Finding the Money
The Cross-Sectional Implications of the Social Discount Rate
Maya Eden
Econometrica, forthcoming
Abstract:
In this paper, I consider two normative questions: (1) how should policymakers approach tradeoffs that involve different age groups, and (2) at what rate should policymakers discount the consumption of future generations? I demonstrate that, under standard assumptions, these two questions are equivalent: caring more about the future means caring less about the elderly. Even small differences between the social discount rate and the market interest rate can have significant quantitative implications for the relative value placed on the consumption of different age groups.
Value Pricing or Lexus Lanes? The Distributional Effects of Dynamic Tolling
Cody Cook & Pearl Li
Stanford Working Paper, November 2023
Abstract:
This paper studies the welfare and distributional effects of dynamically priced highway toll lanes. To quantify the equilibrium effects of tolling, we develop and estimate a model of driver demand, the road technology, and the pricing algorithm. The demand model features heterogeneous drivers choosing both where and when to drive, as well as uncertainty about prices and travel times. A key welfare channel is the option value of tolling: even drivers who infrequently take the priced lanes can benefit from having the option but not the obligation to pay for speed. The model is estimated using data on toll transactions, historical traffic conditions, and driver characteristics from the I-405 Express Toll Lanes in Washington State. Relative to a world in which the same number of highway lanes are all free, status-quo tolling increases aggregate welfare and benefits drivers in all income quartiles, driven in large part by the option value. Moreover, we find that drivers in the bottom income quartile gain the most under status-quo tolling. Low-income drivers have the longest I-405 commutes and they face low prices relative to their time savings from the priced lanes. They also have high option values of tolling because they are more price-sensitive, so they are more likely to be marginal when deciding between the priced and unpriced lanes. Finally, we show how simple revisions to the pricing algorithm can increase aggregate welfare and achieve redistributive goals.
Do Tax Incentives Increase Firm Innovation? An RD Design for R&D, Patents, and Spillovers
Antoine Dechezleprêtre et al.
American Economic Journal: Economic Policy, November 2023, Pages 486-521
Abstract:
We present causal evidence of R&D tax incentives' positive impacts on a firm's own innovation and that of its technological neighbors. Exploiting a change in size-based eligibility thresholds for R&D tax relief, we implement a Regression Discontinuity Design using administrative data. We find significant effects of tax relief on (quality-adjusted) patenting (and R&D) that persist up to seven years, and evidence of R&D spillovers on the innovation of technologically close firms. We can rule out elasticities of patenting with respect to R&D user cost of under 2 at the 5 percent level and show that our large effects are driven by financially constrained treated firms.
Tax Policy and Investment in a Global Economy
Gabriel Chodorow-Reich et al.
NBER Working Paper, October 2023
Abstract:
This paper combines administrative tax data and a model of global investment behavior to evaluate the investment and firm valuation effects of the Tax Cuts and Jobs Act (TCJA) of 2017, the largest corporate tax reduction in the history of the United States. We extend the canonical model of Hall and Jorgenson (1967) to a multinational setting in which a firm produces in domestic and international locations. We use the model to characterize and measure four determinants of domestic investment: domestic and foreign marginal tax rates and cost-of-capital subsidies. We estimate elasticities of domestic investment with respect to each and use them to identify the structural parameters of our model, to quantify which parts of the reform mattered most to investment, and to conduct policy counterfactuals. We have five main findings. First, the TCJA caused domestic investment of firms with the mean tax change to increase by roughly 20% relative to firms experiencing no tax change. Second, the TCJA created large incentives for some U.S. multinationals to increase foreign capital, which rose substantially following the law change. Third, domestic investment also increases in response to foreign incentives, indicating complementarity between domestic and foreign capital in production. Fourth, the general equilibrium long-run effects of the TCJA on the domestic and total capital of U.S. firms are around 6% and 9%, respectively. Finally, in our model, the dynamic labor and corporate tax revenue feedback in the first 10 years is less than 2% of baseline corporate revenue, as investment growth causes both higher labor tax revenues from wage growth and offsetting corporate revenue declines from more depreciation deductions. Consequently, the fall in total corporate tax revenue from the tax cut is close to the static effect.
Do Governments Hide Resources from Unions? The Influence of Public Sector Unions on Reported Discretionary Fund Balance Ratios
Angela Gore, Yuan Ji & Susan Kulp
Journal of Accounting Research, December 2023, Pages 1735-1770
Abstract:
We explore whether municipalities with public sector unions exploit aspects of governmental (or “fund”) accounting to obscure the availability of discretionary resources in fund balance accounts, relative to municipalities without public sector unions. We first investigate whether governments with unions report higher proportions of discretionary resources outside of the general fund, a primary measure of financial health, and instead within less prominent fund types. Second, we explore whether governments with unions report lower ratios within accessible general fund balance account categories -- that is, report lower proportions of unreserved fund balance. Primary findings are consistent with both hypotheses. Although somewhat mixed, cross-sectional analyses reveal that effects are magnified when unions have more bargaining power, as proxied by the ability to strike or the absence of state right-to-work laws. Further analysis corroborates cross-sectional findings by examining difference-in-differences specifications surrounding the quasi-exogenous shock of Wisconsin's 2011 weakening of state public sector union laws and Ohio's time-varying union contract negotiations. Overall, the evidence suggests that governments with unions shelter resources to avoid the appearance of large discretionary amounts available.
The global minimum tax raises more revenues than you think, or much less
Eckhard Janeba & Guttorm Schjelderup
Journal of International Economics, November 2023
Abstract:
The OECD’s global minimum tax (GMT) of 15% on what is deemed excess profit of multinationals aims to reduce profit shifting to low-tax jurisdictions. We study the revenue effects of the GMT by focusing on strategic tax setting effects. The direct effect from less profit shifting increases revenues in high-tax countries. A secondary effect, however, is that the value of attracting foreign investments increases, which intensifies tax competition. We show that when governments compete via lump sum subsidies, the revenue gains from less profit shifting are exactly offset by higher subsidies. When competition is by tax rates, revenues may increase, however.
Political behavior and voting for tax incentives
Mark Owens & Adam Rennhoff
Applied Economics, forthcoming
Abstract:
This study looks at the factors which influence state legislators’ votes on movie production tax incentives. It investigates the relationship between votes cast by state legislators for/against movie production subsidies with respect to election results, political party, political donations, and district geographic and economic characteristics. Votes depend on incentives offered by neighbouring states, political affiliation, margin of election victory, and district unemployment. The number of movies filmed in the district prior to legislative action or political contributions to legislators from movie industry donors are not important vote determinants on this issue. Districts that voted for incentives appear to receive a greater increase in post-legislation film production than those that voted against legislation. Using statewide ballot initiatives to measure voter preferences, the data indicates that legislator votes on movie tax incentives reflect the underlying beliefs of their districts and is consistent with the median voter theorem.
“Just BEAT It”: Do Firms Reclassify Costs to Avoid the Base Erosion and Anti-Abuse tax (BEAT) of the TCJA?
Stacie Kelley et al.
Journal of Accounting and Economics, forthcoming
Abstract:
This study empirically examines whether firms reclassify related-party payments to avoid the base erosion and anti-abuse tax (BEAT) of the Tax Cuts and Jobs Act (TCJA). We leverage the BEAT filing threshold and use both a difference-in-differences design among U.S. firms and a triple-difference design utilizing the parent company's location to provide evidence that firms reclassify related-party payments to avoid the BEAT. This effect is stronger in firms with greater pre-TCJA income shifting incentives. We estimate a $6 billion aggregate reduction in U.S. taxes for our sample firms in 2018. We also examine the consequences of reclassifying related-party payments and find some evidence of an increase in tax reserves and a reduction in internal information quality for firms that engage in cost reclassification to avoid the BEAT. These findings help explain observed BEAT collection shortfalls, contribute to the current policy debate about international tax reform, and document spillover effects of tax policy.