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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.

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.

International Monetary Fund. External Relations Dept.

What should be the role of the state in economic affairs? This long-standing question has assumed greater prominence as countries have tried to adjust to the forces of globalization and aging populations. The experience of Sweden, which for many years has maintained one of the most extensive welfare states, is of particular interest not only to other industrial countries but also to emerging market and developing countries. The authors of Sweden’s Welfare State: Can the Bumblebee Keep Flying? Michael Keen, Subhash Thakur, Valerie Cerra, and BÁldzs HorvÁth, met with the IMF Survey to discuss how Sweden has managed to sustain a welfare state for so long and the challenges it now faces.

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.

Mr. George A Mackenzie, Mr. Philip R. Gerson, and Mr. David William Harold Orsmond

Abstract

This study examines the composition of fiscal adjustment - tax and expenditure policies and administrative procedures, and some aspects of public enterprise reform - in a sample of eight countries (Bangladesh, Chile, Ghana, India, Mexico, Morocco, Senegal, and Thailand) during a period of fiscal reform (usually 1978-93), to determine whether and to what extent the fiscal reforms fostered growth during the adjustment period.

Ms. Era Dabla-Norris

There is a widespread belief that underground economies arise from high statutory tax rates and excessive, but poorly enforced, government regulation. Whatever their causes, underground economies can impede macroeconomic performance and undermine economic growth. A recent IMF Working Paper, “An Analysis of the Underground Economy and Its Macroeconomic Consequences,” by Era Dabla-Norris and Andrew Feltenstein, explores the interaction between fiscal policy, underground economies, and economic performance.

International Monetary Fund. External Relations Dept.

Discussing the flat tax always generates heated debate—even about its definition. Proponents claim its simplicity and efficiency can be a key to economic success, while critics argue that it has little effect on economic activity and can be unfair.

Mr. Olivier P. Benon, Ms. Katherine Baer, and Mr. Juan Toro R.

Abstract

Many tax administrations have established special systems to monitor their large taxpayers. In the 1950s and 1960s, several countries in the Organization for Economic Cooperation and Development (OECD) introduced special tax audit operations for large corporations. A more recent trend, especially in developing and transition countries, has been to set up full-fledged large taxpayer units that are responsible for most tax administration functions, including taxpayer services, collection, enforcement of tax arrears, and audit. Some developed countries (Australia, the Netherlands, New Zealand, the United Kingdom, and the United States) have followed a similar policy and have reorganized their tax administrations around different types of taxpayers, or taxpayer segments.5 This has resulted in a restructuring of the tax administration from one based on functions (e.g., returns and payment processing, audit, enforcement of arrears, appeals, etc.) to one centered on individuals, small and medium-size businesses, and large corporations.6

Mr. George Kopits

Abstract

The Single European Act of 1987 represents perhaps the most significant step toward European economic integration since the creation of the EC three decades earlier. In accordance with and building upon the initial Treaty of Rome, the Act envisages the removal of remaining barriers to the free movement of commodities and factor inputs, with a view to enhancing competition and efficiency within the Community. Under the authority of the Act, the EC Council of Ministers was expected to approve nearly 300 provisions that would dismantle, by the end of 1992, physical barriers (customs and passport control), technical barriers (regulatory restrictions that affect trade, and financial and real factor flows), and fiscal barriers (border controls involving indirect taxation) among member countries.1 Of these, all except about 50 measures have been adopted a year before the deadline. In addition, by the end of 1991, agreement was reached in Maastricht on the Economic and Monetary Union (EMU) Amendments to the Treaty, mapping out the final stages toward economic integration and eventual adoption of a single currency, largely through fiscal convergence and monetary coordination.

Mr. Olivier P. Benon, Ms. Katherine Baer, and Mr. Juan Toro R.

Abstract

This section summarizes country responses to the LTU survey in several areas, ranging from a country’s main reason for establishing the LTU to the LTU’s organization and functions. The discussion of different aspects of LTUs across countries also highlights IMF guidelines and policy recommendations, where relevant.