Power to Tax

Kevin Lewis

September 15, 2009

Constitutional Agreement during the Drafting of the Constitution: A New Interpretation

Ben Baack, Robert McGuire & Norman Van Cott
Journal of Legal Studies, June 2009, Pages 533-567

We provide a new interpretation of one of the "great" but in ouagreer view "failed" North-South agreements during the U.S. Constitution's drafting. In 1787, lower South delegates to the Constitutional Convention reputedly settled for a simple-majority congressional vote for commercial regulations in exchange for northern delegates reputedly agreeing to limitations on national slave import restrictions and an export tariff prohibition. We document that the overall South gained little from the agreement because (1) import taxes are de facto export taxes, (2) the simple-majority rule was costly to southern interests, and (3) the slave import provision was limited. The agreement represents serious economic and political miscalculation by southern framers. Because the agreement was at a constitutional level, it endowed the nation with decades of unforeseen and unintended constitutional and sectional conflict that played a critical role in American public finance and southern secession and has important implications for contemporary constitution making.


How Far Are We From The Slippery Slope? The Laffer Curve Revisited

Mathias Trabandt & Harald Uhlig
NBER Working Paper, September 2009

We characterize the Laffer curves for labor taxation and capital income taxation quantitatively for the US, the EU-14 and individual European countries by comparing the balanced growth paths of a neoclassical growth model featuring "constant Frisch elasticity" (CFE) preferences. We derive properties of CFE preferences. We provide new tax rate data. For benchmark parameters, we find that the US can increase tax revenues by 30% by raising labor taxes and 6% by raising capital income taxes. For the EU-14 we obtain 8% and 1%. Denmark and Sweden are on the wrong side of the Laffer curve for capital income taxation.


Tax competition with parasitic tax havens

Joel Slemrod & John Wilson
Journal of Public Economics, forthcoming

We develop a tax competition framework in which some jurisdictions, called tax havens, are parasitic on the revenues of other countries, and these countries use resources in an attempt to limit the transfer of tax revenue from capital taxation to the havens. We demonstrate that the full or partial elimination of tax havens would improve welfare in non-haven countries. We also demonstrate that the smaller countries choose to become tax havens, and we show that the abolition of a sufficiently small number of the relatively large havens leaves all countries better off, including the remaining havens. We argue that these results extend to the case where there are also taxes on wage income that involve administrative and compliance costs.


The Effects of Soft Drink Taxes on Child and Adolescent Consumption and Weight Outcomes

Jason Fletcher, David Frisvold & Nathan Tefft
Yale Working Paper, August 2009

Childhood and adolescent obesity is associated with serious lifetime health consequences and has seen a recent rapid increase in prevalence. Soft drink consumption has also expanded rapidly, so much so that soft drinks are currently the largest single contributors to energy intake. In this paper, we investigate the potential for soft drink taxes to combat rising levels of adolescent obesity through a reduction in consumption. Our results, based on state soft drink sales and excise tax information between 1988 and 2006 and the National Health Examination and Nutrition Survey, suggest that soft drink taxation, as currently practiced in the United States, leads to a moderate reduction in soft drink consumption by children and adolescents. However, we show that this reduction in soda consumption is completely offset by increases in consumption of other high calorie drinks.


Corporate Taxes and Union Wages in the United States

Alison Felix & James Hines
NBER Working Paper, August 2009

This paper evaluates the effect of U.S. state corporate income taxes on union wages. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, reflecting that unions and employers share tax savings associated with low tax rates. In 2000 the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below four percent than in states with tax rates of nine percent and above. Controlling for observable worker characteristics, a one percent lower state tax rate is associated with a 0.36 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 54 percent of the benefits of low tax rates.


Why is There No Race to the Bottom in Capital Taxation?

Thomas Plümper, Vera Troeger & Hannes Winner
International Studies Quarterly, September 2009, Pages 761-786

This article explains the absence of a race to the bottom in capital taxation by analyzing fiscal competition under budget rigidities and tax equity constraints (fairness norms). We outline a political economic model of tax competition that treats the outcome of tax competition as one argument in the governments utility function, the others being public expenditure and tax equity. In accordance with previous theoretical research, tax competition tends to cause a reduction in taxes on mobile capital and an increase in the tax rates on relatively immobile labor in our model. Yet, our model predicts that governments do not fully abolish taxes on mobile capital. Instead, the government being least restricted by budget constraints and equity norms cuts tax rates to levels slightly below the lowest tax rates of those countries, in which governments are more constrained, where effective constraints are country size, budget rigidities and fairness norms. Analyzing data from 23 Organization for Economic Co-operation and Development countries between 1975 and 2004 we find empirical support for the hypotheses derived from our theoretical model.


Are State Corporate Income Tax Rates Too High? A Panel Study of Statewide Laffer Curves

John Robert Stinespring
University of Tampa Working Paper, June 2009

This paper estimates the impact of corporate income tax rates on corporate tax revenue at the state level over the period 1996-2007. Following standard theoretical constructs, corporate income tax revenues are characterized as a quadratic function of the corporate tax rate. Empirical results using linear, log-log, and semi-log econometric models support the hypothesis of the existence of a Laffer curve for the corporate income tax. Results also show the revenue-maximizing corporate tax rate has declined over time. The rates range from 8.52% to 9.32% for the time period 1996-2002 and 6.03% to 7.47% over the time period 2004-2007. These values indicate that 8 states were taxing on the right side of their Laffer curve in 2002, and 22 states were taxing on the right side of their Laffer curve in 2007. The policy implication is that these states could have experienced higher tax revenues with a lower tax rate.


Social Security and Marginal Returns to Work Near Retirement

Gayle Reznik, David Weaver & Andrew Biggs
Social Security Administration Working Paper, April 2009

Using the Social Security Administration's MINT (Modeling Income in the Near Term) model, this paper calculates the marginal returns to work near retirement, as measured by the increase in benefits associated with an additional year of employment at the end of an individual's work life. With exceptions for certain population subgroups, the analysis finds that marginal returns on Social Security taxes paid near retirement are generally low. The paper also tests the effects on marginal returns of a variety of potential Social Security policy changes designed to improve incentives to work.


Inertia and Overwithholding: Explaining the Prevalence of Income Tax Refunds

Damon Jones
UC Berkeley Working Paper, May 2009

Every year over three-quarters of US taxpayers receive income tax refunds, indicating tax prepayments above the level of tax liability. This amounts to a zero interest loan to the government and in some cases may hinder consumption smoothing. Previous studies have suggested two main explanations for this behavior: precautionary behavior in light of tax uncertainty and/or a forced savings motive. I present evidence on a third explanation: inertia. I find that tax filers only partially adjust tax prepayments in response to changes in default withholdings or tax liability. Thus, the initial shock leads to a drift in the refund level. I use four different settings for identification: (1) a 1992 change in default federal withholding, (2) a panel study of child dependents and tax liability, (3) the expansion of the Earned Income Tax Credit (EITC) during the 1990s and (4) a change in default enrollment rules for the Advance EITC option. In the first two cases, I find that individuals o¤set less than 30% of the shock to the refund level in the first year, and less than 60% of this shock after three years. I also find suggestive evidence of asymmetry in tax filers' responses. There is a stronger response to a shock that drives the refund below zero than to equivalent shocks that drive the refund up. In the latter two settings, I shift focus to the EITC-eligible population and find even stronger evidence of inertia. Adjustments in tax prepayments by this group offset no more than 2% of the change in tax liability. In the case of the Advance EITC, I show that informational interventions have the potential to greatly reduce default e¤ects. In light of these findings, one must take caution when using observational tax return data to draw inferences about preferences; such an exercise is confounded by the presence of inertia. From a public finance perspective, I conclude that given the evidence on inertia, the design of default withholding rules is no longer a neutral decision made by the social planner, but rather, may have significant welfare implications, particularly for low-income tax filers.


Sources of Polarization of Income and Wealth: Offshore Financial Centers

Mehrene Larudee
Review of Radical Political Economics, September 2009, Pages 343-351

One cause of increasing polarization of income and wealth in the United States has been the shift in taxation, with corporate income tax revenues declining and individual income tax revenues rising as a share of total tax revenues. This change flows in part from a rise in the use of tax haven services by the wealthy and by corporations, as well as in innovation in the types of services tax havens provide. Available evidence shows that tax havens hold at least $10 trillion in assets, are used by a majority of large corporations, and account for lost tax revenue of hundreds of billions of dollars annually. Economic data are likely distorted by transfer pricing of activities related to tax havens, including exports and imports, value added, productivity, profit, current account balances, and the nature and size of investment flows across borders. This and other research questions should be near the top of the agenda for radical political economists.


Freedom in the 50 States: An Index of Personal and Economic Freedom

William Ruger & Jason Sorens
GMU Working Paper, March 2009

This paper presents the first-ever comprehensive ranking of the American states on their public policies affecting individual freedoms in the economic, social, and personal spheres. We develop and justify our ratings and aggregation procedure on explicitly normative criteria, defining individual freedom as the ability to dispose of one's own life, liberty, and justly acquired property however one sees fit, so long as one does not coercively infringe on another individual's ability to do the same. This study improves on prior attempts to score economic freedom for American states in three primary ways: (1) it includes measures of social and personal freedoms such as peaceable citizens' rights to educate their own children, own and carry firearms, and be free from unreasonable search and seizure; (2) it includes far more variables, even on economic policies alone, than prior studies, and there are no missing data on any variable; and (3) it uses new, more accurate measurements of key variables, particularly state fiscal policies. We find that the freest states in the country are New Hampshire, Colorado, and South Dakota, which together achieve a virtual tie for first place. All three states feature low taxes and government spending and middling levels of regulation and paternalism. New York is the least free by a considerable margin, followed by New Jersey, Rhode Island, California, and Maryland. On personal freedom alone, Alaska is the clear winner, while Maryland brings up the rear. As for freedom in the different regions of the country, the Mountain and West North Central regions are the freest overall while the Middle Atlantic lags far behind on both economic and personal freedom. Regression analysis demonstrates that states enjoying more economic and personal freedom tend to attract substantially higher rates of internal net migration. The data used to create the rankings are publicly available online and we invite others to adopt their own weights to see how the overall state freedom rankings change.


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