Everyone's money
Carving Out: Isolating the True Effect of Self-Interest on Policy Attitudes
Jake Haselswerdt
American Political Science Review, forthcoming
Abstract:
How important is self-interest in people's opinions about public policy? If a policy proposal exempts a subset of the target group from costs that others will have to pay, or denies them benefits that others will enjoy, do they respond according to self-interest? This experimental study distinguishes between true self-interest and affinity for one's in-group by exploiting a common feature of policy proposals: age-based "carve-outs" that prevent otherwise similar subgroups of a population from being affected by the benefits or burdens of a new policy (e.g., cuts to an old-age program that exempt people above a certain age). I find self-interest effects for older Americans exempt from cuts to Medicare and younger people too old to benefit from a hypothetical student debt relief program. These effects vary in ways that are consistent with extant theory.
Understanding the Revenue Potential of Tax Compliance Investment
Natasha Sarin & Lawrence Summers
NBER Working Paper, July 2020
Abstract:
In a July 2020 report, the Congressional Budget Office estimated that modest investments in the IRS would generate somewhere between $60 and $100 billion in additional revenue over a decade. This is qualitatively correct. But quantitatively, the revenue potential is much more significant than the CBO report suggests. We highlight five reasons for the CBO's underestimation: 1) the scale of the investment in the IRS contemplated is modest and far short of sufficient even to return the IRS budget to 2011 levels; 2) the CBO contemplates a limited range of interventions, excluding entirely progress on information reporting and technological advancements; 3) the estimates assume rapidly diminishing returns to marginal increases in investment; 4) the estimates leave out the effect of increased enforcement on taxpayer decision-making; and 5) the use of the 10-year window means that the long-run benefits of increased enforcement are excluded. We discuss these issues, present an alternative calculation, and conclude that a commitment to restoring tax compliance efforts to historical levels could generate over $1 trillion in the next decade.
The Tax Elasticity of Capital Gains and Revenue-Maximizing Rates
Ole Agersnap & Owen Zidar
NBER Working Paper, August 2020
Abstract:
This paper uses an event study approach to estimate the effect of capital gains taxation on realizations at the state level, and then develops a framework for determining revenue-maximizing rates at the federal level. We find that the elasticity of revenues with respect to the tax rate over a ten-year period is -0.5 to -0.3, indicating that capital gains tax cuts do not pay for themselves, and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent.
Public pension shortfalls and state economic growth: A preliminary examination
Charles Steindel
Business Economics, July 2020, Pages 138-149
Abstract:
Public pension funding problems may contribute to a state's poor economic performance. This paper examines that proposition, using state-level data on public pensions developed by the Pew Trust, and jointly by the Federal Reserve Board and the Bureau of Economic Analysis. There is little evidence that measures of the level of unfunded pension plan liabilities lead directly to a state's soft economic performance, though growth in unfunded liabilities appear to be associated with lower growth. While these results suggest that reductions in the growth of a state's pension debt may be beneficial, they arguably do not imply that dramatic action to reduce liabilities is necessarily called for. In that regard, the implications are comparable to those of Lenney et al. (2019), that suggest that reasonable goals for some presumed highly troubled systems are stabilization of the ratio of their unfunded liabilities to their state's nominal GDP, rather than outright elimination of the debt.
Do Pensions Matter for Recruiting State and Local Workers?
Laura Quinby & Geoffrey Sanzenbacher
State and Local Government Review, forthcoming
Abstract:
Many state and local governments have responded to financial challenges facing their pension systems by cutting benefits or by shifting costs to employees. Will these changes make it harder for state and local governments to recruit highly skilled workers? This study explores this question by linking individual-level data from the Current Population Survey on worker transitions between the private and public sectors to measures of state and local pension generosity from the Public Plans Database. The results suggest that state and local employers with relatively generous pensions are better able to recruit high-wage workers from the private sector, but that this advantage is lost as workers are asked to contribute more from current paychecks to prefund those benefits. The findings help inform an ongoing debate over the role that state and local pensions play in shaping the public workforce.
Bargaining over Mandatory Spending and Entitlements
Marina Azzimonti, Gabriel Mihalache & Laura Karpuska
NBER Working Paper, July 2020
Abstract:
Do mandatory spending rules improve social welfare? We analyze a dynamic political-economy model in which two parties disagree on the split of a fixed budget between public goods and private transfers. Under a mandatory spending rule, expenditures are governed by criteria set by enacted law, namely last year's spending bill is applied in the current year unless successfully changed by a majority of policymakers. We model budget rules with an endogenous status quo and study the welfare implications of introducing entitlement programs. Entitlements depend on individual eligibility and participation and, hence, impose constraints on publicly-provided private goods and transfers. We emphasize that bargaining over entitlements is qualitatively different from bargaining over public goods provision, particularly with risk-aversion. Entitlement programs induce under-provision of public goods but also a smoother path for private consumption than discretion. Whether entitlement programs are welfare-improving depends critically on political turnover. When proposers alternate frequently, it benefits society because it reduces volatility in private consumption. Outcomes under rules can be worse than under discretion if political power is persistent enough. We contrast these findings to those from a mandatory spending rule on public goods, commonly studied in the literature. Finally, we describe conditions under which all parties would agree to the introduction of budget rules, within a bargaining equilibrium.
Employment Protection and Tax Aggressiveness: Evidence from Wrongful Discharge Laws
Douglas Fairhurst, Yanguang Liu & Xiaoran Ni
Journal of Banking & Finance, forthcoming
Abstract:
We examine whether labor market frictions affect firms' tax aggressiveness. Exploiting the adoption of U.S. state-level Wrongful Discharge Laws as a quasi-exogenous shock to a firm's firing costs, we document a decline in tax aggressiveness for firms located in states that increase employment protection. We further show that greater employment protection increases distress risk. The decline in tax aggressiveness is more pronounced for firms that are more vulnerable to financial distress and constrained from external financial markets. Our results imply that firms avoid risky tax positions in order to mitigate increased distress risk due to more rigid labor costs.
Investor Tax Credits and Entrepreneurship: Evidence from U.S. States
Matthew Denes et al.
NBER Working Paper, August 2020
Abstract:
Angel investor tax credits are used globally to spur high-growth entrepreneurship. Exploiting the staggered implementation of these tax credits in 31 U.S. states, we find that while they increase angel investment, they have no significant effect on entrepreneurial activity. Tax credits induce entry by inexperienced, local investors and are often used by insiders. A survey of 1,411 angel investors suggests that a "home run" investing approach alongside coordination and information frictions explain low take-up among experienced investors. The results contrast with evidence that direct subsidies to firms have large positive effects, raising concerns about using investor subsidies to promote entrepreneurship.