On budget
Public Debt Overhangs: Advanced-Economy Episodes since 1800
Carmen Reinhart, Vincent Reinhart & Kenneth Rogoff
Journal of Economic Perspectives, Summer 2012, Pages 69-86
Abstract:
We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90 percent for at least five years. Consistent with Reinhart and Rogoff (2010) and most of the more recent research, we find that public debt overhang episodes are associated with lower growth than during other periods. The duration of the average debt overhang episode is perhaps its most striking feature. Among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates, as in eleven of the episodes, interest rates are not materially higher.
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Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach
Gauti Eggertsson & Paul Krugman
Quarterly Journal of Economics, forthcoming
Abstract:
In this article we present a simple new Keynesian-style model of debt-driven slumps - that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan's lost decade (now in its 18th year) and the Great Depression itself.
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Tax and Expenditure Limitations and State Credit Ratings
Judith Stallmann et al.
Public Finance Review, September 2012, Pages 643-669
Abstract:
The impact of state tax and expenditure limitations (TELs) on bond credit ratings is estimated using an incomplete (or unbalanced) panel from the US states from 1973 to 2005. Three indices of the restrictiveness of TELs are used. Both Moody's and Standard and Poor's bond credit ratings are used and the outcomes compared. The results are consistent with previous work; more restrictive revenue TELs are associated with lower credit ratings while expenditure TELs are generally associated with higher credit ratings. TELs restricting both revenues and expenditures are negatively associated with Moody' ratings, but not with those of Standard and Poor's. Contrary to previous studies, the authors find limited differences in the fiscal and economic variables that influence the ratings of the two agencies.
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Warfare, fiscal capacity, and performance
Mark Dincecco & Mauricio Prado
Journal of Economic Growth, September 2012, Pages 171-203
Abstract:
We exploit differences in casualties sustained in pre-modern wars to estimate the impact of fiscal capacity on economic performance. In the past, states fought different amounts of external conflicts, of various lengths and magnitudes. To raise the revenues to wage wars, states made fiscal innovations, which persisted and helped to shape current fiscal institutions. Economic historians claim that greater fiscal capacity was the key long-run institutional change brought about by historical conflicts. Using casualties sustained in pre-modern wars to instrument for current fiscal institutions, we estimate substantial impacts of fiscal capacity on GDP per worker. The results are robust to a broad range of specifications, controls, and sub-samples.
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Debt and growth: New Evidence for the euro area
Anja Baum, Cristina Checherita-Westphal & Philipp Rother
Journal of International Money and Finance, forthcoming
Abstract:
Against the background of the euro area sovereign debt crisis, our paper investigates the relationship between public debt and economic growth and adds to the existing literature in the following ways. First, we extend the threshold panel methodology by Hansen (1999) to a dynamic setting in order to analyse the non-linear impact of public debt on GDP growth. Second, we focus on 12 euro area countries for the period 1990-2010, therefore adding to the current discussion on debt sustainability in the euro area. Our empirical results suggest that the short-run impact of debt on GDP growth is positive and highly statistically significant, but decreases to around zero and loses significance beyond public debt-to-GDP ratios of around 67%. This result is robust throughout most of our specifications, in the dynamic and non-dynamic threshold models alike. For high debt-to-GDP ratios (above 95%), additional debt has a negative impact on economic activity. Furthermore, we can show that the long-term interest rate is subject to increased pressure when the public debt-to-GDP ratio is above 70%, broadly supporting the above findings.
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Florian Heider & Alexander Ljungqvist
NBER Working Paper, July 2012
Abstract:
We use a natural experiment in the form of staggered changes in corporate income tax rates across U.S. states and time to show that tax considerations are a first-order determinant of firms' capital structure choices. Over the period 1990-2011, firms increase leverage by 114 basis points on average (equivalent to $62.1 million in extra debt) when their home state raises tax rates. Contrary to standard trade-off theory, the tax sensitivity of leverage is asymmetric: Firms do not reduce leverage in response to tax cuts. Using treatment reversals, we find this to be true even within-firm: Tax increases that are later reversed nonetheless lead to permanent increases in a firm's leverage - an unexpected and novel form of hysteresis. Our findings are robust to various confounds due to unobserved variation in local business conditions or investment opportunities, union power, or states' political leanings. Treatment effects are heterogeneous, with greater tax sensitivity among profitable and investment-grade firms which have a greater marginal tax benefit and lower marginal cost of issuing debt, respectively.
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Political Determinants of State E-Commerce Sales Tax Policy
Geoffrey Propheter
Politics & Policy, August 2012, Pages 657-679
Abstract:
In the absence of congressional action, states have two nonexclusive e-commerce sales tax policy options: membership in the Streamlined Sales Tax Project or enactment of Amazon tax legislation. Previous research has suggested that economic factors are important predictors of adopting the former, and legislators frequently assert that lost revenue is a motivation for adopting either. There is also some evidence that a state's political environment determines policy selection. This article tests these claims. Using two unique datasets, one for each policy, economic factors and foregone revenue are found to not be statistically significant predictors of e-commerce tax policy adoption. Instead, the political environment matters. The analysis concludes that governors drive state e-commerce sales tax policy, and that the naïve perception that Republicans are less willing to tax than Democrats is misleading. Furthermore, the analysis finds indirect evidence that retail lobby influence is an important factor in a state's enactment of Amazon tax legislation.
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Kaifeng Yang & Gary VanLandingham
American Review of Public Administration, September 2012, Pages 543-561
Abstract:
How hollow government can go is a long-standing question that has not been fully answered. In particular, the literature has highlighted the importance of contracting monitoring, but has rarely examined whether or when this function can be successfully outsourced. Extending and integrating theoretic approaches that are relevant to government contracting, this article proposes six conditions that public managers must address in order to successfully outsource the contracting oversight function. The framework is then applied to the case of Florida's experiment with contracting out financial and programmatic monitoring of outsourced child welfare services. The discontinued experiment in Florida illustrates the challenges that arise when outsourcing the contracting monitoring function in a politically charged environment.
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George Krause & James Douglas
American Journal of Political Science, forthcoming
Abstract:
Increasing both the size and diversity of policymaking panels is widely thought to enhance the accuracy of collective policy decisions. This study advances the theoretical conditions in which improving collective accuracy necessitates an efficient trade-off between a panel's size and its level of organizational diversity. This substitution effect between these organizational characteristics is empirically supported with data on official general-fund revenue forecasts made by consensus group (CG) independent commissions in the American states. Evidence of an asymmetric substitution effect is also uncovered, whereby increasing organizational diversity in large CG commissions produces revenue forecasts that reduce collective accuracy by slightly more than three times as much compared to decreasing such diversity in small CG commissions. This study underscores the limits of organizational diversity as a mechanism for improving collective judgments when policymaking authority is diffuse among many panel members.
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Economic Effects of State-Level Tax and Expenditure Limitations
Suho Bae, Seong-gin Moon & Changhoon Jung
Public Administration Review, forthcoming
Abstract:
As a result of devolution, state governments have taken on greater responsibility for financing and providing public services. Increasingly, states have adopted state-level tax and expenditure limitations (TELs) to manage the growth and size of state budgets. The adoption of TELs is supported by claims that they have a positive effect on state economies, although such claims lack empirical evidence and have been contested by several scholars. Despite the ongoing debate about validating the actual economic effects of state-level TELs, there is a lack of empirical assessments of their effects. The empirical results of this article indicate that the presence of state-level TELs has a negative effect on the level of employment but no effect on the state's personal income per capita. The presence of state-level TELs has no effect on either the growth of personal income per capita or the growth of employment.
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John Shoven & Sita Nataraj Slavov
NBER Working Paper, July 2012
Abstract:
Social Security benefits may be commenced at any time between ages 62 and 70. As individuals who claim later can, on average, expect to receive benefits for a shorter period, an actuarial adjustment is made to the monthly benefit to reflect the age at which benefits are claimed. In earlier work (Shoven and Slavov, 2012), we investigated the actuarial fairness of this adjustment for individuals with average life expectancy for their cohort. We found that for current real interest rates, delaying is actuarially advantageous for a large subset of people, particularly for primary earners in married couples. In this paper, we quantify the degree of actuarial advantage or disadvantage for individuals whose mortality differs from the average. We find that at real interest rates close to zero, most households - even those with mortality rates that are twice the average - benefit from some delay, at least for the primary earner. At real interest rates closer to their historical average, however, singles with mortality that is substantially greater than average do not benefit from delay; however, primary earners with high mortality can still improve the present value of the household's benefits through delay. We also investigate the extent to which the actuarial advantage of delay has grown since the early 1960s, when the choice of when to claim first became available, and we decompose this growth into three effects: (1) the effect of changes in Social Security's rules, (2) the effect of changes in the real interest rate, and (3) the effect of changes in life expectancy.
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Jeffrey Liebman & Erzo Luttmer
Tax Policy and the Economy, 2012, Pages 1-42
Abstract:
The degree to which the Social Security tax distorts labor supply depends on the extent to which individuals perceive the link between current earnings and future Social Security benefits. Some Social Security reform plans have been motivated by an assumption that workers fail to perceive this link and that increasing the salience of the link could result in significant efficiency gains. To measure the perceived linkage between labor supply and Social Security benefits, we administered a survey to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply. Indeed, respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual incentive. We also surveyed people about their understanding of various other provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming and rules on widow benefits) are relatively well understood while others (e.g., rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood. In addition, our survey incorporated a framing experiment, which shows that how the incentives for delayed claiming are presented has an impact on hypothetical claiming decisions. In particular, the traditional "break-even" framing used by the Social Security Administration leads to earlier claiming than other presentations do.
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Social Security Systems, Human Capital, and Growth in a Small Open Economy
Michael Kaganovich & Volker Meier
Journal of Public Economic Theory, August 2012, Pages 573-600
Abstract:
We consider a small open economy in which the level of public education funding is determined by popular vote. We show that growth can be enhanced by the introduction of pay-as-you-go pensions even if the growth rate of aggregate wages falls short of the interest rate. The reason is that the pay-as-you-go (PAYG) system allows future retirees to partially internalize positive externalities of public education due to the positive effect of higher future labor productivity on their pension benefits. The majority support for education funding will be especially strong when the PAYG benefit formula is flat, i.e., progressively redistributive. If a flat benefit PAYG pension system is in place then the economy will achieve the highest growth rate relative to the alternative pension system designs. While such PAYG pension system may be opposed by the majority of working individuals due to inferior returns to their pension contributions relative to a funded scheme, it is likely to be politically sustained by a coalition of older individuals and lower income workers.
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Siew Ling Yew & Jie Zhang
Journal of Economic Dynamics and Control, forthcoming
Abstract:
This paper considers socially optimal government policies in a dynastic family model with physical capital, human capital, endogenous fertility and positive spillovers from average human capital. Such spillovers reduce human capital investment but raise fertility from their social optimum. We first characterize the social optimum with a non-convex feasible set due to the quantity-quality tradeoff concerning children. We then show that social security and education subsidization together, financed by labor income taxes, can fully eliminate the efficiency losses of the spillovers and achieve the social optimum under plausible conditions. However, none of the policies can do so alone.
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Bridging the Gap: Anticipated Shortfalls in Future Retirement Income
Douglas Hershey & Joy Jacobs-Lawson
Journal of Family and Economic Issues, September 2012, Pages 306-314
Abstract:
Determining an appropriate and desirable income replacement rate is one of the keys to developing a successful personal financial plan for retirement. In the present investigation, we examined workers' expectations of the pre-retirement income they believed would be necessary in order to have a "good" retirement relative to the income they anticipated they would receive. Analyses revealed an expected income shortfall, the magnitude of which was positively related to one's income and age. Sex was also related to the magnitude of the expected shortfall, with women anticipating a larger financial discrepancy than men. Finally, a sex by marital status interaction emerged in which single women were found to have a larger shortfall than single men and married individuals of both sexes. Findings are discussed in terms of the importance of interventions aimed at educating workers to understand the value of selecting a reasonable retirement income replacement rate.
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Games within borders: Are geographically differentiated taxes optimal?
David Agrawal
International Tax and Public Finance, August 2012, Pages 574-597
Abstract:
The discontinuous tax treatment of sales at borders creates incentives for individuals to cross-border shop. This paper addresses whether it is optimal for a state composed of multiple regions to levy differentiated commodity tax rates across the regions. In a model where states maximize social welfare, a state's optimal commodity tax system is almost always geographically differentiated. The optimal pattern of geographic differentiation critically depends on fundamental parameters as well as whether the state has a preference for high or low taxes. Under the assumption that utility is linear in consumption and that the elasticity of cross-border shopping is less than unity in absolute value, high-tax states will find it optimal to set a tax rate that is lower in the border region than in the periphery region and low-tax states will find it optimal to set a tax rate that is higher in the border region than in the periphery region. Optimizing high-tax states will set a higher tax rate in the border region if the social welfare measure is sufficiently redistributive. With welfare maximization, it is possible for taxes to be higher in the region near the state border-an outcome that cannot arise when the government cares only about total tax revenue.
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Taxes and Time Allocation: Evidence from Single Women and Men
Alexander Gelber & Joshua Mitchell
Review of Economic Studies, July 2012, Pages 863-897
Abstract:
The classic model of Becker (1965, "A Theory of the Allocation of Time", Economic Journal, 125, 493-517) suggests that labour supply decisions should be analysed within the broader context of time allocation and market good consumption choices, but most empirical work on policy has focused exclusively on measuring impacts on market work. This paper examines how income taxes affect time allocation during the entire day and how these time allocation decisions interact with expenditure patterns. Using the Panel Study of Income Dynamics from 1975 to 2004, we analyse the response of single women's housework, labour supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. We find that when the economic reward to participating in the labour force increases, market work increases and housework decreases, with the decrease in housework accounting for approximately two-thirds of the increase in market work. Analysis of repeated cross sections of time diary data from 1975 to 2004 shows that "home production" decreases substantially when market hours of work increase in response to policy changes. Data on expenditures show some evidence that expenditures on market goods likely to substitute for housework increase in response to a greater incentive to join the labour force. The baseline estimates imply that the elasticity of substitution between consumption of home and market goods is 2•61. The results are consistent with the Becker model. Meanwhile, single men show little response to changes in tax policy, and we are able to rule out an elasticity of substitution between home and market goods for this group of more than 1•66.
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The direct incidence of corporate income tax on wages
Wiji Arulampalam, Michael Devereux & Giorgia Maffini
European Economic Review, August 2012, Pages 1038-1054
Abstract:
A stylised model is provided to show how the direct effect of corporate income tax on wages can be identified in a bargaining framework using cross-company variation in tax liabilities, conditional on value added per employee. Using data on 55,082 companies located in nine European countries over the period 1996-2003, we estimate the long run elasticity of the wage bill with respect to taxation to be -0.093. Evaluated at the mean, this implies that an exogenous rise of $1 in tax would reduce the wage bill by 49 cents. Only a weak evidence of a difference for multinational companies is found.
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What Will My Account Really Be Worth? An Experiment on Exponential Growth Bias and Retirement Saving
Gopi Shah Goda, Colleen Flaherty Manchester & Aaron Sojourner
NBER Working Paper, March 2012
Abstract:
Recent findings on limited financial literacy and exponential growth bias suggest saving decisions may not be optimal because such decisions require an accurate understanding of how current contributions can translate into income in retirement. This study uses a large-scale field experiment to measure how a low-cost, direct-mail intervention designed to inform subjects about this relationship affects their saving behavior. Using administrative data prior to and following the intervention, we measure its effect on participation and the level of contributions in retirement saving accounts. Those sent income projections along with enrollment information were more likely to change contribution levels and increase annual contributions relative to the control group. Among those who made a change in contribution, the increase in annual contributions was approximately $1,150. Results from a follow-up survey corroborate these findings and show heterogeneous effects of the intervention by rational and behavioral factors known to affect saving. Finally, we find evidence of behavioral influences on decision-making in that the assumptions used to generate the projections influence the saving response.
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Nursing home residents make a difference - The overestimation of saving rates at older ages
Michael Ziegelmeyer
Economics Letters, forthcoming
Abstract:
Based on the HRS, I find strong dissaving of nursing home residents and a significant overestimation of U.S. saving rates from age 75 onwards if nursing home residents are excluded as in most micro datasets.