Untax and spend
Baumol's Cost Disease and the Sustainability of the Welfare State
Torben Andersen & Claus Kreiner
Economica, forthcoming
Abstract:
If productivity increases more slowly for services than for manufactured goods, then services suffer from Baumol's cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure that seems to leave policymakers with a trilemma: increase tax distortions, cut spending or redistribute less. Under the assumptions underlying Baumol's cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable, and there is even scope for Pareto improvements under Baumol's cost disease.
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Do Corporate Taxes Hinder Innovation?
Abhiroop Mukherjee, Manpreet Singh & Alminas Žaldokas
Journal of Financial Economics, forthcoming
Abstract:
We exploit staggered changes in state-level corporate tax rates to show that an increase in taxes reduces future innovation. A variety of tests, including those based on policy discontinuity at contiguous counties straddling borders of politically similar states, show that local economic conditions do not drive our results. The effect we document is consistent across the innovation spectrum: taxes affect not only patenting and R&D investment but also new product introductions, which we measure using textual analysis. Our empirical results are consistent with models that highlight the role of higher corporate taxes in reducing innovator incentives and discouraging risk-taking.
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Government Size and Macroeconomic Volatility
Fabrice Collard, Harris Dellas & George Tavlas
Economica, forthcoming
Abstract:
We examine the implications of government size for macroeconomic volatility in a standard New-Keynesian model with multiple shocks. Larger government size mitigates volatility arising from technology, preference, mark-up and monetary policy shocks, but amplifies that emanating from expenditure shocks. The degree of mitigation-amplification varies with the size of government, which opens up the possibility of a non-monotone relationship between volatility and government size. When we estimate the model on US data we find that the relationship is negative around the current US size, but it could eventually turn positive as the ratio of government spending to GDP increased. The location of the turning point in this relationship depends mainly on the type of private expenditure crowded out by higher government spending and on the degree of price stickiness.
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Austerity in the Aftermath of the Great Recession
Christopher House, Christian Proebsting & Linda Tesar
NBER Working Paper, February 2017
Abstract:
We examine austerity in advanced economies since the Great Recession. Austerity shocks are reductions in government purchases that exceed reduced-form forecasts. Austerity shocks are statistically associated with lower real GDP, lower inflation and higher net exports. We estimate a cross-sectional multiplier of roughly 2. A multi-country DSGE model calibrated to 29 advanced economies generates a multiplier consistent with the data. Counterfactuals suggest that eliminating austerity would have substantially reduced output losses in Europe. Austerity shocks were sufficiently contractionary that debt-to-GDP ratios in some European countries increased as a consequence of endogenous reductions in GDP and tax revenue.
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Profit shifting of U.S. multinationals
Tim Dowd, Paul Landefeld & Anne Moore
Journal of Public Economics, forthcoming
Abstract:
We analyze the profit shifting behavior of U.S. multinational firms using a unique panel data set of U.S. tax returns over the period 2002-2012. Prior research has found significant effects of tax rates in affiliate and parent countries on the profit shifting behavior of multinational entities, with semi-elasticities ranging from close to zero to well above one. We build on this prior work by allowing more heterogeneity in response across the distribution of tax rates and by including affiliates located in tax havens around the world. Our findings suggest that elasticities based on a log-linear specification may severely understate the sensitivity of profits to tax in low-tax jurisdictions while simultaneously overstating this elasticity in high-tax jurisdictions. Accounting for this type of nonlinearity appears crucial in considering how the global allocation of firm profits might change in response to tax rate changes.
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David Heres, Steffen Kallbekken & Ibon Galarraga
Environmental and Resource Economics, January 2017, Pages 1-15
Abstract:
The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants' expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.
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Impact of income tax on happiness: Evidence from the United States
Taurean Hutchinson & Ishraq Ahmed
Applied Economics Letters, forthcoming
Abstract:
The present work considers the level of demonstrated happiness and unhappiness within groups, the latter measured by the conditional probability of suicide within groups facing an income tax rate and those without. Using US data for the year 2004, our results show that individuals have lower rates of suicide or are 'happy' when they do not pay income taxes than those who pay.
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The Effective Income Tax Experience of U.S. and Non-U.S. Multinationals
Eric Allen & Susan Morse
University of Southern California Working Paper, December 2016
Abstract:
In this paper we examine how the incorporation of a parent firm outside the United States affects the effective income tax rates of global firms with material business operations in the U.S. We find that for profit firm years, firms with a non-U.S. parent corporation have lower effective tax rates than firms with a U.S. parent. However, in loss firm years we find that these non-U.S. firms report smaller negative tax expense. We find no statistically significant difference in outcomes if the non-U.S. firm engaged in an inversion transaction. We provide evidence that earnings stripping opportunities available to non-U.S. firms and the worldwide tax law applicable to U.S. firms contribute to the better tax results of non-U.S. firms in profit years. For loss firm years, we find evidence that the U.S. worldwide tax law and differences in valuation allowance practice support better tax outcomes for U.S. firms.
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Subsidies and Stadia' Opulence
Geoffrey Propheter
Journal of Sports Economics, January 2017, Pages 3-18
Abstract:
Quirk and Fort's gold plating hypothesis stipulates that subsidies are partly capitalized into stadia' opulence. If the gold plating hypothesis is true, it would indicate that subsidies contribute to their own existence, as owners and major league executives argue subsidies are necessary to meet leagues' increasing facility design standards. This study tests the gold plating hypothesis using a pooled cross section of stadia from the five major leagues. The findings confirm that subsidies increase stadia' opulence. As evaluated at leagues' mean stadia acreage, the marginal opulence of an additional US$1 million construction subsidy ranges from US$188,490 to US$501,420 depending on the league.
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A note on economic freedom and political ideology
Ji Gu et al.
Applied Economics Letters, forthcoming
Abstract:
Within the field of public economics, there is the perception that Republicans are associated with 'small government' and Democrats with 'big government'. We test this notion by examining whether economic freedom is affected when a single party is in control of the state legislature. We find no link between party control and our main economic freedom indicator, but we do find a positive link between Republican control and the taxation component of economic freedom, suggesting a Republican legislature leads to lower taxation.
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Does The Samaritan's Dilemma Matter? Evidence From U.S. Agriculture
Tatyana Deryugina & Barrett Kirwan
NBER Working Paper, November 2016
Abstract:
The Samaritan's dilemma posits a downside to charity: recipients may rely on free aid instead of their own efforts. Anecdotally, the expectation of free assistance is thought to be important for decisions about insurance and risky behavior in numerous settings, but reliable empirical evidence is scarce. We estimate whether the Samaritan's dilemma exists in U.S. agriculture, where both private crop insurance and frequent federal disaster assistance are present. We find that bailout expectations are qualitatively and quantitatively important for the insurance decision. Furthermore, aid expectations reduce both the amount of farm inputs and subsequent crop revenue.
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The long-run effects of privatization on productivity: Evidence from Canada
Anthony Boardman, Aidan Vining & David Weimer
Journal of Policy Modeling, November-December 2016, Pages 1001-1017
Abstract:
From a public policy perspective, the social value of privatization depends on the aggregate efficiency benefits over the long term. However, most privatization studies that examine the efficiency impacts of privatization employ relatively short time frames: usually 3-years before and 3-years after the privatization. In contrast, this study examines the long run effects (up to 24 years) of privatization on productivity based on an examination of major, mostly federal, share-issue privatizations in Canada. We control for factors that might affect productivity apart from privatization by including panels of Always-SOE firms and Always-Private firms, and estimating difference-in-difference models. The major finding is that the productivity of Privatized SOEs increases relative to SOEs at a decreasing rate, peaking at 14-16 years. Despite this improvement, the productivity of privatized firms continues to lag that of Always-Private firms. We consider some of the policy implications of these findings.
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Julie Zissimopoulos et al.
Research on Aging, January 2017, Pages 166-189
Abstract:
An aging America presents challenges but also brings social and economic capital. We quantify public revenues from, and public expenditures on, Americans aged 65 and older, the value of their unpaid, productive activities and financial gifts to family. Using microsimulation, we project the value of these activities, and government revenues and expenditures, under different scenarios of change to the Old Age and Survivors Insurance eligibility age through 2050. We find the value of unpaid productive activities and financial gifts are US$721 billion in 2010, while net (of tax revenues) spending on the 65 years and older is US$984 billion. Five-year delay in the full retirement age decreases federal spending by 10%, while 2-year delay in the early entitlement age increases it by 1.5%. The effect of 5-year delay on unpaid activities and transfers is small: US$4 billion decrease in services and US$4.5 billion increase in bequests and monetary gifts.