Funny Money

Kevin Lewis

June 07, 2023

What Drives Tax Policy? Political, Institutional and Economic Determinants of State Tax Policy
Sarah Robinson & Alisa Tazhitdinova
NBER Working Paper, May 2023 


We collect detailed data on U.S. state personal income, corporate, sales, cigarette, gasoline, and alcohol taxes over the past 70 years to shed light on the determinants of state tax policies. We provide a comprehensive summary of how tax policy has changed over time, within and across states. We then use permutation analysis, variance decomposition, and machine learning techniques to show that the timing and magnitude of tax changes are not driven by economic needs, state politics, institutional rules, neighbor competition, or demographics. Altogether, these factors explain less than 20% of observed tax variation.

Vertical migration externalities
Mark Colas & Emmett Saulnier
Regional Science and Urban Economics, forthcoming 


State income taxes affect federal income tax revenue by shifting the spatial distribution of households between high- and low-productivity states, thereby changing household incomes and tax payments. We derive an expression for these fiscal externalities of state taxes in terms of estimable statistics. An empirical quantification using American Community Survey data reveals that the externalities range from large and negative in some states, to large and positive in others. In California, an increase in the state income tax rate and the resulting change in the distribution of households across states lead to a decrease in federal income tax revenue of 39 cents for every dollar of California tax revenue raised. The externality amounts to a 0.27% decrease in total federal income tax revenue for a 1 pp increase in California’s state tax rate. Our results raise the possibility that state taxes may be set too high in high-productivity states, and set too low in low-productivity states.

Who Gains from Corporate Tax Cuts?
James Cloyne, Ezgi Kurt & Paolo Surico
NBER Working Paper, May 2023 


Goods producers increase their capital expenditure and employment in response to a cut in marginal corporate income tax rates or an increase in investment tax credits. In contrast, companies in the service sector mostly use any tax windfall to increase dividend payouts. We base our conclusions on a novel measure of U.S. firm-specific tax shocks that combines changes in statutory tax rates faced by each firm with narrative identified legislated U.S. federal tax changes between 1950 and 2006.

Do Tax Increases Tame Inflation?
James Cloyne et al.
AEA Papers and Proceedings, May 2023, Pages 377-381 


The answer is "yes" for personal income taxes but "no" for corporate income taxes. Using narrative-identified US federal tax changes post-World War II and disaggregated sectoral data on consumer and producer prices, we show that higher average personal income tax rates lower prices across a broad range of sectors, but higher average corporate tax rates do not. There is also significant sectoral heterogeneity in the size of the effects. Finally, only personal tax increases lower inflation expectations, while corporate tax increases lead to persistent declines in stock prices. Our results are consistent with personal taxes affecting aggregate demand and corporate taxes persistently affecting supply conditions.

The Effect of Tax Increases on Public Spending Levels
Jack Salmon
George Mason University Working Paper, May 2023 


This study replicates the research of economist Richard Vedder, who conducted a study in 1987 (and subsequently updated the data in 1991, 2007, and 2010) which reviewed four decades of empirical data on the relationship between tax increases and government expenditure. The original study published by Vedder and coauthors provided evidence of public choice theory, with newly found revenues encouraging policymakers to favor new additional constituent spending. Specifically, the study found that each dollar of new tax revenue was associated with a $1.58 increase in Federal spending. Using standard statistical analysis that introduce variables to control for business-cycle fluctuations, wars, and inflation, the results of this study reveal that over the entire post World War II era through 2022 each dollar of new tax revenue was associated with $1.50 to $1.64 of new spending. Observing different time periods (e.g. 1951-2022 vs. 1962-2021), different lag structures, and controlling for additional variables, the alternative analyses produce different estimates of the tax-spend relationship -- between $1.31 and $1.92. Regardless of how the data are configured, higher tax collections never result in less government spending, or even sustained levels of spending.

Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach with Heterogeneous Firms: Further Results
Juan Carlos Suárez Serrato & Owen Zidar
NBER Working Paper, May 2023 


This paper estimates the incidence of state corporate taxes using new data and methods for estimating the effects on profits. We extend Suarez Serrato and Zidar (2016) by developing two new identification approaches that use the effects of business taxes on the labor demand of incumbent firms and local productivity to identify profit effects. We estimate these reduced-form effects using data from Census, show how reduced-form moments identify incidence and parameters, and provide incidence estimates using a variety of reduced-form approaches as well as a structural model. Across these approaches, we find that owners bear a substantial portion of incidence. Our central estimate is that firm owners bear half of the incidence, while workers and landowners bear 35-40 percent and 10-15 percent, respectively.

Revealing and Mitigating Racial Bias and Discrimination in Financial Services
Maura Scott et al.
Journal of Marketing Research, forthcoming 


Three field studies and a laboratory experiment reveal racial discrimination in financial loan services. The results show that (a) service employees provide Black (vs. White) customers with inferior service outcomes (i.e., products offered), (b) Black (vs. White) customers experience inferior service processes (employees’ warmth/competence), and (c) Black (vs. White) customers report lower loyalty intentions toward the firm. Such discrimination is not only morally wrong and illegal, but it is also bad for business. Therefore, the authors also show when and why racial discrimination is mitigated: namely, when Black customers signal higher socioeconomic status, or a Black customer’s company (for which they seek the loan) has a more complex and sophisticated legal structure (corporation vs. sole proprietorship). Exploring this mitigation effect further, the results show that a more sophisticated business structure increases the employee’s trust toward Black customers, which reduces the perceived default likelihood and increases the likelihood to offer a loan; yet, this process does not emerge for White applicants. The findings point to managerial and policy implications to mitigate racial discrimination.

Are Minorities Still Paying Higher Mortgage Interest Rates?
Young Baek & David Cho
International Advances in Economic Research, May 2023, Pages 31–47 


The literature on racial differences in mortgage interest rates is mixed depending on samples, sample period, and product types. Mortgage loans that originated during the period between 2011 and 2019 from the 2013, 2016 and 2019 waves of the Survey of Consumer Finance were examined using weighted regressions with the repeated imputation inference method. During the whole sample period, Hispanics and Blacks paid 40 and 22 basis points (bp) higher rates than Whites at the one percent and ten percent statistical significance levels, respectively, after loan characteristics, such as term and adjustable rate, and borrower credentials, like net worth and debt to income, were controlled for. An analysis with time trend shows that Blacks paid higher rates by 56 bp in the base year but the gap decreased by 6.6 bp per year. The loan pricing gap disappeared by the end of sample period. However, Hispanics did not experience a reduction in rate differentials over time.

Impact of Corporate Subsidies on Borrowing Costs of Local Governments: Evidence From Municipal Bonds
Sudheer Chava, Baridhi Malakar & Manpreet Singh
Review of Finance, Volume 28, Issue 1, January 2024, Pages 117–161 


We analyze the impact of $40 billion of corporate subsidies given by U.S. local governments on their borrowing costs. We find that winning counties experience a 15.2 bps increase in bond yield spread as compared to the losing counties. The increase in yields is higher (18 – 26 bps) when the subsidy deal is associated with a lower jobs multiplier or when the winning county has a lower debt capacity. However, a high jobs multiplier does not seem to alleviate the debt capacity constraints of local governments. Our results highlight the potential costs of corporate subsidies for local governments.

Measuring the Expected Effects of the Global Tax Reform
Roberto Gómez-Cram & Marcel Olbert
Review of Financial Studies, forthcoming 


Over 140 countries agreed on a fundamental corporate tax reform in 2021 to be implemented in 2023 and beyond. To measure its potential effects, we study asset price changes within minutes of the reform announcements. We construct proxies for the reform’s costs regarding U.S. companies’ tax burdens and countries’ public finances. Likely exposed companies exhibit significant negative stock returns. Our lower-bound estimates indicate total shareholder value losses of $112.6 billion one day after the reform announcements. Further, likely exposed countries experience increases in sovereign debt credit risk. Our findings inform the cost-benefit analysis of a historical international tax reform.

Judging Nudging: Understanding the Welfare Effects of Nudges Versus Taxes
John List et al.
NBER Working Paper, April 2023 


While behavioral non-price interventions (“nudges”) have grown from academic curiosity to a bona fide policy tool, their relative economic efficiency remains under-researched. We develop a unified framework to estimate welfare effects of both nudges and taxes. We showcase our approach by creating a database of more than 300 carefully hand-coded point estimates of non-price and price interventions in the markets for cigarettes, influenza vaccinations, and household energy. While nudges are effective in changing behavior in all three markets, they are not necessarily the most efficient policy. We find that nudges are more efficient in the market for cigarettes, while taxes are more efficient in the energy market. For influenza vaccinations, optimal subsidies likely outperform nudges. Importantly, two key factors govern the difference in results across markets: i) an elasticity-weighted standard deviation of the behavioral bias, and ii) the magnitude of the average externality. Nudges dominate taxes whenever i) exceeds ii). Combining nudges and taxes does not always provide quantitatively significant improvements to implementing one policy tool alone.

The impact of government form on resource allocation in local government, evidence from municipal court closures
Siân Mughan & Dallin Overstreet
Public Budgeting & Finance, forthcoming 


Differences in managerial expertise and political incentives associated with local government form may affect local government spending levels as well as the allocation of resources. This paper explores the latter possibility by estimating how the distribution of resources in council-manager and mayor-council municipalities responds to a positive fiscal shock resulting from the abolition of a municipality's court. We find that court abolition has a distinct effect on the allocation of resources in council-manager and mayor-council governments. As expected, mayor-council municipalities allocate the marginal dollar to policing. However, council-manager municipalities react to court closure by reducing police expenditures over the long-term.


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