Taxed Spending
Exorbitant Privilege Gained and Lost: Fiscal Implications
Zefeng Chen et al.
NBER Working Paper, May 2022
Abstract:
We study three centuries of U.K. fiscal history. Before WW-I, when the U.K. dominated global bond markets, the U.K.'s government debt was not always fully backed by its future surpluses, even after accounting for the seigniorage revenue from convenience yields. As predicted by theories of safe asset determination, investors concentrate extra fiscal capacity in a single country, the global safe asset supplier, based on relative macro fundamentals, and its debt growth may temporarily outstrip what is warranted by its own macro fundamentals. After the relative deterioration in U.K. fundamentals, due to the run-up in debt during WW-I and WW-II, bond investors focused exclusively on the U.K's own macro fundamentals. Since then the U.K. debt has been fully backed by surpluses.
Does Receiving Government Assistance Shape Political Attitudes? Evidence from Agricultural Producers
Sarah Anzia, Jake Alton Jares & Neil Malhotra
American Political Science Review, forthcoming
Abstract:
When individuals receive benefits from government programs, does it affect their attitudes toward those programs or toward government generally? A growing literature blends policy feedback theory and political behavior research to explore these questions, but so far it has focused almost exclusively on social policies such as the Affordable Care Act. In this article, we focus on a very different set of government programs that reach a more conservative, rural population: agricultural assistance. Our study ties administrative records on participation in USDA farm aid programs to an original, first-of-its-kind survey measuring agricultural producers' political attitudes. We find that receiving agricultural assistance is sometimes related to producers' views of the program delivering the benefits, but it depends on the divisiveness of the program and - for highly partisan programs - recipients' ideology. However, receiving federal agricultural assistance is not associated with more positive views of government.
State Dependent Government Spending Multipliers: Downward Nominal Wage Rigidity and Sources of Business Cycle Fluctuations
Yoon Jo & Sarah Zubairy
NBER Working Paper, May 2022
Abstract:
We consider a New Keynesian model with downward nominal wage rigidity (DNWR) and show that government spending is much more effective in stimulating output in a low-inflation recession relative to a high-inflation recession. The government spending multiplier is large when DNWR binds, but the nature of recession matters due to the opposing response of inflation. In a demand-driven recession, inflation falls, preventing real wages from falling, leading to unemployment, while inflation rises in a supply-driven recession limiting the consequences of DNWR on employment. We document supporting empirical evidence, using both historical time series data and cross-sectional data from U.S. states.
State income taxes and team performance
Erik Hembre
International Tax and Public Finance, June 2022, Pages 704-725
Abstract:
Professional athletes are both highly paid and highly mobile workers. Previous research has shown that athletes respond to state income taxes differentials through bargaining and migration. If athletes are compensated for state tax burden, teams located in higher taxed states may be at a competitive disadvantage. I examine the effect of state income taxes on professional sports team performance. Using within-team variation in state top marginal income tax rates, I show that, only after the availability of free agency, did state income tax increases lower team winning percentages. I find that for each percentage point increase in state income tax rates, team winning declines by 0.70 percentage points.
Bargaining over Taxes and Entitlements in the Era of Unequal Growth
Marina Azzimonti, Laura Karpuska & Gabriel Mihalache
NBER Working Paper, May 2022
Abstract:
Entitlement programs have become an increasing component of total government spending in the US over the last six decades. To some observers, this growth of the welfare state is excessive and unwarranted. To others, it is a welcome counter-acting force to the rapid increase in income inequality. Using a political-economy model where parties bargain over taxes and entitlements, we argue that such dynamics can be explained by two factors. The first one is that institutional features of policy determination, in particular budget rules, make the status quo levels of taxes and entitlements difficult to change. The second one is that the country experienced a process of "unequal growth," where top earners became richer while the income levels of the bottom 50 percent remained stagnant. Richer agents would like the government to provide more public goods as the economy grows. Low-income earners are willing to support such policies only in exchange for an expansion of entitlement programs. Sustained bargaining power by a party that represents the latter, amid budget rules, results in a rising share of entitlements. We explain how parties can take advantage of budget rules to tilt the evolution of policy in their favor in a simple two-period model. We then calibrate an infinite horizon version of the model to the US, and show that it delivers dynamics consistent with the data. Through counter-factual experiments, we find that while entitlements programs are sub-optimally large, welfare outcomes are better than those under alternative budget rules and in scenarios without rules, making it explicit that the type of budget rule matters for both welfare and equity.
How Do Firms Respond to Corporate Taxes?
Jeffrey Coles et al.
Journal of Accounting Research, June 2022, Pages 965-1006
Abstract:
Using a novel empirical approach and newly available administrative data on U.S. tax filings, we estimate the corporate elasticity of taxable income, decompose the elasticity into economic responses versus other tax-motivated "accounting" transactions, and determine how responsiveness varies depending on accounting method, firm size, and interest rate. In response to a 10% increase in the expected marginal tax rate, private U.S. firms decrease taxable income by 9.1%, which indicates a discernibly more elastic response than prevailing estimates. This response reflects a decrease in taxable income of 3.0% arising from real economic responses to a firm's scale of operations and 6.1% arising from accounting transactions via (for example) revenue and expense timing. Responsiveness to the corporate tax rate is more elastic if a firm uses cash (9.9%) rather than accrual accounting (7.4%), if the firm is small (9.9%) rather than large (8.6%), and if the firm discounts future cash flows at a lower rate.
Optimal Taxation of Risky Entrepreneurial Capital
Corina Boar & Matthew Knowles
NBER Working Paper, April 2022
Abstract:
We study optimal taxation in a model with endogenous financial frictions, risky investment and occupational choice, where the distribution of wealth across entrepreneurs affects how efficiently capital is used. The planner chooses linear taxes on wealth, capital and labor income to maximize the steady state utility of a newborn agent. Most agents in the model are poor, leading to a redistributive motive for taxation. Optimal tax rates can be written as a closed-form function of the size of the tax bases and their elasticities with respect to tax rates. We find that it is optimal to tax capital income because financial frictions reduce the elasticity of capital income with respect to taxes and because capital income taxes prevent excessive entry into entrepreneurship. Optimal wealth taxes are positive but close to zero, since they strongly discourage capital accumulation.
Tax incentives and housing decisions: Effects of the Tax Cut and Jobs Act
Erik Hembre & Raissa Dantas
Regional Science and Urban Economics, forthcoming
Abstract:
The 2017 Tax Cut and Jobs Act (TCJA) altered the US tax code, greatly reducing itemization rates and effective homeownership subsidies. Using American Community Survey data combined with the NBER TAXSIM program, we estimate that the TCJA caused the average effective homeownership subsidy to decline 61 percent from $2272 to $885. To uncover the TCJA effect on homeownership and mortgage decisions, we use a simulated policy instrument exploiting state tax policy and housing market differentials. Comparing similar households but varying in state exposure to the TCJA, we find that each percentage point decline in the effective homeownership subsidy rate lowered homeownership rates by 0.57 percentage points and mortgage use by 0.70 percentage points following the TCJA.
Online Shopping Can Redistribute Local Tax Revenue from Urban to Rural America
David Agrawal & Iuliia Shybalkina
University of Kentucky Working Paper, April 2022
Abstract:
Exploiting reforms requiring online vendors to remit taxes on a destination basis and using the unprecedented shock to online shopping due to COVID-19, we examine the effect of e-commerce on the distribution of tax revenues across urban and rural jurisdictions. We assemble a high-frequency and nationally representative dataset of sales tax bases and revenues for counties and municipalities. The shift to online shopping results in revenue contractions in large jurisdictions but, contrary to the conventional wisdom, increases revenue growth in small jurisdictions. As e-commerce expands, although remittance rules enforcing taxes mute revenue losses in large jurisdictions with retail agglomerations, these policies also "redistribute" tax revenues from those jurisdictions towards smaller hometown jurisdictions. This finding highlights the distributional implications of firm-based remittance rules.
Fireside Chats: Communication and Consumers' Expectations in the Great Depression
Mathieu Pedemonte
Review of Economics and Statistics, forthcoming
Abstract:
This paper shows how policy announcements can be used to manage expectations. Using regional variation in radio exposure, I evaluate the impact of FDR's 1935 Fireside Chat, in which he showcased the introduction of important social policies, establishing a new expansionary cycle of the New Deal. I document that cities with higher exposure to the announcement exhibited a significant increase in spending on durable goods. The estimated effect is consistent with changes in expectations in line with the policies announced. This paper shows the power of communication as a policy tool.
Automatic Tax Filing: Simulating a Pre-Populated Form 1040
Lucas Goodman et al.
NBER Working Paper, April 2022
Abstract:
Each year Americans spend over two billion hours and $30 billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for the tax year 2019. Our baseline results indicate that between 62 and 73 million returns (41 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $9.0 billion in refunds due to 12 million (22 percent) of them.