Super-normal Returns Research Articles

The Pivotal Role of Capital Gains in Efficient and Progressive Tax Reform

Increased, targeted taxation of capital gains is key to making the personal income tax more progressive, and it can also contribute to a more efficient system. This article assesses a two-tier capital gains tax that would apply a second, higher inclusion rate for gains above a specified threshold. Relative to a general increase in the inclusion rate—widely promoted by tax analysts—a two-tier scheme would focus on high-income, high-wealth taxpayers, forgo limited revenue, and be more publicly acceptable and politically viable. Relative to reforms to the alternative minimum tax (AMT), the two-tier scheme would be simpler, cover more taxpayers, capture more revenue, and conform more closely to the notion that "the rich pay their fair share." The article explains how capital gains are an amalgam of capital and labour inputs, often containing supernormal returns that are an efficient target for increased taxation. The article further details the high concentration of recurrent large capital gains at top income levels and critically assesses arguments commonly made against raising the gains inclusion rate. It also identifies desirable companion measures for a two-tier gains tax—including restoration of income averaging and abolition of the federal 33 percent top tax bracket and the AMT itself. In short, the current 50 percent capital gains deduction serves as a gateway for endless tax-minimizing and economy-distorting stratagems. Closing that gate even partway for those most prone to enter into such planning would be pivotal in making Canada's tax system both more efficient and more progressive.

Hirability and Educational Prestige

Alternative credentials offer a partial solution to the skill gap and student debt crises, supernormal returns for some students, and a tool to support diversity hiring for firms. This paper tests the hypothesis that educational prestige explains hirability better than accreditation. An original questionnaire using repeated measures (n = 454) is investigated to determine the effects of accreditation and prestige on willingness to hire. A combination of descriptive statistics, ordinary least squares (OLS), and linear mixed models (LMM) reveal that prestige explains a larger component of hirability variance than accreditation. Accreditation remains independently important. Alternative credentials from a Fortune 50 learning provider are competitive with a traditional degree. Other high prestige alternative credentials demonstrate job search value, albeit at a lower level. The conclusion includes a discussion on industry and policy moves to improve total market surplus.

HARRY GRUBERT’S EVOLVING VIEWS ON INTERNATIONAL TAX POLICY

Harry Grubert made important contributions to our thinking about international tax policies. He identified the numerous margins on which corporate tax systems could distort behavior in a global economy and estimated the relative costs of these distortions. His views evolved over time from support of worldwide taxation of U.S. multinationals to favoring a territorial system with a minimum tax on super-normal returns and a shift in taxation from the corporate to the shareholder level. His research greatly influenced corporate reforms in the Tax Cuts and Jobs Act of 2017 (TCJA), although he no doubt would have differed with many of the Act’s details.

Profitability of Style based Investment Strategies: Evidence from India

In this paper, we aim to identify profitable investment styles on the Indian stock market by using various combinations of important stock pricing anomalies consisting of. size, value, volume, profitability, earnings surprises, short term and long term prior returns. Using NSE200 stocks, three different investment styles viz. univariate, independent bivariate and conditional bivariate are constructed for the period July 2005-June 2016.Results show that on an absolute return basis, bivariate strategies do not seem to outperform univariate strategies. The unifactor CAPM is able to absorb 42% of the returns owing to the explanatory power of beta. After adjusting for risk using the three factor Fama and French (1993) model, 42% of the alphas are explained. However, additional risk factors from the Carhart (1997) model and Fama and French (2015) model do not provide any incremental explanatory power over the three factor model, recommending the use of the latter as a baseline to evaluate investment strategies in India. The highest supernormal returns of 1.1% per month are obtained from combining attributes and employing the conditional bivariate investment strategy viz.E2L1 (earnings momentum-Liquidity), M2S1 (price momentum-size), E2M3 (earnings momentum-price momentum). The findings are pertinent to portfolio managers, financial regulators and other stakeholders.

The Potential Distributive Effects of the Proposed Destination Based Cash Flow Tax (DBCFT)

The House GOP Blueprint for tax reform is the most ambitious corporate tax reform since the 1930s. It cuts business tax rates and allows immediate expensing of capital outlays. It accomplishes these goals by replacing the current corporate income tax which taxes profits to a destination based cash flow tax that taxes cash flow. The tax is a move from origin or production based to destination or consumption based. As Alan Auerbach said rather than figuring out “how do you measure income...with cash flow you just follow the money.” The cash flow tax is designed to accomplish a couple big goals. First, stop the gaming done by companies like Facebook to reduce their corporate tax burden. Second, encourage equity investment over borrowing. Finally, encourage exports while increasing the tax burden on imports. To put it mildly, the plan has caused quite a reaction. This essay considers the GOP proposals under the lens of whether the new corporate tax will disproportionately harm the lower boundaries. The new corporate income tax is being marketed as more progressive than the current corporate income tax because it will shift the tax from normal returns to supernormal returns, in other words from labor to capital. Since capital tends to be the wealthy; the tax will redistribute from the rich to the poor. In order to examine the progressivity of the proposal, I first discuss the proper comparative baseline for determining progressivity. Since the proposed tax, at first blush, appears to increase the deficit, the primary question is can the current structure ever be progressive. By cutting other social programs or raising the deficit to pay for the tax is not progressive. Then, assuming that the tax could be neutral in costs because rates can change, the essay concludes that the proposed corporate tax still fails short of being considered progressive. The distortions that continue to exist cause too much uncertainty that the distributive effects would benefit anyone but the owners of capital.

Close, But No Cigar

This article examines the economic effects of prizes with implications for the diversity of market positions, especially in cultural fields. Many prizes have three notable features that together yield an emergent reward structure: (1) consumers treat prizes as judgment devices when making purchase decisions, (2) prizes introduce sharp discontinuities between winners and also-rans, and (3) appealing to prize juries requires costly sacrifices of mass audience appeal. When all three conditions obtain, winning a prize is valuable, but seeking it is costly, so trying and failing yields the worst outcome—a logic we characterize as a Tullock lottery. We test the model with analyses of Oscar nominations and Hollywood films from 1985 through 2009. We create an innovative measure of prize-seeking, or “Oscar appeal,” on the basis of similarity to recent nominees in terms of such things as genre, plot keywords, and release date. We then show that Oscar appeal has no effect on profitability. However, this zero-order relationship conceals that returns to strong Oscar appeals are bimodal, with super-normal returns for nominees and large losses for snubs. We then argue that the effect of judgment devices on fields depends on how they structure and refract information.

Multiple Inference and Gender Differences in the Effects of Early Intervention: A Reevaluation of the Abecedarian, Perry Preschool, and Early Training Projects

The view that the returns to educational investments are highest for early childhood interventions is widely held and stems primarily from several influential randomized trials—Abecedarian, Perry, and the Early Training Project—that point to super-normal returns to early interventions. This article presents a de novo analysis of these experiments, focusing on two core issues that have received limited attention in previous analyses: treatment effect heterogeneity by gender and overrejection of the null hypothesis due to multiple inference. To address the latter issue, a statistical framework that combines summary index tests with familywise error rate and false discovery rate corrections is implemented. The first technique reduces the number of tests conducted; the latter two techniques adjust the p values for multiple inference. The primary finding of the reanalysis is that girls garnered substantial short- and long-term benefits from the interventions, but there were no significant long-term benefits for boys. These conclusions, which have appeared ambiguous when using “naive” estimators that fail to adjust for multiple testing, contribute to a growing literature on the emerging female–male academic achievement gap. They also demonstrate that in complex studies where multiple questions are asked of the same data set, it can be important to declare the family of tests under consideration and to either consolidate measures or report adjusted and unadjusted p values.

Infrastructure in the 21st Century Economy Overview and Summary of Methods and Findings

Four objectives were defined for this project's contribution to the Federal nfrastructure Strategy: 1. to answer the question of whether the nation (USA) is under-invested in infrastructure; 2. to gain insight into the mechanism by which infrastructure investment affects economic activity. 3. to resolve the discrepancies in various estimates of infrastructure's economic impacts; 4. to gain insight into which analytical approaches are best suited to answering specific questions about the economic effects of infrastructure. This means... Different methods have been used to answer different questions, using similar or identical data, and the results of these different exercises have been compared to assess how close they are to one another. The use of various econometric methods has been used to control for various statistical problems. A model has been constructed which links the macro and micro consequences of infrastructure, and which provides valuable insights in the impact of infrastructure at both levels of aggregation, as well as insights into the special characteristics of infrastructure capital. The Conclusions... Infrastructure matters - it is an important factor in production, but not as important as private investment (i.e. a small percentage increase in the latter has a more powerful effect on economic growth than does an equal percentage increase in the former). The impression left by some recent studies that infrastructure is merely a pork barrel public expenditure is not supported. However, an increase in infrastructure spending may have little of no effect on output, even though, on average, it matters a lot. The way in which infrastructure is financed matters - when distortionary taxes are used to finance infrastructure investments, losses due to those distortions in the use of private resources must be netted-out against the incremental gains. Rates of return to private and public capital appear to be approximately equal. Thus, there is no significant under-investment in infrastructure. Spillovers of impact from local areas to the nation as a whole appear to be largely absent, suggesting that the principal infrastructure systems have been built up and the main opportunities for super-normal returns in the US may already be exploited.

Uncovering Gender Differences in the Effects of Early Intervention: A Reevaluation of the Abecedarian, Perry Preschool, and Early Training Projects

The view that the returns to public educational investments are highest for early childhood interventions stems primarily from several influential randomized trials - Abecedarian, Perry, and the Early Training Project - that point to super-normal returns to preschool interventions. This paper implements a unified statistical framework to present a de novo analysis of these experiments, focusing on core issues that have received little attention in previous analyses: treatment effect heterogeneity by gender, overrejection of the null hypothesis due to multiple inference, and robustness of the findings to attrition and deviations from the experimental protocol. The primary finding of this reanalysis is that girls garnered substantial short- and long-term benefits from the interventions, particularly in the domain of total years of education. However, there were no significant long-term benefits for boys. These conclusions change little when allowance is made for attrition and possible violations of random assignment.

Franchise Value, Capital Requirements and Closure Rules in a Dynamic Model of Bank Portfolio Management

In a dynamic framework where franchise value is determined endogenously, we show how different sources of rents (underpriced deposit insurance, super-normal returns on loans, and imperfect competition for deposits) affect banks' risk taking behaviour, the probability of default and the value of deposit insurance liability. The model predicts that bank behaviour will depend on the sources of its rents. The paper also analyzes the implications for bank risk taking of current capital requirements and the new framework proposed by the BIS. Bank closure rules also have important implications for risk taking, in particular when shareholders are allowed to replenish capital in the event that asset value falls below the value of desposit liability. In this case the disciplinary effect of the loss of the franchise value disappears and, in general, the value of the deposit insurance liability increases because the bank fails less often but with a large deficit. Capital requirements potentially mitigate the effects generated by the option to re-capitalize on the value of deposit insurance liability.

Some Hypotheses on the Valuation of Stock Warrants

Stock warrants are often portrayed as securities that yield supernormal returns while their counterpart stocks only earn moderate yields. Those returns seem inconsistent with efficient capital markets. A present‐value warrant model is developed in this paper. This model assumes that warrants grow at a rate appropriate to their risk class. The model suggests that warrant values vary directly with growth of the stock and the time remaining to exercise, and vary inversely with the warrant holder's cost of capital.