of the US economy

consider the impact on savings capital formation and interest rates of deficit policies and balanced

budget increases in government consumption They conclude that deficit finance and government

consumption can significa-ntly crowd out capital formation and lower the welfare of future

generations However crowding out from deficit finance is a very slow process because it results

from increased government spending over potentially long horizons Also deficit policies may

substantially influence the longmiddotrun interest rates while leaving the short-run rates essentially

unaffected Finally and in opposition to the central role adjustment costs seem to play in both

53 Financial crowding outeff~cts of government deficits

Goulder-Summers and Pereiras models Auerbach-Kotlikoff suggest that the time path of interest

rates induced by a policy of deficit financing seems to be insensitive to the presence of adjustment

costs

bull

35

54 The role 01 consumer expectatlons

The expectations analysis has uncovered one of the benefits of dynamic modelling

Ballard-Goulder (1985) find that the appeal of adopting a consumption tax depends on the level of

foresight possessed by the consumers Furthermore additional foresight may be welfare worsening

This is a second best type of result This tends 10 occur under policies that lead to capital deepening

and declining rate of return to capital over time To the extent that consumers have more foresight

they will be beller equippod to anticipate the fall in the rental price of capital Consequently if a

saving incentive is enacted people save more with myopia than with perfect foresight Given the

exi~tence of taxes on capita and the discrepancy between the private an~--sccial returns to capital

the greater savings with myopia is beller socially Ballard-Goulder find that the welfare gains

from a consumption tax are reduced by about 10 when we move from myopia to farleet foresight

Therefore the attractivenness of adopting a consumption tax seems fairly [obust across these

foresight specifications

I

bull

36

6 Tbe power and weaknesses 01 dynamic modelling the example 01 corporale

tax Integrallon

The Issue of corporate tax integration allows us to sh~w the stre-ngths and weaknesses or the

dynamic approach Empirical evidence using CGE techniques indicates that depending on the precise

scheme of integration and the 1ax replacement methods integratiOn may have substantial effects In

Ihe work of FuliertonmiddotKingmiddotShoven-Whalley (1980 1981) total integration was found to yield an bull

annual static eHielency gain of $4 to $8 billion in 1973 dollars Simulated dynamic gains may be as

large as $695 billion or abcu 14 of the present value of tulUre consumption and leisure in the

US economy These gains result primarily from interindustry reallocalions of Investment and an

improved inter~emporal allocation of consumption

Mora recent work emphasizes hOw consumers asset portfolio decisions and firms finanCial

decisions affect the efficiency gains from integration Slemrod (1980) focusing on consumers

asset ponfoio deCisions finds static efficiency gains which are about twice -as Iarge as those

repOrted iiy Fulierton-King-ShovenWhalley (1961) FuUrlon-Gurdon (1983) focus on the

firms financial decisions They roporl efficiency gains of 6 of GNP from the elimination of the

tax distor1ions favoring debt However when they eliminate the corporate tax and repiace it with

increaSed persona income taxes addlHonal dls10t1ions are created in the optimal labot~leisure

decisions These distortions tend to dominate the analysis slJ(h that the overall effects of complete

integration are very modest Galpr-LuckmiddotTodr (1986) address simultaneously consumers

asset pOrlfollo decisions and the firms financial decisions They also find very modest efficiency

gains from integralion

The above results are important but may be severely biased There are severa aspects of

economic behavior and modelling crucial for the study of Income tax Integration whiCh have no been

i 37

captured innny of the above papers One aspect is the absence of government deficitsmiddot a balanced

budget is assumed It is true Ihal resource crowding OUI is caplured In these mOdels but financial

crowding out induced by government spending is nOI Second investment is not derived from

optimtztlcn behavior Investment behavior passively accomodates endogenous saving decisions As

a consequence the differential impacts of policies in the incentives to save and to invest are not

captured Aso full capital mobility across secors is assumed with instantaneous capital

adjustmenlS towards optimal levels This assumption rules qut different costs of capital across

seclors and therefore differentiated reactions to tax policies changes Finallyhe modelling of both

gov9rnmerlt deficits and of endogenous real and financial investment decisions necessitates the

~nsideraiion of a dynamilt framework and the introduction of financiaJ assets govemment bonds and

iprivate financial assets A dynamic framework also highlights the efficiency effects of Integration on r

ithe ptimal intertemporal decisions The above models are either sIalic (Slemrods and

GalpermiddotltJckemiddotTode(sj or a dynamic sequ~nce of otherwise Slatic model bullbull I Pereir a (1986b) develops a dynamic applied general equilibrium model bull to study the tbull

efficiency effects of integration on the growth and allocation of investmenl across sectors Special

Iattention is paid to the structural affeelS of resource and financial crowding oul induced by

gove mect spending and deficits and to the real and financial Investment reactions across industries

to both tax integration and flnancial crowding out His mode departs from previous work on income

lax Integraticn and for that matler from most 01 the CGIE literalure for tax policy evaluation in

several direcllons It encompasses an endogenous sequential equilibrium struelure founded on

dynamic behavior with flexible expectations Government deficits are optlmaUy determined

Investment decisions are tward looking and the resull of optimizing behavior Several financial

assetsmiddot public and privatemiddot are considered

Simulation resulls Indicale that the welfare gains from Integration under large deficits are at

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

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112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

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n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

bull

34

-of his mod~1 of the US economy Pereira focuses on the trade-off between the distortion in the

intersectoral allocation of capital induced by the lTC the lower tax revenues it generates and

potential financial crowding-out effects on one hand and the positive effects of lowering the relative

price of new capital goods on the other hand Preliminary results confirm the qualitative results in

Goulder-Summers (1987) suggestting a welfare gain of about 2 of the present value of GNP in

the best scenario of absence of replacement taxes Furthermore preliminary results show an

important time pattern to welfare gains with the average benefits increasing the further you look

into the future This pattern is due to the presence of constraints to intersectoral mobility of capital

and inertia in the adjustment towards the optimal capital levels as reflected by the presence of

adjustment costs

I

I

bullAuerbach-Katlikaff (1gB) in the context of their intergenerational model of the US economy

consider the impact on savings capital formation and interest rates of deficit policies and balanced

budget increases in government consumption They conclude that deficit finance and government

consumption can significa-ntly crowd out capital formation and lower the welfare of future

generations However crowding out from deficit finance is a very slow process because it results

from increased government spending over potentially long horizons Also deficit policies may

substantially influence the longmiddotrun interest rates while leaving the short-run rates essentially

unaffected Finally and in opposition to the central role adjustment costs seem to play in both

53 Financial crowding outeff~cts of government deficits

Goulder-Summers and Pereiras models Auerbach-Kotlikoff suggest that the time path of interest

rates induced by a policy of deficit financing seems to be insensitive to the presence of adjustment

costs

bull

35

54 The role 01 consumer expectatlons

The expectations analysis has uncovered one of the benefits of dynamic modelling

Ballard-Goulder (1985) find that the appeal of adopting a consumption tax depends on the level of

foresight possessed by the consumers Furthermore additional foresight may be welfare worsening

This is a second best type of result This tends 10 occur under policies that lead to capital deepening

and declining rate of return to capital over time To the extent that consumers have more foresight

they will be beller equippod to anticipate the fall in the rental price of capital Consequently if a

saving incentive is enacted people save more with myopia than with perfect foresight Given the

exi~tence of taxes on capita and the discrepancy between the private an~--sccial returns to capital

the greater savings with myopia is beller socially Ballard-Goulder find that the welfare gains

from a consumption tax are reduced by about 10 when we move from myopia to farleet foresight

Therefore the attractivenness of adopting a consumption tax seems fairly [obust across these

foresight specifications

I

bull

36

6 Tbe power and weaknesses 01 dynamic modelling the example 01 corporale

tax Integrallon

The Issue of corporate tax integration allows us to sh~w the stre-ngths and weaknesses or the

dynamic approach Empirical evidence using CGE techniques indicates that depending on the precise

scheme of integration and the 1ax replacement methods integratiOn may have substantial effects In

Ihe work of FuliertonmiddotKingmiddotShoven-Whalley (1980 1981) total integration was found to yield an bull

annual static eHielency gain of $4 to $8 billion in 1973 dollars Simulated dynamic gains may be as

large as $695 billion or abcu 14 of the present value of tulUre consumption and leisure in the

US economy These gains result primarily from interindustry reallocalions of Investment and an

improved inter~emporal allocation of consumption

Mora recent work emphasizes hOw consumers asset portfolio decisions and firms finanCial

decisions affect the efficiency gains from integration Slemrod (1980) focusing on consumers

asset ponfoio deCisions finds static efficiency gains which are about twice -as Iarge as those

repOrted iiy Fulierton-King-ShovenWhalley (1961) FuUrlon-Gurdon (1983) focus on the

firms financial decisions They roporl efficiency gains of 6 of GNP from the elimination of the

tax distor1ions favoring debt However when they eliminate the corporate tax and repiace it with

increaSed persona income taxes addlHonal dls10t1ions are created in the optimal labot~leisure

decisions These distortions tend to dominate the analysis slJ(h that the overall effects of complete

integration are very modest Galpr-LuckmiddotTodr (1986) address simultaneously consumers

asset pOrlfollo decisions and the firms financial decisions They also find very modest efficiency

gains from integralion

The above results are important but may be severely biased There are severa aspects of

economic behavior and modelling crucial for the study of Income tax Integration whiCh have no been

i 37

captured innny of the above papers One aspect is the absence of government deficitsmiddot a balanced

budget is assumed It is true Ihal resource crowding OUI is caplured In these mOdels but financial

crowding out induced by government spending is nOI Second investment is not derived from

optimtztlcn behavior Investment behavior passively accomodates endogenous saving decisions As

a consequence the differential impacts of policies in the incentives to save and to invest are not

captured Aso full capital mobility across secors is assumed with instantaneous capital

adjustmenlS towards optimal levels This assumption rules qut different costs of capital across

seclors and therefore differentiated reactions to tax policies changes Finallyhe modelling of both

gov9rnmerlt deficits and of endogenous real and financial investment decisions necessitates the

~nsideraiion of a dynamilt framework and the introduction of financiaJ assets govemment bonds and

iprivate financial assets A dynamic framework also highlights the efficiency effects of Integration on r

ithe ptimal intertemporal decisions The above models are either sIalic (Slemrods and

GalpermiddotltJckemiddotTode(sj or a dynamic sequ~nce of otherwise Slatic model bullbull I Pereir a (1986b) develops a dynamic applied general equilibrium model bull to study the tbull

efficiency effects of integration on the growth and allocation of investmenl across sectors Special

Iattention is paid to the structural affeelS of resource and financial crowding oul induced by

gove mect spending and deficits and to the real and financial Investment reactions across industries

to both tax integration and flnancial crowding out His mode departs from previous work on income

lax Integraticn and for that matler from most 01 the CGIE literalure for tax policy evaluation in

several direcllons It encompasses an endogenous sequential equilibrium struelure founded on

dynamic behavior with flexible expectations Government deficits are optlmaUy determined

Investment decisions are tward looking and the resull of optimizing behavior Several financial

assetsmiddot public and privatemiddot are considered

Simulation resulls Indicale that the welfare gains from Integration under large deficits are at

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

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51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

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Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

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Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

bull

35

54 The role 01 consumer expectatlons

The expectations analysis has uncovered one of the benefits of dynamic modelling

Ballard-Goulder (1985) find that the appeal of adopting a consumption tax depends on the level of

foresight possessed by the consumers Furthermore additional foresight may be welfare worsening

This is a second best type of result This tends 10 occur under policies that lead to capital deepening

and declining rate of return to capital over time To the extent that consumers have more foresight

they will be beller equippod to anticipate the fall in the rental price of capital Consequently if a

saving incentive is enacted people save more with myopia than with perfect foresight Given the

exi~tence of taxes on capita and the discrepancy between the private an~--sccial returns to capital

the greater savings with myopia is beller socially Ballard-Goulder find that the welfare gains

from a consumption tax are reduced by about 10 when we move from myopia to farleet foresight

Therefore the attractivenness of adopting a consumption tax seems fairly [obust across these

foresight specifications

I

bull

36

6 Tbe power and weaknesses 01 dynamic modelling the example 01 corporale

tax Integrallon

The Issue of corporate tax integration allows us to sh~w the stre-ngths and weaknesses or the

dynamic approach Empirical evidence using CGE techniques indicates that depending on the precise

scheme of integration and the 1ax replacement methods integratiOn may have substantial effects In

Ihe work of FuliertonmiddotKingmiddotShoven-Whalley (1980 1981) total integration was found to yield an bull

annual static eHielency gain of $4 to $8 billion in 1973 dollars Simulated dynamic gains may be as

large as $695 billion or abcu 14 of the present value of tulUre consumption and leisure in the

US economy These gains result primarily from interindustry reallocalions of Investment and an

improved inter~emporal allocation of consumption

Mora recent work emphasizes hOw consumers asset portfolio decisions and firms finanCial

decisions affect the efficiency gains from integration Slemrod (1980) focusing on consumers

asset ponfoio deCisions finds static efficiency gains which are about twice -as Iarge as those

repOrted iiy Fulierton-King-ShovenWhalley (1961) FuUrlon-Gurdon (1983) focus on the

firms financial decisions They roporl efficiency gains of 6 of GNP from the elimination of the

tax distor1ions favoring debt However when they eliminate the corporate tax and repiace it with

increaSed persona income taxes addlHonal dls10t1ions are created in the optimal labot~leisure

decisions These distortions tend to dominate the analysis slJ(h that the overall effects of complete

integration are very modest Galpr-LuckmiddotTodr (1986) address simultaneously consumers

asset pOrlfollo decisions and the firms financial decisions They also find very modest efficiency

gains from integralion

The above results are important but may be severely biased There are severa aspects of

economic behavior and modelling crucial for the study of Income tax Integration whiCh have no been

i 37

captured innny of the above papers One aspect is the absence of government deficitsmiddot a balanced

budget is assumed It is true Ihal resource crowding OUI is caplured In these mOdels but financial

crowding out induced by government spending is nOI Second investment is not derived from

optimtztlcn behavior Investment behavior passively accomodates endogenous saving decisions As

a consequence the differential impacts of policies in the incentives to save and to invest are not

captured Aso full capital mobility across secors is assumed with instantaneous capital

adjustmenlS towards optimal levels This assumption rules qut different costs of capital across

seclors and therefore differentiated reactions to tax policies changes Finallyhe modelling of both

gov9rnmerlt deficits and of endogenous real and financial investment decisions necessitates the

~nsideraiion of a dynamilt framework and the introduction of financiaJ assets govemment bonds and

iprivate financial assets A dynamic framework also highlights the efficiency effects of Integration on r

ithe ptimal intertemporal decisions The above models are either sIalic (Slemrods and

GalpermiddotltJckemiddotTode(sj or a dynamic sequ~nce of otherwise Slatic model bullbull I Pereir a (1986b) develops a dynamic applied general equilibrium model bull to study the tbull

efficiency effects of integration on the growth and allocation of investmenl across sectors Special

Iattention is paid to the structural affeelS of resource and financial crowding oul induced by

gove mect spending and deficits and to the real and financial Investment reactions across industries

to both tax integration and flnancial crowding out His mode departs from previous work on income

lax Integraticn and for that matler from most 01 the CGIE literalure for tax policy evaluation in

several direcllons It encompasses an endogenous sequential equilibrium struelure founded on

dynamic behavior with flexible expectations Government deficits are optlmaUy determined

Investment decisions are tward looking and the resull of optimizing behavior Several financial

assetsmiddot public and privatemiddot are considered

Simulation resulls Indicale that the welfare gains from Integration under large deficits are at

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

I

bull

36

6 Tbe power and weaknesses 01 dynamic modelling the example 01 corporale

tax Integrallon

The Issue of corporate tax integration allows us to sh~w the stre-ngths and weaknesses or the

dynamic approach Empirical evidence using CGE techniques indicates that depending on the precise

scheme of integration and the 1ax replacement methods integratiOn may have substantial effects In

Ihe work of FuliertonmiddotKingmiddotShoven-Whalley (1980 1981) total integration was found to yield an bull

annual static eHielency gain of $4 to $8 billion in 1973 dollars Simulated dynamic gains may be as

large as $695 billion or abcu 14 of the present value of tulUre consumption and leisure in the

US economy These gains result primarily from interindustry reallocalions of Investment and an

improved inter~emporal allocation of consumption

Mora recent work emphasizes hOw consumers asset portfolio decisions and firms finanCial

decisions affect the efficiency gains from integration Slemrod (1980) focusing on consumers

asset ponfoio deCisions finds static efficiency gains which are about twice -as Iarge as those

repOrted iiy Fulierton-King-ShovenWhalley (1961) FuUrlon-Gurdon (1983) focus on the

firms financial decisions They roporl efficiency gains of 6 of GNP from the elimination of the

tax distor1ions favoring debt However when they eliminate the corporate tax and repiace it with

increaSed persona income taxes addlHonal dls10t1ions are created in the optimal labot~leisure

decisions These distortions tend to dominate the analysis slJ(h that the overall effects of complete

integration are very modest Galpr-LuckmiddotTodr (1986) address simultaneously consumers

asset pOrlfollo decisions and the firms financial decisions They also find very modest efficiency

gains from integralion

The above results are important but may be severely biased There are severa aspects of

economic behavior and modelling crucial for the study of Income tax Integration whiCh have no been

i 37

captured innny of the above papers One aspect is the absence of government deficitsmiddot a balanced

budget is assumed It is true Ihal resource crowding OUI is caplured In these mOdels but financial

crowding out induced by government spending is nOI Second investment is not derived from

optimtztlcn behavior Investment behavior passively accomodates endogenous saving decisions As

a consequence the differential impacts of policies in the incentives to save and to invest are not

captured Aso full capital mobility across secors is assumed with instantaneous capital

adjustmenlS towards optimal levels This assumption rules qut different costs of capital across

seclors and therefore differentiated reactions to tax policies changes Finallyhe modelling of both

gov9rnmerlt deficits and of endogenous real and financial investment decisions necessitates the

~nsideraiion of a dynamilt framework and the introduction of financiaJ assets govemment bonds and

iprivate financial assets A dynamic framework also highlights the efficiency effects of Integration on r

ithe ptimal intertemporal decisions The above models are either sIalic (Slemrods and

GalpermiddotltJckemiddotTode(sj or a dynamic sequ~nce of otherwise Slatic model bullbull I Pereir a (1986b) develops a dynamic applied general equilibrium model bull to study the tbull

efficiency effects of integration on the growth and allocation of investmenl across sectors Special

Iattention is paid to the structural affeelS of resource and financial crowding oul induced by

gove mect spending and deficits and to the real and financial Investment reactions across industries

to both tax integration and flnancial crowding out His mode departs from previous work on income

lax Integraticn and for that matler from most 01 the CGIE literalure for tax policy evaluation in

several direcllons It encompasses an endogenous sequential equilibrium struelure founded on

dynamic behavior with flexible expectations Government deficits are optlmaUy determined

Investment decisions are tward looking and the resull of optimizing behavior Several financial

assetsmiddot public and privatemiddot are considered

Simulation resulls Indicale that the welfare gains from Integration under large deficits are at

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

i 37

captured innny of the above papers One aspect is the absence of government deficitsmiddot a balanced

budget is assumed It is true Ihal resource crowding OUI is caplured In these mOdels but financial

crowding out induced by government spending is nOI Second investment is not derived from

optimtztlcn behavior Investment behavior passively accomodates endogenous saving decisions As

a consequence the differential impacts of policies in the incentives to save and to invest are not

captured Aso full capital mobility across secors is assumed with instantaneous capital

adjustmenlS towards optimal levels This assumption rules qut different costs of capital across

seclors and therefore differentiated reactions to tax policies changes Finallyhe modelling of both

gov9rnmerlt deficits and of endogenous real and financial investment decisions necessitates the

~nsideraiion of a dynamilt framework and the introduction of financiaJ assets govemment bonds and

iprivate financial assets A dynamic framework also highlights the efficiency effects of Integration on r

ithe ptimal intertemporal decisions The above models are either sIalic (Slemrods and

GalpermiddotltJckemiddotTode(sj or a dynamic sequ~nce of otherwise Slatic model bullbull I Pereir a (1986b) develops a dynamic applied general equilibrium model bull to study the tbull

efficiency effects of integration on the growth and allocation of investmenl across sectors Special

Iattention is paid to the structural affeelS of resource and financial crowding oul induced by

gove mect spending and deficits and to the real and financial Investment reactions across industries

to both tax integration and flnancial crowding out His mode departs from previous work on income

lax Integraticn and for that matler from most 01 the CGIE literalure for tax policy evaluation in

several direcllons It encompasses an endogenous sequential equilibrium struelure founded on

dynamic behavior with flexible expectations Government deficits are optlmaUy determined

Investment decisions are tward looking and the resull of optimizing behavior Several financial

assetsmiddot public and privatemiddot are considered

Simulation resulls Indicale that the welfare gains from Integration under large deficits are at

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

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51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

32

best lJlodest when measured in terms of the GNP The elimination of the corporate tax and its I replacemenl by increased income lax rates yields long run benefits which are never larger than

2 of the presenl yalue ct telr consumption and leisure onder the previous tax regime and 1

under the current tax regime However the short run w~lare effects of full integration tend 10 be

very low and in in some scenarios even negative This is a flew intertemporar pattern of efficiency Ieffects which reflects an adjJsiment lag in the interindustry investment decisions due to the

existence of costs of adjustment On the of her hand partial integration achieved by excluding I dividends from the corporale lax base syslematically yields negalive efficlencyeffeclS In Ihe long Inm these can be as high as 3 of present value of the future value of consumption and leisure This

is a new second best effect suggesllng Ihat less than complete integration may have perverse I efficiency effects

The dynamic slructure of PerclrBs model snowing for an improved freatment of real investment

declsions and government deficts provides a potential setting for a more accurate measure of the

costs and benefits of inlegration The simulation resullS suggest lower benefits and an intertempora Ibull

pattern of growing benefits

Simulation results also clearly suggest robust negative effects from partial integration How

reliable is this result If dJvidends were deductible from the corporate lax base (as are interest

payments) the preferenlial Ireatmant of debl over equily would be ellminaled Corporallons should

be expecled 10 react by decreasing the optimal deWeqully rallo However corporale financial

gecisions are exogenously set In Pereiras model as in aft of the other models surveyed that go as far

as dealing with the issue

Also withdrawing dividends from Ihe corporate tax base is a way of eliminating Ihe double

taxation of dividends at belh Ihe corporate and personnal Income levels How will the optimal

aliocellon of household saving accomodate that change in Ihe relalive return to corporale equity

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

39 I

t However hOusehold portfolio decisions are exogenouly set in Pereiras model as in all of the other

models surveyeltj go as far as dealing with the issue

IIt is sate to say that the evaluation 01 the benefits 01 partial Integration as defined above are

sevrey underestima1eO Meanwhile the distortionSoenerated by the increase in the marginal

personal tax rates designed to ralse the revenue foregone by the dividend exclusion are fully

aCCltlunted for A good measure of the costs of integration together With a poor evaluation of the

benefils may very well be the reason why partial integration is Simulated 10 yield neg alive

eHikiency gains

On a different vein as most of Ihe model surveyed here Pereiras is a closed economy model It

is legitimate to wonder how the resullS would change If international capital flows were anowed

IThis almost certainly would affect financial crowding out since a good d~al of the capital inflows

could be used to finance public debt

For these various reasons the results should be treated as preliminary but they strongly I suggosl that the dynamic structure provides valuable new insights into the corporate tax integration SSU2

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

40

7 Concluding remarks I I I i

What has been acccmplished Ihis far The success of Ihe CGE research in laelding the challenge

of dynamic modelling can not be denied

I iGreat progress in the modelling of household behavior has been achieved Promising

developm~nts in the modeUing of production and government behavior have also been accomplished

Interesting innovations in the concept of equilibrium and computation techniques were discussed

The policy analysis was greatly enriched by considering transitional effects together with longer

run steadymiddotstate equilibrium paths generalized equal yield strategies accomodating different

financial crowding out impacts and generalized dynamic policy evaluation indicators

An important set of issues have been addresed by the models surveyed Traditional issues

focusing on the effects of capital taxation and consumption taxes have been pursued In terms of

capital taxation for example the intertemporal nature of the issue was enhanced by allowing an

optimal evolution of capital stock in the economy and forward looking optimal investment decisions

In Andersson (1987) GouldermiddotSummers (1987) and Pereira (1986b 1987d) this is coupled

with a improved treatment of several tax provisions like investment tax credits and depreciation

allowances In terms of the consumption taxes developments in the specification of Intertemporal

household behavior the introduction of overlapping generations and the modelling of

intergenerational links via bequest motives as well as a closer attention to demographic evolution

provided a much improved economic setting for the understanding of the several aspects of the

problem

Furthermore dynamic modelling has permitted the addressing of a set of new issues Policy

Issues ranging from dynamic tax policy analysis to the evaluation of exogenous changes in

government expenditures to the impact of different methods of financing government expenditure to

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

4 1

the importance of tinanciai croHrii1g out to 1he relevance of consumorS expectations in tne policy

results have been addressed

Despile all of the progress and in part due to such progress several avenues are wide open for

much neded additional research The following seem to be the most Interesting and promising

areasmiddot First the specincation of liquidity constraints to household behavior may help to obtain a

better understanding of policy chenges that affect directly the interest rates in the economy Second

major attention needs to be paid to the incorporafion of a roraign sector (with open capital markets)

Third some efforts are needed in terms of finding adequate computation techniques now that

dynamic modelling eally makes the curse of dimensionality worse than eVOrbull

The modelling of financial markets is the single most unsatisfactory speet of the dynamic

models surveyed here~ The problems associated with provlding a mo~ adequate treatment of

financial markets and in general endogenous and optimal financial deci$ions bull both at the corporate

and at the personal levelsmiddot have 10 be addressed That necessarily requires Introducing uncertainty

into the models To b adequate this must go well beyond the mere assumption of point expeetalions

with the whole array of modelling implementalion and evaluation problems thai generates

bull I i

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

42

REFERENCES

Abel A and O Blanchard 1983 An Intertemporal Model of Saving and Interest Econometrica

51 pp 675-92

~ Andersson K 1987 Tar-ation of Capital in Sweden - A General Equilibrium Model Ph D

Dissenation UnIversity of Lund Sweder

Auerbach A L KotlikoH 1983 National Savings Economic Welfare and the Structure of

Taxation in M Feldstein ed Behavioral Simulation Methods in Tax Policy- Analysis Chicago

University of Chicago Press

Auerbach A l Kotlikoff 1984 Social Security and the Economics of Demographic-

Transition in H Aaron and G Burtless eds Retirement and Economic Behavior Washington DC

Brookings Institution

Auerbach A L Kotlikoff 1987 Dynamic Fiscal Policy Cambridge Cambridge University

Press

Auerbach A L Kotlikof and J Skinner 1983 The Efficiency Gains from Dynamic Tax

Reform Internatiooaj Economic Reyiew 24 pp 81middot100

Ballard C 1983 Evaluation of the Consumption Tax with Dynamic General Equilibrium

Models Ph D Dissertation Stanford University

Ballard C 1987 Tax Policy and Consumer Foresight A General Equilibrium Simulation

Study Economic Inquiry 25 pp 267-284

Ballard C and L Goulder 1985 Consumption Taxes ForeSight and Welfare a Computatonal

General Equilibrium Analysis in J Piggott and J Whalley eds New Deyelooments in Apolied

General Equilibrium Analysis Cambridge Cambridge University Press

Ballard C D Fullerton J Shoven and J Whalley 1985 A General Equilibrium Model for

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

t 43

Tax Eoliey Eyalua~iQO NBER University or Chicago Press

Borges A (1987) bull A Survey of Compula1ional General Equilibnum Models CECD Economic

Slud~ 8

Bovenbig L 19B3 imperfect Capital Mobility in a Perfect Foresight Herberger Model

Mimea UC Br~eley

Bovenberg L 1984 Capitel Accumulation and Capital Immobility Qmiddottheory In a Dynamic General Equilibrium Framework PhD dissertation University of California at Berkeley t

Bovenberg L 19850 Dynamic General Equilibrium Tax Models with Adjustment Costs in A iManne ed bull 1985 EtQnomrc ECUjilbrium Model Formulation and Solution Mathematical

lProgramming Siudy 23 Arnsterdam NorthmiddotHoliand

Bovenberg L t 1986 Capital Income Taxation in Growing Open Eeondmies Journa of Pubtic

Eamp(omlcs 3t pp 347middot376 IBovenberg L ald W Keller 1981 Dynamics and Nonlinearlties in Applied General

Equilibrium Models Internal Report Mlmiddot81middot208 Department for Statistical Methods CBS bull

Vooiburg The Netherlands

Charnley C 1981 The Welfare Cost of C~pltal income Taxation In a Growing Economy

IJournal of Political ECQnQm~ 89 3 pp 468middot496 I

Charnley C 19810 Efficient Tax Reform in a Dynamic Model of General Equilibrium I Mimeo Yale University I Charnley C 1982 On the Optimal Taxation In Stylized Models 01 Inlartemporal General

Equilibrium Mimeo Yale University I Decaluw B and A Manens 1985 Pays en Oeveloppement at Modeles Calculables OEquilibre

General - Une Revue de al litterature empirique Monographie Sene 9 Volume 3 Centre de

Recherche et Developpemont Economlque Unrslt de Montreal

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

44

bull

I I

I

I

1

Erlich $ V Ginsburgh and L van der Heyden 1987 Wher~ do Real Wage Policies Lead

Belgium bull A General Equilibrium Analysis European Economic Reyiew (forthcoming)

air R and J Taylor 1983 Solution and Maximum Likelihood Estimation of Dynamic

Nonlinear Ratioant Expeclations Models Ecooometrica 51 pp 1169middot1186

Feltenstein A 1984 Money and Bonds In a Disaggregated Ec~nonYin Searl 1-1 J Shoven

Eds Aoolied ~eoeral EqJiliDCiulD tioalYsis Cambridge University Press Cambridge

Feltenstein A 19B6 A Dynamic General Equllibrlu Analysis of Financial Crowding Out

Theory with an Application to Australia Journal of Public Economics 31 No1

Fullerlon D R Gorden 1983 A Reexamination of Tax Distorllons in General Equilibrium

Models in M Feldstein Ed Behayora Simulation Methods in Tax pOlicy Analysis Chicago

University of Chipgo Press

Fvllerlon D J Shaven and J Whalley 1983 Replacing the US Income Tax with a

Progressive Consumption Tax JoulOal of Public ECQnomics 20 pp3middot23

Fullerton D Y Henderson J Shaven 1984 A COmparision of Methodologies in Empirical

General Equilibrium Models of Taxation in Searl H J Shoven Eds ~pQlied Geoaral Jguilibrium

lIoalyss Cambridge University Press Cambridge

Fullerton 0 A King J Shaven and J Whaney 1981 Corporate Tax Integration in the United

Statesmiddot a General Equiiibdufi1 Approach American Economic Review 71 pp~ 677~691

Galper H R Lucke E Tader 1985 Taxation portlor Choice and the Allocation of Capital A

General Equilibrium Approach Mimeo

Gill p W Murray M Saunders M Wright 1986 Users Guide for NPSOL (Version 40) A

Fortran Package for Nonlinear Programming T echnicsl Report SOL 86middot2 Deparlment of

Operations Research Stanford University

Glnsbur~h V and L van der Heyden 1985 General Equilibrium with Wage Rigidities An

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

45

AppJication to Belgium in A Manne ed t Economic EQumprit1m~ Made Formulation and $oJioo

Mathematical Programming Study 23 Amsterdam NorthmiddotHolland ~

Goulet J 1968 1 Adjustrent CO$1S in the Theory o(the Firm Reyiew of EconomiC Studies 35 bull

pp47middot55

Goulder L 1985 Tax-Financed versus BondmiddotFinancedGhanges in Governent Spending

bull Mimeo Harva(d UniversilYmiddot

Goulder l J Shaven and J Whalley 1983 Domestic Tax Policy and the Foreign Sector The

importance of altemative foreign policy formulations to results from a general equilibrium tax

analysis model In ~n methods in Ibe antico of income from caoia1 ed Martin

Feldstein Chicago University of Chicago riSS

Goulder l L Summers 1987 Tax Policy Asset Prices and 3rowtly ~

A General Equilibrium Analysis NBER Working Pper No 212B

Grandmont J 1982 Temporary General Equilibrium Theory Ch 20 in Handbook 01

Mathemalical Eccnornics Vol II NorthmiddotHoliand

Harberger A 1959 The Corporate Income Tax An empirical Appraisal In lax Revision

Comoendjum Voll House Cornmitee on Ways and Means Washington DC Govemment Printing

Office

Harberger A 1962 The Incidence of the Corporate Income Tax JOULn1 of Political

Economy 70 pp 215middot240

Harberger A 1964 Taxation Resource Aliocalrlon and Welfare fn lb Role of Dir bullbulll and

Indjresl Taxes io tbe Fede[al Reserve s~I~Ill Princeton Princeton Unlveresity Press

James J 1985 New Developments in the Applications of General Equilibrium models to

Economic History in Piggott aand Whalley Eds

Jorgenson D and K Yun 1984 Tax Policy and Capital Allocation Harvard Inslitute of

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

bull

I

I f

Economic Research WP 1107

Judd K 1965 ShonmiddotRun Analysis of Fiscal Policy in a Simple Perfect Foresight Model

Journal of poJiHcal 5CCJiW1l pp 298middot319 r

Upton D J Potbc J Sachsa nd L Summers 1982 Multiple Shooting in Rational

Expectations Models fuoometrlc 50 1329middot1333

Manne A ed 1985 fconQrnjc Eoullibrium Model FOrIDujaljQo and Solution Mathematical

Pogrammlng Study 23 Amsterdam NorthmiddotHolland

Manne A 1985 Or the Formulation and Solution 01 Economic Equilibrium Models In A

Manne ed ECQOQlli-Jr~ibmiddotum ~tQdel EQlJulailon and Solution Malhematical Programming

Study 23 Amsterdam NorthmiddotHolland

Mansur A and J Whalley 1984 Numerical Specification of Applied General Equilibrium

Models in Scarf H J Shoven Eds Aoplied General Eouillbrium AnaiysectIsect Cambridge Universily

Press Cambridge

Merrill 0 1972 Applications and Extensions of an Algorithm thaI Computes FixedmiddotPoints of

Cenain Upper Semimiddotcominuou Point to Set Mappings PhD Disserlation Unlvel$ity 01 Michigan

Negishi T 1960 Welfar Economics and Exislence I an Equnlbrlum for a Competitive

Economy MelroeCOOQ11ka 12 92middot97

Pereira A 1985 On the Existence and Uniqueness of Optimal Ou1put Path lor CRTS Firms in

Adjustment Costs Technologies Mimeo Stanford University

Pereira A 1985a Consumer Expectations and Ihe COSI 01 UllUty In an Intertemporat

Framework Mlmeo Stanford University

Pereira A 1985b Corporale Tax Integrallon and Government Deficits A Dynamic General

Equilibrium Anaiysls Mlmeo Stanford University

Pereir A 1987 On Ihe Computation of the Users Costs of Stocks Ecooomi (forthcoming)

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

47

Pereira A bull 1987b Equal Yield Alternatives and Government Oeficlts Mimeof Stanford

University

Pereira A 1987c A Dynamic Applied General ~uHlbrium Model for Tax Policy Evaluation

Comlletamp Docurnent2tion Mimeo University of California San Diego (in progress)

Pereira A 1987d Should the investment Tax Credit be Rei(ltroduced Mlmeo University

of California San Diego (ir progreSs)

Piggott J and J Whalley eds 1985 tJew QeyeQpments in Applied General EQuilibrium

bullenalysjs Cambridge Cambridge University Press

Preckel Pbull 1985 Alternative algorithms for computing economic equilibria In A Manne Ed

Radnor R 19amp3 Equllibrium under Uncertainty In K Arrow M Intrilligaor ods

I ibull

Robinson S 1 g86 Mullisectorai Models of Oeveloping CountrieS a Survey Oivision of

Agricullure and Resources UC Borkeley WP 401

Scarf H 1967 The approximation of fixed points of a continuous mapping ~MM Jouwal of

epplid Mathornallcs 15 pp 1328middot43

Scarf H with T Hansen 1973 00 the Computation of EconomiC Eguilibria New Haven Yale

University Press

Scarf H J Shoven Eds 1984 61l1llied Genera Elujlibrium 6nalyssect Cambridge University

~ Press Cambridge

Shoven J 1976 The Incidence and Efficiency Effects of Taxe on Income from Capital

Jurnal of ramie1 Economy 84 pp 1261-83

Shoven J 1983 Applied General Equilibrium Tax Modemng IMF Slaff PaoerS 30

Shoven J and LB Simon 1986 Share Repurchases and Acquisitions An Analysis of which

Firms Participate NBER Working Paper No 2243

bull

48

IShaven J and J Whalley 1972 ft General Equmbrium Calculation of lhe Effects of

Differential Taxation of Incoma from Capital in the US Jauroe of public Econgmics 1

pp281middot321 (

Shoven J bull and J Whalley 1973 General Equilibrium with Tax$s a computation procedure

and an existence pr00f ReviEhi of Economic Studies 40 pp 475middot490

Shoven J J Whalley 1977 Equal Yield Tax Alternatives A General Equilibrium

Computa~ui0nal Tfchnique J~HJrnal of PUblic EconomIcs 8 pp 211~224 bull

Shaven J J Whalley 1984 Applied GeneralmiddotEquilibrlum MOdels of Taxalion and

International Tr8de An Introduction and Survey Journal of Economic literature 23t pp

1007middot1051

Slemrod J 1980 A General Equilibrium Model of Capital Income Taxation Ph D bullDissertation Harvard Univnrsity

Slemrod J 1983 A General Equilibrium Model of Taxation with Endogenous Financial

Behavior in M Feldstein edbull Behavioral Simulation Methods In Tax Policy Analysis Chicago

UniVerSity of Chicago Press

Stone J 1985 Sequential Optimization and Complementarily Techniques for computing

Economic equilibrium in A Manne Ed

Summers L 1981 Taxation and Corporate Investment a q-Theory Approach BroQkinas

Summers L 1985 Taxation and the Size and ComposHion 01 the Capital Stock An Asset Price

Approach Mlmeo Harvard University

Whalley J 1975 A Geneal Equiloibrium Assessment of the 1973 United Kingdom tax

reform Economica 42 pp 139middot61

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

bull

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1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

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112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA

1JLTIllOS JIQll~)ltG PAPERS PUBLICADOS bull

I

I I

j

112 70 - LUCENA iJiCIIJo ~ IIEnvironrilent Honitoring and Orqanization Structure T (Setellibro 1987)

nI 71 - L~ENA Diogo A Note on the Representation of Information Stxueture (SeteJObro 1987)

nQ 72 - LUCENA D1CgO Envuorment 111)nitoring and Organization

Structure II (Setelilhro 1987)

ril 73 - AlmmE3 Antonio Pais e CAsPAR Yitor bull Tributacao Inoentivos e InvesUlllentos Analise Qualitativa noYellibro 19S7)

n2 74 - liAlltOSA rose Pedro Opt1lllal lIage R1gidity A SUggestedtlthodology to Teet tb Theory and an Application (Outubro 1987)

nI 75 - CABRAL L 11 B Three lIotes on SYJIIlletric Gemes witt itsYJIIlletric Equilibri (NoveJObro 1987)

n2 76 - LUCENlt D10gOTo Search or Not to Search (Fevereiro1967)

nQ 17 - SA Jorge asconcelos euroI A Theory of SynergyB (Fevereiro1987)

n2 76 - VILARES tanuei Jose Os Be IntenaMios IlIIportados ColIIO Factor de Produao (Julho 1987)

nQ 79 - SA J~rge VasCQncel03 e HoY to Copete and Co~unicate in tature Industrial Products_ (aio 1988)

n2 80 - ROIl Rafael Learning and Capacity Expansion in a New larket Under Uncertainty (Fevereiro 1988)

n2 81 PEREIRA Alfredo llarvilo Survey of Dynamic Computational General EquilibriUlll Hodel for Tax Policy Evaluation (Outubro 1987)

Qualquer in ormacao sabre o 1IIorlltlng Papers ja publlcados sera prestada pelo Secretariado de Apoio aos Docentes podendo os ~e3OSf

ser adquirido5 ne Secyo de Vlndas da Faculdade de EconollLia UNL na Travessa Esteviio Pinto Cltpolide - 1000 LISllOA