Budget Hawking
Racial Unfairness and Fiscal Politics
Katherine Krimmel & Kelly Rader
American Politics Research, March 2021, Pages 143-156
Abstract:
We provide and test a theory explaining how and why racial attitudes shape public opinion on government spending in the United States. We hypothesize that many people think the government allocates money unfairly across racial groups, and “inequity aversion” leads them to reject spending as a result. Using data from an original survey, we find support for our theory in the sample as a whole, and within racial, partisan, and ideological subgroups. Indeed, unfairness views are comparable to partisanship in their relationship to opinion on spending. While prior work has shown that whites’ racial attitudes are correlated with opinion on specific government programs, we show they shape opinion about the appropriate level of government spending writ large. We also move beyond the study of white opinion, measuring views of unfairness in the distribution of spending among racial minorities as well.
Rethinking How We Score Capital Gains Tax Reform
Natasha Sarin et al.
NBER Working Paper, January 2021
Abstract:
We argue the revenue potential from increasing tax rates on capital gains may be substantially greater than previously understood. First, many prior studies focus primarily on short-run taxpayer responses, and so miss revenue from gains that are deferred when rates change. Second, the composition of capital gains has shifted in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. Third, focusing on capital gains tax collection may understate fiscal spillovers from decreasing the preferential tax treatment for capital gains. Fourth, additional base-broadening reforms, like eliminating stepped-up basis and making charitable giving a realization event, will decrease the elasticity of the tax base to rate changes. Overall, we do not think the prevailing assumption of many in the scorekeeping community — that raising rates to top ordinary income levels would raise little revenue — is warranted. A crude calculation illustrates that raising capital gains rates to ordinary income levels could raise $1 trillion more revenue over a decade than other estimates suggest. Given the magnitudes at stake, scorekeeping procedures employed in evaluating capital gains should be made more transparent and be the subject of external professional debate and review.
The 283 Days of Stock Returns after the 2016 Election
Anthony Diercks, Daniel Soques & William Waller
Federal Reserve Working Paper, October 2020
Abstract:
Conventional wisdom suggests that the promise of tax legislation played an important and positive role in the 25% increase in the stock market that began on November 9, 2016 and continued through December 22, 2017 (the day TCJA was signed into law). Our comprehensive and exhaustive forensic analysis confirms its positive effect. With that said, we find that its net impact is relatively modest. To come to this conclusion, we first construct a novel daily human-based attribution by carefully reading the news on each of the 283 days. This exercise shows the 52 days in which tax-related news was important make up less than 1% of the total observed return. We attribute large gains to tax-related news immediately after the election as well as the build-up to passage in late 2017. However, key events in the summer of 2017 decreased the prospects for tax legislation, which wiped out most of the gains that we attributed to tax policy over the full sample. This "up, down, and up again" narrative is corroborated across a wide-range of alternative approaches, including (1) a machine-driven textual analysis based on over 1,500 possible specifications, (2) a novel probability measure tied to the passage of tax legislation constructed from prediction markets, (3) the relative performance of high tax firms compared to low tax firms, (4) a daily attribution based on firm-level regressions, and (5) several macroeconomic financial indicators. The relatively modest estimated effects are consistent with the market potentially being more driven by strong global growth, changes in other policies, a weaker dollar (which coincided with a reduction in the likelihood of passage of tax legislation), and numerous below-expectations inflation prints (keeping monetary policy at bay) that fortuitously occurred over this time period.
Does government spending crowd out R&D investment? Evidence from government-dependent firms and their peers
Phong Ngo & Jared Stanfield
Journal of Financial and Quantitative Analysis, forthcoming
Abstract:
We provide evidence that managerial incentives to manipulate real activities can influence the effectiveness of fiscal policy. Increases in federal spending lead government-dependent firms to expand R&D investment whereas industry-peer firms contract. The net result is a reduction in industry-level R&D investment. We find evidence of a novel mechanism for the crowding out of peer-firm investment: peer-firm managers respond to falling relative performance by cutting R&D to manage current earnings upward. We show that these differential responses manifest in firm value. These findings are robust to endogeneity and selection concerns as well as a battery of alternative explanations.
The Side Effects of Central Bank Independence
Michaël Aklin & Andreas Kern
American Journal of Political Science, forthcoming
Abstract:
Central bank independence (CBI) solves the time inconsistency problem faced by policymakers with respect to monetary policy. However, it does not solve their underlying incentives to manipulate the economy for political gains. Unable to use monetary policy, and often limited in their ability to use fiscal spending, governments can resort to financial deregulation to generate short‐term political benefits. We show qualitatively and quantitatively that governments systematically weaken financial regulations in the aftermath of CBI, and that the effect of CBI is separate from an ideological shift toward liberalization. Our findings suggest that the growing financialization of the economy experienced by many countries over the last few decades is partly a by‐product of central bank independence.
Treasury Yield Implied Volatility and Real Activity
Martijn Cremers, Matthias Fleckenstein & Priyank Gandhi
Journal of Financial Economics, forthcoming
Abstract:
We show that at-the-money implied volatility of options on futures of five-year Treasury notes (Treasury “yield implied volatility”) predicts both the growth rate and volatility of gross domestic product, as well as of other macroeconomic variables, like industrial production, consumption, and employment. This predictability is robust to controlling for the term spread, credit spread, stock returns, stock market implied volatility, and several other variables that prior literature showed to predict macroeconomic activity. Our results indicate that Treasury yield implied volatility is a useful forward-looking state variable to characterize risks and opportunities in the macro economy.
Why are Residential Property Tax Rates Regressive?
Natee Amornsiripanitch
Yale Working Paper, November 2020
Abstract:
Among single family homes that enjoy the same set of property tax-funded amenities and pay the same statutory property tax rate, owners of cheap houses pay 50% higher effective tax rates than owners of expensive houses. This pattern appears throughout the United States and is caused by systematic assessment regressivity -- cheap houses are overappraised relative to expensive houses. At least 30% of the observed regressivity can be explained by tax assessors' flawed valuation methods, which ignore variation in priced house and neighborhood characteristics. Infrequent reappraisal explains less than 10% of the phenomenon. Heterogeneous appeal behavior and outcomes do not contribute. Overtaxation of minorities and low-income households is a by-product of assessment regressivity because these households sort into cheap houses. Within the same local house price decile, black households are proportionately taxed, while Hispanic and low-income households are undertaxed. Taken at face value, correcting assessment regressivity would increase poor homeowners' net worth by more than 15%.
Legalized Sports Betting, VLT Gambling, and State Gambling Revenues: Evidence from West Virginia
Brad Humphreys
Eastern Economic Journal, January 2021, Pages 9–28
Abstract:
A Supreme Court decision legalizing sports betting in the US led states to legalize sports betting in order to generate new tax revenues from wagering on sports events. Most states already permit other forms of gambling and receive tax revenues from these sources. The literature analyzing consumer substitution in gambling spending contains some evidence on the impact of expansions in many types of gambling, but no evidence on the impact of expanded sports betting. This paper exploits the legalization of sports betting and timing of sports book openings in West Virginia to analyze the impact of expanded sports betting on other casino gambling. Evidence using Instrumental Variables and difference-in-differences shows that increased consumer spending on sports betting caused a significant decline in spending on video lottery terminals (VLTs) in casinos, both of which generate tax revenues. Fiscal impacts include $2.6 million in new tax revenue from sports betting and a $45.4 million decrease in VLT tax revenues caused by expanded sports betting.
The Effect of Tax Avoidance Crackdown on Corporate Innovation
Qin Li, Mark (Shuai) Ma & Terry Shevlin
Journal of Accounting and Economics, forthcoming
Abstract:
To constrain the use of intangible assets in tax-motivated state income shifting, many U.S. state governments adopted addback statutes. Addback statutes reduce the tax benefits that firms can gain from creating intangible assets such as patents. Using a sample of U.S. public firms, we examine the effect of addback statutes on corporate innovation behavior. First, the adoption of addback statutes leads to a 4.77 percentage point decrease in the number of patents and a 5.12 percentage point decrease in the number of patent citations. Second, the “disappearing patents” resulting from addback statutes have significant economic value. Third, after a state adopts an addback statute, a firm with material subsidiaries in that state assigns fewer patents to subsidiaries in zero-tax states, whereas the number of patents assigned to the other states does not change. Overall, our findings suggest that addback statutes impede corporate innovation.