edge that aids in the establishment of a business in the enterprise zone, they may also gain some of the tax benefits provided.

Analysis of the incidence of enterprise zone tax benefits is further complicated by several factors. First, many of the potential employees of the newly established enterprises may be hired at wages at or near the minimum wage. Second, the proposals vary in the extent to which they provide incentives for employment as opposed to investment. Third, some proposals would place a limitation on the total tax benefits available within any particular zone. Fourth, the proposals may vary in the magnitude of transactions costs (e.g., syndication or legal fees) required of the taxpayer to avail him or herself of the benefit.

A tax credit given to employers for wages paid for work within enterprise zones might benefit minimum wage workers more than other workers hired. Businesses locating within enterprise zones might find it profitable to hire workers at the minimum wage whom they would not hire at the minimum wage were it not for the credit they receive. The individuals hired receive a portion of the benefit of the credit in the form of employment at a wage at least equal to the minimum wage. However, for workers paid more than the minimum wage the credit may provide no benefit if the supply of such workers is great enough that businesses which may claim the credit can continue to hire these workers without having to bid up the wages they offer. In this case, all the benefit of the tax credit accrues to the employer.

If, on the other hand, the credit were to be claimed by the employee, the business would not hire at the minimum wage an individual who is currently unemployed because the employer would be unable to pay the individual less than the minimum wage. Such an individual would receive no benefit from the tax credit. Those employed at wages above the minimum wage may now face competition from individuals willing to work at a lower wage with the knowledge that a tax credit will make up at least a part of the difference. If such competition among workers occurs, the employer benefits from lower labor costs. An employee who is currently employed at the minimum wage would, by law, face no direct competition and thus might benefit from the wage credit. However, the employer might find it profitable to substitute more skilled (and more highly paid) workers for such an employee, if the credit causes the wages paid to more skilled workers to fall.

One might expect tax benefits directed at investment rather than wages to benefit investors primarily. However, as with wage subsidies that might accrue to labor, the benefits of investment incentives will accrue to suppliers of capital only to the extent that capital is available in restricted supply to the enterprise zones. In a relatively competitive capital market, the benefits of investment incentives, like wage subsidies, will be shifted to other, less mobile factors, such as land. Hence, the incidence of the two types of subsidies need not differ markedly.

Ghetto?" National Bureau of Economic Research, Working Paper No. 1188, August 1983. In analyzing black, teenage unemployment, Ellwood finds no effect on the employment rate of teenage blacks of the proximity of job opportunities or of spatial neighborhood effects.

The degree to which tax benefits shifted from labor and capital are divided among land and entrepreneurs depends in part on the restrictions put on zone development through tax benefit limitations. If limitations are not imposed, activity may proceed to the point where entrepreneurs receive nothing more than a normal return to their efforts, with the entire benefit being received by land owners in the form of higher land rents or dissipated through the establishment of relatively high cost businesses. However, limitations may restrict the extent of this shifting, providing entrepreneurs with a greater fraction of the tax benefits that are provided. Deferral v. exemption

Enterprise zone tax incentive proposals generally provide certain forms of income deferral from tax or exemption from tax. The form in which the incentive is provided affects the magnitude of the incentive. Exempting income from taxation is always more valuable to the taxpayer than deferring taxation on the same income. For example, if $1,000 could be invested for 10 years to earn eight percent annually and those earnings were exempt from taxation, this investment would have accumulated $1,158.93 in interest by the end of the 10-year period. If the earnings instead were taxed annually to a taxpayer at a 28-percent marginal tax rate, the accumulated interest, net of taxes, would be $750.71 after 10 years. If the earnings were not taxed annually, but rather the tax was deferred for 10 years and assessed on the accumulated interest at the end of the 10-year period, the value of the taxpayer's net earnings would be $834.43. In this example, deferral increases the taxpayer's return by 11.2 percent over the 10-year period compared to annual taxation. Exemption is 38.9 percent more beneficial than deferral over the same period.

The benefit of tax exemption generally is greater to a higherincome taxpayer than a lower-income taxpayer, because the tax liability saved per dollar of tax-exempt income is greater for taxpayers in higher marginal tax rate brackets. The benefit of deferral depends not only on the taxpayer's current tax rate, but also on his or her future tax rate. The benefit of deferral is increased for a taxpayer who currently is taxed at a high marginal rate, but who can defer the tax liability until a lower marginal rate applies. The benefit of deferral is decreased if the taxpayer currently is taxed at a low marginal rate and defers the tax liability to a year when a higher marginal tax rate applies. In this circumstance, because of the taxpayer's low initial tax rate, the taxes deferred may actually be worth less, in present value, than the taxes owed at the later date when the taxpayer is in a higher tax bracket.

Equity considerations

Horizontal equity requires that taxpayers in similar economic situations be treated by the tax system in the same manner. To the extent taxpayers with identical economic incomes bear different income tax burdens as a result of the enterprise zone tax incentive programs, horizontal equity is not attained. This may be more of a concern in the short run than in the long run because such differential tax treatment may be capitalized in the price of assets leading to an equalization of after-tax incomes. 65 Vertical equity requires that taxes be assessed in accordance with the taxpayer's ability to pay. To the extent that the benefits of enterprise zone tax incentives accrue primarily to high-income taxpayers, vertical equity of the Federal tax system may be compromised.

Tax incentives may be structured as either deductions or credits. When taxpayers face different marginal tax rates, deductions yield different dollar amounts of tax benefit depending upon the taxpayer's marginal tax rate. As the taxpayer's income and marginal tax rate increase the tax subsidy increases. Credits yield the same dollar amount of tax benefit to all recipients. 66

Limitations on benefits

A goal of enterprise zones is to foster economic development within specified geographic areas. The tax benefits made available to enterprise zones may, however, be used to satisfy policy goals other than the economic development of the designated geographic area. For example, one may want to limit the ability of higherincome persons to utilize the tax benefits; to limit the magnitude of Federal assistance to any one geographic region; or to foster certain forms of economic development, such as the creation of labor intensive businesses rather than capital intensive businesses. Limitations on tax benefits available in enterprise zones may be used to satisfy policy goals in addition to the goal of the economic development of the designated geographic area. Proponents of limitations on tax benefits believe it is appropriate to address these additional policy concerns within the context of geographic economic development programs. Opponents observe that imposing limitations on tax benefits may reduce the magnitude of the tax incentives for economic development and thereby make it more difficult to achieve desired levels of economic development.

Limitation of the tax benefits available in enterprise zones generally may take two forms: limitations on specific tax benefits and limitations on the aggregate level of benefits. In the former case, the amount of tax benefit available to any one taxpayer may be limited or the class of qualifying taxpayers may be limited, but there generally is no limitation on the number of qualifying taxpayers who may receive the tax benefit. Many such limitations exist under present law. For example, the amount of money a taxpayer may annually contribute to a qualified pension plan is limited, but there is no limitation on the number of taxpayers who can make qualifying contributions. Present law also provides limitations on the aggregate amount of tax benefits available in certain cases. For example, the low-income housing credit is subject to an annual State credit allocation ceiling.

If a limitation on the aggregate level of benefits is utilized, it is necessary to create a method of allocating the available benefits among potentially competing taxpayers. For example, under present law, allocations of the low-income housing credit are made by State allocating agencies. Critics of this approach argue that the market system is impeded by introducing a government agency into the process. They argue that market allocation decisions generally are superior to other outcomes and agency involvement slows individuals' ability to react to market opportunities. They note that the concept of an enterprise zone is based on a philosophy of non-planning and private sector domination. 67 Proponents note that utilizing an allocating agency has the potential advantage of bringing State and local officials into the economic development process as partners whose participation may enhance the possibility of success because these officials have a stake in the success of the project. They observe that these officials may better know the needs of their jurisdictions and may be able to allocate the Federal benefits, or to combine the Federal tax benefits with State and local benefits, to achieve the economic development goals of their jurisdictions at least total cost. They further observe that such officials may provide oversight of the program to the benefit of taxpayers generally.

B. Issues in the Design of Specific Enterprise Zone Tax Incentives Tax credits for enterprise zone employment

The tax credits for enterprise zone employment in S. 2217, S. 1920, S. 1603, S. 1032, S. 686, S. 383, and H.R. 4210 consist of two separate types: a credit for increased employment and a credit for employee compensation. S. 686 creates a credit for increased employment, while the other bills create a credit for employee compensation. H.R. 4210, S. 686, and S. 383 would provide the credit to the employer. S. 2217, S. 1920, S. 1603, and S. 1032 would provide the credit to the employee.

Tax credit for increased employment expenditures

S. 686 would provide a 10-percent tax credit for increased employment expenditures. This credit is intended as an incentive for the expansion of employment and wages beyond a base period level of wage expenditures. Because only wages below the designated cap would be eligible for the credit, the credit would provide an incentive for part-time or modestly compensated labor. For example, if the wage cap were $17,000, an increase in wages paid for additional work performed by a current employee from $17,000 to $18,000 would not be eligible for the credit, but hiring a new part-time employee to do the same work for $1,000 would generate wages eligible for the credit.

The employer credit for increased employment expenditures is a marginal credit which for existing employers is determined by reference to the amount of qualified wages paid by the employer prior to designation as an enterprise zone. If in later years the amount of employment and qualified wages decline from a previous higher level, the amount of wages paid in excess of the amount paid before the area was designated an enterprise zone would still qualify for the credit. In the case of a business that starts up after an area is designated as an enterprise zone, all qualified wages would be eligible for the credit every year.

Tax credit for compensation paid employees

H.R. 4210 would provide a 7.5-percent tax credit to employers for wages paid to qualifying employees. Qualifying employees must receive annual wages of less than $30,000, live in the enterprise zone, and work in the enterprise zone for an employer who does not employ more than 100 employees. S. 2217, S. 1920, S. 1603, and S.1032 would provide a 5-percent credit to employees for the first $10,500 of wages (based on the FUTA wage base) to employees who work in an enterprise zone. The credit is phased out for wages between $20,000 and $25,000.

Some argue that such credits would have the greatest effect on the distressed area if the employee were required to live and to work in the enterprise zone. Others claim, however, that incentives for businesses to establish operations within a zone and encourage more employment within a zone will benefit the distressed area regardless of where the employees reside. (A more general discussion of the incidence of the benefits of wage credits is presented in Part IV. A., above.)