First Quarter 1997
Federal Reserve Bank of Dallas

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Taxation, Growth, and Welfare: A Framework For Analysis and Some Preliminary Results
Mark A. Wynne

Reform of the U.S. tax system has become the focus of much political discourse in recent years. Proposals have called for many types of change-from the relatively modest, like more favorable treatment of capital gains or tax credits for college education, to more radical plans to introduce a flat tax and "end the IRS as we know it." The benefits of such proposals, advocates claim, range from a more efficient, less burdensome tax collection process to higher long-run growth.

In this article, Mark Wynne provides a framework for analyzing the validity of some of these claims. He begins with a look at how U.S. tax rates on capital, labor, and consumption compare with similar tax rates of other major industrialized countries. Wynne then develops a framework for analyzing how some potential tax reforms might affect the economy's long-run growth rate. He uses a series of simple tax reform experiments to illustrate a basic principle of efficient taxation: that a shift toward heavier taxation of consumption would be beneficial.

Is There a Stable Relationship Between Capacity Utilization and Inflation?
Kenneth M. Emery and Chih-Ping Chang

Many policymakers and financial market participants use the Federal Reserve's industrial capacity utilization rate as an indicator of future changes in inflation. During the past few years, however, the usefulness of the utilization rate as an inflation indicator has come under scrutiny.

In this article, Kenneth Emery and Chih-Ping Chang examine capacity utilization's power to predict changes in inflation, with a focus on whether the relationship is stable over time. They find that while there was a positive forecasting relationship between capacity utilization and changes in consumer price inflation before 1983, this relationship has substantially weakened since the end of 1982. In fact, after 1982 there is no evidence that high capacity utilization rates predict increases in consumer price inflation. Although the results are similar for changes in producer price inflation, the deterioration in the relationship is not as severe. So there is still some evidence that, after 1982, capacity utilization helps to predict changes in producer price inflation.

Liberalization, Privatization, and Crash: Mexico's Banking System in the 1990s
William C. Gruben and Robert P. McComb

Although Mexico's 1994 peso devaluation and subsequent capital outflows shook the nation's banking system, the foundations of the banking crisis were laid much earlier.

Econometric evidence suggests that in the wake of the 1991-92 bank privatizations, Mexico's banks entered a market share struggle in which they incurred short-term losses at the margin, perhaps in the interests of greater expected gains over the long term.

Euphoric investor behavior and a rising economy may have aggravated the situation by making risky borrowers more difficult to identify.