Title: Fiscal Policies, Capital Formation, and Capitalism
Abstract: This lecture examines the effects of tax policy and social security retirement benefits on capital accumulation and economic welfare.The paper begins by examining how capital income taxes reduce the real return to savers and then discusses the welfare loss of capital income taxation relative to the alternatives of taxing consumption and labor income.The analysis shows that capital income taxes impose a very substantial dead weight toss even if they do not alter private saving.The first section of the paper also discusses the theory and empirical literature on the effect of capital income taxes on national saving.The second part of the lecture deals with social security retirement benefits.In 1994.the aged members of the U.S. population will receive cash and medical benefits that cost the government $530 billion or $16,000 per person over age 65.The likely impact of these benefits on private saving and the empirical evidence on this subject are then reviewed.The second part of the paper concludes by discussing the welfare loss of unfunded social security benefits and the possibilities for alternative arrangements.A final section discusses the implications of international capital flows for this analysis.As capital flows become more important, particularly in Europe, the response of government policy may.be to compete for foreign capital inflows and to tax domestic savers more heavily.This would lead to a smaller total volume of capital.The sharp decline in the net national saving rate --from more than 8 percent of GOP in the United States in the 1970s to only 4.5 percent in the 1980s and from more than 14 percent of GOP in Europe in the 1970s to 9.9 percent in the 1980s -may not only create lower real incomes and slower growth but may weaken capitalism itself.In the United States, a decade of slow growth has increased protectionist tendencies in international irade and led to a new interest in industhal policies that expand the role of the government in guiding the direction of technology and of private investment.In these ways, the government policies that discourage saving might make the Schumpeterian vision of a shift from private capitalism to a governmentdominated economy more likely.