Big government
Taxation, Corruption, and Growth
Philippe Aghion et al.
European Economic Review, forthcoming
Abstract:
We build an endogenous growth model to analyze the relationships between taxation, corruption, and economic growth. Entrepreneurs lie at the center of the model and face disincentive effects from taxation but acquire positive benefits from public infrastructure. Political corruption governs the efficiency with which tax revenues are translated into infrastructure. The model predicts an inverted-U relationship between taxation and growth, with corruption reducing the optimal taxation level. We find evidence consistent with these predictions and the entrepreneurial channel using data from the Longitudinal Business Database of the US Census Bureau. The marginal effect of taxation for growth for a state at the 10th or 25th percentile of corruption is significantly positive; on the other hand, the marginal effects of taxation for growth for a state at the 90th percentile of corruption are much lower across the board. We make progress towards causality through Granger-style tests and by considering periphery counties where effective tax policy is largely driven by bordering states. Finally, we calibrate our model and find that the calibrated taxation rate of 37% is fairly close to the model's estimated welfare maximizing taxation rate of 42%. Reducing corruption provides the largest potential impact for welfare gain through its impact on the uses of tax revenues.
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How Income Taxes Should Change during Recessions
Zachary Liscow & William Woolston
Yale Working Paper, March 2016
Abstract:
This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space” for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.
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Do State Business Climate Indicators Explain Relative Economic Growth at State Borders?
Georgeanne Artz et al.
Journal of Regional Science, forthcoming
Abstract:
This study submits 11 business climate indexes to tests of their ability to predict relative economic performance on either side of state borders. Our results show that most business climate indexes have no ability to predict relative economic growth regardless of how growth is measured. Some are negatively correlated with relative growth. Many are better at reporting past growth than at predicting the future. In the end, the most predictive business climate index is the Grant Thornton Index which was discontinued in 1989.
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The political economy of public investment when population is aging: A panel cointegration analysis
Philipp Jäger & Torsten Schmidt
European Journal of Political Economy, June 2016, Pages 145–158
Abstract:
Time preferences vary by age. Notably, according to experimental studies, senior citizens tend to discount future payoffs more heavily than working-age individuals. Based on these findings, we hypothesize that demographic change has contributed to the cut-back in government-financed investment that many advanced economies experienced over the last four decades. We demonstrate for a panel of 19 OECD countries between 1971 and 2007 that the share of elderly people and public investment rates are cointegrated, indicating a long-run relationship between them. Estimating this cointegration relationship via dynamic OLS (DOLS) we find a negative and significant effect of population aging on public investment. Moreover, the estimation of an error correction model reveals long-run Granger causality running exclusively from aging to investment. Our results are robust to the inclusion of additional control variables typically considered in the literature on the determinants of public investment.
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Fiscal Sentiment and the Weak Recovery from the Great Recession: A Quantitative Exploration
Finn Kydland & Carlos Zarazaga
Journal of Monetary Economics, forthcoming
Abstract:
The US economy hasn't recovered from the Great Recession as strongly as predicted by the neoclassical growth model, even after incorporating a variety of frictions to it. The paper explores quantitatively the hypothesis that the counterfactual predictions are mostly the result of ignoring the expectations of higher taxes prompted by unprecedented fiscal challenges faced by that country in peacetime. The main finding is that this fiscal sentiment hypothesis can account for a substantial fraction of the decline in investment and labor input in the aftermath of the Great Recession, provided the perceived higher taxes fall almost exclusively on capital income.
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Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach to Heterogeneous Firms
Juan Carlos Suarez Serrato & Owen Zidar
American Economic Review, forthcoming
Abstract:
This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners using variation in state corporate tax rates and apportionment rules. We develop a spatial equilibrium model with imperfectly mobile firms and workers. Firm owners may earn profits and be inframarginal in their location choices due to differences in location-specific productivities. We use the reduced-form effects of tax changes to identify and estimate incidence as well as the structural parameters governing these impacts. In contrast to standard open economy models, firm owners bear roughly 40 percent of the incidence, while workers and landowners bear 30-35 percent and 25-30 percent, respectively.
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Sebastien Bradley
Review of Economics and Statistics, forthcoming
Abstract:
Michigan's implementation of assessment limits gives rise to wide variation in taxable basis across comparable homes. Exploiting the fact that the resulting differences in property tax liability are temporarily inherited by new homebuyers, I estimate the degree of capitalization of these largely-idiosyncratic tax differences to evaluate whether homebuyers understand the tax implications of their home purchases. Consistent with anecdotal evidence — but in stark contrast to the traditional view of rational consumer behavior — I find that homebuyers are woefully inattentive to the temporary nature of their initial tax obligations, resulting in an overpayment of nearly $10,000 for the average home.
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Decentralized Governance, Expenditure Composition, and Preferences for Public Goods
Javier Arze del Granado, Jorge Martinez-Vazquez & Robert McNab
Public Finance Review, forthcoming
Abstract:
The literature on decentralization has long asserted that decentralized governance increases public sector allocative efficiency. We offer an indirect test of this hypothesis by examining how decentralized governance affects revealed preferences for public goods. Specifically, we examine the relationship between expenditure decentralization and the functional composition of public expenditures. We hypothesize that higher levels of expenditure decentralization induce agents to demand increased production of publicly provided private goods. We test this hypothesis using an unbalanced panel data set of forty-two developed and developing countries over twenty-two years. Using system Generalized Methods of Moments and Quasi-Maximum Likelihood estimators, we find that expenditure decentralization positively, significantly, and robustly influences the share of education expenditures in consolidated government budgets. We also find evidence to suggest that expenditure decentralization positively influences the share of health expenditures in consolidated government budgets. Decentralized governance appears to alter the composition of public expenditures toward publicly provided private goods.
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The impacts of fiscal policy shocks on the US housing market
Isabel Ruiz & Carlos Vargas-Silva
Empirical Economics, May 2016, Pages 777-800
Abstract:
We explore empirically the impact of fiscal policy shocks on the US housing market using a vector autoregressive model. Identification is achieved through sign restrictions. Accounting for announcement effects, a revenue shock has a short-lived positive impact on house prices and indicators of housing activity. The impact of a spending shock on housing activity is negative and more persistent, but there is no substantial response from house prices. A balanced budget spending expansion (i.e. 1 % increases in spending and revenue) has a short-lived negative impact on housing activity and a very persistent negative impact on house prices. The paper presents results from other combinations of the two shocks. Results are generally robust to only using data for the post-financial liberalization period (i.e. since 1983).
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Performance Management and Deficit Adjustment in U.S. Cities: An Exploratory Study
Benedict Jimenez
International Journal of Public Administration, forthcoming
Abstract:
Performance management or PM has been promoted as a tool to transform government. Claims that PM will enable governments to “do more with less,” “increase efficiency,” provide “value for money,” and make “rational budget decisions” abound. Has PM helped city governments in the United States cope with the effects of the 2007–2009 Great Recession? Theory suggests that PM can provide the informational and analytical foundation necessary for city officials to implement comprehensive but conflictive budget-cutting and revenue-raising strategies. By facilitating deep expenditure cuts and tax increases, PM can indirectly influence budget deficits. Using data from a national survey of city governments and multiyear audited financial reports, the empirical analysis shows that PM cities favored what are essentially decremental responses to fiscal crises that lead to marginal changes in revenues and expenditures. Not surprisingly, there is no evidence that PM influences the size and change in budget shortfalls.