Our money
State Adoption of Tax Policy: New Data and New Insights
Thomas Hayes & Christopher Dennis
American Politics Research, forthcoming
Abstract:
This article examines the factors that influence two important areas of state tax policy — the adoption of an income tax as well as whether a state permits deducting federal income taxes against state individual income taxes. We focus on a factor that has largely been unexplored, the flow of income going to the Top 1% of earners. Using data from two different time periods (1916-1937 and 1960-2003), we find that the share of income received by the richest 1% of taxpayers corresponds with both the likelihood states will adopt an income tax as well as whether states allow deductions of federal income tax against state individual income taxes.
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Tax Legislation in the Contemporary U.S. Congress
Michael Doran
Tax Law Review, forthcoming
Abstract:
This paper identifies and analyzes a recent trend toward “clean” federal tax legislation. Existing explanations of the tax-legislative process account for the regular, highly particularistic tax legislation prevalent during the 1980s and the early 1990s using legislator-motivation and traditional policy models. But a new tax-legislative process, characterized by alternating periods of tax gridlock and strikingly non-particularistic tax legislation, emerged during the late 1990s. This paper argues that tax gridlock and non-particularistic tax legislation are best understood as companion phenomena, and it examines three general determinants of recent tax-legislative outcomes. First, exogenous events, particularly macro-economic and macro-political developments, typically provide the central policy objective for any item of major tax legislation. Second, the voting behavior of individual legislators on tax legislation corresponds closely to generally accepted understandings of legislator motivations. Third and most importantly, several legislative-organizational developments within Congress – specifically, the emergence of sharp coalitional polarization and strong coalitional cohesion, the re-establishment of centralized chamber management, and the relaxation of restrictions on the federal budget – combined to produce the new tax-legislative process during the late 1990s and the 2000s. This paper does not offer a positive theory of the tax-legislative process or make predictions about tax-legislative outcomes. Rather, it builds on existing accounts to provide an updated and more nuanced explanation of the tax-legislative process in the contemporary Congress.
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Debt and Growth: Is There a Magic Threshold?
Andrea Pescatori, Damiano Sandri & John Simon
IMF Working Paper, February 2014
Abstract:
Using a novel empirical approach and an extensive dataset developed by the Fiscal Affairs Department of the IMF, we find no evidence of any particular debt threshold above which medium-term growth prospects are dramatically compromised. Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt. Notwithstanding this, we find some evidence that higher debt is associated with a higher degree of output volatility.
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Public debt and economic growth: Is there a causal effect?
Ugo Panizza & Andrea Presbitero
Journal of Macroeconomics, forthcoming
Abstract:
This paper uses an instrumental variable approach to study whether public debt has a causal effect on economic growth in a sample of OECD countries. The results are consistent with the existing literature that has found a negative correlation between debt and growth. However, the link between debt and growth disappears once we correct for endogeneity. We conduct a battery of robustness tests and show that our results are not affected by weak instrument problems and are robust to relaxing our exclusion restriction. Our finding that there is no evidence that public debt has a causal effect on economic growth is important in the light of the fact that the negative correlation between debt and growth is sometimes used to justify policies that assume that debt has a negative causal effect on economic growth.
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Andrew Bell, Ron Johnston & Kelvyn Jones
Journal of Economic Geography, forthcoming
Abstract:
This article reanalyses data used by Reinhart and Rogoff (2010c, American Economic Review, 100: 573–78—RR), and later Herndon et al. (2013, Cambridge Journal of Economics, online, doi: 10.1093/cje/bet075) to consider the relationship between growth and debt in developed countries. The consistency over countries and the causal direction of RR’s so called ‘stylised fact’ is considered. Using multilevel models, we find that when the effect of debt on growth is allowed to vary, and linear time trends are fully controlled for, the average effect of debt on growth disappears, whilst country-specific debt relations vary significantly. Additionally, countries with high debt levels appear more volatile in their growth rates. Regarding causality, we develop a new method extending distributed lag models to multilevel situations. These models suggest the causal direction is predominantly growth-to-debt, and is consistent (with some exceptions) across countries. We argue that RR’s findings are too simplistic, with limited policy relevance, whilst demonstrating how multilevel models can explicate realistically complex scenarios.
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Soledad Artiz Prillaman & Kenneth Meier
Journal of Politics, April 2014, Pages 364-379
Abstract:
State fiscal policy frequently focuses on stimulating a healthy business environment with the assumption that this is linked with long-term economic growth. The conventional wisdom is that a state’s tax rates are negatively correlated with economic development, prompting states to decrease business-targeted taxes to stimulate the economy. Surprisingly, however, very few studies have documented the long-term effects of these tax policies on different facets of the state economy and overall business atmosphere. In short, we do not know how the level of business taxation actually affects the economies of states. Using panel data for all 50 U.S. states from 1977 to 2005, this article examines the impact of state business taxes on the overall economic position of the state, specifically looking at their effect on economic development and business growth. With an elaborate set of controls, the article finds that state business tax cuts have little to no positive impact on gross state product, job creation, personal income, poverty rates, and business establishments.
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Colin McCubbins & Mathew McCubbins
Stanford Working Paper, March 2014
Abstract:
Tax limitations (TLs) represent a class of lawmaking that often pits voters against the incentives of their elected representatives. Thus, are voter backed TLs successful in changing state government fiscal behavior? Using agency theory, we discuss how TLs will likely be ineffective at their stated goals in the face of hostile legislative interests. We test the effectiveness of these measures through use of the Synthetic Control Method presented by Abadie, Diamond, and Hainmueller (2010), which allows us to analyze the passage of TLs in each state individually by comparing them to constructed counterfactuals that estimate what constant-level taxes would have been in each state had its TL never been passed. Using this approach, we show that these TLs are almost always ineffective at reducing taxes or expenditures. This result is consistent with recent studies that highlight the ineffectiveness of initiatives. We will argue that the ineffectiveness of TLs is also true generally, for the same reasons that initiatives are typically ineffective in that there is no means for the people to implement, oversee, or enforce the limits and legislatures will often be unwilling to enforce these limitations themselves.
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Do State-funded Property Tax Exemptions Actually Provide Tax Relief? Georgia’s HTRG Program
Spencer Brien & David Sjoquist
Public Finance Review, forthcoming
Abstract:
We examine the effect of a state-funded property tax homestead exemptions on the burden of property taxes. This class of exemptions is characterized by a grant from the state to local governments that is intended to replace the reduction in property tax revenue due to the exemption. The median voter model predicts that part of the homestead exemption will be used to increase expenditures. In addition, fiscal illusion could reduce the effectiveness of this type of grant in lowering the tax burden. We test these predictions for the Georgia’s Homeowner’s Tax Relief Grant program by separately using panels of county-level data and school system data. We find that over one-third of funds transferred to counties through this program are used to increase revenues rather than provide tax relief. We find evidence of possible fiscal illusion for school systems.
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Tax Evasion, Human Capital, and Productivity-Induced Tax Rate Reduction
Max Gillman & Michal Kejak
Journal of Human Capital, Spring 2014, Pages 42-79
Abstract:
Growth in the human capital sector’s productivity explains in part how US postwar growth and welfare could have increased while US tax rates declined. Modeling tax evasion within an endogenous growth model with human capital, an upward trend in goods and human capital sectors gradually decreases tax evasion and allows for tax rate reduction. Using estimated goods and human capital sectoral productivities, the model explains 30 percent of the actual decline in a weighted average of postwar US top marginal personal and corporate tax rates. The productivity increases are asymmetric in a fashion related to that of McGrattan and Prescott.
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A Tale of an Unwanted Outcome: Transfers and Local Endowments of Trust and Cooperation
Antonio Accetturo, Guido de Blasio & Lorenzo Ricci
Journal of Economic Behavior & Organization, June 2014, Pages 74–89
Abstract:
Transfers can do good; however, they can also result in massive failures. This paper presents a model that highlights the ambiguous nature of the impact of transfers on local endowments of social capital. It then describes an empirical investigation that illustrates that the receipt of EU structural funds causes a deterioration of the endowments of trust and cooperation in the subsidized regions.
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Assessing the Impact of the Size and Scope of Government on Human Well-Being
Patrick Flavin, Alexander Pacek & Benjamin Radcliff
Social Forces, forthcoming
Abstract:
We examine how public policies affect life satisfaction across the industrial democracies. We consider as indicators of policy overall levels of government spending, the size and generosity of the welfare state, and the degree of labor market regulation. Using individual- and aggregate-level data for OECD countries from 1981 to 2007, we find robust evidence that citizens find life more satisfying as the degree of government intervention in the economy increases. We find, further, that this result is inelastic to changes in income; that is, high- and low-income citizens appear to find more “leftist” social policies equally conducive to their subjective well-being. We conclude with a discussion of the practical and theoretical implications of the results.
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Alexander Jakubow
Politics & Policy, February 2014, Pages 3–36
Abstract:
To what extent does state intervention in the market condition how individuals subjectively experience the lives that they lead? Prevailing attempts to understand the relationship between state intervention and subjective well-being have yielded mixed empirical results. However, these differences result from omitted variable biases, not different methodological choices. Drawing on insights from the new social risk and quality of governance literatures, this article contends that the policy orientation and administrative quality of welfare state programs jointly condition the effect of state intervention on life satisfaction. State intervention exerts a strong positive effect on perceived satisfaction with life when the quality of administrative institutions is high and policy interventions focus on insuring individuals against newer, post-industrial forms of market risk. This main hypothesis is tested and confirmed against an empirical analysis of survey data taken from Wave 5 of the World Values Survey.
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Government Size, Nonprofit Sector Strength, and Corruption: A Cross-National Examination
Nuno Themudo
American Review of Public Administration, May 2014, Pages 309-323
Abstract:
Government should serve the public good. Yet critics argue that “big government” is a major cause of corruption. This article assesses the empirical validity of their argument through cross-national statistical analysis, addressing two of previous research’s key weaknesses: lack of controls for potential reverse causation and for the likely confounding impact of nonprofit sector size. Contrary to critics’ claims, the analysis presented here finds no evidence that a larger government generally contributes to higher corruption. Instead, both government and nonprofit sector size generally have an inverse relationship with the level of corruption. To combat corruption, therefore, public administrators should be skeptical of recommendations for sweeping government cuts and should instead consider policies that strengthen the public and the nonprofit sectors.
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Crowding Out and Crowding In of Private Donations and Government Grants
Garth Heutel
Public Finance Review, March 2014, Pages 143-175
Abstract:
A large literature examines the interaction of private and public funding of charities, much of it testing if public funding crowds out private funding. In this article, the author looks for two alternative phenomena using a large panel data set gathered from nonprofit organizations’ tax returns. First, the author looks for crowding out in the opposite direction: increased private funding may cause reduced public funding. Second, the author tests whether one type of funding acts as a signal of charity quality and thus crowds in other funding. The author finds evidence that government grants crowd in private donations. Crowding in is larger for younger charities. This is consistent with signaling, if donors know less about younger charities and the signal value is stronger. The author finds no evidence of an effect of private donations on government grants.
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The Metric System of State Income Taxes
Yair Listokin & Erik Stegemiller
Yale Working Paper, February 2014
Abstract:
The residents of six US states (Alabama, Iowa, Louisiana, Missouri, Montana, and Oregon) get to exclude or deduct all or part of their federal income taxes paid when they calculate their taxable income for state income tax purposes. Critics have called this deduction “costly and regressive.” The critics are probably right, but not for the reasons they think. The critics of the deduction overlook the fact that the states that allow deductibility of federal income tax for state tax purposes use a different state income “tax base” or “scale” than other states. Most state income tax regimes use a tax base that includes federal income taxes paid (we call it FTI), but the six states listed above use an income tax base that excludes federal income taxes (the FTE base). The two tax bases can translated from one to the other. Indeed, this paper provides original formulae for converting the FTE base into its FTI equivalent and vice verce. Because of this equivalence, one state income tax base is not a priori better than another. But when we convert FTE income tax bases into their FTI equivalents, we find a pervasive trend. States with FTE income tax regimes systematically have more regressive income tax regimes than states with FTI bases. We argue that taxpayers and legislators under-adjust relative to our translation formula when comparing FTE regimes to FTI regimes, causing the systematic regressive trend in states with FTE regimes.
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How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs
Youssef Benzarti
University of California Working Paper, March 2013
Abstract:
Every year more than 240 million taxpayers have to file income taxes, imposing a significant cost on the economy. How large is this cost and are taxpayers willing to forego large tax benefits to avoid it? To answer this question, I focus on the choice between itemizing deductions and claiming the standard deduction. I use a non-parametric approach along with administrative tax data to show that the cost of itemizing deductions exceeds $700 on average per household and that taxpayers are willing to forego large tax benefits to avoid it. I show that this cost is mostly driven by the time spent archiving receipts rather than filling-out forms. The cost also increases in income, consistent with the fact that the value of time of richer households is larger. I explain the magnitude of the cost using a model based on present-bias. I also argue that the results cannot be explained by lack of information nor audit probabilities.
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Stephen Miller & Christopher Clarke
University of Nevada Working Paper, February 2014
Abstract:
The slow economic recovery since the 2008 financial crisis and Great Recession requires state and local governments to continue to make difficult decisions concerning which taxes to raise and which expenditures to decrease in order to maintain a balanced budget. As expenditures usually raise economic growth and taxes generally hinder it, seeking the optimum combination of taxes and expenditures encourages prosperity in a state. In this paper, we study the effects of various expenditures and revenue combinations on growth in real state personal income per capita, using a sample of annual observations from 1977 to 2010 for 49 states and the District of Columbia. We find that state and local governments overfund education and parks, recreation, and natural resources while they underfund hospitals and health spending, once netted for charges and user fees. State and local governments also underutilize corporate income taxes as a source of revenue. Finally, we also estimate non-linear and short- and long-run specifications, which generally support prior findings.
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Machines, Buildings, and Optimal Dynamic Taxes
Ctirad Slavík & Hakki Yazici
Journal of Monetary Economics, forthcoming
Abstract:
The effective taxes on capital returns differ depending on capital type in the U.S. tax code. This paper uncovers a novel reason for the optimality of differential capital taxation. We set up a model with two types of capital - equipments and structures - and equipment-skill complementarity. Under a plausible assumption, we show that it is optimal to tax equipments at a higher rate than structures. In a calibrated model, the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state. The welfare gains of optimal differential capital taxation can be as high as 0.4% of lifetime consumption.
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Shrouded Costs of Government: The Political Economy of State and Local Public Pensions
Edward Glaeser & Giacomo Ponzetto
Journal of Public Economics, forthcoming
Abstract:
Why do public-sector workers receive so much of their compensation in the form of pensions and other benefits? This paper presents a political economy model in which politicians compete for taxpayers’ and government employees’ votes by promising compensation packages, but some voters cannot evaluate every aspect of promised compensation. If pension packages are “shrouded,” so that public-sector workers better understand their value than ordinary taxpayers, then compensation will be highly back-loaded. In equilibrium, the welfare of public-sector workers could be improved, holding total public-sector costs constant, if they received higher wages and lower pensions. Centralizing pension determination has two offsetting effects on generosity: more state-level media attention helps taxpayers better understand pension costs, and that reduces pension generosity; but a larger share of public-sector workers will vote within the jurisdiction, which increases pension generosity. A short discussion of pensions in two decentralized states (California and Pennsylvania) and two centralized states (Massachusetts and Ohio) suggests that centralization appears to have modestly reduced pensions, but, as the model suggests, this is unlikely to be universal.
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Benedict Jimenez
Public Administration Review, March/April 2014, Pages 246–257
Abstract:
The fundamental value underlying the design of a fragmented system of local governance is consumer sovereignty. This system functions as a market-like arrangement providing citizen-consumers a choice of jurisdictions that offer different bundles of public services and taxes. However, the same choice also can facilitate class-based population sorting, creating regions where fiscally wealthy jurisdictions coexist with impoverished ones. Some argue that the public market enhances the power of all consumers, whether poor or rich. Even if the poor are concentrated in some jurisdictions, they can exercise their voice to ensure that their government responds to their service needs. But does the voice of the poor matter as much as the voice of the rich in determining service levels in the local public market? Comparing the budgetary choices in poor and affluent municipalities, this article shows that in highly fragmented regions, some municipal services are provided the least in communities where they are needed the most.
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Follow the Leader? Evidence on European and US Tax Competition
Rosanne Altshuler & Timothy Goodspeed
Public Finance Review, forthcoming
Abstract:
This article breaks from the previous empirical literature that estimates Nash tax reaction functions of national governments competing with other national governments assuming that competitors play a Nash game and adjust to a Nash equilibrium in every year. We question this assumption and explore whether one country plays a leadership role in tax competition using data from 1968 to 2008. We test the leadership role of the United States, the United Kingdom, and Germany, and find support for a US leadership role. We also investigate whether countries react differently immediately after watershed tax reforms such as the 1986 US Tax Reform Act or the 1984 UK tax reform. We find some support for a different reaction to the United States following the 1986 US reform, but not for the United Kingdom or Germany.
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The Role of Retiree Health Insurance in the Early Retirement of Public Sector Employees
John Shoven & Sita Nataraj Slavov
Journal of Health Economics, forthcoming
Abstract:
Most government employees have access to retiree health coverage, which provides them with group health coverage even if they retire before Medicare eligibility. We study the impact of retiree health coverage on the labor supply of public sector workers between the ages of 55 and 64. We find that retiree health coverage raises the probability of stopping full time work by 4.3 percentage points (around 38 percent) over two years among public sector workers aged 55-59, and by 6.7 percentage points (around 26 percent) over two years among public sector workers aged 60-64. In the younger age group, retiree health insurance mostly seems to facilitate transitions to part-time work rather than full retirement. However, in the older age group, it increases the probability of stopping work entirely by 4.3 percentage points (around 22 percent).
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The Taxpayer Relief Act of 1997 and Homeownership: Is Smaller Now Better?
Amelia Biehl & William Hoyt
Economic Inquiry, April 2014, Pages 646–658
Abstract:
Prior to the Taxpayer Relief Act of 1997 (TRA97), the capital gain from the sale of a home was taxed differently for those over and under the age of 55. TRA97 eliminated this differential treatment. Using a difference-in-difference approach, we find that home sellers slightly under the age of 55 were 6.2% more likely to move for a less expensive house to maintain, 6.6% less likely to move for a larger place, and 5.2% more likely to reside in a condominium after TRA97's enactment, relative to those slightly over 55.
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Flypaper Nonprofits: The Impact of Federal Grant Structure on Nonprofit Expenditure Decisions
Jeremy Thornton
Public Finance Review, March 2014, Pages 176-198
Abstract:
This article examines the influence of federal grants on nonprofit expenditure decisions. The topic is of particular concern for governments who wish to stimulate private provision of public services. Recent research shows that grants may inadvertently reduce private sector provision by causing a reduction in fund-raising effort. This study extends line of inquiry by examining the influence of conditional versus lump-sum-style grants. The article draws detailed grant data from the Federal Assistance Award Data System (FAADS), which includes structural characteristics of the grant. FAADS grant information is combined with a panel of nonprofit financial data. Empirical results demonstrate that, though relatively uncommon in the data, conditional grants are particularly effective at stimulating both additional fund-raising activity and output of the firm. Block-Formula grants appear to significantly reduce both fund-raising and output decisions. The study implies that the use of conditional grants could mitigate crowd-out due to nonprofit management decisions.