Coffers
Capitalizing patriotism: The Liberty loans of World War I
Sung Won Kang & Hugh Rockoff
Financial History Review, April 2015, Pages 45-78
Abstract:
Although taxes were raised substantially in the United States during World War I, recourse was had to five bond issues, the famous Liberty loans, to finance the bulk of war expenditures. The Secretary of the Treasury, William Gibbs McAdoo, hoped to create a broad market for the Liberty bonds and to limit their yields by following an aggressive policy of 'capitalizing patriotism'. He called on everyone from Wall Street bankers to the Boy Scouts to volunteer for campaigns to sell the bonds. The campaigns have become legendary. Some of the nation's best-known artists were recruited to draw posters depicting the contribution to the war effort to be made by buying bonds, and giant bond rallies featuring Hollywood stars were organized. These efforts, however, enjoyed limited success. The yields on the Liberty bonds were kept low mainly by making the bonds tax exempt and by making sure that a large proportion of them were purchased directly or indirectly by the Federal Reserve, turning the Federal Reserve into an engine of inflation. Patriotism proved to be a weak, although not powerless, offset to normal market forces.
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The Influence of Political Bias in State Pension Funds
Daniel Bradley, Christos Pantzalis & Xiaojing Yuan
Journal of Financial Economics, forthcoming
Abstract:
Using a sample of state pension funds' equity holdings, we find evidence of not only local bias, but also bias towards politically-connected stocks. Political bias is detrimental to fund performance. State pension funds have longer holding durations of politically-connected local firms and display disposition behavior in these positions. Political bias is positively related to the percentage of politically-affiliated trustees on the board and Congressional connections. The more politically-affiliated trustees on the board, the more the fund shifts toward risky asset allocations. Overall, our results imply that political bias is likely costly to taxpayers and pension beneficiaries.
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Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?
Zhiguo He & Gregor Matvos
Management Science, forthcoming
Abstract:
The existing theoretical literature provides little justification for a corporate debt subsidy. We illustrate the welfare benefit of this subsidy and study how the social costs and benefits change with the duration of industry distress. In our model, two firms engage in socially wasteful competition for survival in a declining industry. Firms differ on two dimensions: exogenous productivity and endogenously chosen amount of debt financing, resulting in a two-dimensional war of attrition. Debt financing increases incentives to exit, which, although costly for the firm, is socially beneficial. These benefits decline as industry distress shortens. Our normative model sheds light on why the debt tax subsidy still persists around the world. Analogously, the model can also rationalize a seemingly ad hoc feature of the U.S. tax system, which subsidizes the conflict of interest between debt and equity regarding firm liquidation.
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The Response of Deferred Executive Compensation to Changes in Tax Rates
Aspen Gorry et al.
Journal of Public Economics, forthcoming
Abstract:
Given the increasing use of stock options in executive compensation, we examine how taxes influence the choice of compensation and document that income deferral is an important margin of adjustment in response to tax rate changes. To account for this option in the empirical analysis, we explore deferral by estimating how executives' choice of compensation between current and deferred income depends on changes in tax policy. Our empirical results suggest a significant impact of taxes on the composition of executive compensation.
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In Tandem or Out of Sync? Academic Economics Research and Public Policy Measures
Lea-Rachel Kosnik
Contemporary Economic Policy, forthcoming
Abstract:
This paper investigates whether academic research attention to certain policy-related measures (including gross domestic product, unemployment, and inflation) is correlated with empirical measurements of the measures themselves. In other words, when unemployment rises, does research attention to the matter increase? Or do economists pursue research (in the short run) relatively uninfluenced by policy shocks on the ground? Text analysis implies that economic attention to key policy terms does correlate with empirical movements of the terms in most instances; however, the stronger and more consistent correlation is between use of policy terms in the literature and discussion of them by the broader public.
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Government Economic Policy, Sentiments, and Consumption
Atif Mian, Amir Sufi & Nasim Khoshkhou
NBER Working Paper, July 2015
Abstract:
We examine how consumption responds to changes in sentiment regarding government economic policy using cross-sectional variation across counties in the ideological predisposition of constituents. When the incumbent party loses a presidential election, individuals in counties more ideologically predisposed toward the losing party experience a dramatic and discontinuous relative decrease in optimism on government economic policy. Using the interaction of constituent ideology in a county with election timing as an instrument, we estimate the impact of government policy sentiment shocks on consumer spending, and we find a very small effect that cannot be statistically distinguished from zero. The small magnitude of the effect is estimated precisely. For example, we can reject the hypothesis that pessimism regarding government economic policy effectiveness during the Great Recession had as large an effect on consumption as the negative shock to household net worth coming from the collapse in house prices.
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Min-Seok Pang, Ali Tafti & M.S. Krishnan
Management Science, forthcoming
Abstract:
Given the recent concern on "big governments" and rising budget deficits in the United States and European nations, there has been a fundamental economic debate on the proper boundary and role of governments in a society. Inspired by this debate, we study the relationship between information technology (IT) and government size. Drawing on a broad range of the literature from multiple disciplines such as information systems, industrial organization, and political sciences, we present several theoretical mechanisms that explain the impact of IT on government expenditures. Using a variety of data on IT spending and state government expenditures, we find that greater IT investments made by a state chief information officer (CIO) are associated with lower state government spending. It is estimated that on average, a $1 increase in state CIO budgets is associated with a reduction of as much as $3.49 in state overall expenditures. This study contributes to the literature by identifying a key technological factor that affects government spending and showing that IT investments can be a means to restrain government growth.
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Proposition 13: An Equilibrium Analysis
Ayse Imrohoroglu, Kyle Matoba & Selale Tuzel
University of Southern California Working Paper, August 2015
Abstract:
In 1978, California passed one of the most significant tax changes initiated by voters in the United States. Proposition 13 lowered property tax rates and restricted future property tax increases. In this paper, we study the implications of Proposition 13 on house prices, housing turnover, and household welfare. In our benchmark calibration, the introduction of Proposition 13 leads to a 25% increase in house prices and a 4% decrease in the moving rates. We find that elimination of Proposition 13 in a revenue-neutral way leads to small changes in house prices and modest increases in mobility but large welfare gains.
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The Optimal Use of Government Purchases for Macroeconomic Stabilization
Pascal Michaillat & Emmanuel Saez
NBER Working Paper, July 2015
Abstract:
This paper extends Samuelson's theory of optimal government purchases by considering the contribution of government purchases to macroeconomic stabilization. We consider a matching model in which unemployment can be too high or too low. We derive a sufficient-statistics formula for optimal government purchases. Our formula is the Samuelson formula plus a correction term proportional to the government-purchases multiplier and the gap between actual and efficient unemployment rate. Optimal government purchases are above the Samuelson level when the correction term is positive -- for instance, when the multiplier is positive and unemployment is inefficiently high. Our formula indicates that US government purchases, which are mildly countercyclical, are optimal under a small multiplier of 0.03. If the multiplier is larger, US government purchases are not countercyclical enough. Our formula implies significant increases in government purchases during slumps. For instance, with a multiplier of 0.5 and other statistics calibrated to the US economy, when the unemployment rate rises from the US average of 5.9% to 9%, the optimal government purchases-output ratio increases from 16.6% to 19.8%. However, the optimal ratio increases less for multipliers above 0.5 because with higher multipliers, the unemployment gap can be filled with fewer government purchases. For instance, with a multiplier of 2, the optimal ratio only increases from 16.6% to 17.6%.
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Risky Business: The Decline of Defined Benefit Pensions and Firms' Shifting of Risk
Adam Cobb
Organization Science, forthcoming
Abstract:
Since the early 1980s, employment in the United States has undergone significant transformation as the large corporations that once safeguarded employees with stable jobs and rewards for loyalty have replaced these employment relationships with ones based on cost containment and flexibility. One important consequence of these developments is that firms have abdicated their role as a critical risk bearer in society. Although evidence suggests that firms have increasingly shifted market risks onto their workforce, to date, there have been few detailed analyses exploring what factors have driven this phenomenon. This study adds to our understanding of why firms have transferred risk to their employees by examining the decline of a highly institutionalized practice wherein large U.S. firms used to bear retirement risk: the defined benefit (DB) pension plan. Through a detailed analysis, I show that variance in the presence, power, and interests of shareholders and employees at the firm level differentially affect a firm's willingness to shift the risk of retirement onto its workers. Specifically, I demonstrate empirically that different types of shareholders have differential effects on a firm's retirement practices, suggesting that the changing equity ownership structure of large U.S. firms has played a key role in how risk is allocated between workers and firms. Declines in employee power have also played a role because firm levels of unionization positively affect rates of DB participation for both unionized and nonunionized workers.
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Has Regulation of Charitable Foundations Thrown the Baby Out With the Bath Water?
Benjamin Marx
Journal of Public Economics, September 2015, Pages 63-76
Abstract:
Regulations to curb tax avoidance and evasion through charitable foundations have been in place since the Tax Reform Act of 1969. Newly-compiled longitudinal data makes it possible to estimate the effects of these regulations by comparing affected and unaffected foundations before and after the reform. Donations and entry dropped precipitously. Proxy variables suggest significant deterrence of abuses, but half of the decline in donations can be explained by the increased cost of running a foundation. The results highlight the potential for large reductions in the benefits of regulation when the cost of compliance affects externality-producing actions such as charitable giving.
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Saurabh Bhargava & Dayanand Manoli
American Economic Review, forthcoming
Abstract:
We address the puzzle of incomplete take-up with a large policy experiment conducted in collaboration with the IRS. The experiment assesses whether confusion, informational complexity, and stigma contribute to low take-up in a setting in which costs of claiming are otherwise minimal. We specifically evaluate response to experimental mailings which notified 35,050 tax-filers, unresponsive to a first mailed reminder, of $26m in unclaimed EITC benefits. Overall, merely receiving a second mailing prompted 0.22 of recipients to claim. Simplifying information and increasing the salience of benefit information substantially improved response but attempts to reduce perceived costs of stigma, application, and audits did not. The experiment, observation that low-earners were disproportionately harmed by complexity, and mechanisms implied by an accompanying survey, suggest the failure to claim in this setting is attributable, at least in part, to a deficit in program awareness and understanding, and an aversion to program complexity. These findings, along with a second survey which hints of broader generalizability, emphasize the need for economic models which recognize the role of "psychological frictions" the decision to take-up.
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Voluntary Disclosure of Evaded Taxes - Increasing Revenues, or Increasing Incentives to Evade?
Dominika Langenmayr
Journal of Public Economics, forthcoming
Abstract:
Many countries apply lower fines to tax evading individuals when they voluntarily disclose the tax evasion they committed. I model such voluntary disclosure mechanisms theoretically and show that while such mechanisms increase the incentive to evade taxes, they nevertheless increase tax revenues net of administrative costs. I confirm the importance of administrative costs in a survey of German competent local tax authorities. I then test the effects of voluntary disclosure on the tax evasion decision, using the introduction of the 2009 offshore voluntary disclosure program in the U.S. for identification. The analysis confirms that the introduction of voluntary disclosure increases tax evasion.
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Zhenhua Chen & Kingsley Haynes
Economic Development Quarterly, August 2015, Pages 275-291
Abstract:
This research examines the regional impact of public transportation infrastructure in the northeast megaregion of the United States: public highways, railways, transit, and airports. Infrastructure stock is valued in monetary terms from 1991 to 2009. A spatial panel approach with fixed effects is adopted to test the hypothesis of spillovers by controlling for spatial dependence. The result suggests that transportation infrastructure, in general, does have a significant impact on regional economic growth, most of which is from spillover effects. Highways have an overwhelming influence through local effects and spillover effects. The impacts from public railways and airports are significant, but transit impacts are insignificant, although a positive spillover effect is found.