Fiscal year
"The Federal Emergency Management Agency is spending an increasing portion of its disaster relief budget on administrative costs such as salaries for government workers and could save hundreds of millions of dollars by better controlling such expenses, federal auditors have found." [WP]
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"Texas toll roads face mounting opposition, including within the state's Republican Party, which amended its platform this year to add language hostile to toll roads. 'A large segment of our party believes in having free access to transportation,' said Steve Munisteri, chairman of the Republican Party of Texas." [WSJ]
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"Some companies have been called economic traitors for seeking to lower their tax bills by moving overseas. But life insurers are accomplishing the same goal without leaving the country, saving as much as $100 billion in federal taxes, much of it in the last several years. The insurers are taking advantage of fierce competition for their business among states, which have passed special laws that allow the companies to pull cash away from reserves they are required to keep to pay claims. The insurers use the money to pay for bonuses, shareholder dividends, acquisitions and other projects, and because of complicated accounting maneuvers, the money escapes federal taxation." [NYT]
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"Officials from more than 50 countries signed an agreement...under the auspices of the Organization for Economic Cooperation and Development...to collect and exchange information on taxpayers' assets and income outside their home country, including bank accounts, interest payments, bank balances, and beneficial ownership...While states supporting the initiative include Switzerland, Liechtenstein, the British Virgin Islands and the Cayman Islands, the U.S. isn't a signatory [though the] U.S. Foreign Account Tax Compliance Act, or Fatca, had added momentum to the debate about automatic exchange of information in Europe" [WSJ]
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Taxing across Borders: Tracking Personal Wealth and Corporate Profits
Gabriel Zucman, Journal of Economic Perspectives, Fall 2014, Pages 121-148
Abstract:
This article attempts to estimate the magnitude of corporate tax avoidance and personal tax evasion through offshore tax havens. US corporations book 20 percent of their profits in tax havens, a tenfold increase since 1980; their effective tax rate has declined from 30 to 20 percent over the last 15 years, and about two-thirds of this decline can be attributed to increased international tax avoidance. Globally, 8 percent of the world's personal financial wealth is held offshore, costing more than $200 billion to governments every year. Despite ambitious policy initiatives, profit shifting to tax havens and offshore wealth are rising. I discuss the recent proposals made to address these issues, and I argue that the main objective should be to create a world financial registry.
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Changes in Corporate Effective Tax Rates Over the Past Twenty-Five Years
Scott Dyreng, Duke University Working Paper, November 2014
Abstract:
This paper investigates systematic changes in corporate effective tax rates over the past twenty-five years. We find that effective tax rates have decreased significantly. Contrary to conventional wisdom, we find that the decline in effective tax rates is not concentrated in multinational firms; effective tax rates have declined at approximately the same rate for both multinational and domestic firms. Moreover, we find that within multinational firms, both foreign and domestic effective rates have decreased. Finally, we find that changes in firm characteristics and declining foreign statutory tax rates explain little of the overall decrease in effective rates. The findings have broad implications for tax research, as well as for current policy debates about reforming the corporate income tax.
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How Does Tax Progressivity and Household Heterogeneity Affect Laffer Curves?
Hans Holter, Dirk Krueger & Serhiy Stepanchuk, NBER Working Paper, November 2014
Abstract:
How much additional tax revenue can the government generate by increasing labor income taxes? In this paper we provide a quantitative answer to this question, and study the importance of the progressivity of the tax schedule for the ability of the government to generate tax revenues. We develop a rich overlapping generations model featuring an explicit family structure, extensive and intensive margins of labor supply, endogenous accumulation of labor market experience as well as standard intertemporal consumption-savings choices in the presence of uninsurable idiosyncratic labor productivity risk. We calibrate the model to US macro, micro and tax data and characterize the labor income tax Laffer curve under the current choice of the progressivity of the labor income tax code as well as when varying progressivity. We find that more progressive labor income taxes significantly reduce tax revenues. For the US, converting to a flat tax code raises the peak of the Laffer curve by 6%, whereas converting to a tax system with progressivity similar to Denmark would lower the peak by 7%. We also show that, relative to a representative agent economy tax revenues are less sensitive to the progressivity of the tax code in our economy. This finding is due to the fact that labor supply of two earner households is less elastic (along the intensive margin) and the endogenous accumulation of labor market experience makes labor supply of females less elastic (around the extensive margin) to changes in tax progressivity.
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Economic Freedom and State Bond Ratings
Ariel Belasen, Rik Hafer & Shrikant Jategaonkar, Contemporary Economic Policy, forthcoming
Abstract:
Are state bond ratings, ceteris paribus, related to economic freedom? We test for the relationship between economic freedom and an aggregate index comprised of ratings by Standard & Poor, Moody's, and Fitch. We also test for a relationship between economic freedom and the ratings by these three agencies individually. With a sample covering all 50 states for the period 1995–2008, the evidence strongly indicates that state bond ratings are positively and significantly related to overall economic freedom as well as three sub-categories of economic freedom. Our results show that the quantitative impact of economic freedom on bond ratings is comparable to the effect of state real income and the unemployment rate.
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What happened to and in Detroit?
John McDonald, Urban Studies, December 2014, Pages 3309-3329
Abstract:
The paper describes the fiscal status of the city of Detroit leading up to its filing for bankruptcy on 18 July 2013. Then the economic history of metropolitan Detroit and the city of Detroit from 1950 to the present is examined in an effort to answer these questions: Why did Detroit file for bankruptcy – not some other major city? And why now and not earlier? The paper concludes that, while Detroit and several other cities in the northeastern region suffered major population and employment losses and went through a long period of urban crisis between roughly 1970 and 1990, the severity of Detroit's problems compared with other cities did not emerge fully until the most recent decade.
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Is Fiscal Stimulus a Good Idea?
Ray Fair, Business Economics, October 2014, Pages 244–252
Abstract:
The results in this paper, using a structural multicountry macroeconometric model, suggest that there is at most a small gain from fiscal stimulus in the form of increased transfer payments or increased tax deductions if the increased debt generated must eventually be paid back. The gain in output and employment on the way up is roughly offset by the loss in output and employment on the way down as the debt from the initial stimulus is paid off. This conclusion is robust to different assumptions about monetary policy. To the extent that there is a gain, the longer one waits to begin paying the debt back the better. Possible caveats regarding the model used are that (1) monetary policy is not powerful enough to keep the economy at full employment, (2) potential output is taken to be exogenous, (3) possible permanent effects on asset prices and animal spirits from a stimulus are not taken into account, and (4) the model does not have the feature that in really bad times the economy might collapse without a stimulus.
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Why Market Returns Favor Democrats in the White House
Sang Hyun (Hugh) Kim & Michael Long, Rutgers Working Paper, November 2014
Abstract:
This study explains why the equity market earns greater returns for bearing risk when a Democrat is President in the USA versus a Republican. We look at data from 1929 through 2012. The data show that the value weighted return minus the corresponding period's risk free rate is 10.83% when a Democrat is President, versus a corresponding return of -1.20% under Republican Presidents. In considering the more recent post-Kennedy time period, the excess returns are still large with 9.23% versus 0.16%. Starting with a basic valuation of a firm, we see the two basic macroeconomic arguments that affect market value between the two parties: differences in risk free interest rates and differences in economic growth. On average the Democrats follow a policy of low interest rates. The rate of return on short term T-bills averages 4.55% under the GOP and a 2.48% under Democrats. Further, the Democrats overall economic policies create a higher average real growth rate with a 4.8% average versus only 1.8% under Republican administrations. This results in higher dividend growth rates under Democrats of 2.46% versus 1.96% under the GOP administrations. These together explain the differences in equity market returns. What we cannot determine is what specific policies cause the lower risk free interest rates or the higher economic growth rates under Democrats as opposed to the Republicans.
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To Cut or Not to Cut? On the Impact of Corporate Taxes on Employment and Income
Alexander Ljungqvist & Michael Smolyansky, NBER Working Paper, December 2014
Abstract:
Do corporate tax increases destroy jobs? And do corporate tax cuts boost employment? Answering these questions has proved empirically challenging. We propose an identification strategy that exploits variation in corporate income tax rates across U.S. states. Comparing contiguous counties straddling state borders over the period 1970 to 2010, we find that increases in corporate tax rates lead to significant reductions in employment and income. We find little evidence that corporate tax cuts boost economic activity, unless implemented during recessions when they lead to significant increases in employment and income. Our spatial-discontinuity approach permits a causal interpretation of these findings by both establishing a plausible counterfactual and overcoming biases resulting from the fact that tax changes are often prompted by changes in economic conditions.
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Are State Tax Amnesty Programs Associated with Financial Reporting Irregularities?
Neal Buckwalter et al., Public Finance Review, November 2014, Pages 774-799
Abstract:
This article investigates the relation between state tax amnesties and financial reporting irregularities. State tax amnesty programs, which potentially signal a lax regulatory enforcement environment, provide a unique setting in which to examine the effects of state tax authorities on non-tax financial reporting behavior. The results suggest that firms headquartered in states offering a tax amnesty program are more likely to begin engaging in a financial reporting irregularity during the amnesty period. Furthermore, the results show that the observed increase in financial reporting irregularities occurs only during periods of repeat, not initial, amnesty programs. These findings suggest state tax amnesties have previously unexplored adverse effects on managers' behavior.
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The economic effects of financial derivatives on corporate tax avoidance
Michael Donohoe, Journal of Accounting and Economics, February 2015, Pages 1–24
Abstract:
This study estimates the corporate tax savings from financial derivatives. I document a 3.6 and 4.4 percentage point reduction in three-year current and cash effective tax rates (ETRs), respectively, after a firm initiates a derivatives program. The decline in cash ETR equates to $10.69 million in tax savings for the average firm and $4.0 billion for the entire sample of 375 new derivatives users. Of these amounts, $8.75 million and $3.3 billion, respectively, are incremental to tax savings that theory suggests are a byproduct of risk management. Collectively, these findings provide economic insight into the prevalence of derivatives-based tax avoidance.
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Say it with Candy: The Power of Framing Tax Increases as Items
Geneviève Risner & Daniel Bergan, Journal of Political Marketing, forthcoming
Abstract:
Framing tax increases as frequent purchases appears to be a popular message strategy to generate donations and elicit support for policies. We test whether this strategy is effective at obtaining support for tax increases through two survey experiments. Results demonstrate that this message strategy - framing tax increases in terms of items - is more effective than stating the increase in terms of a yearly or weekly amount. This strategy appears to be effective when the amount of a tax increase is framed as hedonic item and appears to be particularly effective as the tax amount requested increases and among those uninvolved with the issue under consideration.
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Timothy Bartik & George Erickcek, Economic Development Quarterly, November 2014, Pages 314-327
Abstract:
This article simulates job and fiscal impacts of the Michigan Economic Growth Authority's tax credit program for job creation, commonly called "MEGA." Under plausible assumptions about how such credits affect business location decisions, the net costs per job created of the MEGA program are simulated to be of modest size. The job creation impacts of MEGA are simulated to be considerably larger than devoting similar dollar resources to general business tax cuts. The simulation methodology developed here is applicable to incentives in other states.
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Economic Stimulus and the Tax Code: The Impact of the Gulf Opportunity Zone
James Williamson & John Pender, Public Finance Review, forthcoming
Abstract:
This article investigates the impact of geographically targeted Federal tax relief enacted after Hurricane Katrina in 2005. The relief included provisions to replace lost income, mitigate uninsured losses, and stimulate business activity. Using propensity score and Mahalanobis metric (MM) matching methods, we develop difference-in-differences (DD) estimates of the impacts of these tax incentives on income and employment growth in the Gulf Opportunity Zone. Results show that per capita personal income, including earnings, increased more rapidly in counties treated with the tax provisions than in similar untreated counties, though the results only apply to counties with minimal damage. We do not find strong evidence of impacts on employment or population growth.
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Retiree health insurance for public school employees: Does it affect retirement?
Maria Fitzpatrick, Journal of Health Economics, December 2014, Pages 88–98
Abstract:
Despite the widespread provision of retiree health insurance for public sector workers, little attention has been paid to its effects on employee retirement. This is in contrast to the large literature on health-insurance-induced "job-lock" in the private sector. I use the introduction of retiree health insurance for public school employees in combination with administrative data on their retirement to identify the effects of retiree health insurance. As expected, the availability of retiree health insurance for older workers allows employees to retire earlier. These behavioral changes have budgetary implications, likely making the programs self-financing rather than costly to taxpayers.
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Buying Their Votes? A Study of Local Tax-Price Discrimination
Randall Reback, Economic Inquiry, forthcoming
Abstract:
A population's demographic composition may affect political support for various public services. This article examines whether the aging-in-place of local residents decreases financial support for public schools in the United States. I expand on previous empirical work by examining whether tax-price reductions offered to elderly homeowners moderate their effect on local school revenues. The results reveal that an aging population structure substantially decreases school revenues, unless elderly homeowners receive state-financed reductions in their local tax-prices. Sizable differences hold even when comparing school districts located near each other but on opposite sides of state borders. Given the imminent aging of the population structure in the United States and many other developed countries, governments' targeted tax reduction policies could have important effects on equilibrium school revenues.
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Perceptions of Tax Expenditures and Direct Spending: A Survey Experiment
Conor Clarke & Edward Fox, Yale Law Journal, forthcoming
Abstract:
This paper presents the results of an original survey experiment on whether the public prefers "tax expenditures" to "direct outlays" — that is, whether members of the public are more likely to support government spending that takes the form of a tax credit rather than a check or cash. Using a survey that spans a wide variety of policy areas — and with important variations in wording and information — we show that the public strongly prefers tax expenditures even when the "economic substance" of the proposed policies is identical. We also show that the public views tax expenditures as less costly than equivalent direct outlays. These results support a longstanding but largely unstudied hypothesis that tax expenditures "hide" the costs of government spending, and have implications for why tax expenditures have continued to grow in size and complexity.
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Does Credit-Card Information Reporting Improve Small-Business Tax Compliance?
Joel Slemrod et al., University of Michigan Working Paper, October 2014
Abstract:
Third-party information has greatly decreased tax underreporting, but substantial underreporting persists where third-party information is not present. We investigate the preliminary response of businesses filing a Schedule C to the introduction in 2011 of Form 1099-K, which provides the Internal Revenue Service (IRS) and taxpayers with information about small businesses' sales done by payment card and other electronic means. We find evidence that taxpayers with high prior noncompliance and/or sufficient use of electronic payment methods did adjust their behavior in response to the new information returns. Theory and distributional analysis isolate a subset of taxpayers who respond to information reporting by reporting receipts equal to or slightly exceeding the amount of receipts reported on 1099-K. Information reporting made these taxpayers much more likely to file Schedule C and, conditional on filing a Schedule C, increased their reported receipts by up to 24 percent. However, firms largely offset this change with increased reported expenses (an area not subject to information reporting), so that the overall effect on reported net taxable income was significantly smaller than would otherwise be expected without the increase in expenses.
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Soomi Lee, State Politics & Policy Quarterly, December 2014, Pages 414-436
Abstract:
My article examines whether supermajority vote requirements (SMVR) to raise taxes in California's constitution suppresses state tax burdens. SMVR is a politically popular but contentious measure that 16 states have adopted and many other states have attempted to adopt. The rationale behind the rule is to contain the growth of government by making it costly to form a winning coalition to raise taxes. Nonetheless, the current empirical literature is mixed at best and suffers from causal inference. I take a different approach from extant literature and estimate the causal effect of SMVR on tax burdens in California by using synthetic control methods. The results show that, from 1979 to 2008, SMVR reduced the state nonproperty tax burden by an average of $1.44 per $100 of personal income, which is equivalent to 21% of the total tax burden for each year. The effect of SMVR was immediate after its adoption, but has abated over time.
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Lobbying Behavior of Governmental Entities: Evidence from Public Pension Accounting Rules
Abigail Allen, Harvard Working Paper, October 2014
Abstract:
In an effort to reform public pension reporting, the Governmental Accounting Standards Board (GASB) recently issued Statements 67 and 68. We examine the lobbying behavior of state governments in the development of these standards. Consistent with opportunistic motivations, we find that states' opposition to the liability increasing provisions contained in these standards is increasing in the severity of pension plan underfunding, state budget deficits, and the use of aggressive pension assumptions. We also find that opposing states face greater pressure from unions and stricter balanced budget constraints. We contrast these findings to the lobbying behavior of the states' financial statement users: public employees, credit analysts, and the broader citizenry. We find evidence user support for liability increasing provisions is amplified in states with poorly funded plans and large budget deficits. We also find that support varies by user type: public employees overwhelmingly oppose the standards, relative to credit analysts and citizens but the difference is moderated in states with constitutionally guaranteed benefits. This finding is consistent with the expectation that pension accounting reform will motivate cuts in pension benefits as opposed to increased levels of funding from the governments.
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Stephen Coate, NBER Working Paper, October 2014
Abstract:
This paper studies the optimal design of fiscal limits in the context of a simple political economy model. The model features a single politician and a representative voter. The politician is responsible for choosing the level of public spending for the voter but may be biased in favor of spending. The voter sets a spending limit and requires that the politician have voter approval to exceed it. This limit must be set before the voter's preferences for public spending are fully known. The paper first solves for the optimal limit and explains how it depends upon the degree of politician bias and the nature of the uncertainty concerning the voter's preferred spending level. A dynamic version of the model is then analyzed and policies which limit the rate of growth of spending are shown to dominate those that cap spending to be below some fixed fraction of community income.
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Linda Lobao, Lazarus Adua & Gregory Hooks, Social Problems, November 2014, Pages 644-672
Abstract:
Privatization, business attraction incentives, and limited social service provision are market-oriented policies that broadly concern social scientists. These policies are conventionally assumed to be widely implemented across the United States, a world model of neoliberal development. This study takes a new look at these policies, providing a first view of how they unfold across the nation at a geographic scale that drills down to the local state. We document the extent to which localities privatized their public services, used business attraction, and limited social service delivery in the last decade. Extending national-level theories of the welfare state, we focus on two sets of factors to explain where these policies are most likely to be utilized. The first, derived from the class-politics approach, emphasizes class interests such as business and unions and political-ideological context, and anticipates that these policies are utilized most in Republican leaning, pro-business, and distressed contexts. The second, derived from the political-institutional approach, emphasizes state capacity and path dependency as determinants. The analyses are based on over 1,700 localities, the majority of county governments, using unique policy data. Class-politics variables have modest relationship to neoliberal policies and show that business sector influence and public sector unions matter. The findings strongly support the importance of state capacity and path dependency. Overall our study challenges assumptions that acquiescence to neoliberal policies is widespread. Rather, we find evidence of resilience to these policies among communities across the United States.
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Zahn Bozanic et al., Ohio State University Working Paper, November 2014
Abstract:
In its enforcement role, the IRS has access to substantial private information, but some have argued that it also accesses complementary public information from firms' financial statements. We employ a novel dataset that records the IRS's access to 10-Ks hosted on EDGAR, which we term IRS attention. We use the data to examine how the IRS monitors corporations, which we predict will be related to firm characteristics, tax avoidance characteristics, and tax-related disclosures in the 10-K, all of which plausibly complement its substantial private information. We find evidence that IRS attention is primarily a firm-level construct, as firm fixed effects and firm characteristics drive most of the variation in IRS attention. IRS attention is also associated with various measures of tax avoidance, such as the CASH ETR, UTB, and the number of disclosed subsidiaries in tax havens. Moreover, IRS attention has surged since the FASB required increased disclosure of tax contingencies under FIN 48, consistent with them serving as a "roadmap to tax avoidance," as pundits have conjectured. We next examine firms' responses to anticipated IRS examination of financial accounting disclosures. We find that after the implementation of Schedule UTP and Schedule M-3, which both increased the level of private tax reporting to the IRS, the amount of public disclosure in the tax footnote also increased, consistent with the perception of reduced proprietary costs of disclosure in the tax footnote among public firms. Overall, this study shows evidence of substantial IRS attention to financial statements and of an important interplay between IRS-required private disclosures and firms' public disclosure patterns.
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Do Powerful Politicians Really Cause Corporate Downsizing?
Jason Snyder & Ivo Welch, University of California Working Paper, September 2014
Abstract:
Cohen, Coval and Malloy (2011) suggested that increased government spending crowded out private corporate investment by publicly-traded corporations, as identified by changes in Congressional chairmanships. Our paper shows that this was incorrect. The magnitude of their reported crowding-out is implausibly large. Instead, their inference was due to an omitted variable. The Chairmanship of Texas Senator Lloyd Bentsen from 1987 to 1992 followed a large decline in oil prices from 1980 to 1986. Similar investment reductions also occurred contemporaneously in oil firms and oil states beyond Texas. Our paper also discusses other issues, such as standard-error clustering, Senate coding choices, and temporal alignment diagnostics, which carry even more importance in their other regressions. The answer to the question in the title is that there is no evidence that powerful politicians caused corporate downsizing.
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Reevaluating the Pursuit of Defense Investment
Marc Doussard, Economic Development Quarterly, November 2014, Pages 339-350
Abstract:
In 2015, the Pentagon will likely announce a round of military base closures and expansions with the power to remake regional economies throughout the United States. Current estimates of the impact of base realignments implicitly assume that military bases have similar economic impacts. But the military is a diverse institution engaged in thousands of distinct activities, each with their own benefits to local economies. Using detailed soldier, civilian, and contracting data from two army bases, this article compares the economic impact of the main activities in which military bases engage. Because military bases source their inputs from national defense procurement networks, the economic benefits of soldier-based activities are smaller than most economic development alternatives. This finding suggests that regions facing defense contracting cuts are significantly more economically vulnerable than regions facing base closures.
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Nudges and Learning: Evidence from Informational Interventions for Low-Income Taxpayers
Dayanand Manoli & Nicholas Turner, NBER Working Paper, November 2014
Abstract:
Do informational interventions create one-time nudges or permanent changes in behavior? We study how taxpayers respond to informational interventions that alert them of their eligibility for the Earned Income Tax Credit using population-level administrative tax data. The empirical analysis is based on a natural experiment in 2005, a randomized experiment in 2009, and quasi-random audits between 2006 and 2009. The evidence from each of these settings indicates that the informational interventions cause economically significant increases in EITC take-up in the short-term, but there are little to no long-term increases in EITC take-up.
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Reference-Dependent Preferences, Team Relocations, and Major League Expansion
Brad Humphreys & Li Zhou, Journal of Economic Behavior & Organization, January 2015, Pages 10–25
Abstract:
Professional sports teams receive large subsidies, some in excess of $500 million, from local governments for the construction of new facilities. These subsidies cannot be explained by tangible economic benefits, and estimates of the value of intangible benefits also fall short of typical subsidies. In this paper, we incorporate fans' reference-dependent preferences into a model of the bargaining between local governments and teams. The model predicts that teams use relocation threats to exploit fans' utility loss from team departures, a negative deviation from the status quo, to extract large subsidies from local governments. Fans' loss aversion provides an explanation of the current team distribution, and observed team relocation and league expansion decisions in North America. The model also highlights the importance of anti-trust exemptions of the leagues in creating credible relocation threats for existing teams.