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Politics in Forgotten Governments: The Partisan Composition of County Legislatures and County Fiscal Policies
Justin de Benedictis-Kessner & Christopher Warshaw
Journal of Politics, forthcoming
Abstract:
County governments are a crucial component of the fabric of American democracy. Yet there has been almost no previous research on the policy effects of the partisan composition of county governments. Most counties in the United States have small legislatures, usually called commissions or councils, that set their budgets and other policies. In this study, we examine whether counties with Democratic legislators spend more than counties with Republican ones. We assemble an original dataset of 10,708 elections in approximately 298 medium and large counties over the past 25 years. Based on a regression discontinuity design, we find that electing a Democratic legislator rather than a Republican one leads the average county to increase spending by about 5%. Overall, our findings contribute to a growing literature on the policy consequences of partisan control of state and local government. They show that the partisan selection of county legislators has important policy effects in county governments.
Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy
Enrico Moretti & Daniel Wilson
NBER Working Paper, October 2019
Abstract:
We study the effect of state-level estate taxes on the geographical location of the Forbes 400 richest Americans and its implications for tax policy. We use a change in federal tax law to identify the tax sensitivity of the ultra-wealthy's locational choices. Before 2001, some states had an estate tax and others didn't, but the tax liability for the ultra-wealthy was independent of their domicile state due to a federal credit. In 2001, the credit was phased out and the estate tax liability for the ultra-wealthy suddenly became highly dependent on domicile state. We find the number of Forbes 400 individuals in estate tax states fell by 35% after 2001 compared to non-estate tax states. We also find that billionaire's sensitivity to the estate tax increases significantly with age. Overall, billionaires' geographical location appears to be highly sensitive to state estate taxes. We then estimate the effect of billionaire deaths on state tax revenues. We find a sharp increase in tax revenues in the three years after a Forbes billionaire death, totaling $165 million for the average billionaire. In the last part of the paper, we study the implications of our findings for state tax policy. We estimate the revenue costs and benefits for each state of having an estate tax. The benefit is the one-time tax revenue gain when a wealthy resident dies, while the cost is the foregone income tax revenues over the remaining lifetime of those who relocate. Surprisingly, despite the high estimated tax mobility, we find that the benefit exceeds the cost for the vast majority of states.
Behavioral Responses to State Income Taxation of High Earners: Evidence from California
Joshua Rauh & Ryan Shyu
NBER Working Paper, October 2019
Abstract:
Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.
State Taxes and Legislative Turnover in the United States
Pavel Yakovlev & Sebastian Leguizamon
Economic Inquiry, forthcoming
Abstract:
Mounting empirical evidence suggests that term limits and, by extension, higher legislative turnover increase the overall size of government and change its spending composition. However, less is known about the turnover's impact on the composition of tax revenues. This study fills this void by exploiting exogenous variation in term limits and redistricting as instruments for legislative turnover, which is found to be positively associated with most state taxes except for the corporate income tax. We hypothesize that the negative association between legislative turnover and corporate income taxes might be influenced by a higher propensity of business owners to enter term‐limited state legislatures.
Does Capital Bear the U.S. Corporate Tax After All? New Evidence from Corporate Tax Returns
Edward Fox
Journal of Empirical Legal Studies, forthcoming
Abstract:
This Article uses U.S. corporate tax return data to assess how government revenue would have changed if, over the period 1957-2013, corporations had been subject to a hypothetical corporate cash flow tax - i.e., a tax allowing for the immediate deduction of investments in long-lived assets like equipment and structures - rather than the corporate tax regime actually in effect. Holding taxpayer behavior fixed, the data indicate actual corporate tax revenue over the most recent period (1995-2013) differed little from that under the hypothetical cash flow tax. This result has three important implications. First, capital owners appear to bear a large fraction of the corporate tax today. This is because economic theory holds that corporate cash flow taxes are largely borne by capital owners and my result implies that the actual tax behaves in practice a lot like a cash flow tax. This theory is embodied in the Treasury’s most recent model of corporate tax incidence. Applying the model to my results implies that only a small portion (2%-10%) of the U.S. corporate tax was borne by labor in the years before the 2017 Act and thus capital providers are the primary beneficiaries of the Act’s large corporate rate cut. Second, the results suggest that the U.S. could switch fully over to a cash flow tax, which is likely to be administratively simpler for both the government and corporations, at relatively low revenue cost. Third, the impact of fully switching to a cash flow tax on the operations of the real economy and its efficiency are likely to be fairly small. This is precisely because the corporate tax has already evolved to largely mimic a cash flow tax, and the paper explores the reasons underlying this evolution using a novel data set.
Technology and Time Inconsistency
Bard Harstad
Journal of Political Economy, forthcoming
Abstract:
A growing body of evidence suggests that individuals have time-inconsistent preferences. Even when they do not, policy makers who fear to loose elections will apply discount rates that decrease in relative time when they consider investment projects. To influence future choices, current strategic investments or investment subsidies should be larger for technologies that are strategic complements to future investments, further upstream in the supply chain, and characterized by longer maturity. A quantitative assessment suggests that time inconsistency can rationalize subsidies at similar levels as market failures such as externalities can. Furthermore, the two effects are superadditive: Time inconsistency and strategic investments are thus especially important for long-term policies associated with externalities.
The Paradox of Global Thrift
Luca Fornaro & Federica Romei
American Economic Review, November 2019, Pages 3745-3779
Abstract:
This paper describes a paradox of global thrift. Consider a world in which interest rates are low and monetary policy is constrained by the zero lower bound. Now imagine that governments implement prudential financial and fiscal policies to stabilize the economy. We show that these policies, while effective from the perspective of individual countries, might backfire if applied on a global scale. In fact, prudential policies generate a rise in the global supply of savings and a drop in global aggregate demand. Weaker global aggregate demand depresses output in countries at the zero lower bound. Due to this effect, noncooperative financial and fiscal policies might lead to a fall in global output and welfare.
Does a Value-Added Tax Increase Economic Efficiency?
Bibek Adhikari
Economic Inquiry, forthcoming
Abstract:
Theory predicts that a value‐added tax (VAT) is an efficient tax system, which is one of the primary reasons for its rapid adoption worldwide. However, there is little empirical evidence supporting this prediction, especially for developing countries. I estimate the efficiency gains of introducing a VAT using the synthetic control method. I find that a VAT has, on average, positive and economically meaningful impact on economic efficiency. This result, however, is driven by richer countries only. There is no significant impact of the VAT on poorer countries. The findings are robust across a series of placebo studies and sensitivity checks.
Public Employee Pensions and Municipal Insolvency
Sean Myers
Stanford Working Paper, October 2019
Abstract:
This paper studies how governments manage public employee pensions and how this affects insolvency risk. I propose a quantitative model of governments that choose their savings and risk exposure by borrowing/saving in defaultable bonds, borrowing in non-defaultable pension benefits, and saving in a pension fund that earns a risk premium. In insolvency, the government can receive transfers from households who may differ from the government in their preferences for public services and private consumption. I match the model to a panel of CA cities and a hand-collected record of fiscal emergencies. The model predicts that governments are highly vulnerable to another stock market bust. A hypothetical shock to pension funds in 2015 produces twice as many fiscal emergencies as the original 2008-10 shock. In the quantified model, the government undersaves and take excess risk relative to what households would choose. Savings requirements that limit spending to essential services plus 0.3% of cash-on-hand produce large welfare gains for households. Requiring the pension fund to invest more in safe assets decreases household welfare because the lower average return discourages the government from saving.
The economic impact of city-county consolidations: A synthetic control approach
Joshua Hall, Josh Matti & Yang Zhou
Public Choice, forthcoming
Abstract:
Although more rapid development is a primary motivation behind city-county consolidations, few empirical studies explore the impact of consolidation on economic development. No studies look at government consolidation in the United States using modern causal inference methods. We use the synthetic control method to examine the long-term impact of city-county consolidations on per capita income, population, and employment. The results from the three cases explored indicate that consolidation does not guarantee development and actually can have negative effects. Additionally, consolidation can deepen the urban-rural divide by accelerating the decline of rural populations relative to those of urban areas. The effects vary based upon the county, time horizon and development measure. The results are robust to placebo test simulations and counterfactuals constructed only from counties with earlier failed consolidation attempts. Our results highlight how public choice considerations surrounding the implementation of governmental consolidations are crucial to outcomes and can help inform any subsequent city-county consolidation attempts.
Do Movie Production Incentives Generate Economic Development?
John Charles Bradbury
Contemporary Economic Policy, forthcoming
Abstract:
Movie production incentives (MPIs) are a popular economic development strategy employed by U.S. states. Film subsidies are intended to encourage external investment into a nascent industry that spills over onto complementary industries to generate economic growth through a multiplier. Despite their widespread use, the positive impact of MPIs on state economies has not been documented, and several states have halted their MPI programs due to high costs and questionable efficacy. This study exploits the staggered implementation, suspension, and elimination of film incentive programs across states to estimate the macroeconomic impact of MPIs. Instrumental variable estimates that permit causal inference do not support the hypothesized positive impacts of film incentives on state economies.
Do State Corporate Tax Incentives Create Jobs? Quasi-experimental Evidence from the Entertainment Industry
Michael Thom
State and Local Government Review, forthcoming
Abstract:
Policy makers allocate billions of dollars each year to tax incentives that increasingly favor creative industries. This study scrutinizes that approach by examining motion picture incentive programs used in over thirty states to encourage film and television production. It uses a quasi-experimental strategy to determine whether those programs have contributed to employment growth. Results mostly show no statistically significant effects. Results also indicate that domestic employment is unaffected by competing incentives offered outside the United States. These findings are robust to several alternative models and should lead policy makers to question the wisdom of targeted incentives conferred on creative industries.
Tax Increment Financing in Chicago: The Perplexing Relationship Between Blight, Race, and Property Values
Twyla Blackmond Larnell & Davia Cox Downey
Economic Development Quarterly, November 2019, Pages 316-330
Abstract:
Cities use tax increment financing (TIF) to trigger growth in blighted communities. Critics argue that Chicago’s broad conceptualization of “blight” facilitates the designation of TIF districts that do not resemble conventional notions of blight, bolstering their natural ability to generate capital, thereby exacerbating the gap between wealthy and poor minority spaces. This study examines Chicago’s TIF districts to determine whether blight levels and percentage of non-White residents interact to reduce the effectiveness of TIFs measured as the change in the equalized assessed valuation (EAV) of properties. Using composite indices to measure physical and economic blight, the results of a quantile regression analysis indicate that economically blighted TIFs with predominantly non-White populations outperform other districts. These findings run counter to expectations given that TIFs report high rates of growth in property values, yet they remain substantially blighted. This suggests a need to reconsider change in equalized assessed valuation as the measure of TIF effectiveness given that the “growth” in TIFs does not seem to reflect a higher quality of life for residents.
Population Aging and Structural Transformation
Javier Cravino, Andrei Levchenko & Marco Rojas
NBER Working Paper, September 2019
Abstract:
We propose and quantify a novel mechanism behind the structural transformation process: older individuals devote a larger share of their expenditures to services, so the relative size of the service sector grows as the population ages. We document that for a large sample of countries, increases in population age are accompanied by the rise in the relative size of the service sector. We use household-level data from the US Consumer Expenditure Survey to show that the fraction of expenditures devoted to services increases with household age. We use a shift-share decomposition and a quantitative model to show that changes in the US population age distribution accounted for about a fifth of the increase in the share of services in consumption expenditures observed between 1982 and 2016. In our quantitative model, population aging plays a much larger role than changes in real income in accounting for the structural change observed in the US during this period.