On a budget
Explaining Systematic Bias and Nontransparency in U.S. Social Security Administration Forecasts
Konstantin Kashin, Gary King & Samir Soneji
Political Analysis, forthcoming
Abstract:
The accuracy of U.S. Social Security Administration (SSA) demographic and financial forecasts is crucial for the solvency of its Trust Funds, other government programs, industry decision-making, and the evidence base of many scholarly articles. Because SSA makes public insufficient replication information and uses antiquated statistical forecasting methods, no external group has ever been able to produce fully independent forecasts or evaluations of policy proposals to change the system. Yet, no systematic evaluation of SSA forecasts has ever been published by SSA or anyone else - until a companion paper to this one. We show that SSA's forecasting errors were approximately unbiased until about 2000, but then began to grow quickly, with increasingly overconfident uncertainty intervals. Moreover, the errors are largely in the same direction, making the Trust Funds look healthier than they are. We extend and then explain these findings with evidence from a large number of interviews with participants at every level of the forecasting and policy processes. We show that SSA's forecasting procedures meet all the conditions the modern social-psychology and statistical literatures demonstrate make bias likely. When those conditions mixed with potent new political forces trying to change Social Security, SSA's actuaries hunkered down, trying hard to insulate their forecasts from strong political pressures. Unfortunately, this led the actuaries into not incorporating the fact that retirees began living longer lives and drawing benefits longer than predicted. We show that fewer than 10% of their scorings of major policy proposals were statistically different from random noise as estimated from their policy forecasting error. We also show that the solution to this problem involves SSA or Congress implementing in government two of the central projects of political science over the last quarter century: (1) transparency in data and methods and (2) replacing with formal statistical models large numbers of ad hoc qualitative decisions too complex for unaided humans to make optimally.
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The Paradoxical Impact of Corporate Inversions on US Tax Revenue
Rita Nevada Gunn & Thomas Lys
Northwestern University Working Paper, April 2015
Abstract:
Do corporate inversions cost the US Treasury billions of dollars in tax revenue, justifying legislative responses and even strong-arming corporations from moving their tax domicile abroad? We show that corporate inversions not only do not appear to reduce, but, paradoxically, are even likely to increase tax collections by the US Treasury.
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The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists
Enrico Moretti & Daniel Wilson
NBER Working Paper, April 2015
Abstract:
Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists' migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pre-trends: Changes in mobility follow changes in taxes and do not precede them. Consistent with their high income, star scientists migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state's formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor's location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive where innovative individuals and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter.
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The Welfare Effects of Temporary Tax Cuts and Subsidies: Theory, Estimation, and Applications
Mark Phillips
Economic Inquiry, forthcoming
Abstract:
This article presents a tractable and intuitive theory on the welfare effects of temporary tax cuts and subsidies, fiscal policies that I generically term "holidays." The Kaldor-Hicks efficiency effects are theoretically ambiguous, with competing pro- and anti-efficiency effects on newly incentivized versus time-shifted purchases. To rectify this ambiguity I derive expressions for the welfare effects that are consistent with constant elasticity assumptions and depend only upon readily and reliably observed information. To demonstrate the framework's broad applicability, I analyze two different policies: the 2009 Cash for Clunkers program and states' sales tax holidays. I estimate that both policies generated substantial deadweight loss.
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The Macroeconomic Effects of Public Investment: Evidence from Advanced Economies
Abdul Abiad, Davide Furceri & Petia Topalova
IMF Working Paper, May 2015
Abstract:
This paper provides new evidence of the macroeconomic effects of public investment in advanced economies. Using public investment forecast errors to identify the causal effect of government investment in a sample of 17 OECD economies since 1985 and model simulations, the paper finds that increased public investment raises output, both in the short term and in the long term, crowds in private investment, and reduces unemployment. Several factors shape the macroeconomic effects of public investment. When there is economic slack and monetary accommodation, demand effects are stronger, and the public-debt-to-GDP ratio may actually decline. Public investment is also more effective in boosting output in countries with higher public investment efficiency and when it is financed by issuing debt.
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The Consequences of an Unknown Debt Target
Alexander Richter & Nathaniel Throckmorton
European Economic Review, forthcoming
Abstract:
Several proposals to reduce U.S. debt reveal large differences in their targets. We examine how an unknown debt target affects economic activity using a real business cycle model in which Bayesian households learn about a state-dependent debt target in an endogenous tax rule. Recent papers use stochastic volatility shocks to study fiscal uncertainty. In our setup, the fiscal rule is time-varying due to unknown changes in the debt target. Households infer the current debt target from a noisy tax rule and jointly estimate the transition probabilities. Three key findings emerge from our analysis: (1) Limited information about the debt target amplifies the effect of tax shocks through changes in expected tax rates; (2) The welfare losses are an order of magnitude larger when both the debt target state and transition matrix are unknown than when only the debt target state is unknown to households; (3) An unknown debt target likely reduced the stimulative effect of the ARRA and uncertainty about the sunset provision in the Bush tax cuts may have slowed the recovery and led to welfare losses.
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Identifying the Elasticity of Taxable Income
Sarah Burns & James Ziliak
Economic Journal, forthcoming
Abstract:
We use matched panels from the Current Population Survey along with a grouping instrumental variables estimator to provide new estimates of the elasticity of taxable income. Our identification strategy exploits the fact that federal and state tax reforms over the past three decades have differentially affected cohorts across states and over time. We find that the elasticity is in the range of 0.4-0.55. The implication of our new estimates for tax policy is that the revenue-maximizing tax rate is nearly 30 percentage points lower than that obtained when we use the typical identification strategy in the literature.
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At a Loss: The Real and Reporting Elasticity of Taxable Income
Elena Patel, Nathan Seegert & Matthew Grady Smith
U.S. Department of Treasury Working Paper, May 2015
Abstract:
We provide evidence that the corporate tax distorts firms' behavior, leading them to report 8 percent less taxable income, such that the elasticity of corporate taxable income is 0.51. We find that this distortion is due to reporting responses, such as profit shifting, rather than real economic activity, such as capital investment. We exploit a particular feature of the U.S. corporate tax system that allows us to use a control group to estimate these firm responses. Relative to methods without a control group, this method corrects for a downward bias, produces estimates with less variance, and decreases the sensitivity to tuning parameters. Finally, we provide practical guidelines for the bias and variance tradeoff when estimating behavioral responses using bunching from discontinuities.
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Eloy Fisher
Review of Political Economy, Spring 2015, Pages 201-217
Abstract:
This paper argues that financial pressures affect state public welfare expenditures, controlling for economic effects, financial constraints faced by state administrations and general economic conditions. It develops a series of panel models for 17 states with the largest muni markets (representing 71 per cent of all state-level public welfare spending in the US or $326 billion) from 1998 to 2010. As economic conditions worsen, government revenues decline. Coupled with marginal increases in social spending, state governments face higher debt and binding budget constraints. As investors realize the situation, muni bond prices drop, yields increase and higher finance costs compel state governments to decrease expenditures. These cuts are generally focused on public welfare expenditures. Between 1998 and 2010, one percentage point increases in short (1y), medium (5y) and longer (10y) bonds yields are associated with 0.01 per cent, 0.03 per cent and 0.04 per cent decreases in public welfare expenditures relative to gross state output.
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Public Opinion, Policy Tools, and the Status Quo: Evidence from a Survey Experiment
Jake Haselswerdt & Brandon Bartels
Political Research Quarterly, forthcoming
Abstract:
The method in which a government policy is delivered - for example, as a tax break rather than a direct payment - could potentially have significant implications for how the public views that policy. This is an especially important consideration given the importance of indirect policy approaches like tax breaks to modern American governance. We employ a series of survey experiments to test whether citizens react more favorably to tax breaks than to equivalent spending programs. We find that citizens prefer tax breaks, particularly when they are the established means of intervention. When direct intervention is the status quo, or when any government involvement on the issue is unfamiliar, the preference is reduced. We also find an interactive effect for ideology, with conservatives strongly preferring tax breaks to direct intervention, though the effect is still present among liberals. This study establishes the importance of delivery mechanism to citizens' policy preferences and suggests that the policy status quo structures citizens' perceptions of policy proposals.
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Shaming Tax Delinquents: Theory and Evidence from a Field Experiment in the United States
Ricardo Perez-Truglia & Ugo Troiano
NBER Working Paper, June 2015
Abstract:
We study shaming as a policy to improve tax debt collection. First, we show that when the tax agency focuses on private welfare and revenues, the optimal policy may involve a mix of financial and shaming penalties. Second, we present evidence from a field experiment with 34,344 tax delinquents who owed half a billion dollars in three U.S. states. We find that increasing the salience of financial and shaming penalties reduces tax delinquency. We also provide suggestive evidence that the effectiveness of these penalties depends on the garnishability of the debtor's income as in the model.
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Directed giving enhances voluntary giving to government
Sherry Xin Li et al.
Economics Letters, August 2015, Pages 51-54
Abstract:
Giving to private charities is commonplace, and the chance to direct one's gift is a standard fundraising strategy. But voluntary donations to government organizations are less widely known, and the impact of the opportunity to direct a gift is unexplored. We investigate the effect of directed giving on voluntary contributions to government organizations using a "real donation" lab experiment. We compare giving to the US federal general revenue fund with directed giving to particular government organizations. Directed giving more than doubles both the likelihood of giving and the size of contributions, indicating that individuals are responsive to the opportunity to direct their gifts in the government context. Our results suggest that the revenue-raising potential of directed voluntary gifts to government may be underutilized.
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The Effect of Fiscal Decentralization on the Financial Condition of Municipal Government
Samuel Stone
International Journal of Public Administration, Spring 2015, Pages 453-460
Abstract:
This study examines the effect of fiscal decentralization between states and their local governments on the financial condition of municipal governments. There are strong theoretical arguments on both sides of the federalism debate about the benefits for and against decentralization. Most of the research in this area investigates economic and social welfare consequences of fiscal decentralization. There is limited research, however, on the effects of fiscal decentralization on the financial health of local governments. Using data from the nation's 150 largest cities, this study finds that intrastate fiscal decentralization results in weaker financial condition for municipalities in those states.
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Political Bonds: Political Hazards and the Choice of Municipal Financial Instruments
Abhay Aneja, Marian Moszoro & Pablo Spiller
NBER Working Paper, May 2015
Abstract:
We study the link between the choice of rule-based public contracts and political hazards using the municipal bond market. While general obligation bonds are serviced from all municipal revenue streams and offer elected officials financial flexibility, revenue bonds limit the discretion that political agents have in repaying debt as well as the use of revenues from the projects financed by the debt. We predict that public officials choose revenue bonds when elections are very contested to signal trustworthiness and transparency in contracting to the voter. We test this hypothesis on municipal finance data that includes 6,500 bond issuances nationwide as well as election data on over 400 cities over 20 years. We provide evidence that in politically contested cities, mayors are more likely to issue revenue bonds. The correlation is economically significant: a close victory margin of winning candidates and more partisan swings increases the probability of debt being issued as a revenue bond by 3-15% and the probability of issuing bonds through competitive bids by 7%. We test a few additional hypotheses that strengthen the argument that the choice of revenue bonds is a political risk adaptation of public agents so as to signal commitment and lower the likelihood of successful political challenges of misuse of funds.
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Lisa De Simone
Journal of Accounting & Economics, forthcoming
Abstract:
I test whether adoption of IFRS by individual affiliates of multinational entities (MNEs) for unconsolidated financial reporting facilitates tax-motivated income shifting. MNEs often justify transfer prices to tax authorities by benchmarking intercompany profit allocations against a range of book profit rates reported by economically comparable, independent firms that use similar accounting standards. Additional qualifying benchmark firms resulting from IFRS adoption could allow managers to support more tax-advantaged transfer prices. Using a database of European unconsolidated financial and ownership information over 2003 to 2012, I first document an increase in the arm's length range of book profits reported by potential IFRS benchmark firms following affiliate adoption of IFRS. I then estimate a statistically and economically significant 11.3 percent tax-motivated change in reported book pre-tax profits following affiliate IFRS adoption, relative to pre-adoption and non-adopter affiliate-years.