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John B Shoven

The general-equilibrium model has long been the centerpiece of economic theory, but its development through this century has been frustratingly slow. Despite its formalization by Leon Walras late in the nineteenth century, a formal proof of the existence of an equilibrium of the model was not established until the 1950s. It is surprising that Marshallian competitive general-equilibrium microeconomics developed so fully in the absence of even a proof that prices existed that simultaneously cleared all markets. The breakthrough of the 1950s was disappointing in one sense—despite demonstrating existence, the proofs did not determine the equilibrium set of prices. It took another decade and breakthrough to develop reliable algorithms for computing equilibria. The work of Herbert E. Scarf and Harold W. Kuhn in the middle to late 1960s provided this capability.

Ruud A. de Mooij and Mr. Michael Keen

For the latest thinking about the international financial system, monetary policy, economic development, poverty reduction, and other critical issues, subscribe to Finance & Development (F&D). This lively quarterly magazine brings you in-depth analyses of these and other subjects by the IMF’s own staff as well as by prominent international experts. Articles are written for lay readers who want to enrich their understanding of the workings of the global economy and the policies and activities of the IMF.

Mr. Parthasarathi Shome and Christian Schutte

The cash-flow tax has been proposed as an alternative to the corporate income tax on grounds that it would define the tax base more clearly and more simply in the face of widespread departures from the comprehensive income tax of actual practice. The cash-flow tax, and its variants, would require careful design. Simplicity may prove elusive because of anticipated administrative problems related to tax avoidance and evasion through transfer pricing, to inflation adjustments, and to incompatibility with existing international tax regimes. Thus, the tax remains theoretically attractive but difficult to implement.

International Monetary Fund. External Relations Dept.

Anders Ăslund has been a cheerleader for transition economies, particularly Russia, for the past decade. In a presentation at the Cato Institute on January 17, based on his new book Building Capitalism: The Transformation of the Former Soviet Bloc, Åslund outlined some reasons to be optimistic about the future of many of these economies. Stanley Fischer, then Special Advisor to the IMF’s Managing Director, served as discussant.

International Monetary Fund. External Relations Dept.

This paper analyzes the IMF’s Convention for Settlement of Investment Disputes. In March 1965, the Executive Directors of the IMF approved a Convention for submission to governments, together with a report commenting on the Convention’s principal features. The Convention establishes the International Centre for Settlement of Investment Disputes as an autonomous international institution “to provide facilities for conciliation and arbitration of investment disputes.” It will “provide facilities,” because the Centre will not itself engage in conciliation or arbitration activities.

International Monetary Fund. External Relations Dept.

In early 2006, the Lebanese government outlined an ambitious reform program to reduce the country’s large debt and financial vulnerabilities. The timing was opportune because the economy looked poised for a strong recovery. However, the July 2006 conflict with Israel dashed hopes of high growth and forced the government to adapt its reform strategy to the postconflict environment. Donors endorsed the government’s revised agenda, presented at the Paris III conference on January 25, 2007, and on April 9, the IMF Executive Board approved a $77 million loan to Lebanon in the form of Emergency Post-Conflict Assistance, as part of a concerted international effort to assist the country.

International Monetary Fund. Research Dept.

The IMF Research Bulletin, a quarterly publication, selectively summarizes research and analytical work done by various departments at the IMF, and also provides a listing of research documents and other research-related activities, including conferences and seminars. The Bulletin is intended to serve as a summary guide to research done at the IMF on various topics, and to provide a better perspective on the analytical underpinnings of the IMF’s operational work.

Ms. Era Dabla-Norris and Ms. Aleksandra Zdzienicka

Most countries around the world have rightfully taken a “whatever it takes” approach to combating the COVID-19 pandemic. On the fiscal side, extraordinary and far-reaching tax and spending measures have been implemented to save lives, support individuals and firms, and set the stage for recovery. It is still too early to predict an endgame for this crisis. But once the virus is beaten back and the global recession bottoms out, public finances will have to be put back in order, especially in countries where debt was already high before the pandemic arrived. This will inevitably raise questions about what taxes to increase and which spending to cut, decisions that are politically unpopular.

Mr. Reint Gropp

The current system of corporate taxation in the United States treats debt and equity financing of firms differently. Interest payments, unlike dividends, are deducted from the corporate income tax and, therefore, enjoy a tax advantage. Firms with higher corporate tax rates have an incentive to increase leverage. Although most firms face the same statutory tax rate, effective corporate tax rates may vary greatly because of differences across firms in the ability to shield profits from the corporate tax.1 A firm with higher investment tax credits, accelerated depreciation allowances, or tax loss carryforwards faces lower effective corporate tax rates than an identical firm without these nondebl tax shields.