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Showing papers on "Capital deepening published in 1981"


Journal ArticleDOI
TL;DR: In this article, the steady state capital stock is inversely related to the rate of inflation, as a result that is directly opposite the usual conclusion that an economy is constructed in which the steady-state capital stock of a firm is positively related to its inflation rate.

841 citations


Posted Content
TL;DR: Auerbach et al. as discussed by the authors examined the impact of capital income taxes on the long-run welfare of a population in a continuous-time life cycle model, and showed that the effect of tax changes on the lifetime utility of a consumer can exceed six years' income in the new steady state.
Abstract: Almost all of the serious economic work on savings decisions within the past decade has relied on some variant of the life cycle hypothesis in which savings arise out of individual choices of an optimum lifetime consumption path. This paper reexamines the incidence and welfare consequences of capital income taxes within a realistic life cycle model. The results suggest that the elimination of capital income taxation would have very substantial economic effects. For example, a complete shift to consumption taxation might raise steady-state output by as much as 18 percent, and consumption by 16 percent. The long-run welfare gain from such a shift would for plausible parameter values exceed $150 billion annually. Stated somewhat differently, shifting to consumption taxation would raise the lifetime utility of the representative consumer by the equivalent of about six years' income in the new steady state. These estimates dwarf estimates of the static welfare cost of taxation, and significantly exceed even extreme previous estimates of the dynamic loss. This study departs from earlier analyses of the effects of taxes on capital income in several respects. Probably the most important difference between this treatment and most preceding ones lies in the assumptions about the interest elasticity of saving. It is shown below that the common two-period formulation of saving decisions yields quite misleading results. A more realistic model of life cycle savings demonstrates that, for a wide variety of plausible parameter values, savings are very interest elastic. This implies that shifting away from capital income taxation would significantly increase capital formation, making possible long-run increases in consumption. Many studies of the welfare effects of capital income taxation have ignored the general equilibrium effects of increased capital formation. In an economy with life cycle savings, there is no presumption that the undistorted growth path corresponds to any sort of social optimum. As Peter Diamond has shown, life cycle savings can lead to a steady-state capital intensity either greater or less than the Golden Rule level. More generally, it is clear that there is no reason to believe that a life cycle economy will maximize any particular intertemporal social welfare function. A fundamental tenet of welfare evaluation is that preexisting distortions must be considered in evaluating the consequences of tax changes. The results presented in this paper take explicit account of the nonoptimal character of the no-tax steady state. This explains in large part why such a sizeable welfare effect of capital taxes is found. In an economy far from the Golden Rule level of capital intensity, there are substantial gains in steady-state consumption achievable through increased capital formation. Section I of the paper examines the aggregate savings function in a continuous-time life cycle framework. The second section clarifies the differences between wage and consumption taxes. An aggregate production function is added to complete the model in the third section. The effects of changes in capital taxes on both steady-state incidence and welfare are considered within a general equilibrium framework. The final section of the paper discusses some implications of the results and suggests areas which appear to warrant further study. *Assistant professor of economics, Massachusetts Institute of Technology, and research analyst, National Bureau of Economic Research. I am grateful to Alan Auerbach, Martin Feldstein, Laurence Kotlikoff, to the participants in the NBER Workshop on Business Taxation, and to the Harvard Public Finance Seminar for useful discussions. James Poterba and James Buchal performed the numerical calculations.

526 citations


Posted Content
TL;DR: In this paper, the authors show that the growth of human capital is both a condition and a consequence of economic growth and that human capital activities involve not only the transmission and embodiment in people of available knowledge, but also the production of new knowledge which is the source of innovation and of technical change which propels all factors of production.
Abstract: Individuals differ in both inherited and acquired abilities, but only the latter differ among countries and time periods. Human capital analysis deals with acquired capabilities which are developed through formal and informal education at school and at home, and through training, experience, and mobility in the labor market. Just as accumulation of personal human capital produces individual economic (income) growth, so do the corresponding social or national aggregates. At the national level, human capital can be viewed as a factor of production coordinate with physical capital. This implies that its contribution to growth is greater the larger the volume of physical capital and vice versa. The framework of an aggregate production function shows also that the growth of human capital is both a condition and a consequence of economic growth. Human capital activities involve not merely the transmission and embodiment in people of available knowledge, but also the production of new knowledge which is the source of innovation and of technical change which propels all factors of production. This latter function of human capital generates worldwide economic growth regardless of its initial geographic locus. Contrary to Malthus, economic growth has not been eliminated by population growth. Indeed, spatial and temporal patterns of the "demographic transition" appear to be congruent with economic growth. Human capital is a link which enters both the causes and effects of these economic-demographic changes.

265 citations


Journal ArticleDOI
01 Jan 1981
TL;DR: In this paper, the authors argue that the slowdown in labor productivity growth that has occurred since 1968 and particularly since 1973 has probably been caused by a decline in the services of capital and labor relative to the measured quantities of these inputs.
Abstract: This paper argues that the slowdown in labor productivity growth that has occurred since 1968 and particularly since 1973 has probably been caused by a decline in the services of capital and labor relative to the measured quantities of these inputs. There is enough suggestive evidence of a decrease in effective labor input relative to measured labor hours to attribute about one-seventh of the productivity growth decline to this source. These effects have been concentrated outside the main manufacturing and industrial sectors. The most important cause of the growth slowdown in recent years seems to be a decline in the services of capital, caused by obsolescence and by the diversion of some part of capital spending to saving energy or product conversion. According to the model in this paper, conventional estimates based on the measured capital stock overstated the rate of total factor productivity growth through the mid-1960s, and the steady-state productivity growth rate of the US economy is lower than has been thought. Thus some part of the recent productivity slow-down is simply a return to the long-run steady-state path. An implication of this paper is that investment may do more to improve productivity growth than a coventional analysismore » predicts. There is an important qualification to this conclusion. We will gain little by adding substantially to the growth rate of gross output if we add little to output net of economic depreciation. The payoff to investment will be exceptionally large provided that new capital can avoid the problem of obsolescence that slowed productivity during the past decade. 64 references, 6 tables.« less

179 citations


Journal ArticleDOI

98 citations


Journal ArticleDOI
TL;DR: In this paper, the authors constructed estimates of real output, real input, and total factor productivity for South Korea for the period 1960-1973 and found that the average annual growth rates were 9.7, 5.5, and 41% higher than the major developed countries.

42 citations



Journal ArticleDOI
TL;DR: In this article, Melichar compared estimates of capital gains in agriculture to the returns earned by productive assets in agriculture and concluded that both recent real capital gains and those of 1954-67 are, in a sense, fully explained by the growth exhibited by the current return to assets.
Abstract: In the December 1979 issue of this Journal, Melichar compares estimates of capital gains in agriculture to the returns earned by productive assets in agriculture. As a result of his analysis, which was based on data from the balance sheet calculations of Evans, Melichar concludes: "It thus appears that both recent real capital gains and those of 1954-67 are, in a sense, fully explained by the growth exhibited by the current return to assets" (p. 1090). These findings have special significance at a time when the "conventional wisdom" of the profession seems to be suggesting that recent land value increases are based on speculative forces rather than asset earnings. Melichar shows that when asset earnings are expected to grow then, "a significant portion of the total return to farm real estate necessarily takes the form of real capital gains" (p. 1091). Melichar's analysis is based upon an asset valuation model that has as a key assumption the constant growth rate of earnings. The purpose of this comment is to extend the description of the model used by Melichar and thereby suggest some further tests of its applicability to agriculture.

24 citations


Journal ArticleDOI
01 Aug 1981-Futures
TL;DR: In this article, the conditions encouraging innovation are formulated in a contingency theory of changes in capital values, changes which occur as the economic influence bestowed by owning production facilities moves from one sector to another.

23 citations



ReportDOI
TL;DR: This article examined the lock-in effect induced by the differential tax treatment of long-term and short-term gains and concluded that the holding period distinction is not very effective in deterring speculation and does not increase government revenues.
Abstract: United States tax law distinguishes between short-term and long-term capital gains. By taxing long-term gains at a lower rate the law creates an incentive for investors to postpone the realization of short-term gains. This study examines the lock-in effect induced by the differential tax treatment of long- and short-term gains. Analysis of data on corporate stock transactions from 1973 suggests that the lock-in effect is large and, thus, causes investors to alter their investment portfolios. The existence of such an effect is inefficient and results in a reduction in capital market efficiency. The inefficiency might be justified if there were convincing reasons which supported the existence of the holding period distinction. It is commonly argued, for instance, that eliminating the distinction would encourage short-term speculation at the expense of long-term commitment to capital. It is also claimed that this would result in a loss of revenue to the government. This study relies on IRS data and simulations using the NBER-TAXSIM file to examine the validity of these arguments. The results of this study suggest that the holding period distinction is not very effective in deterring speculation and does not increase government revenues; in fact, it may decrease them.


ReportDOI
TL;DR: This article developed a general equilibrium two country, two commodity dynamic simulation model of international trade in commodities and financial claims, which generalizes the Heckscher-Ohlin static theory of trade by incorporating costs of quickly adjusting levels of capital stocks in particular industries; i.e., capital mobility in the short run is permitted, but at a price.
Abstract: This paper develops a general equilibrium two country, two commodity dynamic simulation model of international trade in commodities and financial claims. The model generalizes the Heckscher-Ohlin static theory of trade by incorporating costs of quickly adjusting levels of capital stocks in particular industries; i.e., capital mobility in the short run is permitted, but at a price. The model predicts Heckscher-Ohlin relationships, including factor price equalization, in the long-run, but not during the economy's transition path to its ultimate steady-state. An interesting feature of the model is that it provides a determinate solution to the long-run inter- national allocation of the world's capital stock. This is true despite the fact that the Rybchinski-theorem holds in the long-run. The simulation model of international trade with costly capital stock adjustment appears capable of explaining many features of the patterns of factor price equalization, international investment, and changes in comparative advantage that have characterized the post-war period.

Book ChapterDOI
01 Jan 1981
TL;DR: In the U.S., capital formation in the form of tangible assets dropped precipitously after the cyclical peak in economic activity in 1973, and economic growth has slowed measurably as mentioned in this paper.
Abstract: Rapid growth of the U.S. economy during the postwar period has been sustained by the highest rate of capital formation in U.S. economic history. The postwar performance of the U.S. economy is all the more remarkable in view of the experience of the 1930s, when growth was negligible and the rate of capital formation was severely depressed. Capital formation in the form of tangible assets dropped precipitously after the cyclical peak in economic activity in 1973, and economic growth has slowed measurably. The revival of capital formation is clearly the key to reestablishment of postwar trends in economic growth in the United States.


Journal ArticleDOI
TL;DR: In this article, the authors correct the models for these errors and offer some further thoughts on the assessment of the value of farmland capital gains, including tax and inflation in their models, which leads to an overestimation of the gains of about 5%.
Abstract: Plaxico and Kletke (PK) presented three alternative models for valuing farmland capital gains. Their first model assessed the present value of anticipated capital gains, assuming that they have value only when the asset is sold. Their second model viewed the value of unrealized capital gains as equivalent to a tax-deferred income stream with the tax being paid at capital gains rates either when the property is sold or at the end of the planning horizon. Their third model assessed the value of the capital gains as an equity base for further credit. Dunford has criticized PK's formulations, especially their second model. However, his alternative model perpetuates several errors made by PK. Other errors made by PK led them to an important conclusion about tax rate effects, which conflicts with conventional wisdom. In this comment we correct the models for these errors and offer some further thoughts on the assessment of the value of farmland capital gains. Dunford correctly comments that, "because the capital gains on the farmland are not actually realized until year n, it is necessary to borrow for additional investments." The value of unrealized capital gains will depend on how the increased equity base is used in borrowing more funds and how the borrowed funds are invested. There are two possibilities. One is that each year's capital gain is used as a basis for a one-year investment. Second, the gain can be the basis of an investment lasting for the whole planning horizon. The latter is equivalent to using the total accumulated value of capital gains each year as an equity base for an investment lasting one year. These two possibilities conform to Dunford's equations (2') and (3), respectively, equation (3) being identical to PK's third model. Since the first of these alternatives appears distinctly inferior, we concentrate on the latter. What these authors have failed to note is that it is only possible to use an unrealized capital gain as an equity base for an investment in periods after the gain occurs. All the models suggested by PK and Dunford for valuing unrealized capital gains imply that the farmland owner can borrow at the start of each year against the expected capital gain in that year. This is clearly not tenable and leads to an overestimation of the gains of about 5%. PK err further in the way in which they include tax and inflation in their models. The present value of any future cash sum can be calculated either by discounting the nominal sum with a nominal discount rate to year 0, or by discounting the real value, measured in year 0 dollars, of the cash sum by the real discount rate. Both methods necessarily lead to the same present value. For example, a future sum S,, when discounted at a nominal rate N, has a present value


Journal ArticleDOI
TL;DR: The authors showed the potential importance of human resource development in explaining this residual when he made estimates of investments in education for the period 1900 to 1957 and stated that educational capital was clearly an important element in production and that it had risen at a much faster rate than reproducible non-human wealth.
Abstract: Economists have known for some time that increases in the amounts of capital and labour cannot explain all of the growth of output (Kendrick, 1961, 1976). Schultz showed the potential importance of human resource development in explaining this residual when he made estimates of investments in education for the period 1900 to 1957. He stated that educational capital was clearly an important element in production and that it had risen at a much faster rate than reproducible non‐human wealth (Schultz, 1960, 1962).

Journal ArticleDOI
TL;DR: In this paper, the authors explore the opportunities which may exist for increasing the extent to which the United Kingdom invests in capital assets, with the aim of increasing national economic growth, and some apparent defects in companies' existing investment procedures are highlighted.
Abstract: This paper explores the opportunities which may exist for increasing the extent to which the United Kingdom invests in capital assets, with the aim of increasing national economic growth. A number of factors thought to be relevant are examined and some apparent defects in companies' existing investment procedures are highlighted. It is suggested that a possible national strategy for the next few years might be an attempt to stimulate increased labour productivity and increased investment simultaneously. The paper tries to give some indication of the results which might be achieved if such a policy were successful. (It is assumed that a higher rate of economic growth would be desirable, and the paper does not enter into a discussion of whether non-quantifiable factors, e.g. the quality of life, are more important. This does not mean that such factors can be ignored in practice, however, and they may—quite rightly—restrain what could otherwise be done.)


Journal ArticleDOI
TL;DR: In this paper, the analysis of constant capital as a social relation is presented and the relationship between constant capital and the social divi sion of labor is investigated, based on which the theory of the deterministic falling rate of profit must be rejected.



Journal ArticleDOI
TL;DR: The authors found that companies are waiting until two things happen to take advantage of the new incentives from Washington: the economy has to start growing again, and companies' large excess plant capacity has to dry up.
Abstract: A few heads must be shaking in Washington, D.C. After giving U.S. chemical and other industries a Whitman's Sampler-sized box of tax sweeteners to encourage job-creating investment, the government is being greeted with very modest gains in capital spending plans for 1982. It isn't quite so illogical as it looks, however. Companies have universally praised the new incentives from Washington but are waiting until two things happen to take advantage of them. The economy has to start growing again, and companies' large excess plant capacity has to dry up. Since both of these developments look somewhat distant at this midrecessionary moment, companies are keeping a decidedly light hand on the spending button. C&EN's annual survey of 17 leading basic chemical companies finds that, on average, ...


Posted Content
TL;DR: In this paper, the authors show that incomplete deductibility of depreciation reinforces the distortions in the equilibrium growth path brought about by an ideal capital income tax, and that the tax law is able to drive wedges both between the rate of time preference and the market rate of interest, and between the latter and the marginal productivity of capital.
Abstract: The results indicated in Table 1 show that incomplete depreciation allowances reinforce the distortions in the equilibrium growth path brought about by an ideal capital income tax. A reduction in the deductible share of economic depreciation, like an increase in the tax rate, raises the current level of consumption, but reduces the steady state levels of consumption and capital per efficiency unit of labour. The reason for these distortions is that the tax law is able to drive wedges both between the rate of time preference and the market rate of interest, and between the latter and the marginal productivity of capital. The first wedge is created through capital income taxation as such and its size is directly related to the tax rate. The second wedge is created by the incomplete deductibility of depreciation. Its size is directly related to the tax rate and inversely to the deductible share of depreciation. For the distortion in the growth path of the economy it is the sum of the two wedges that counts. Therefore it is plausible that incomplete depreciation allowances reinforce the effects of capital income taxation. Knowing the determinants of the two wedges one can easily derive the influence of a tax reform on the marginal productivity of capital, the market rate of interest and the rate of time preference (cf. Table 2). In the short run, the system of these three interest rates is anchored by the marginal productivity of capital, and hence any measure that widens a wedge is translated into a reduction in the rate or those rates below the wedge. In the long run the system is anchored by the rate of time preference and an increase in the width of a wedge is translated into an increase in those rates or that rate above this wedge.