Balancing Act
Capping Individual Tax Expenditure Benefits
Martin Feldstein, Daniel Feenberg & Maya MacGuineas
NBER Working Paper, April 2011
Abstract:
This paper analyzes a new way of reducing the major individual tax expenditures: capping the total amount that tax expenditures as a whole can reduce each individual's tax burden. More specifically, we examine the effect of limiting the total value of the tax reduction resulting from tax expenditures to two percent of the individual's adjusted gross income. Each individual can benefit from the full range of tax expenditures but can receive tax reduction only up to 2 percent of his AGI. Simulations using the NBER TAXSIM model project that a 2 percent cap would raise $278 billion in 2011. The paper analyzes the revenue increases by AGI class. The 2 percent cap would also cause substantial simplification by inducing more than 35 million taxpayers to shift from itemizing their deductions to using the standard deduction. For any taxpayer for whom the 2 percent cap is binding, a cap would reduce the volume of wasteful spending and the associated deadweight loss. Even for those taxpayers for whom the cap is not binding but who are induced by the cap to shift from itemizing to using the standard deduction, the deadweight loss associated with deductible expenditures would be completely eliminated.
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Emergence and Persistence of Inefficient States
Daron Acemoglu, Davide Ticchi & Andrea Vindigni
Journal of the European Economic Association, April 2011, Pages 177-208
Abstract:
We present a theory of the emergence and persistence of inefficient states based on patronage politics. The society consists of rich and poor. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. By choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics, so reducing the amount of redistribution in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient one. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We obtain that the rich-bureaucrats coalition may also expand the size of bureaucracy excessively so as to generate enough political support. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater income inequality, when bureaucratic rents take intermediate values, and when individuals are sufficiently forward-looking.
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Macroeconomic Effects From Government Purchases and Taxes
Robert Barro & Charles Redlick
Quarterly Journal of Economics, February 2011, Pages 51-102
Abstract:
For U.S. annual data that include World War II, the estimated multiplier for temporary defense spending is 0.4-0.5 contemporaneously and 0.6-0.7 over 2 years. If the change in defense spending is "permanent" (gauged by Ramey's defense news variable), the multipliers are higher by 0.1-0.2. Since all estimated multipliers are significantly less than 1, greater spending crowds out other components of GDP, particularly investment. The lack of good instruments prevents estimation of reliable multipliers for nondefense purchases; multipliers in the literature of two or more likely reflect reverse causation from GDP to nondefense purchases. Increases in average marginal income tax rates (measured by a newly constructed time series) have significantly negative effects on GDP. When interpreted as a tax multiplier, the magnitude is around 1.1. The combination of the estimated spending and tax multipliers implies that the balanced-budget multiplier for defense spending is negative. We have some evidence that tax changes affect GDP mainly through substitution effects, rather than wealth effects.
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Guns and Butter? Regime Competition and the Welfare State during the Cold War
Herbert Obinger & Carina Schmitt
World Politics, April 2011, Pages 246-270
Abstract:
Scholars from a number of disciplines have argued that the massive expansion of the welfare state in the postwar period was at least in some part a byproduct of the cold war and the associated political competition between two rival regime blocs. However, the question of whether regime competition fuelled welfare-state growth has never been subject to systematic examination. Applying spatial econometrics, this article offers the first empirical test of this argument. The authors' findings support the notion that regime competition stimulated the expansion of the welfare state on both sides of the Iron Curtain in the postwar period.
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Giving to Government: Voluntary Taxation in the Lab
Sherry Xin Li et al.
Journal of Public Economics, forthcoming
Abstract:
In the U.S., widespread complaints that taxes are too high exist alongside substantial voluntary donations to private charities whose missions parallel those of government agencies. We employ a "real donation" experiment to compare giving to government agencies and private charities with similar missions, for four different causes (cancer research, disaster relief, education enhancement, parks and wildlife) at three levels (national, state, and local). We find that individuals will give to government, paying voluntary taxes to support specific functions. Donations average 22 percent of an endowment to government, significantly lower than the 27 percent to private charities. The difference is influenced by cause, level, and perceptions of effectiveness and efficiency, as well as individual characteristics such as income and political affiliation.
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Identifying Government Spending Shocks: It's all in the Timing
Valerie Ramey
Quarterly Journal of Economics, February 2011, Pages 1-50
Abstract:
Standard vector autoregression (VAR) identification methods find that government spending raises consumption and real wages; the Ramey-Shapiro narrative approach finds the opposite. I show that a key difference in the approaches is the timing. Both professional forecasts and the narrative approach shocks Granger-cause the VAR shocks, implying that these shocks are missing the timing of the news. Motivated by the importance of measuring anticipations, I use a narrative method to construct richer government spending news variables from 1939 to 2008. The implied government spending multipliers range from 0.6 to 1.2.
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Fiscal stimulus for the USA in the current financial crisis: What does 1930-2008 tell us?
Jonathan Leightner
Applied Economics Letters, April 2011, Pages 539-549
Abstract:
This article uses Bi-directional Reiterative Truncated Projected Least Squares (BD-RTPLS) to estimate annual dGDP/dG (GDP, Gross Domestic Product and G, government spending) multipliers for the USA between 1930 and 2008. The analysis is redone with quarterly data from 1947 to 2008. To account for the influence of omitted variables, BD-RTPLS produces a separate dGPP/dG estimate for every observation in the data set. I find that whenever the US government increases government spending by an unusually large amount in a given year or quarter, the resulting government spending multiplier plummets. This is not good news for the current US government which is hoping that a huge fiscal stimulus package will rescue the USA from the current crisis.
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Warwick Funnell
Accounting History Review, Spring 2011, Pages 69-93
Abstract:
The Liberal Governments that took office in the years immediately before World War I pursued a policy which sought the radical transformation of British society by establishing the foundations of the modern welfare state. Liberal beliefs required that the funding for this would have to be obtained by achieving economies in other government spending, most especially spending on the army. However, with mounting international political tensions, the new Secretary of State for War, Richard Haldane, knew that Britain's security demanded a significant military capability. Thus, to allow the spending on social reform and to provide an army ready for war, Haldane introduced administrative reforms to ensure that Britain's army was both economic and efficient. These reforms included the beginnings of an 'object-based' system of military accounting which promoted a dominant role for the military in financial decisions.
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Social Security Reform with Self-Control Preferences
Cagri Kumru & Athanasios Thanopoulos
Journal of Public Economics, forthcoming
Abstract:
This paper analyzes a fully funded social security system under the assumption that agents face temptation issues. Agents are required to save through individually managed Personal Security Accounts without, and with mandatory annuitization. When the analysis is restricted to CRRA preferences our results are congruent with the literature in indicating that the complete elimination of social security is among the reform scenarios that maximize welfare. However, when self control preferences are introduced, and as the intensity of self control becomes progressively more severe the "social security elimination" scenario loses ground very rapidly. In fact, in the case of relatively severe temptation the elimination of social security becomes the least desirable alternative. Under the light of the above findings, any reform proposal regarding the social security system should consider departures from standard preferences to preference specifications suitable for dealing with preference reversals.
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The Institutions of Fiscal Federalism
Jason Sorens
Publius, Spring 2011, Pages 207-231
Abstract:
Federal and decentralized political systems vary in the extent to which sub-central governments enjoy policy authority, political independence from the center, and taxation powers. The institutionalist view of fiscal federalism holds that sub-central governments' fiscal powers are meaningful and self-enforcing only when the central government cannot undermine regional authority. Most recent empirical research on fiscal federalism has ignored the institutional foundations of the system, with adverse consequences for measurement and interpretation. A new, institutional measure of fiscal federalism is proposed. Cross-national tests using this measure for thirty-nine democracies find that more fiscally federal countries, especially those with many competing jurisdictions, have smaller government consumption and government share of gross domestic product, while expenditure decentralization increases government size, findings consistent with widely accepted institutionalist theories.
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Tobias Broer
Journal of Economic Theory, forthcoming
Abstract:
When the risk of default constrains financial contracts, public insurance policies can significantly affect private risk-sharing. This is because by changing income expectations and volatility, redistribution changes the attractiveness of default and thus endogenous borrowing-constraints. Extending results by Krueger and Perri, this paper analyses the conditions under which redistribution can improve private insurance by making default less attractive to the income-rich, whose income it reduces. I first explain why public redistribution typically crowds out private insurance in the two-income economy, and identify the role of income persistence and saving after default. Second, I show how, in endowment economies with three income states or more and in economies with capital, redistributive taxes can improve, or "crowd in", private consumption insurance. Finally, in a quantitative exercise using a realistic income process calibrated to US micro-data, moderate redistribution crowds in private insurance with production but not in an endowment economy.
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State Government Response to Income Fluctuations: Consumption, Insurance, and Capital Expenditures
Steven Craig & Edward Hoang
Regional Science and Urban Economics, forthcoming
Abstract:
This paper analyzes state government response to changes in the underlying economy with a view to determining whether, and to what extent, state governments respond to economic fluctuations. Specifically, we build impulse response functions from a panel of US states to examine how states cope with changes in economic conditions. We examine current expenditures, as well as Unemployment Insurance, welfare, and capital spending. Further, we examine how both short and long term debt and state government taxes vary with GSP. Our examination of average state government behavior indicates that states' respond slowly to changes in the economy, and that they do not utilize some of the institutional features that are purportedly designed to cushion budgetary impacts. Finally, we find that welfare and UI spending follow separate distinct time paths, but not ones seemingly constrained by institutional barriers.