Public economics.

• Author: Poterba, James M.
• Position: Economic effects of the Social Security system, taxation, public education, privatization, income and government service

It has been three years since the last report on the NBER Program on Public Economics. During that brief period, substantial federal budget deficits have been replaced by surpluses. There has been a significant tax reform (the Taxpayer Relief Act of 1997) and discussion of Social Security reform has moved from the outskirts to the center of national policy debate. As the questions that attract the most attention in public policy debates have changed, so too have the issues studied by NBER researchers associated with the Program on Public Economics. These researchers have been carrying out important work on a wide range of topics related to taxation, social insurance, and the economic impact of government expenditure programs. This report highlights several strands of this research but, since there have been more than 250 Public Economics working papers during this period, it necessarily excludes some interesting and significant work.

Social Security

The economic effects of the current Social Security system and the potential consequences of modifying that system in the United States and other nations have been active research topics for the past three years. The current Social Security system is a pay-as-you-go, defined-benefit system. A substantial body of NBER research has focused on the consequences of shifting to alternative systems, possibly with greater reliance on a defined-contribution structure. Several studies, using a range of theoretical and computational models, have investigated the efficiency effects of replacing part or all of the current system with a system of individual accounts [WP 5281, 5330, 5413]. Among the related questions that have been studied are: the nature of the transition from the current system to a modified system; the funding of existing but unfunded liabilities; and the length of time needed to reach a new steady state [WP 5761, 5776, 6055, 6149, 6229, 6540]. Some research has also considered the distributional effects of potential Social Security reforms [WP 6428, 6430].

Another topic of interest in both public economics and labor economics is the effect of defined-benefit Social Security programs on labor market behavior. A number of recent studies have explored the impact of Social Security on retirement in the United States [WP 6097, 6534, 6548]. Also, NBER researchers have participated in a major international comparative study of Social Security programs and labor supplied by older workers [WP 6134].

In addition to research directed specifically at the effects of the Social Security system, many studies have looked at the provision of retirement income security. The research findings in these studies provide important background for discussions of reform. Two examples of such research are work on the determinants of household saving [WP 5568, 5571, 5609, 5655, 5667, 6085, 6227] and research on the functioning of annuity markets [WP 6001, 6002, 6525].

In the recent past, there have been major Social Security reforms in Chile, Australia, and a number of other nations. A substantial volume of NBER research has investigated the effects of Social Security reform in these and other nations [WP 5780, 5799, 5811, 6316]. Additional work has focused on the historical development of Social Security in the United States [WP 5949].

Taxation of Individuals and Firms

How taxation affects individual decisions about work, saving, and many other behaviors is one of the central questions in public economics. The impact of corporate and investor taxes on firm behavior is a similarly critical issue. During the last three years, NBER researchers have carried out a wide range of studies on these issues.

One of the most important questions that has arisen in recent discussions of income tax reform is how changing marginal tax rates will affect reported taxable income. Understanding the magnitude of this behavioral response is essential for revenue estimation, and it is also a potentially important determinant of the efficiency costs of income taxation. A number of recent studies [WP 5218, 5370, 6333, 6395, 6576, 6582, 6584] have provided new estimates of the impact of tax rates on taxable income and on the extent to which past experience may provide a guide to the impact of future tax changes.

Another set of studies have described how income taxation affects the labor supply of two-earner couples [WP 5155], the demand for employer-provided health insurance [WP 5147], investment decisions by self-employed individuals [WP 6578], capital gains realization [WP 6399], and human capital accumulation [WP 6462]. The effect of retirement saving programs, such as Individual Retirement Accounts and 401(k) plans, on the net accumulation of assets also has been an active research topic [WP 5287, 5599, 5686, 5736, 5759, 6295].

On the related subject of taxation and saving, one 1997 study [WP 5815] documented the substantial marginal tax rates that were associated with the then-present tax on excess distributions from pension plans. This tax was enacted as part of the Tax Reform Act of 1986; for some taxpayers, it could result in an effective tax rate of more than 90 percent on earned income bequeathed to heirs. The tax was repealed in the Taxpayer Relief Act of 1997, in part as a result of the attention that it received following publication of this study. Other research [WP 6337] also has focused on the behavioral effects of estate taxation.

Studies of taxation usually focus on individual or corporate tax rules, but one study [WP 6260] points out that regulatory policies too may place additional taxes on economic activity. That paper estimates that the Federal Communication Commission's decision to levy a tax on long distance service as a means of financing high school connections to the Internet imposed efficiency costs that were larger than the revenue collected.

Corporate taxation has attracted less policy attention in recent years than individual tax reform, but there has still been a steady flow of new research on the economic effects of corporate income taxation. This work has focused on investment behavior [WP 5189, 5232, 5683] and particularly the...