Take and give
Fiscal Policy and Economic Recovery: The Case of the 1936 Veterans' Bonus
Joshua Hausman
American Economic Review, forthcoming
Abstract:
Conventional wisdom has it that in the 1930s fiscal policy did not work because it was not tried. This paper shows that fiscal policy was tried in 1936. The veterans' bonus of 1936 paid 2 percent of GDP to 3.2 million veterans; the typical veteran received a payment equal to per capita income. Multiple sources, including a household consumption survey, show that veterans spent the majority of their bonus. Point estimates of the MPC are between 0.6 and 0.75. Spending was concentrated on cars and housing in particular.
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Business in the United States: Who Owns it and How Much Tax Do They Pay?
Michael Cooper et al.
NBER Working Paper, October 2015
Abstract:
"Pass-through" businesses like partnerships and S-corporations now generate over half of U.S. business income and account for much of the post-1980 rise in the top-1% income share. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. We present three findings. (1) Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners. (2) Partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships. (3) The average federal income tax rate on U.S. pass-through business income is 19% - much lower than the average rate on traditional corporations. If pass-through activity had remained at 1980's low level, strong but straightforward assumptions imply that the 2011 average U.S. tax rate on total U.S. business income would have been 28% rather than 24%, and tax revenue would have been approximately $100 billion higher.
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Legal Enforcement and Corporate Behavior: An Analysis of Tax Aggressiveness after an Audit
Jason DeBacker et al.
Journal of Law & Economics, May 2015, Pages 291-324
Abstract:
Contrary to common expectations, legal enforcement may increase subsequent corporate misbehavior. Using Internal Revenue Service and financial statement data, we find that corporations gradually increase their tax aggressiveness for a few years following an audit and then reduce it sharply. We show that this U-shaped impact is consistent with strategic responses on the part of firms and with Bayesian updating of audit risk. This adverse effect on corporate behavior calls for a reexamination of both the theory and policy of legal enforcement.
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Taxpayer Confusion: Evidence from the Child Tax Credit
Naomi Feldman, Peter Katuščák & Laura Kawano
American Economic Review, forthcoming
Abstract:
We develop an empirical test for whether households understand or misperceive their marginal tax rate. Our identifying variation comes from the loss of the Child Tax Credit when a child turns 17. Using this age discontinuity, we find that despite this tax liability increase being lump-sum and predictable, households reduce their reported wage income upon discovering they have lost the credit. This finding suggests that households misinterpret at least part of this tax liability change as an increase in their marginal tax rate. This evidence supports the hypothesis that tax complexity can cause confusion and leads to unintended behavioral responses.
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Judd Kessler & Michael Norton
Journal of Economic Behavior & Organization, forthcoming
Abstract:
In a real-effort laboratory experiment, labor supply decreases more with the introduction of a tax than with a financially equivalent drop in wages. This "tax aversion" is large in magnitude: when we decompose the productivity decrease that arises from taxation, we estimate that 40% is due to the lower net wage and the remaining 60% to tax aversion. This tax aversion affects labor supply more on the extensive margin (working less) than on the intensive margin (being less productive while working). The aversion is equally strong whether tax revenue goes to the U.S. government or back to the experimenter (a "laboratory tax"). We discuss the implications of our results for the relationship between labor supply and taxation.
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The Permanent Effects of Fiscal Consolidations
Antonio Fatás & Lawrence Summers
Harvard Working Paper, October 2015
Abstract:
The global financial crisis has permanently lowered the path of GDP in all advanced economies. At the same time, and in response to rising government debt levels, many of these countries have been engaging in fiscal consolidations that have had a negative impact on growth rates. We empirically explore the connections between these two facts by extending to longer horizons the methodology of Blanchard and Leigh (2013) regarding fiscal policy multipliers. Using data seven years after the beginning of the crisis as well as estimates on potential output our analysis suggests that attempts to reduce debt via fiscal consolidations have very likely resulted in a higher debt to GDP ratio through their negative impact on output. Our results provide support for the possibility of self-defeating fiscal consolidations in depressed economies as developed by DeLong and Summers (2012).
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The U.S. Debt Restructuring of 1933: Consequences and Lessons
Sebastian Edwards, Francis Longstaff & Alvaro Garcia Marin
NBER Working Paper, November 2015
Abstract:
In 1933, the U.S. unilaterally restructured its debt by declaring that it would no longer honor the gold clause in Treasury securities. We study the effects of the abrogation of the gold clause on sovereign debt markets, the Treasury's ability to issue new debt, investors' willingness to hold Treasury bonds, and on the Treasury's borrowing costs. We find that the restructuring was followed by a flight to quality in the sovereign market. Despite this, there was little effect on the Treasury's ability to sell new debt or the willingness of investors to roll over restructured debt. The Treasury incurred a marginally higher cost of capital by issuing new bonds without the gold clause.
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Do Individuals Perceive Income Tax Rates Correctly?
Michael Gideon
Public Finance Review, forthcoming
Abstract:
This article uses data from survey questions fielded on the 2011 wave of the Cognitive Economics Study to uncover systematic errors in perceptions of income tax rates. First, when asked about the marginal tax rates (MTRs) for households in the top tax bracket, respondents underestimate the top MTR on wages and salary income, overestimate the MTR on dividend income, and therefore significantly underestimate the currently tax-advantaged status of dividend income. Second, when analyzing the relationship between respondents' self-reported average tax rates (ATRs) and MTRs, many people do not understand the progressive nature of the federal income tax system. Third, when comparing self-reported tax rates with those computed from self-reported income, respondents systematically overestimate their ATR while reported MTR are accurate at the mean, the responses are consistent with underestimation of tax schedule progressivity.
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Optimal Income Taxation with Unemployment and Wage Responses: A Sufficient Statistics Approach
Kory Kroft et al.
NBER Working Paper, November 2015
Abstract:
This paper reassesses whether the optimal income tax program features an Earned Income Tax Credit (EITC) or a Negative Income Tax (NIT) at the bottom of the income distribution, in the presence of unemployment and wage responses to taxation. The paper makes two key contributions. First, it derives a sufficient statistics optimal tax formula in a general model that incorporates unemployment and endogenous wages. This formula nests a broad variety of structures of the labor market, such as competitive models with fixed or flexible wages and models with matching frictions. Our results show that the sufficient statistics to be estimated are: the macro employment response with respect to taxation and the micro and macro participation responses with respect to taxation. We show that an EITC-like policy is optimal provided that the welfare weight on the working poor is larger than the ratio of the micro participation elasticity to the macro participation elasticity. The second contribution is to estimate the sufficient statistics that are inputs to the optimal tax formula using a standard quasi-experimental research design. We estimate these reduced-form parameters using policy variation in tax liabilities stemming from the U.S. tax and transfer system for over 20 years. Using our empirical estimates, we implement our sufficient statistics formula and show that the optimal tax at the bottom more closely resembles an NIT relative to the case where unemployment and wage responses are not taken into account.
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Regional effects of federal tax shocks
Bernd Hayo & Matthias Uhl
Southern Economic Journal, October 2015, Pages 343-360
Abstract:
This article studies the effects of federal tax changes on U.S.-state-level income. Utilizing an exogenous tax shock series recently proposed in the literature, we find considerable variation in how federal tax changes affect regional income: estimated state income multipliers range between -0.2 in Utah and -3.7 in Hawaii. Analyzing the determinants of differences in regional tax multipliers suggests that size and composition of the state tax base help explain the observed heterogeneity in the transmission of federal tax policy.
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Nancy Hudspeth et al.
Public Budgeting & Finance, Winter 2015, Pages 68-89
Abstract:
Fiscal controls require monitoring and transparent reporting. Financial documents with multiple funds, transfers, and inconsistent year-to-year categorization of revenues and expenditures provide opportunities to obscure a negative fiscal picture. We hypothesize that fiscal stress increases obfuscation. We investigate the relationship between the share of total governmental expenditures in U.S. states' general funds and independent variables drawn from the literature. Consistent with our hypothesis, deficit and debt are the most important explanatory variables. A one standard deviation increase in the deficit as a share of total expenditures is predicted to decrease the general fund share by one percentage point.
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Fiscal Stimulus in Economic Unions: What Role for States?
Gerald Carlino & Robert Inman
NBER Working Paper, October 2015
Abstract:
The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. This paper addresses three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of US state fiscal policies show state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Second, to internalize these spillovers, what central government fiscal policies are most effective for stimulating income and job growth? Both federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.
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Tax Havens, Growth, and Welfare
Hsun Chu, Ching-Chong Lai & Chu-Chuan Cheng
Journal of Public Economic Theory, December 2015, Pages 802-823
Abstract:
This paper develops an endogenous growth model featuring tax havens, and uses it to examine how the existence of tax havens affects the economic growth rate and social welfare in high-tax countries. We show that the presence of tax havens generates two conflicting channels in determining the growth effect. First, the public investment effect states that tax havens may erode tax revenues and in turn decrease the government's infrastructure expenditure, thereby reducing growth. Second, the tax planning effect of tax havens reduces marginal cost of capital and hence encourages capital accumulation so as to spur economic growth. The overall growth effect is ambiguous and is determined by the extent of these two effects. The welfare analysis shows that tax havens are more likely to be welfare-enhancing if the government expenditure share in production is low, or the initial income tax rate is high. Moreover, the welfare-maximizing income tax rate is lower than the growth-maximizing income tax rate if tax havens are present.
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State Taxes and Spatial Misallocation
Pablo Fajgelbaum et al.
NBER Working Paper, November 2015
Abstract:
We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general-equilibrium model in which the distribution of workers, firms, and trade flows across states responds to state taxes and public-service provision. We estimate firm and worker mobility elasticities and preferences for public services using data on the distribution of economic activity and state taxes from 1980 to 2010. A revenue-neutral tax harmonization leads to aggregate real-GDP and welfare gains of 0.7%. Tax cuts by individual states lower own-state tax revenues and economic activity, and generate cross-state spillovers depending on trade linkages.
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Productive Efficiency of Public Expenditures: A Cross-state Study
Aman Khan & Olga Murova
State and Local Government Review, September 2015, Pages 170-180
Abstract:
Public productivity, in particular the efficiency of public expenditures, has been a subject of academic and nonacademic debate for a long time. A number of studies have been conducted over the years on the subject using mostly conventional statistical methods such as production functions and occasionally using techniques such as data envelopment analysis (DEA). Most of these studies were conducted at a microlevel using a single decision unit with limited data. This study uses a multistage DEA to analyze public productivity using panel data for all fifty states of the United States over a twenty-one-year period. Based on well-known Farrell's technical efficiency, the study measures productivity using both constant and variable returns to scale. The results of the study show that there has been a general decrease in efficiency during the study period, with some exceptions, consistent with the growth trend in the national economy.