1. Recent Developments Andrew Mason January 21, 2006

2. Recent Developments Private consumption allocation Intra-household transfers Asset-based reallocations

3. Private consumption allocation Education: regression method Health: regression method Other: ad hoc equivalence scale Discussion: Experience of teams and suggestions for improvements.

4. Intra-household transfers Governing principles –Intra-household transfers are directly from individuals with “surplus” disposable income to individuals with deficits. –After all consumption needs are met, residual surplus is transferred to the household head and saved. –Owner-occupied housing and consumer durables are owned by the head; hence, consumption of these services by non-heads is matched by a transfer from the head.

5. Definition of Surplus Disposable income less current consumption Disposable income = labor income + net public cash transfers + net inter-household transfers; Current consumption = consumption less value of consumption of durables and owner- occupied housing. Surplus if positive; deficit if negative.

6. Transfer “Policy” Each surplus household member pays the same household-specific “tax rate” which may not exceed 1. If the total household deficit exceeds the total household surplus, the difference is financed through a transfer from the household head (out of asset income or dis-saving if asset income is insufficient).

7. Sector-specific Transfers For each sector, the transfer inflow is proportional to current consumption in that sector Results are intra-household transfers for –Education –Health –Owner-occupied housing and durables –Other consumption –Saving

8. Explanation of Saving Inflows: Flows from household members to household heads that are saved. Difference between household saving and flow should equal saving out of the head’s personal income. Outflows:

9. Details Description of method and stata program available on the website: Documents/Private Transfers

13. Asset-based Reallocations Terminology –Asset-based reallocations Capital-based reallocations Credit-based reallocations –Treatment of land and other non-financial assets Previously included with credit Propose that they be included with capital

14. Public Asset-based Reallocations Public capital-based reallocations: investment in schools, highways, ports, communication systems, etc. Public credit-based reallocations: accumulation of public credit (debt)

15. Public Capital-based Reallocations: General Principles Public investment yields no profit or capital income (not sold in the market; the value assumed to be equal to the cost.) The only form of reallocation is saving/dis- saving. Public capital belongs to the beneficiaries (not taxpayers) Taxpayers invest in new public capital and then transfer the capital to program beneficiaries Old public capital is transferred from one generation of beneficiaries to the next

16. A Simple Example: A School Taxpayers build a $10 million school Transfer the school to students, the beneficiaries

17. A Simple Example: A School PeriodTransactionStudents Tax- payers tTransfer*+10-10 tInvesting**-10 t+1 to t+20Investing**0.5 *Classified as a capital transfer. **Investment is signed negative - an outflow; dis-investment is signed positive - an inflow. Straight-line depreciation; useful life of 20 years.

18. A Simple Example: A School Each year school is transferred from old students to new students Suppose –Students are all those age 2, 3, and 4 –Per capita benefits are independent of age –No mortality: N(a+1,t+1)=N(a,t)

19. Public Capital Transfers (Old Capital) Age 12345Total Population (t)10987640 Public K, end of t03.563.172.7709.5 Public K, start of t+103.523.172.8109.5 Capital transfer (t+1)03.52-0.39-0.36-2.770 Public I, old capital0-3.520.390.362.770 Beneficiaries are ages 2, 3, and 4. Benefits are proportional to population. No mortality. A negative sign for investment if an outflow; positive if an inflow. Wealth account will be adjusted to reflect investment.

20. Public Capital-based Reallocations Summary Public investment is essentially a store of value. An asset is created through investment and then consumed in future periods through dis-investment. Age reallocations are produced because those who pay for the public asset are not those who consume the asset.

21. Public Credit-based Reallocations General Principles –The government borrows from domestic and perhaps foreign investors on behalf of taxpayers. –Taxpayers do not keep the funds, which are “taxed” away (an implicit tax) and used to fund programs. –This generates public debt seen from the perspective of taxpayers and public credit as seen from the perspective of investors –As with private credit systems, public debt and public credit are equal in total but not for each age group.

22. Public Credit-based Reallocations General Principles (continued) –In subsequent periods, the accumulated debt is transferred to a new generation of taxpayers. –Current taxpayers pay interest on the debt generating an outflow from taxpayers and an inflow to investors; and/or –Current taxpayers retire the debt generating an outflow from taxpayers and an inflow to investors.

23. A Simple Example Government runs a deficit of 100 in year t at an interest rate of 5% How are the transactions recorded in the NT Accounts? –Credit-based reallocations –Transfers –Wealth account

24. Deficit spending leads to a flow from investors to taxpayers Taxpayers Investors Flow account entryTotalAge Profile Accumulation of new public debt by taxpayers +100Tax payments Accumulation of new public credit by investors -100Investment Note: Wealth account is adjusted by +100 for investors and -100 for taxpayers.

25. Debt servicing leads to a flow from taxpayers to investors Taxpayers Investors Flow account entryTotalAge Profile Public interest expense paid by taxpayers -5Tax payments Public interest income received by investors +5Assets

26. Implicit Tax Generates Transfer from Taxpayers to Consumers Taxpayers Consumers Flow account entryTotalAge Profile Implicit tax: public transfer outflow from taxpayers -100Tax payments Public transfer inflow to beneficiaries of program financed through deficit spending +100Public consumption

27. Public Debt Passes from One Generation to the Next Taxpayers (t) Taxpayers (t+1) Flow account entryTotalAge Profile Public debt transfer to taxpayers in year t +100Tax payments (t) Public debt transfer from taxpayers in year t+1 -100Tax payments (t+1) Saving, public debt by taxpayers in year t -100Tax payments (t) Saving, public debt by taxpayers in year t+1 -100Tax payments (t+1)

28. TO DO LIST Age profile for the accumulation of public credit: spreadsheet uses assets but it should be investment. Finalize terminology Update variable list on website Revise spreadsheets for capital and credit –Include sectors for capital-based reallocations –Add reconciliation page –Add data base upload sheet Test

29. The End