The worldwide growth slowdown after 1975 was a major negative fiscal shock; lower growth lowers the present value of tax revenues and primary surpluses and thus makes a given level of debt more burdensome. Most countries failed to adjust to the negative fiscal consequences of the growth implosion and so public debt to GDP ratios exploded. The growth slowdown therefore played an important role i...

This paper traces the origins of HIPC debt sustainability targets. These targets are interpreted as ‘switching values’, below which countries are expected to avoid debt service problems, but as such, they do not take into account that countries encounter debt problems for a variety of reasons and at different levels of debt. Most likely the ‘true’ switching value of the debt-to-export ratio of ...

We analyze equilibrium leverage dynamics in a dynamic tradeoff model when the firm is unable to commit to a leverage policy ex ante. We develop a methodology to characterize equilibrium equity and debt prices in a general jump-diffusion framework, and apply our approach to the standard Leland (1998) setting. Absent commitment, the leverage ratchet effect (Admati et al. 2015) causes firms to tak...

We find over 30% of public U.S. non-financial companies have negative net-financial-obligation (NFO) during the sample period of 1965 to 2014. According to the modified DuPont analysis, NFO is defined as total debt minus excess cash and passive investments. The persistence of negative-NFO observations suggests that its occurrence is not random, raising the questions of why these firms hold such...

Recently, Treasury Secretary Larry Summers implied that the government would be de creasing the supply of government bonds in order to pay down outstanding debt. This likely represents the beginning of President Clinton's plan to use a surplus that could total as much as $1.92 trillion over the next ten years to begin to eliminate the national debt (Dreazen, 2000). The wave of prosperity that h...

Contrary to what the literature on the linkage between debt accumulation and hidden economy suggests, this paper advocates that the two relationships, tax-hidden economy size and inflation-hidden economy size, have to be inverse because it is the relative, not the absolute hidden economy size that matters, and it is this that should be the yardstick for empirical work on the subject. It is also...

Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric t...

This paper studies how to protect future generations from expropriation and to induce optimal investment in intergenerational public goods (IPGs), by introducing constitutional restrictions on the tax base. The type of tax-base restrictions that we consider places limits on the tax instruments that the government can use to raise revenue, but not on the level of expenditures or debt. We show th...

In a previous article,1 we discussed some of the basic tax considerations investors face in lawsuits. We concluded that debt treatment tends to be unfavorable to an investor because income is ordinary and the investor may even be required to accrue phantom income. Outside the debt context, we observed, the investor tends to be indifferent as to whether the arrangement is a prepaid forward contr...

We use a general equilibrium model to study the impact of fully funding social security on the distribution of consumption across cohorts and over time. In an initial stationary equilibrium with an unfunded social security system, the capital-output ratio, debt-output ratio, and rate of return to capital are 3.2, 0.6 and 6.8%, respectively. In our rst experiment, we suddenly terminate social se...