Foregone Tax Research Articles

Discussion of The LIFO/FIFO Choice: An Asymmetric Information Approach

The paper addresses the LIFO/FIFO choice issue in the context of a signaling model. It offers an explanation of why some firms choose FIFO and others LIFO. In the model the firm manager has private information about firm quality, where quality refers to the distribution of future cash flows and therefore to the likelihood of bankruptcy. Firms with better prospects can signal high quality by choosing FIFO. This, in turn, increases the current market value of good firms, and, since management compensation is at least partially determined by firm value, management is better off. In this way FIFO is a rational choice for the management of good firms even though tax (and, hence, cash-flow) benefits are associated with LIFO. In an incomplete information setting there is always a potential for a deadweight loss whenever some of the players have incentives to withhold their private knowledge-that is, they will not divulge it for free. In this model, the foregone tax benefits of choosing FIFO are a deadweight loss. Low-quality firms are reluctant to disclose their type. Hence, the highquality firms are willing to explore costly options to identify themselves publicly. The specific mechanism by which high-quality firms identify themselves is that they forego the tax benefits associated with LIFO. This, in turn, makes it more likely that the firm will be unable to meet its debt repayment requirements and incur a bankruptcy cost. For a separating equilibrium to exist, FIFO must be more costly for low-quality firms than for high-quality firms. Otherwise, the low-quality firms would mimic the high-quality ones and capture the same benefits.

Health tax policy mismatch.

Prologue: The favorable tax treatment of employer-provided health insurance has had the very beneficial effect of motivating the rapid growth of private insurance coverage. Data from the National Health Care Expenditures Study estimated that by 1977, 883 percent of employees in the United States worked for employers that offered health insurance plans. But the cost of this tax incentive, which is most generous to employed upper-income people, has escalated by many billions during a period when the federal government has squeezed medical spending for the old and poor. These foregone tax revenues now represent the federal government's second largest health program, as the administrations 1986 spending estimates document: Medicare $73 billion; tax expenditures $24 billion; Medicaid $24 billion; veterans medical care system $9 billion; and the National Institutes of Health $5.5 billion. In this essay, Professor Alain Enthoven of the Stanford University Graduate School of Business puts forward a sharply higher estimate of the revenue loss that will result from this favorable tax treatment and then explains why. Enthoven, an economist by training, has provided much of the intellectual lifeblood for the movement toward the use of market principles in health care delivery. But, interestingly, his relationship to the Reagan administration, which believes fervently in market approaches, has been, at best, arms length. For the better part of a decade, Enthoven has been promoting comprehensive medical care delivery reform through the marriage of two ideas: (1) the creation of a network of competitive medical plans which would operate under economic incentives that encourage efficiency and (2) the development of a regulatory framework that insures the operation of these plans on a basis which comports with the best interests of society. The administration has embraced the first idea, but considered the second to be in conflict with its determination to deregulate government. The administration supports the placement of a ceiling on the deductibility of employer contributions to employee health benefits, but the tax revision bill recently approved by the House Ways and Means Committee retains the exemption.

The Individual Housing Account

This paper summarizes the available information about the proposed Individual Housing Account (IHA), a tax‐exempt savings account designed to facilitate the accumulation of the downpayment on a home for would‐be first‐time homebuyers. We review both the limited body of U.S. research and data on a similar Canadian program which has been in existence since 1974. We find little evidence to suggest that the IHA would stimulate homeownership or housing construction to any noticeable extent. It would enable potential buyers to save enough for a downpayment more rapidly than they now can, but this would increase homeownership only during the start‐up period for the program, not in the long run. We also estimate the foregone tax revenues from the program to be in the neighborhood of $2 to $3 billion annually, once the program has reached maturity.

Rent Controls in Ontario: Roofs or Ceilings?

This paper describes the rent control program in Ontario and discusses the consequences of these controls. It indicates that rent controls caused both a small nominal decline and a large real decline in the per unit value of rental apartments, substantially reduced new rental housing starts, generated a rental housing shortage, created a dual market with significant rent differences between the controlled and uncontrolled (new construction) sectors, and imposed large costs on government in the form of foregone tax revenues and increased rental housing subsidies. The paper also indicates some of the political responses to the developing economic effects, such as the imposition of additional land use controls and increased government spending programs to stimulate new rental construction.

Differential impacts of use value taxation on local property tax bases over time

A method for measuring the relative impacts of an agricultural use value tax program on local tax bases is developed and applied to the case of Hawaii. A simulation model is used to reconstruct local tax bases without the program. The model design takes into account the cumulative growth effects of foregone tax bases over time. The rationale for proper accounting of these foregone growth effects is strengthened by the tendency of tax capitalization effects to lessen the impacts and ultimate transfer effects. The relative impacts of the program on SMSA and rural tax bases are measured by comparing effective tax rates with vs. without the program. The relative impacts have been minor over the first decade of the programless than 0.10% for the SMSA and up to about 1.3% for the rural counties. For the future, even with a recently expanded program, the ultimate transfer effects will tend to be moderated by economic growth and capitalization effects. This moderating tendency is stronger for the SMSA, where there may be greater justification for use value taxation, than for rural counties.