Tax and Spend
Jacob Goldin & Yair Listokin
American Law and Economics Review, forthcoming
Abstract:
We investigate taxpayer perceptions of two tax expenditures: the charitable deduction (CD) and the home mortgage interest deduction (HMID). Our survey evidence suggests widespread misperceptions regarding both programs' incentives. Almost half of eligible taxpayers are unaware of the CD's availability. Regarding the HMID, taxpayers err in both directions: many eligible taxpayers falsely believe themselves to be ineligible while even more ineligible taxpayers falsely believe themselves to be eligible. Eligible taxpayers tend to underestimate the magnitude of both tax subsidies. Our results provide important context for evaluating the effectiveness of the CD and HMID and shed light on potential reforms.
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State Fiscal Rules and Composition Changes in Public Spending before the Election
Pi-Han Tsai
Public Finance Review, January 2014, Pages 58-91
Abstract:
Political budget cycle models have been widely tested, but few studies consider different institutional contexts and different categories of public spending. This article uses data on disaggregated expenditures to estimate the effects of balanced budget requirements on electoral cycles. Using data of American states from 1977 to 2008, the analysis finds that prior to gubernatorial elections, politicians are likely to shift public spending toward more salient categories, such as corrections, security, and welfare expenditure, and away from education expenditure. This finding is consistent with the prediction of Rogoff’s signaling model. Yet, such effects are only significant in states with weak and medium carryover restrictions and are dampened as carryover restrictions become more stringent. Thus, balanced budget requirements constrain politicians’ ability to shift spending across different categories. Without considering the balanced budget requirements, the effects of political budget cycles may be overstated.
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Four facts about dividend payouts and the 2003 tax cut
Jesse Edgerton
International Tax and Public Finance, October 2013, Pages 769-784
Abstract:
Recent literature has claimed that the 2003 U.S. dividend tax cut caused a large increase in aggregate dividend payouts. I document four simple facts that call this claim into question. First, the post-tax cut increase in dividend payouts coincided with a surge in corporate profits, such that the dividend payout ratio did not rise. Second, share repurchases increased even more rapidly than dividend payouts. Third, dividend payouts by Real Estate Investment Trusts also rose sharply, even though they did not qualify for reduced taxation. Finally, the stock market was forecasting an increase in dividend initiations by mid-2002, before the tax cut had been proposed.
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The State and Local Pay Penalty: The Effect of Skill and College Major
Max Schanzenbach
Northwestern University Working Paper, October 2013
Abstract:
Most studies of public sector compensation find that state and local workers face a pay penalty relative to private sector workers. This result is obtained via OLS wage regressions comparing workers across sectors after controlling for a variety of factors, such as age, education, establishment size, race and sex. However, this non-experimental approach is fraught with concerns over selection into state and local employment and what controls are appropriate to reduce selection issues. This paper tests for the direction and magnitude of selection in the public sector by employing two measures of ability, test scores and undergraduate major, provided in the National Longitudinal Survey of Youth (NLSY) and the American Community Survey (ACS) respectively. Consistent with prior work, standard wage and earnings regressions in both datasets find that state and local workers with college degrees or more earn less than observationally equivalent private sector workers. However, the public sector pay penalty dramatically attenuates when proxies for skill are included in the regressions. In the NLSY, college-educated public sector workers are both less skilled and less compensated for skill compared to their private sector counterparts. Indeed, the public sector pay penalty in the NLSY can be fully explained by lower skill and, more importantly, lower returns to skill in the public sector. Similarly, the ACS analysis reveals that one-half to two-thirds of the public sector pay penalty can be explained by crude controls for undergraduate major. Undergraduate major is a strong proxy for both skill and outside options available to employees. Further analysis of the ACS data reveals that (1) state and local workers enjoy a pay premium relative to non-profit employees, and (2) there is dramatic regional variation in the state and local pay penalty, suggesting the importance of institutional factors.
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The Curious Case of the Post-9-11 Boost in Government Job Satisfaction
Gregg Van Ryzin
American Review of Public Administration, January 2014, Pages 59-74
Abstract:
Government job satisfaction has been shown to reflect individual, job and organizational characteristics, but important national crises or events that dramatically alter the image of public service in society and the meaning of work in the public sector may also play a role. The terrorist attacks of September 11, 2001, are an important example, yet it is not known how the attacks and their aftermath may have influenced the everyday job satisfaction of government workers in the United States. Using a difference-in-difference regression strategy and data from the General Social Survey, this study compares change in job satisfaction of government workers to that of private sector workers before and after the attacks. The findings indicate that 9-11 may have boosted government job satisfaction 5 to 10 percentage points, representing 1 to 2 million additional satisfied government workers in the United States. Thus important national crises may causally influence government job satisfaction in nontrivial ways.
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Reevaluating the Effect of Tax and Expenditure Limitations: An Instrumental Variable Approach
Rui Sun
Public Finance Review, January 2014, Pages 92-116
Abstract:
This article evaluates the effect of tax and expenditure limitations (TELs) on municipal general own-source revenue in the United States. Using an instrumental variable approach, this study addresses the endogeneity problem of TELs that has been largely overlooked in previous research. Data are collected on 724 US cities with populations of at least 25,000 from 1970 to 2006. Results indicate that when the endogeneity of TELs is taken into account, TELs lead to considerable reductions in property taxes but substantial increases in sales taxes, income taxes, and user charges per capita. The increases in the latter forms of revenue not only offset the loss in property taxes but also generate a supplemental revenue effect, resulting in a net gain of total municipal general own-source revenue per capita. The study provides important policy implications and suggests that TELs may have unintended consequences and lead to bigger government.
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Too Good to Be True? How State Charitable Tax Credits Could Increase Federal Funding for California
Phillip Blackman & Kirk Stark
University of California Working Paper, September 2013
Abstract:
An IRS chief counsel memorandum published in 2010 found that a taxpayer was permitted to claim a charitable contribution deduction for the full amount of a gift, even though a substantial portion of the gift was effectively refunded to the taxpayer through a charitable state tax credit. In this article, Blackman and Stark explain that the IRS memorandum permits states to adopt charitable tax credits that effectively enable taxpayers to convert state taxes to charitable gifts — a strategy that would be attractive to alternative minimum taxpayers. Those state charitable tax credits (some with extraordinarily high credit percentages) appear to be on the rise, perhaps in part because they effectively enable a transfer of revenue from the federal government to the states. The authors believe the memorandum should be repudiated (as a matter of appropriate federal tax policy), but if it is not, states should consider taking advantage of it. The article discusses how the strategy applies in the case of proposed California legislation that would permit a 60 percent tax credit for contributions to a state fund designed to increase financial support for low- and middle-income students to pursue secondary education.
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Taxpayer Confusion Over Predictable Tax Liability Changes: Evidence from the Child Tax Credit
Naomi Feldman, Peter Katuscak & Laura Kawano
Federal Reserve Working Paper, September 2013
Abstract:
We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the model's hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.
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To Starve or Not to Starve the Beast?
Michael Kumhof, Douglas Laxton & Daniel Leigh
Journal of Macroeconomics, forthcoming
Abstract:
For thirty years, prominent voices have advocated a policy of starving the beast-cutting taxes to force government spending cuts. This paper analyzes the macroeconomic and welfare consequences of this policy using a two-country general equilibrium model. Under several strong assumptions, the policy, if fully implemented, produces domestic output and welfare gains accompanied by losses elsewhere. But negative effects can easily arise in the presence of longer policy implementation lags, utility-enhancing government spending, and productive government capital. Overall, the analysis finds no support for the idea that starving the beast is a foolproof way towards higher output and welfare.
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Strategic Planning and the Fiscal Performance of City Governments during the Great Recession
Benedict Jimenez
American Review of Public Administration, September 2013, Pages 581-601
Abstract:
Strategic planning has the potential to enable cities to weather the effects of fiscal crises. City officials can use the information gathered though internal and external scanning to implement fiscal policy changes that can minimize their governments’ exposure to external fiscal shocks, and to experiment with alternative service delivery arrangements that generate cost savings. Linking strategic plans to budgets allows cities to focus on core services, and reduce expenditures for nonessential programs. Strategic plans can also provide a framework for operations, facilitating closer cooperation and coordination among managers and workers in preventing the further deterioration in the fiscal condition of their organization. Can cities that implement comprehensive strategic planning adjust better to the current fiscal crisis and minimize their budget deficits? The results of advanced econometric analysis are inconclusive. Adjusting for selection bias and endogeneity, strategic planning is associated with the perception of improving city government fiscal health. Planning, however, has no effect on actual deficits.
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Tax multipliers and monetary policy: Evidence from a threshold model
Paul Jones & Eric Olson
Economics Letters, forthcoming
Abstract:
Romer and Romer (2010) use the narrative record to generate a time series of exogenous shocks to fiscal policy. They report a tax multiplier of 3.0. We extend their analysis and allow for nonlinearities between their shocks and the effects on output by estimating a Threshold Regression Model. Using Hansen’s (1997) procedure, we find the best fitting threshold is changes in the federal funds rate with a delay of two quarters. Moreover, we find that the tax multiplier is approximately 4.3 if accompanied by accommodative monetary policy and approximately 1.2 under tight monetary policy.
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Roads and Trade: Evidence from the US
Gilles Duranton, Peter Morrow & Matthew Turner
Review of Economic Studies, forthcoming
Abstract:
We estimate the effect of interstate highways on the level and composition of trade for us cities. Highways within cities have a large effect on the weight of city exports with an elasticity of approximately 0.5. We find little effect of highways on the total value of exports. Consistent with this, we find that cities with more highways specialize in sectors producing heavy goods.
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The Impact of Late Budgets on State Government Borrowing Costs
Asger Lau Andersen, David Dreyer Lassen & Lasse Holbøll Westh Nielsen
Journal of Public Economics, January 2014, Pages 27–35
Abstract:
We analyze how a key component of fiscal governance, the ability of governments to pass a budget on time, affects government bond yield spreads. Based on a sample of 36 US states from 1988 to 1997, and using an original data set on budget enactment dates, we estimate that a 30 day budget delay has a cumulative impact that is equivalent to a one-time increase in the yield spread of around 10 basis points. States with sufficient liquidity incur no costs from late budgets, while unified governments face large penalties from not finishing a budget on time.
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A Spoonful of Choice: How Allocation Increases Satisfaction with Tax Payments
Cait Lamberton
Journal of Public Policy & Marketing, Fall 2013, Pages 223-238
Abstract:
How can tax payment be made more satisfying? The author focuses on the low volition and collective nature of tax-funded benefits as primary causes of low satisfaction with tax payment. Three studies suggest that allowing people to allocate a small portion (in the present research, 10%) of their payment across budgets provided by the billing party both introduces an element of volition into the payment process and increases the perceived benefit associated with tax payment. As a result, the author concludes that taxpayers are significantly more satisfied with paying taxes when they allocate their payments, even if their payment amount remains completely unchanged. In addition to enhancing taxpayer satisfaction, an allocation program, if well implemented, could provide some hope for correcting existing lack of voice, address disconnects between spending and taxpayers' priorities, and increase civic engagement in general.
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The Impact of Headquarter and Subsidiary Locations on Multinationals' Effective Tax Rates
Kevin Markle & Douglas Shackelford
NBER Working Paper, November 2013
Abstract:
We examine effective tax rates (ETRs) for 9,022 multinationals from 87 countries from 2006 to 2011. We find that, despite extensive investments in international tax avoidance, multinationals headquartered in Japan, the U.S., and some high-tax European countries continue to face substantially higher worldwide taxes than their counterparts in havens and other less heavily taxed locations. Other findings include: (a) Effective tax rates remained steady over the investigation period; (b) Entering a tax haven country for the first time results in a slight reduction in the firm’s ETR; (c) ETR changes vary depending on whether the subsidiary is a financial conduit or an operating subsidiary. These results should aid ongoing international tax policy debates and expand scholars’ understanding about the taxation of multinationals.
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Did Cuts in State Aid During the Great Recession Lead to Changes in Local Property Taxes?
Rajashri Chakrabarti, Max Livingston & Joydeep Roy
Federal Reserve Working Paper, October 2013
Abstract:
During the Great Recession and its aftermath, state and local governments’ revenue streams dried up due to diminished taxes. Budget cuts affected many aspects of government; in this paper, we investigate whether (and how) local school districts modified their funding and taxing decisions in response to changes in state aid in the post-recession period. Using detailed district-level panel data from New York and a fixed effects as well as an instrumental variables strategy, we find strong evidence that school districts did indeed respond to state aid cuts in the post-recession period by countering the cuts. In comparison with the pre-recession period, a unit decrease in state aid was associated with a relative increase in local funding per pupil. To further probe the school district role, we explore whether the property tax rate, which districts set each year in response to budgetary needs, also responded to state aid cuts. Indeed, we find that relative to the pre-recession period, the post-recession period was characterized by a strong negative relationship between the property tax rate and state aid per pupil. In other words, after the recession a unit decrease in state aid was associated with a relative increase in the property tax rate in the post-recession period (in comparison with the pre-recession period).
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The Effect of National Revenues on Sub-National Revenues: Evidence from the U.S.
Brian Galle
International Review of Law and Economics, March 2014, Pages 147–155
Abstract:
I present for the first time an empirical examination of the impact of total federal revenues on total sub-national proceeds. Prior theory recognizes that the effects of national revenues on sub-national revenue-raising are ambiguous. Earlier studies have focused on vertical relationships between particular tax bases, such as the impact of federal commodity taxes on state or provincial commodity tax rates. Using a panel of data from U.S. states over the recent decade, I find an economically and statistically significant degree of federal crowding in of state revenues. Also, employing a difference-in-differences design to study the impact of a 2004 change in the federal deductibility of state general sales taxes, I find modest evidence that deductibility increased state revenues in states more dependent on the sales tax. I note the potential implications of these results for fiscal federalism theory and legal controversies over federal conditional spending.
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Balancing Demands: The World Economy and the Composition of Policy Preferences
Timothy Hellwig
Journal of Politics, forthcoming
Abstract:
Researchers remain divided on the consequences of market integration. Some argue that openness increases pressures for social protection; others claim that liberalization constrains policy makers. These debates gloss over a key link between globalization and domestic politics: the preferences of the electorate. This article argues that exposure to flows of goods, services, and capital matters for policy attitudes. However, the extent to which signals from the world economy affect preferences depends on issue domain. Voters respond to signals from the world economy by demanding less in areas where constrained governments can no longer deliver but more where they still can. The implication is that while globalization has no consistent influence on general support for government action, it does matter for the composition of policy preferences. A range of data analyses supports these claims. Results shed new light on arguments about the effect of globalization on domestic politics.