Public economics.

• Author: Poterba, James M.
• Position: Program Report

Researchers in the NBER Public Economics Program study many of the core issues that have been at the center of recent national policy debates. While the Public Economics Program is broadly concerned with the economic role of government, an expansive definition that includes some research in virtually every sub-field of economics, two of its most important research themes are the economics of taxation and the analysis of social insurance programs.

Since the last Public Economics Program Report in 2001, the United States has undergone substantial tax reform in the form of the 2003 and 2004 tax bills. Because many of the tax reform provisions that were enacted in 2001 and 2003 are scheduled to expire later this decade, further tax reforms have already been enacted in a sense. Policy debate about the extension of these tax provisions, and about the structure of the tax system more generally, seems very likely to continue through the next few years.

Tax reform has been widely discussed and there have been substantial changes in the last five years. In contrast, Social Security reform has also been widely discussed, but there have been no significant changes in the program's structure. Public programs for retirement income support have been active topics of discussion in many industrialized nations. In the United States, the earnest discussion of Social Security reform began when a Presidential commission suggested several reform proposals in 2001. Since then, various policy analysts and legislators have advanced a range of different proposals for reform. They differ in the role that they envision for the government in providing retirement income, and in their potential effects on the long-run fiscal balance of the Social Security system. Medicare, which portends to become an even more costly entitlement program over the long-term future, has attracted less policy attention than Social Security.

The NBER Public Economics Program includes a very diverse group of researchers. Nearly 120 Faculty Research Fellows and Research Associates claim affiliation with the program, although only half of those researchers cite Public Economics as their primary affiliation. Program affiliates have a long tradition of analyzing tax policies and of studying social insurance programs such as Social Security. They also study a very wide range of other topics, including environmental economics, political economy, and health economics. Program members meet twice each year at program meetings, and again for a variety of workshops during the NBER Summer Institute. In the last four years, there have been eight program meetings and more than twenty Summer Institute group meetings. Since late 2001, program affiliates have disseminated 605 working papers, or more than one sixth of all NBER papers, and published six books and a number of special issues of academic journals.

One recent innovation in the Public Economics group is the creation of several working groups that tackle specific research issues related to various topics in public policy. One such group, which Martin Feldstein and I have co-directed, focuses on the Behavioral Responses to Taxation. Its members are drawn from the U.S. Treasury Department, the Congressional Budget Office, and the Joint Committee on Taxation, as well as from NBER's ranks. This group has met to discuss completed research about, and the research agenda for, the link between tax rates and various dimensions of taxpayer behavior such as labor supply, capital gain realizations, and the reporting of aggregate taxable income. The Working Group has scheduled meetings just before or just after Program Meetings, or during the NBER's Summer Institute, to maximize participation by the NBER affiliates. A second such group directed by NBER Research Associate Douglas Shackelford of the University of North Carolina focuses on Financial Accounting and Taxation. It includes researchers in the fields of accounting, finance, and public finance. Its agenda includes issues at the intersection of public finance and accounting, for example explaining the growing disparities between book and tax income for U.S. corporations and evaluating the impact of various tax reform proposals on accounting earnings and corporate balance sheets.

A brief report such as this cannot do justice to the breadth of research that is carried out by Public Economics Program members while also explaining the substantive contributions of this research. I have therefore decided to focus here on four broad areas: taxation, social insurance programs, political economy, and the economics of the state and local government sector. Because taxation issues are studied exclusively by researchers in the Public Economics group, while Aging, Economic Fluctuations and Growth, and Well-Being of Children Program researchers study some of the other issues (and their research is described in other Program Reports), I will devote more than equal time to the issues related to taxation. I will describe how Program members have approached a variety of topics, and I will briefly summarize their key research findings. This report unfortunately excludes far more research than it includes, and I apologize to the researchers whose work is not mentioned in this summary.

The Economic Effects of Tax Reform

There have been three important federal tax changes in the last five years. The 2001 Economic Growth and Tax Relief Reconciliation Act reduced marginal tax rates under the federal income tax, although budgetary pressures necessitated temporary rather than permanent tax reductions. The 2003 Job Growth and Taxpayer Relief Reconciliation Act reduced marginal tax burdens on dividend income by as much as 20 percentage points for some households, thereby significantly reducing the relative tax burden on dividends relative to corporate retained earnings that generate capital gains. The 2004 tax bill introduced a transitory tax holiday for firms repatriating earnings from foreign subsidiaries, and it created a range of specialized provisions to encourage specific business activities. Researchers in the NBER Public Economics Program have analyzed the economic effects of tax changes similar to those embodied in each of these tax bills. As data on taxpayer response to the tax reforms has become available, they have also provided a rapid evaluation of actual behavioral changes in response to tax rules.

The tax changes of 2001, which were temporary, phased-in gradually, and included an immediate tax rebate as a means of stimulating economic activity, have generated several lines of research on tax policy and...