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Mr. Roger H. Gordon

When the top personal tax rates are above the corporate rate, high income individuals have an incentive to reclassify their earnings as corporate rather than personal income for tax purposes. At least U.S. tax law imposes strict limits on the extent to which employees in publicly traded corporations can engage in such income shifting. However, entrepreneurs setting up new firms can easily reclassify their income for tax purposes. This tax incentive therefore favors entrepreneurial activity. In the United States, these tax incentives were huge during the 1950s and 1960s, though they have been much smaller since then.

Laurence J. Kotlikoff

The combination of large budget deficits among industrial countries and exceptionally high short-term real interest rates has rekindled interest in crowding out and its potential effects on saving, capital formation, and financial variables. This paper describes how fiscal policies that result in economic deficits alter an economy’s saving behavior. Depending on the economy’s size and degree of openness, the changes in domestic savings arising from deficit financing can produce major changes in domestic investment, real interest rates, and real wage rates. Even if pretax returns to capital and labor are unaltered by deficits, because of international capital mobility and the equalizing of factor prices through trade, economic deficits can dramatically lower an economy’s long-run welfare. This paper provides a quantitative sense of how burdensome the “burden of the debt” may be.


This paper is a study of fiscal incentives for household saving. Section I discusses the rationale for and the general features of such incentives, and considers some of the problems that arise in their operation. A detailed consideration of different types of incentive, as applied in various countries, follows in Section II. Section III examines in depth the experience with these types of incentive in three countries—France, the Federal Republic of Germany, and Japan. Section IV contains some concluding remarks.


DEVELOPMENT POLICY has, until recently, been concerned primarily with stimulating economic growth. In light of the widely accepted view that economic growth was a precondition for a more equal distribution of income, little attention was given to the highly unequal income distribution that prevails in the less developed countries. These inequalities, however, are becoming less and less acceptable politically. Concern with the income distributional aspects of development policies has thus acquired new respectability. As Mr. Robert McNamara, President of the World Bank Group, stated at the Annual Meeting of the International Monetary Fund and the International Bank for Reconstruction and Development in 1972: “When the highly privileged are few and the desperately poor are many—and when the gap between them is worsening rather than improving—it is only a question of time before a decisive choice must be made between the political costs of reform and the political risks of rebellion” (McNamara, 1972, p. 26).1 He added that “shifts in the patterns of public expenditure represent one of the most effective techniques a government possesses to improve the conditions of the poor…. Governments can best begin … by initiating surveys on the effects of their current patterns of disbursement…. The Bank will assist in such surveys and, based on them, will help design programs, to be financed by it and others, which will improve the distribution of public services” (McNamara, 1972, p. 28).

Mr. Alan A. Tait and David Morgan

This paper attempts to assess the role of gasoline taxation in selected countries of the Organization for Economic Cooperation and Development (OECD) since the oil price increases of late 1973 and early 1974, with a view to providing some guidance for future tax policy. It is argued that the experience of these countries in 1970–78 indicates that gasoline taxation has generally declined in real terms. Reluctance to use such taxation seems to stem from skepticism about its potential to reduce demand for gasoline, as well as other concerns that higher gasoline taxation would conflict with such stabilization objectives as the control of inflation, equity, growth, and external equilibrium. The tentative conclusion is that the importance of such concerns is often exaggerated; at the macroeconomic level; the costs appear to be more modest than suggested in most public debate.


The paper first addresses the question of the sustainability of debt growth by examining the behavior of taxation implied by fiscal rules that respect a government’s intertemporal budget constraint. Sustainable debt growth may require the tax burden to rise above some socially acceptable level. In this case, whereas drastic remedies may prove ineffective, a more relevant choice concerns the degree of monetary financing of the deficit (as distinct from monetization of the debt), which affects the dynamics of taxation implied by the constraint. Monetary financing is then introduced into a model by Blanchard, and the effects of monetary financing on the interest rate and capital intensity are examined. Finally, some policy implications are considered.

International Monetary Fund. Research Dept.
This paper finds scope for some optimism that the empirical modeling of exchange rates will someday lead to significantly better-than-random explanations. The first part of the paper focuses on the relationships among exchange rates, national price levels, interest rates, and international balances of payments and provides perspectives on some elements of truth about these relationships that are consistent with the past decade of modeling failures. The lessons emphasize the importance of analyzing exchange rates within complete macroeconomic frameworks and of assuming that expectations are formed in ways consistent with the structural models or with information that can be easily extracted from time series of relevant variables. The open issues include the questions of whether it is adequate or appropriate to treat assets as perfect substitutes or, equivalently, to use the uncovered interest rate parity hypothesis. To the extent that efforts are devoted to modeling exchange rates in general equilibrium frameworks that do not treat assets as perfect substitutes, a second open issue is how to distinguish assets and to specify a basis for portfolio preferences that has solid microeconomic foundations.

Indirect taxes are an important element in stabilization tax packages that aim to raise revenue in the short run. This paper evaluates, by using a general equilibrium model, alternative instruments of indirect taxation in middle-income developing countries. It uses data for Thailand as an illustration and examines the effects of these instruments on revenue, efficiency, equity, and international competitiveness. The paper shows that the interaction between taxes and the distortions caused by various policies can be important for revenue and efficiency. It also reveals significant backward shifting and a link between outward-looking supply-side tax policies and trade policies in industrial countries.

Mr. Vito Tanzi

Inflation affects individuals and income classes in many ways—as consumers, taxpayers, wage earners, savers, asset holders, lenders, borrowers, and so forth. Because of this multiplicity of influences, it is difficult, and perhaps impossible, to assess the total economic impact of inflation. For this reason, empirical studies have limited themselves to analyzing the impact of inflation on individuals or income classes in their roles as consumers, savers, or wage earners. This partial approach does not answer the question of whether the total impact of inflation is or is not beneficial to individuals in particular income classes, but it does provide interesting information that can be useful for policy purposes. This paper will follow this partial approach and analyze the impact of inflation on individuals in connection with the tax treatment of interest paid or received in the United States.