Economic Review
|
|
| To view an Economic Review article
using a PDF reader, click on the article title. If you do
not have a PDF reader, you can download a reader from this
site. Proposals for fundamental reform of the federal tax code are receiving increased attention in the business press and among economic analysts and policymakers. President Bush has identified tax reform as a top priority, calling for a tax system that is “pro-growth, easy to understand, and fair to all.” Moreover, the President has appointed a commission to consider different approaches to tax reform. One approach might be to improve the current income-based federal tax code, perhaps by broadening the tax base and lowering income-tax rates. However, another approach might be to replace current income taxes altogether with a consumption tax.
Switching the federal tax system from an income tax to a consumption tax could have important macroeconomic effects. Most economists believe that switching to a consumption tax could increase saving and real output per person over the long run, although studies differ on the size of these effects. However, switching to a consumption tax might also require sizable short-run economic adjustments and create challenges for monetary policymakers. Garner analyzes the macroeconomic effects of replacing the current federal tax system with a consumption tax. First, he provides some background on the goals of tax reform and the basic difference between an income tax and a consumption tax. Next, he describes three widely discussed versions of a consumption tax: a national retail sales tax, a value-added tax, and a consumption-type flat tax. Finally, he examines the macroeconomic effects of adopting a consumption tax. All three proposals could raise U.S. output over the long run, but adopting a consumption tax could have sizable transition effects as well. These transition effects could vary depending on which consumption tax was adopted and how monetary policy responded to the reforms. Innovation enhances economic performance. High rates of innovation are associated with high rates of productivity growth, and faster productivity growth leads to higher real wages and improvements in standards of living. Consequently, many local policymakers are eager to encourage higher rates of innovation in their areas. Theoretical and empirical studies of the geography of innovation find that relatively populous regions are the most conducive to innovative activity. Large and densely populated places offer more developed markets for the specialized inputs used in innovation. Populous places also offer innovators greater opportunities to learn from one another. On the surface, these findings seem to offer little hope to smaller, more sparsely populated regions—places that would like to compete for innovative activity and the benefits of a knowledge economy. Are large populations a prerequisite for innovation? Orlando and Verba explore this common perception and find it is not always true. More populous regions dominate in relatively new technological fields, where innovations are more original. But less populous regions can compete in relatively mature technological fields, where innovations are more incremental. This finding should be of interest to research and development professionals—and to policymakers who are seeking ways to enhance regional innovative activity. Public interest in the future structure of the U.S. labor market has been understandably high in recent years, for several reasons. Some types of manufacturing and service jobs are going offshore. The recovery in employment from the 2001 recession has been sluggish. And the quality of job creation has been called into question. Against this backdrop, policymakers, businesses, workers, and students in the Tenth Federal Reserve District are asking difficult questions about the future of jobs in their area. Will local industries increase or decrease employment in the years ahead? What types of workers will be in highest demand? Are future jobs in the area likely to be high paying? Wilkerson looks at the potential impact of expected changes in U.S. job structure on employment in the Tenth District. Specifically, he analyzes the latest national industrial and occupational employment projections made by the U.S. Bureau of Labor Statistics and discusses what the projections mean for states and workers in the region—both in terms of quantity and quality of job growth through 2012. He draws two primary conclusions from the data. First, except in Colorado, the current industrial structures of Tenth District states are less favorable for future job growth than in the nation, although in some cases only slightly so. Second, the prospects for high-quality job growth in several district states may be somewhat lower than in the nation. While high paying jobs are projected to grow faster than low paying jobs across the district, the industrial structures of Kansas, New Mexico, Oklahoma, and Wyoming are not quite as conducive to growth in high paying jobs as in the country as a whole. Back to top Economic Review home
|