On the take
Democracy, War, and Wealth: Lessons from Two Centuries of Inheritance Taxation
Kenneth Scheve & David Stasavage
American Political Science Review, February 2012, Pages 81-102
Abstract:
In this article we use an original data set to provide the first empirical analysis of the political economy of inherited wealth taxation that covers a significant number of countries and a long time frame (1816-2000). Our goal is to understand why, if inheritance taxes are often very old taxes, the implementation of inheritance tax rates significant enough to affect wealth inequality is a much more recent phenomenon. We hypothesize alternatively that significant taxation of inherited wealth depended on (1) the extension of the suffrage and (2) political conditions created by mass mobilization for war. Using a difference-in-differences framework for identification, we find little evidence for the suffrage hypothesis but very strong evidence for the mass mobilization hypothesis. Our study has implications for understanding the evolution of wealth inequality and the political conditions under which countries are likely to implement policies that significantly redistribute wealth and income.
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Game Over: Simulating Unsustainable Fiscal Policy
Richard Evans, Laurence Kotlikoff & Kerk Phillips
NBER Working Paper, March 2012
Abstract:
Fiscal sustainability is one of the most pressing policy issues of our time. Yet it remains difficult to quantify. Official debt is plagued with a number of measurement difficulties since its measurement reflects the choice of words, not policies. And forming the fiscal gap - the imbalance in the government's intertemporal budget - requires strong discount rate assumptions. An alternative approach, taken here, is specifying a stochastic general equilibrium model and determining via simulation how long it takes for the economy to reach game over - the point where current policy can no longer be maintained. Our simulations, based on an OLG model calibrated to the U.S. economy, produce an average duration to game over of roughly one century, with a 35 percent chance of reaching the fiscal limit in roughly 30 years. The prospect of man-made economic collapse produces large equity premia, like those observed in the data. Our simulations show that both the fiscal gap and the equity premium rise as the economy gets closer to hitting its fiscal limit, suggesting that the fiscal gap and the equity premium may be good indicators of unsustainable policy.
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Political Influence and TARP: An Analysis of Treasury's Disposition of CPP Warrants
Lucas Puente
PS: Political Science & Politics, April 2012, Pages 211-217
Abstract:
I investigate one mechanism through which financial institutions could have used political influence to receive preferential treatment in the US Department of the Treasury-administered "bailout." I find that neither proxies of political influence nor other political variables, such as public interest in specific deals, can explain variance in the sale price of warrants (a type of financial asset) Treasury acquired through TARP's Capital Purchase Program. Moreover, I find that the more politically active the firm is, the more likely Treasury is to auction its warrants (thereby receiving fair market value). This conclusion is not consistent with recent studies investigating the role of such variables in the initial administration of TARP and can be interpreted as good news for American taxpayers.
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Do Debt Levels Influence State Borrowing Costs?
Mark Robbins & Bill Simonsen
Public Administration Review, forthcoming
Abstract:
This article reports on research into the possible interest cost penalties when state governments impose increasingly high debt levels on their citizens. The potential effect of debt levels on borrowing costs is a material one, given the large amounts of state debt outstanding. At the same time that government borrowing is heavy, the demand for government obligations also appears to be strong. The authors examine state debt levels and borrowing costs over a six-year period (2001-2006) and find little evidence of such an effect, despite rapidly growing debt burdens. Those concerned about state debt levels, the authors say, must look to sources other than investors for pressure to reduce debt issuance.
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Does User-Charge Financing Reduce Expenditure Levels for the Charge-Financed Services?
Rui Sun & Changhoon Jung
American Review of Public Administration, March 2012, Pages 170-185
Abstract:
Spurred by the tax and expenditure limitation movement of the late 1970s, user charges have grown to become a major source of revenue for local governments. Both theory and literature propose that a well-designed user-charge structure could reduce spending on the charge-financed services by strengthening the relationship between service and payment. This study empirically tests such a possibility by examining the level of expenditure for sewer and parks and recreation services. Using a panel of 686 American cities for the sewer services and 715 cities for the parks and recreation services between 1972 and 2004, this study finds evidence that greater reliance on user charges to finance government services leads to a reduction in municipal expenditures.
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Tax Affinity Hypothesis: Do We Really Hate Paying Taxes?
Iwan Djanali & Damien Sheehan-Connor
Journal of Economic Psychology, August 2012, Pages 758-775
Abstract:
This paper proposes and evaluates the tax affinity hypothesis claiming that individuals derive non-negligible utility from paying taxes due to their pro-social tendencies. We present a model in the neoclassical labor-leisure framework with tax paid as a third argument of the utility function. The Slutsky-like equations derived from this model suggest two testable hypotheses that differentiate it from the standard model. A controlled experiment provides support for the two testable propositions of the hypothesis: (1) subjects worked more in the presence of tax than in its absence at the same net wage rate, and (2) the impact of wage changes on labor supply depended not only on the after-tax wage rate, but also on the tax rate. The tax affinity hypothesis has important implications for tax policy and economic analysis.
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John Dove
Constitutional Political Economy, March 2012, Pages 66-93
Abstract:
Between 1839 and 1842 the United States suffered through an acute debt crisis. Over this period, eight states and one territory defaulted, five of which outright repudiated all or parts of their outstanding debts. However, for many of those same states, reentry into capital markets occurred relatively rapidly and at rather favorable terms. The question then arises, how and why was this possible? This work attempts to explain this phenomenon by suggesting that soon after default or repudiation many states enacted constitutional amendments meant to significantly constrain and credibly commit future governments from overextending credit and simultaneously to pursue time-consistent public policy. I explore this by examining the impact that these newly imposed constitutional amendments, which limited both the type and amount of debt and created stronger procedural safeguards for issuing debt, had on average bond prices, gathered from New York market data. Overall, my results show that newly constrained states had higher average bond prices than states that did not impose constitutional limits on debt financing, suggesting that markets did, in fact, perceive these constitutional changes to be binding and credible.
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Tax structure, growth, and welfare in the UK
Konstantinos Angelopoulos, James Malley & Apostolis Philippopoulos
Oxford Economic Papers, April 2012, Pages 237-258
Abstract:
This paper studies the quantitative implications of changes in the composition of taxes for long-run growth and welfare in the UK economy. Our results suggest that if the goal of tax policy is to promote long-run growth by altering relative tax rates in a budget neutral fashion, then it should reduce labour taxes and increase capital and/or consumption taxes. In contrast, if the aim is to promote welfare, substantial gains can be obtained from tax reforms that decrease the capital tax rate relative to the labour and consumption tax rates or that reduce labour relative to consumption taxes. These findings highlight the importance of the choice of tax structure in policy design.
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Can state tax policies be used to promote entrepreneurial activity?
Donald Bruce & John Deskins
Small Business Economics, May 2012, Pages 375-397
Abstract:
Despite a recent flurry of empirical research on the effects of taxes on small business activity, state-level taxes faced by entrepreneurs have been overlooked by most of the existing literature. Using a 50-state panel of tax policy information spanning the years 1989 through 2002, our analysis reveals that state tax policies generally do not appear to have quantitatively important effects on entrepreneurial activity. When we find statistically important effects, we find that higher individual income tax rates, the existence of a state-level estate, inheritance or gift tax, and a higher weight on the sales factor in the state corporate income tax apportionment formula all slightly reduce a state's share of the national entrepreneurial stock. Results also indicate that states with more progressive personal income tax structures and states that have more aggressive corporate income taxes through the imposition of a combined reporting requirement both tend to have slightly higher entrepreneurship rates. The composition of state tax portfolios is not found to be a significant determinant of state entrepreneurship.
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A macroeconomic approach to the income-tax work-effort relationship
Basil Dalamagas & Stelios Kotsios
International Review of Applied Economics, May/June 2012, Pages 349-366
Abstract:
In this paper, we analyse the dynamic relationship between hours worked per employee (per self-employed) and marginal income tax-rate shocks in terms of both a comparative-dynamics model and a stochastic general equilibrium econometric model. The econometric model is estimated for Germany, UK and USA over the post-1960 period using the GMM estimation technique. Estimates in both models show that increases in the marginal income-tax rate exert negative effects on hours worked by both employees and the self-employed, but the response of the employees who are subject to tax withholding is stronger than the response of the self-employed.
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Is There a Connection Between Reciprocity and Tax Competition?
Jonathan Rork & Gary Wagner
Public Finance Review, January 2012, Pages 86-115
Abstract:
One challenge states face in designing income tax systems is deciding how to treat nonresident earners. Numerous states have entered into reciprocity agreements with other states that exclude nonresidents' income from the tax base. These agreements provide a unique opportunity to explore the nature of state tax competition. The authors demonstrate that not only do reciprocity agreements allow states to have higher income tax rates than do nonreciprocity states but also that the states with reciprocity agreements exhibit increased levels of competition over other taxes.
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Alchian and Allen visit the IRS: Costly audits and taxpayer compliance
Calvin Blackwell & Michael McKee
Applied Economics Letters, Fall 2012, Pages 1731-1734
Abstract:
This article reports on the results from a small-scale investigation of the compliance effects of a costly pre-audit on tax compliance. The tax compliance game is modelled in three parts: a declaration phase, a pre-selection phase with a cost for taxpayers and an audit selection phase where all evaded income is discovered. While the theoretical predictions are ambiguous, the data from a series of laboratory experiments demonstrate that the presence of pre-audit costs leads to lower tax compliance.
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Self-Assessment of Takings Compensation: An Empirical Study
Yun-chien Chang
Journal of Law, Economics, and Organization, forthcoming
Abstract:
Several scholars have proposed using property owners' ex ante, periodic self-assessments of properties' economic value as takings compensation, replacing the current US regime, which uses ex post governmental assessments of properties' market value. No empirical study has yet been done to examine whether the proposed ex ante self-assessment method produces accurate takings compensation. This article fills the empirical gap by analyzing data from Taiwan's 1954-1977 regime, which was similar to the proposed scholarly models. I find that most landowners rationally reported their self-assessments at below market value, which was less than or equal to landowners' economic value, mainly because the condemnation probabilities were much lower than the property tax rates.
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Concentrated Powers: Unilateral Executive Authority and Fiscal Policymaking in the American States
George Krause & Benjamin Melusky
Journal of Politics, January 2012, Pages 98-112
Abstract:
Although executive authority is a critical element in separation of powers systems, an excessive amount is not conducive for responsible policymaking behavior. Unilateral executive powers allow elected executives to pursue policies consistent with their short-term electoral incentives. This proposition is tested by analyzing the relationship between the exercise of unilateral executive control over fiscal policymaking and fiscal-spending growth in the American states. The empirical evidence reveals that exercising some amount of unconstrained policymaking authority with a unitary elected executive promotes higher fiscal-spending growth. These effects systematically vary between Democratic and Republican governors. Specifically, fiscal-spending growth under Democratic governors reaches its apex when they possess either unilateral control over revenue forecasts or budget formulation, whereas, unilateral control over both policymaking tools yields the greatest fiscal-spending growth under Republican governors. This study underscores the benefits associated with constraining executive authority through shared policymaking authority arrangements in separation of powers systems.
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Tax policy and entrepreneurship: Empirical evidence from Sweden
Åsa Hansson
Small Business Economics, May 2012, Pages 495-513
Abstract:
This paper examines the relationship between income taxes and the decision to become self-employed using data from Sweden. By making it possible to track a large number of individuals over extended time periods and across a number of tax rate changes while controlling for important additional determinants, available tax-return information from Sweden allows for statistical estimation of the influence that income taxes have on the probability of becoming self-employed. The changing tax rate structure combined with the fact that the Swedish tax system does not provide additional tax benefits to small-business entrepreneurs compared with those who work as employees provides a powerful setting through which to examine the tax rate structure's influence on individuals' choice to become self-employed. Contrary to many earlier studies based on US data, this paper finds that both average and marginal taxes have a negative impact on the decision to become self-employed.
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The Influence of Elections on the Accounting Choices of Governmental Entities
Nolan Kido, Reining Petacchi & Joseph Weber
Journal of Accounting Research, forthcoming
Abstract:
This paper investigates whether gubernatorial elections affect state governments' accounting choices. We identify two accounts, the compensated absence liability account and the unfunded pension liability account, which provide incumbent gubernatorial candidates with flexibility for manipulation. We find that in an election year, the liability associated with compensated absences and unfunded pension liabilities are both systematically lower. We also find that the variation in these employment related liabilities is correlated with proxies for the incumbent's incentives and ability to manipulate their accounting reports. Jointly these results suggest that state governments manipulate accounting numbers to present a healthier financial picture in an election year.
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Royal finance under King Henry III, 1216-72: The wardrobe evidence
Benjamin Wild
Economic History Review, forthcoming
Abstract:
Existing studies have shown how the royal wardrobe, the king's personal administrative office, regularly handled between a quarter and a half of the Crown's annual cash income. Despite this, the financial contribution of the wardrobe to royal finance under Henry III is not fully understood. For a reign in which debates about royal fiscal strategies are so notable a feature, this represents a significant gap. This article will supplement existing studies of wardrobe finance under Henry III by collectively analysing all 15 of the king's wardrobe accounts that are enrolled on the exchequer pipe rolls. The article makes two important findings. Firstly, the wardrobe was financially strong when the period of baronial reform began in 1258. Secondly, the wardrobe's financial strength was the result of a new, and deliberate, approach to acquiring revenue beyond the treasury that targeted sources of income that could generate cash quickly. During Henry's final years, this included greater reliance on credit. These findings suggest Henry III was not incapable of making adroit financial decisions. They also reveal that the foundations for the financial system developed by the three Edwards, which was more reliant on credit and sources of ready cash, were laid under Henry III.