Buried treasury
Politics at the Precipice: Fixing Social Security in 2033
Douglas Arnold
The Forum, April 2015, Pages 3–18
Abstract:
Social Security will be insolvent in 2033. If nothing is done, retirees will face an immediate 23% cut in their monthly benefits. The solvency cliff and its approximate date have been known for more than two decades. This paper examines why Congress has avoided fixing Social Security when the solutions were relatively affordable and when the baby-boom generation could have helped pay its share of the costs. It also examines what solutions will become politically feasible once the solvency cliff arrives. The surprise is that raising the wage base – in short, taxing the affluent – becomes the most politically appealing fix when insolvency arrives, despite the fact that this solution has no political appeal absent a crisis. Politics at the precipice is very different from ordinary politics.
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The In-State Equity Bias of State Pension Plans
Jeffrey Brown, Joshua Matthew Pollet & Scott Weisbenner
NBER Working Paper, March 2015
Abstract:
This paper provides evidence on the investment behavior of 27 state pension plans that manage their own equity portfolios. Even though these state plans typically hold broadly diversified portfolios, they substantially over-weight the equity of companies that are headquartered in-state. The over-weighting of within-state stocks by these plans is three times larger than that of other institutional investors. We explore three possible reasons for this in-state bias: familiarity bias, information-based investing, and political considerations. While there is a substantial preference for in-state stocks, there is no similar tilt toward holding stocks from neighboring states or out-of-state stocks in the state’s primary industry. States generate excess returns through their in-state investment activities, particularly among smaller stocks in the state’s primary industry. We also find that state pension plans are more likely to hold a within-state stock if the headquarters of the firm is located in a county that gave a high fraction of its campaign contributions to the current governor. These politically-motivated holdings yield excess returns for the pension fund.
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Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut
Danny Yagan
NBER Working Paper, March 2015
Abstract:
Policymakers frequently propose to use capital tax reform to stimulate investment and increase labor earnings. This paper tests for such real impacts of the 2003 dividend tax cut — one of the largest reforms ever to a U.S. capital tax rate — using a quasi-experimental design and a large sample of U.S. corporate tax returns from years 1996-2008. I estimate that the tax cut caused zero change in corporate investment, with an upper bound elasticity with respect to one minus the top statutory tax rate of .08 and an upper bound effect size of .03 standard deviations. This null result is robust across specifications, samples, and investment measures. I similarly find no impact on employee compensation. The lack of detectable real effects contrasts with an immediate impact on financial payouts to shareholders. Economically, the findings challenge leading estimates of the cost-of-capital elasticity of investment, or undermine models in which dividend tax reforms affect the cost of capital. Either way, it may be difficult for policymakers to implement an alternative dividend tax cut that has substantially larger near-term effects.
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Tax Cuts For Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment
Owen Zidar
NBER Working Paper, March 2015
Abstract:
This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER's TAXSIM. I aggregate each tax change by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10% on employment growth is small.
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Taxes and Financial Constraints: Evidence from Linguistic Cues
Kelvin Law & Lillian Mills
Journal of Accounting Research, forthcoming
Abstract:
Using a new measure of financial constraints based on firms’ qualitative disclosures, we find that financially constrained firms — firms that use more negative words in their annual reports — pursue more aggressive tax planning strategies as evidenced by: (1) higher current and future unrecognized tax benefits, (2) lower short- and long-run current and future effective tax rates, (3) increase in tax haven usage for their material operations, and (4) higher proposed audit adjustments from the Internal Revenue Service. We exploit the unexpected closures of local banks as exogenous liquidity shocks to show that firms’ external financial constraints affect their tax avoidance strategies. Overall, the linguistic cues in firms’ qualitative disclosures provide incremental information beyond traditional accounting variables or commonly used effective tax rates to reveal and predict tax aggressiveness, both contemporaneously and in the future.
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Corporate Tax Havens and Shareholder Value
Morten Bennedsen & Stefan Zeume
University of Michigan Working Paper, March 2015
Abstract:
Using a novel hand-collected dataset of 17,331 publicly listed firms from 52 countries and their international subsidiaries, we investigate the motives for establishing subsidiaries in tax havens. We document five sets of results. First, a 1 percentage point reduction in firms’ home-country corporate tax rate is associated with a 1.2 percent increase in value of firms without tax haven subsidiary while firms with tax haven subsidiary are unaffected. Second, the signing of Tax Information Exchange Agreements (TIEAs) increases average shareholder value by 2.5 percent. Third, the positive effect is stronger for firms with more complex firm structure within the tax haven. Fourth, firms respond to TIEAs by engaging in haven hopping, i.e. moving their subsidiaries from tax havens that entered TIEAs to tax havens that did not. Fifth, TIEAs do not increase average shareholder value of firms that engage in haven hopping. These results suggest that tax haven subsidiaries are used for entrenchment activities beyond pure tax saving.
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Self-serving bias and tax morale
Kay Blaufus et al.
Economics Letters, forthcoming
Abstract:
In a real-effort laboratory experiment, we find that moral evaluation of tax evasion is subject to a self-serving bias. Subjects with the opportunity to evade taxes judge tax evasion as less unethical as opposed to those who cannot evade.
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A Quantitative Analysis of Subsidy Competition in the U.S.
Ralph Ossa
NBER Working Paper, February 2015
Abstract:
What motivates regional governments to subsidize firm relocations and what are the implications of the subsidy competition among them? In this paper, I address these questions using a quantitative economic geography model which I calibrate to U.S. states. I show that states have strong incentives to subsidize firm relocations in order to gain at the expense of other states. I also show that subsidy competition creates large distortions so that there is much to gain from a cooperative approach. Overall, I find that manufacturing real income can be up to 3.9 percent higher if states stop competing over firms.
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Effects of Fiscal Shocks in a Globalized World
Alan Auerbach & Yuriy Gorodnichenko
NBER Working Paper, April 2015
Abstract:
While theoretical models consistently predict that government spending shocks should lead to appreciation of the domestic currency, empirical studies have been stubbornly finding depreciation. Using daily data on U.S. defense spending (announced and actual payments), we document that the dollar immediately and strongly appreciates after announcements about future government spending. In contrast, actual payments lead to no discernible effect on the exchange rate. We examine responses of other variables at the daily frequency and explore how the response of the exchange rate to fiscal shocks varies over the business cycle as well as at the zero lower bound and in normal times.
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Government Policy and Labor Supply with Myopic or Targeted Savings Decisions
Louis Kaplow
NBER Working Paper, April 2015
Abstract:
A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. This essay offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals’ non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between nonoptimal savings behavior and labor supply.
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General Revenue Sharing and Public Sector Unions
Laura Feiveson
Journal of Public Economics, forthcoming
Abstract:
In this paper, I find that in the context of a large intergovernmental general revenue sharing program implemented from 1972 to 1986, cities increased expenditures one-for-one with federal grants, which is suggestive of a large flypaper effect. Furthermore, I find that cities in states with pro-union collective bargaining laws spent more than half of the transfers on increased wages, while cities in states without such laws spent a greater fraction on increased government services. These latter findings suggest that public sector unions play an important role in determining the usage and impact of intergovernmental grants.
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The Effect of Walmart and Target on the Tax Base: Evidence from New Jersey
Donald Vandegrift & John Loyer
Journal of Regional Science, March 2015, Pages 159–187
Abstract:
We find that a new Walmart has no significant effect on the growth in the tax base in either the host or the adjacent municipality. By contrast, a new Target has a significant positive effect on the growth in the tax base per acre in the host municipality and in the adjacent municipality. The new Target raises the real tax base per acre in the host municipality by about 2.82 percent and in the adjacent municipality by about 5.87 percent. Seventy percent of the host municipality effect follows from changes in the nonresidential tax base.
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How Individuals Smooth Spending: Evidence from the 2013 Government Shutdown Using Account Data
Michael Gelman et al.
NBER Working Paper, March 2015
Abstract:
Using comprehensive account records, this paper examines how individuals respond to a temporary drop in income following the 2013 U.S. Federal Government shutdown. Affected employees saw their income decline by 40% on average, which was recovered within two weeks. Despite having no effect on lifetime earnings, spending dropped sharply, implying a naïve estimate of the marginal propensity to spend of 0.57. This estimate overstates how consumption responded. To smooth consumption, individuals adjusted by delaying recurring payments such as mortgages and credit card balances. Those with the least liquidity struggled most to smooth spending and were left holding more debt months after the shutdown.
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War and the Sectoral Distribution of Wealth: Evidence from United States Firms
Isa Camyar & Bahar Ulupinar
International Studies Quarterly, forthcoming
Abstract:
In this research, we examine the sector-specific distributive effect of war in the United States economy. We argue that war generates sector-specific distributive effects via demand-side and supply-side mechanisms. We also claim that war’s distributive effects materialize over time. Our empirical analysis utilizes a panel dataset with 22,354 U.S. firms for the period from 1960 to 2007. It probes the impact of the U.S. Government’s war making on firm performance in the U.S. arms and non-arms (hybrid and civilian) sectors in both the short and long runs. Our analysis shows that war does not always affect U.S. non-arms sectors adversely. Indeed, war exercises a positive total long-run effect for these sectors. It also finds that the supposedly positive distributive effect of war for U.S. arms sectors proves weaker than analysts generally assume. Finally, it demonstrates that war-induced demand and supply shocks can explain these results. Overall, our research sheds light on a relatively understudied aspect of war and advances the general understanding of the political micro-economy of war making.
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Tax Incentives and Business Climate: Executive Perceptions From Incented and Nonincented Firms
Jason Jolley, Mandee Foushee Lancaster & Jiang Gao
Economic Development Quarterly, May 2015, Pages 180-186
Abstract:
Executive surveys ranking business climate factors have become commonplace in site selection publications. However, these rankings rarely examine if the surveyed firms are receiving economic development incentives and whether or not these incentives influence business climate perceptions. This research note examines the differences in business climate perceptions in North Carolina between executives in companies receiving tax credits for business investment and job creation activities and executives in companies not receiving tax credits. Both groups rank the availability of skilled labor as the primary factor influencing business climate. In addition, executives in both groups prefer overall tax reductions rather than select tax incentives to improve the state’s economy. Contrary to the belief among many economic development practitioners that tax credits are a motivating factor for firms to engage in economic development, only 30% of executives in incented companies were aware that their company had received a state economic development tax credit.
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Are PILOTs Property Taxes for Nonprofits?
Fan Fei, James Hines & Jill Horwitz
NBER Working Paper, April 2015
Abstract:
Nonprofit charitable organizations are exempt from most taxes, including local property taxes, but U.S. cities and towns increasingly request that nonprofits make payments in lieu of taxes (known as PILOTs). Strictly speaking, PILOTs are voluntary, though nonprofits may feel pressure to make them, particularly in high-tax communities. Evidence from Massachusetts indicates that PILOT rates, measured as ratios of PILOTs to the value of local tax-exempt property, are higher in towns with higher property tax rates: a one percent higher property tax rate is associated with a 0.2 percent higher PILOT rate. PILOTs appear to discourage nonprofit activity: a one percent higher PILOT rate is associated with 0.8 percent reduced real property ownership by local nonprofits, 0.2 percent reduced total assets, and 0.2 percent lower revenues of local nonprofits. These patterns are consistent with voluntary PILOTs acting in a manner similar to low-rate, compulsory real estate taxes.
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Input Distortions in The Low-Income Housing Tax Credit: Evidence from Building Size
Bree Lang
Regional Science and Urban Economics, May 2015, Pages 119–128
Abstract:
The Low-Income Housing Tax Credit subsidizes the non-land construction costs of low-income housing units. Because land costs are not subsidized, it may incentivize developers to produce buildings with too much capital from the viewpoint of optimal production. Using data on construction in Los Angeles County between 1993 and 2007, this paper estimates how the Low-Income Housing Tax Credit subsidy affects the size of newly constructed apartment buildings. Holding land area constant, I find the average subsidized building includes 25 to 29 percent more square footage than unsubsidized buildings constructed in the same year and zip code. The effect is primarily driven by subsidized buildings including more, instead of larger, housing units. Consistent with theoretical predictions, the effects are strongest in locations with low market rent. This input distortion is one reason that housing subsidies that fund the construction of low-income housing may be less cost-effective than subsidies given directly to tenants.
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Assist or desist? Conditional bailouts and fiscal discipline in local governments
Jens Dietrichson & Lina Maria Ellegård
European Journal of Political Economy, June 2015, Pages 153–168
Abstract:
Central government bailouts of local governments are commonly viewed as a recipe for local fiscal indiscipline, as local governments learn that the center will come to the rescue in times of trouble. However, little is known about the consequences of bailouts granted conditional on local governments first making efforts to improve the situation. We examine a case in which the Swedish central government provided conditional grants to 36 financially troubled municipalities. We use the synthetic control method to identify suitable comparison units for each of the 36 municipalities. To compare the development of costs and the fiscal surplus of admitted municipalities to that of their most similar counterparts during the decade after the program, we then estimate fixed effects regressions on the resulting sample. The analysis suggests that conditional bailouts did not erode, and may even had induced greater fiscal discipline.
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The Multiplier for Federal Spending in the States During the Great Depression
Price Fishback & Valentina Kachanovskaya
Journal of Economic History, March 2015, Pages 125-162
Abstract:
To estimate the impact of federal spending on state incomes, we develop an annual panel data set between 1930 and 1940. Using panel methods we estimate that an added dollar of federal spending in the state increased state per capita income by between 40 and 96 cents. The point estimates for nonfarm grants are higher and for AAA farm grants are much smaller and negative in some cases. The spending led to increase in durable good spending on automobiles but had no positive effects on private employment.