Tax Policy and the Economy.

• Position: National Bureau of Economic Research conference

The NBER held its Fourteenth Annual Conference on "Tax Policy and the Economy" in Washington on November 2. Organizer James M. Poterba, NBER and MIT, selected these papers for the program:

Brian J. Hall and Jeffrey B. Liebman, NBER and Harvard University, "The Taxation of Executive Compensation"

Douglas A. Shackelford, NBER and University of North Carolina, Chapel Hill, "Stock Market Reaction to Capital Gains Tax Changes: Empirical Evidence from the 1997 and 1998 Tax Acts"

Kathleen McGarry, NBER and University of California, Los Angeles, "Inter Vivos Transfers or Bequests? Estate Taxes and the Timing of Parental Giving"

Austan Goolsbee, NBER and University of Chicago, "Internet Commerce, Tax Sensitivity, and the Generation Gap"

Alan J. Auerbach, NBER and University of California, Berkeley and Philip Oreopoulos, University of California, Berkeley, "Generational Accounting and Immigration in the United States" (NBER Working Paper No. 7041)

Pamela Loprest and Stefanie Schmidt, Urban Institute, and Ann Dryden Witte, NBER and Wellesley College, "Welfare Reform under PRWORA: Aid to Children with Working Families?"

The past 20 years have seen a dramatic increase in the share of executive compensation paid through stock options. Hall and Liebman examine the extent to which tax policy has influenced executive compensation and then discuss the implications of rising stock-based pay for tax policy. After analyzing how changes in various tax rates affect the tax advantages of stock options relative to salary and bonus, the authors conclude that tax changes probably have not played a major role in the dramatic explosion in executive stock option pay since 1980. Rather, the million-dollar rule (which limited the corporate deductibility of nonperformance-related executive compensation to $1 million) has led firms to adjust the composition of their pay away from salary and toward "performance related pay," although the authors' estimates suggest that this substitution was minor. Finally, significant shifting of the timing of option exercises in response to changes in tax rates has not occurred in either of the two tax reforms o f the 1980s. The authors also find that much of the unusually large level of option exercises in 1992 was the result of the rising stock market rather than the change in marginal tax rates.

Shackelford outlines seven necessary conditions for stock prices to be affected by a change in the taxation of long-term capital gains...