Budget mess
Fiscal Analysis is Darned Hard
Eric Leeper
NBER Working Paper, December 2015
Abstract:
Dramatic fiscal developments in the wake of the 2008 financial crisis and global recession led researchers to recognize how little we know about fiscal policies and their impacts. This essay argues that fiscal analysis that aims to address pertinent issues and provide useful inputs to policymakers is intrinsically hard. I illustrate this with examples torn from the economic headlines in many countries. I identify some essential ingredients for useful fiscal analysis and point to examples in the literature that integrate some of those ingredients. Recent methodological advances give reason to be optimistic about fiscal analyses in the future.
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The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security
Erzo Luttmer & Andrew Samwick
NBER Working Paper, December 2015
Abstract:
Policy uncertainty can reduce individual welfare when individuals have limited opportunities to mitigate or insure against consumption fluctuations induced by the policy uncertainty. For this reason, policy uncertainty surrounding future Social Security benefits may have important welfare costs. We field an original survey to measure the degree of policy uncertainty in Social Security and to estimate the impact of this uncertainty on individual welfare. On average, our survey respondents expect to receive only about 60 percent of the benefits they are supposed to get under current law. We document the wide variation around the expectation for most respondents and the heterogeneity in the perceived distributions of future benefits across respondents. This uncertainty has real costs. Our central estimates show that on average individuals would be willing to forego around 6 percent of the benefits they are supposed to get under current law to remove the policy uncertainty associated with their future benefits. This translates to a risk premium from policy uncertainty equal to 10 percent of expected benefits.
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Sharing Risk with the Government: On the Causal Effects of Taxes on Corporate Risk-Taking
Alexander Ljungqvist, Liandong Zhang & Luo Zuo
NBER Working Paper, December 2015
Abstract:
Using a natural experiment in the form of 113 staggered changes in corporate income tax rates across U.S. states, we provide causal evidence on how taxes affect corporate risk-taking decisions. Higher taxes are expected to reduce the expected profit per unit of risk, as the government shares in a firm’s upside but not in its downside. Consistent with this prediction, we find that firms respond to tax increases by reducing risk. We find no corresponding sensitivity to tax cuts, suggesting that firms find it easier to reduce risk than to increase it. Tax loss-offset rules moderate firms’ sensitivity to taxes by allowing firms to partly share downside risk with the government.
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The Political Color of Fiscal Responsibility
Andreas Müller, Kjetil Storesletten & Fabrizio Zilibotti
Journal of the European Economic Association, February 2016, Pages 252–302
Abstract:
We propose a dynamic general equilibrium model that yields testable implications about the fiscal policy run by governments of different political color. Successive generations of voters choose taxation, expenditure, and government debt through repeated elections. Voters are heterogeneous by age and by the intensity of their preferences for public good provision. The political equilibrium switches stochastically between left- (pro-public goods) and right-leaning (pro-private consumption) governments. A shift to the left (right) is associated with a fall (increase) in government debt, an increase (fall) in taxation, and an increase (fall) in government expenditures. However, left-leaning governments engage in more debt accumulation during recessions. These predictions are shown to be consistent with the time-series evidence for the United States in the postwar period, and also with the evidence for a panel of OECD countries.
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Voter turnout and the size of government
Linuz Aggeborn
European Journal of Political Economy, forthcoming
Abstract:
This paper uses Swedish and Finnish municipal data to investigate the effect of changes in voter turnout on the tax rate, public spending and vote-shares. A reform in Sweden in 1970, which overall lowered the cost of voting, is applied as an instrument for voter turnout in local elections. The reform increased voter turnout in Sweden. The higher voter turnout resulted in higher municipal taxes and greater per capita local public spending. There are also indications that higher turnout decreased the vote share for right-wing parties. I use an individual survey data set to conclude that it was in particular low income earners that began to vote to a greater extent after the reform.
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Agglomeration, Tax Differentials, and the Mobility of Professional Athletes
Grant Driessen & Steven Sheffrin
Public Finance Review, forthcoming
Abstract:
Interstate mobility may limit states’ ability to choose their desired tax policies. The forces of agglomeration, however, may allow states more leeway in setting tax rates. Moreover, mobility and agglomeration effects are not uniform for all individuals within a state and may vary significantly across different groups. We explore this heterogeneity by examining the residential location decisions of professional racecar drivers and golfers, which have similar industry characteristics but different levels of agglomeration. Consistent with our theory, we show that tax preferences are a powerful determinant of golfer residential patterns, while agglomeration mitigates much of this effect among racecar drivers. These findings highlight the need to better understand how competition and agglomeration interact when formulating tax policy.
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Income Taxes on Social Security Benefits
Patrick Purcell
Social Security Administration Working Paper, December 2015
Abstract:
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income. Because those income thresholds have remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time. A Social Security Administration microsimulation model projects that an annual average of about 56 percent of beneficiary families will owe federal income tax on part of their benefit income from 2015 through 2050. The median percentage of benefit income owed as income tax by beneficiary families will rise from 1 percent to 5 percent over that period. If Congress does not adjust income tax brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.
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Chronicle of a War Foretold: The Macroeconomic Effects of Anticipated Defense Spending Shocks
Nadav Ben Zeev & Evi Pappa
Economic Journal, forthcoming
Abstract:
We identify news shocks to U.S. defense spending as the shocks that best explain future movements in defense spending over a five-year horizon and are orthogonal to current defense spending. Our identified shocks, though correlated with the Ramey (2011) news shocks, explain a larger share of macroeconomic fluctuations and produce significant demand effects. News about increases in defense spending induces significant and persistent increases in output, hours worked, inflation and the interest rate, and significant increases in investment, consumption and the excess returns of defense contractors on impact.
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Does the Composition of Government Expenditure Matter for Long-Run GDP Levels?
Norman Gemmell, Richard Kneller & Ismael Sanz
Oxford Bulletin of Economics and Statistics, forthcoming
Abstract:
We examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for a sample of OECD countries since the 1970s, taking account of methods of financing expenditure changes and possible endogenous relationships. We provide more systematic empirical evidence than available hitherto for OECD countries, obtaining strong evidence that reallocating total spending towards infrastructure and education is positive for long-run output levels. Reallocating spending towards social welfare (and away from all other expenditure categories pro-rata) may be associated with modest negative effects on output in the long run.
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Arthur Nelson et al.
Economic Development Quarterly, February 2016, Pages 88-98
Abstract:
Economic development in the current century may favor those metropolitan areas that attract the “knowledge class.” This study provides a cross-sectional analysis associating the presence of one or more professional symphony, opera, or ballet/dance organizations with knowledge class growth. The authors find that the presence of one type of such organization is associated with a 1.1% change in knowledge class employment over the period from 2000 to 2010, two types are associated with a 1.5% change, and all three are associated with a 2.2% change. Between 2000 and 2010, the presence of at least one professional performing arts organization is associated with about 540,000 knowledge class jobs, generating about $60 billion in annual income among those 118 metropolitan areas with professional performing arts organizations. Metropolitan economic development implications are offered.
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Did the Community Renewal Tax Incentives Pirate Businesses From Other Places?
Richard Smith
Economic Development Quarterly, February 2016, Pages 46-61
Abstract:
An early concern regarding place-based economic developments was that they might encourage business relocation into target neighborhoods at the expense of other places. To address this concern, when the U.S. Congress passed the Empowerment Zone/Enterprise Community (EZ/EC) program, it included an “antipirating” provision prohibiting use of grants for business relocation. Later iterations of the EZs and Renewal Communities (RCs) received tax incentives only. The RC program did not include an antipirating provision. Did businesses relocate? This study compares business moves within 1,000 feet inside a given RC/EZ with moves within 1,000 feet outside the RC/EZ before and after the intervention. Data are from the National Establishment Time Series (NETS) Database for California and Tennessee. Moves into some RC/EZs increased but so did moves out, leading to no statistically significant net change in numbers of firms. There were no obvious differences between RCs and EZs. The article concludes with policy recommendations.
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Quality of Life Amenities as Contributors to Local Economies: Views of City Managers
James Vanderleeuw & Jason Sides
Journal of Urban Affairs, forthcoming
Abstract:
Is the level of importance attached to quality of life amenities, such as parks and restaurants, influenced by the objectives of the economic development strategy developed by city leaders? This research question drives the analysis presented in this article. We consider municipal leaders’ views of community amenities and how these opinions are influenced by the desire to either create jobs for community residents or generate greater municipal revenue. We evaluate the expectation that the need to generate city revenue will exert the greatest influence on the perceived importance of community amenities. Findings are generated using original survey data from city managers of 133 Texas cities. The results confirm expectations that city managers view quality of life amenities as more efficacious in contributing to revenue generation than job creation. The impact of these findings for the understanding of how city managers promote certain economic development strategies is discussed.