Tax Policy and the Economy.

• Position: National Burea of Economic Research conference

The NBER's 12th Annual Conference on "Tax Policy and the Economy," organized by James M. Poterba who directs the NBER's research on taxation, took place in Washington on November 4. As always, the speakers were academic economists and the participants represented a cross section of government departments and agencies, corporations, foundations, and the press. This year the following papers were discussed:

David M. Cutler, NBER and Harvard University, "The Incidence of Cutting Medicare"

Jerry Hausman, NBER and MIT, "Taxation by Telecommunications Regulation" (NBER Working Paper No. 6260)

Caroline Minter Hoxby, NBER and Harvard University, "Tax Incentives for Higher Education"

Jeffrey B. Liebman, NBER and Harvard University, "The Impact of the Earned Income Tax Credit on Incentives and Income Distribution"

Leora Friedberg, NBER and University of California, San Diego, "The Social Security Earnings Test and Labor Supply of Older Men"

Cutler examines how reductions in hospital payments by Medicare affect hospital operations. He looks at two episodes of payment reductions - the late 1980s and the early 1990s - and finds a large difference in the impact of payment reductions in these two time periods. In the 1980s, reduced Medicare payments were offset dollar-for-dollar by increased prices to private insurers. In the 1990s, however, payment reductions result in lower hospital profits, which must ultimately reduce hospital costs. Hospitals have responded to the payment reductions by reducing the number of beds and nurses, and sometimes by closing entirely, but not by reduced acquisition of high-tech equipment.

Hausman analyzes the Congressional legislation which established a program for all U.S. public schools and libraries to receive subsidized service to the Internet. The cost of the program is currently estimated to be $2.25 billion per year, and the legislation directed all users of interstate telephone service to pay for the pro, gram. Using analytical methods from public finance, Hausman estimates the efficiency cost to the economy of the increased taxation of interstate telephone services to be at least $2.36 billion (in addition to the $2.25 billion of tax revenue). The efficiency loss to the economy for every $1 raised to pay for the Internet access discounts thus is an additional $1.05 to $1.25 beyond the money raised for the Internet discounts. This cost to the economy is extraordinarily high compared to other taxes used by the Federal...