Monday, March 1, 2010
Tax and Spend
Taxation and International Mobility of Superstars: Evidence from the European Football Market
Henrik Jacobsen Kleven, Camille Landais & Emmanuel Saez
University of California Working Paper, December 2009
Abstract:
This paper analyzes the effects of top earnings tax rates on the migration decisions of football players across European countries. We construct a panel data set of top earnings tax rates and football players in the first leagues of 14 European countries since 1980. We identify the effects of top earnings tax rates on migration using various tax and institutional changes: (a) the 1995 Bosman ruling which liberalized the European football market, (b) top tax rate reforms within countries, and (c) country specific tax provisions offering lower tax rates for immigrant football players. We provide both case study analyses and a structural mobility model estimated using all the data and sources of variation simultaneously. Both approaches show that the level of top earnings tax rates has a very large impact on the migration decisions of football players, especially after the 1995 Bosman ruling. Specific tax reductions for immigrants also have large impacts on location decisions. Overall, the elasticity of the probability of playing in a given country with respect to the net-of-tax rate on earnings in this country is large, and even larger for younger players and top quality players. The large tax induced migration effects we uncover translate into significant effects in the performance of football clubs across countries.
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Why Crime Doesn't Pay: Thoughts on State Taxation of Marijuana Distribution and Other Federal Crimes
Robert Mikos
Vanderbilt University Working Paper, January 2010
Abstract:
The financial crisis has breathed new life into proposals to reform marijuana law. Commentators suggest that legalizing and taxing marijuana could generate substantial revenues for beleaguered state governments - as much as $1.4 billion for California alone. This Article, however, suggests that commentators have grossly underestimated the difficulty of collecting a tax on a drug that remains illegal under federal law. The federal ban on marijuana will impair state tax collections for two reasons. First, by giving marijuana distributors powerful incentives to stay small and operate underground, the federal ban will make it difficult for states to monitor marijuana distribution and, consequently, to detect and deter tax evasion. In theory, states could bolster deterrence by increasing sanctions for tax evasion, but doing so seems politically infeasible and may not even work. Second, even if states could find a way to monitor marijuana distribution effectively - for example, by licensing distributors - such monitoring could backfire. Any information the states gather on marijuana distribution could be seized by federal authorities and used to impose federal sanctions on distributors, giving them added incentive to evade state tax authorities. For both reasons, a marijuana tax may not be the budget panacea proponents claim it would be. To be sure, there are reasonable arguments favoring legalization; rescuing states from dire fiscal straits, however, is not one of them.
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Why do small states have big governments?
Karen Remmer
European Political Science Review, March 2010, Pages 49-71
Abstract:
Building on the literature on public finance, this article explores the consequences of political scale for government spending. The central argument is that the tendency for small political units to have big governments is not merely the result of economies of scale in the provision of public goods, but a reflection of the greater pressures for public spending faced by politicians in smaller and more homogeneous political units. The importance of such political pressures relative to other influences on spending is assessed on the basis of subnational data by comparing the relationship between size and spending under democracy and dictatorship. To the extent that government expansion is driven by citizen demands, the impact of size on spending may be expected to be more pronounced under democratic than authoritarian governance. Results from a time-series cross-sectional analysis of growth in government spending are consistent with this expectation. Government growth is shaped not only by the population size of political units but also by the interaction between regime and size. Analysis of spending patterns under democratic rule further indicates that size is an important determinant of spending even after controlling for variations in citizen preferences, political institutions, electoral competitiveness, and economic performance. The results have important theoretical implications for the study of fiscal policy and democratic governance around the world because they suggest that political scale conditions the linkages between citizens and the state, creating widely varying incentives for government growth across differently sized political units.
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Supply Side Interventions and Redistribution
Teresa Garcia-Milà, Albert Marcet & Eva Ventura
Economic Journal, March 2010, Pages 105-130
Abstract:
We evaluate the effect on welfare of shifting the burden of capital income taxes to labour taxes in a dynamic equilibrium model with heterogeneous agents and constant tax rates. We calibrate and simulate the economy; we find that lowering capital taxes has two effects: it increases efficiency in terms of aggregate production and it redistributes wealth in favour of those agents with a low wage/wealth ratio. When the parameters of the model are calibrated to match the distribution of income in terms of the wage/wealth ratio, the redistributive effect dominates, and agents with a high wage/wealth ratio would experience a large loss in utility if capital income taxes were eliminated.
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Credible redistributive policies and migration across U.S. states
Roc Armenter & Francesc Ortega
Review of Economic Dynamics, forthcoming
Abstract:
We ask whether worker mobility has undermined the ability of U.S. states to redistribute income. We build a tractable model where both migration decisions and redistribution policies are jointly determined. Our model features a large number of heterogeneous regions and skilled and unskilled workers with idiosyncratic migration costs. The calibrated model is able to account for the main features of interstate migration in the US, as well as some qualitative features of the cross-sectional distribution of redistributive policies. We conduct a counterfactual experiment in order to isolate the effect of worker mobility on state-level redistributive policies. We find that migration has induced substantial convergence in tax rates across U.S. states, but no race to the bottom. Interestingly, the degree of convergence has been much lower for transfers due to an offsetting tax-base effect.
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Simple Analytics of the Government Expenditure Multiplier
Michael Woodford
NBER Working Paper, January 2010
Abstract:
This paper explains the key factors that determine the effectiveness of government purchases as a means of increasing output and employment in New Keynesian models, through a series of simple examples that can be solved analytically. Delays in the adjustment of prices or wages can allow for larger multipliers than exist in the case of fully flexible prices and wages; in a fairly broad class of simple models, the multiplier is 1 in the case that the monetary authority maintains a constant path for real interest rates. The multiplier can be considerably smaller, however, if the monetary authority raises real interest rates in response to increases in inflation or real activity resulting from the fiscal stimulus. A large multiplier is especially plausible when monetary policy is constrained by the zero lower bound on nominal interest rates; in such a case, expected utility is maximized by expanding government purchases to at least partially fill the output gap that would otherwise exist owing to the central bank's inability to cut interest rates. However, it is important in such a case that neither the increased government purchases nor the increased taxes required to finance them be expected to persist beyond the period over which monetary policy is constrained by the zero lower bound.
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Death of the Partisan? Globalization and Taxation in South America, 1990-2006
Austin Hart
Comparative Political Studies, March 2010, Pages 304-328
Abstract:
Correcting the relative lack of attention to the revenue side of public finance, this article examines to what extent globalization constrains partisan tax policy. The author hypothesizes that political ideology is still a good predictor of taxation in the neoliberal era, advancing this argument against the prominent globalization thesis: that global economic pressures have supplanted political ideology as the driving force of revenue policy. Although research in developed democracies identifies a resilient link between partisanship and policy outcomes, the impact of the drastic neoliberal transition on partisan policy making in the developing world remains poorly understood. Using time-series cross-section data to evaluate partisan taxation in South America, the author finds that partisanship is a reliable indicator of tax revenue in the neoliberal era. Counterintuitively, however, the promarket Right generates more tax revenue than the interventionist Left. The author argues that this previously unexpected revenue gap is driven by ideological concerns for equity versus growth.
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The challenge of a rising skill premium for redistributive taxation
Kjetil Bjorvatn & Alexander Cappelen
International Tax and Public Finance, February 2010, Pages 15-24
Abstract:
The present paper analyzes the challenge to redistribution programs posed by an increase in the skill premium. The skill premium affects both the profitability of education and the profitability of migration. We propose a two country, median voter model, where the equilibrium tax policy is shaped by the desire of the median voter to promote skill formation and to avoid emigration of skilled individuals. Our paper shows that the effect of an increase in the skill premium on redistributive programs depends on the initial level of the skill premium. Below a critical level, an increase in the skill premium is met by an increase in the tax rate. Beyond this level, however, a further rise in the skill premium leads to a fall in the tax rate, and hence a sharp increase in post-tax inequality.
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Mobile Capital, Local Economic Regulation, and the Democratic City
Richard Schragger
Harvard Law Review, December 2009, Pages 482-540
Abstract:
This Article examines local efforts to regulate mobile capital. Despite the conventional wisdom that subnational governments cannot effectively control or redistribute capital, cities have increasingly sought to do just that. This Article describes these efforts, which include putting conditions on the entry of development dollars through contract, excluding capital through anti-chain and anti-big box store laws, and redistributing from capital to labor through local minimum wage laws and other labor-friendly legislation. The Article describes the economic and political factors that have given rise to these local regulatory efforts and assesses the viability of local regulation of mobile capital. In the course of doing so, I argue that the mobility of capital drives a set of local political pathologies, all of which revolve around the governmental promotion of, participation in, and subsidization of private commercial enterprise. Geographically fixed cities are inclined both to give too much away in trying to attract mobile capital and to extract too much from capital once it has become fixed in place. These two political problems - giveaways and exploitation - explain the historical development of local government law as well as current approaches to the division of labor among city, state, and federal levels of government. The new "regulatory localism" challenges the proposition that industrial policy, redistribution, and other responses to global economic restructuring must be addressed at the national level. It also challenges the proposition that local economic development policies must necessarily be biased in favor of corporate capital.
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Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark
Henrik Kleven, Martin Knudsen, Claus Kreiner, Søren Pedersen & Emmanuel Saez
University of California Working Paper, October 2009
Abstract:
This paper analyzes a randomized tax enforcement experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 Danish individual tax filers was selected for the experiment. Half of those tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, "threat-of-audit" letters were randomly assigned and sent to those tax filers. This experiment allows us to study income tax compliance in Denmark in great detail, as well as the causal effects of (a) prior audits and (b) audit threats on subsequent reporting behavior. We find that tax compliance in Denmark is high overall, but that there is substantial tax evasion on purely self-reported income, i.e. income which is not subject to double reporting by third parties. Our results show that the informational framework is more important than socioeconomic variables in explaining tax compliance. We find that prior audits significantly increase the likelihood of self-reporting higher incomes the following year, implying that individuals update their beliefs about audit probability based on experiencing an audit. Threat-of-audit letters also have significant effects on self-reported income adjustments. All those empirical results can be explained using a simple rational model of tax evasion and introducing the key distinction between self-reported and third-party reported incomes.
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Tax-mix, public spending composition and growth
Gustavo Marrero
Journal of Economics, February 2010, Pages 29-51
Abstract:
This paper characterizes optimal fiscal policy in an endogenous growth model whose policy implications are consistent with the relationship between two stylized facts observed in a majority of OECD economies, namely the growth in the ratios of both government consumption to public investment and of direct to indirect taxation from 1970 to 2004. Assuming a continuation in the upward trend for the public consumption to output ratio consistent with that observed for this variable between 1970 and 2004 for most developed economies, we find that the optimal tax system becomes more intensive in income taxation relative to consumption taxation, and that public disbursements become less intensive in public investment, which is consistent with the co-evolution of these ratios over the last 40 years.
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Liability in Search and Rescues: Should Individuals who Necessitate Their Own Rescues Have to Pay?
Sheila Huss
Journal of Homeland Security and Emergency Management, 2010
Abstract:
Over the course of the past several years, numerous disasters in the outdoors have received widespread attention by the media and the American public. Search and rescue (SAR) services in the U.S. generally have been provided free of charge to outdoor enthusiasts who need them. In light of the excessive costs associated with some rescues, the fact that many rescues are either the result of perceived stupidity or unwarranted, and other factors, there has been a shift toward charging individuals who necessitate their own rescues. This paper examines the legal basis for free SAR services in the U.S., the rationale behind the shift toward charging for these services, and the implications of holding individuals liable for the cost of SAR activities. It reviews the formal shift toward individual liability for SAR services, looking specifically at state legislation and local policies, as well as some case law. Finally, the paper discusses the implications of charge-for-rescue policies.
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Gabrielle Fack & Camille Landais
University of California Working Paper, November 2009
Abstract:
The tax treatment of charitable contributions is a highly debated policy issue. This paper contributes to this debate by showing how tax cheating modifies the traditional approach to subsidizing private philanthropy. We break down the behavioral response of charitable contributions to tax policies into changes in real contributions vs. changes in tax sheltering through "cheating" contributions. First, we develop a model of charitable contributions in the presence of "cheating" contributions and present formulas for the optimality of tax subsidies for contributions. In addition to the standard price elasticity of reported charitable contributions, two new parameters appear in the formulas: the share of "cheating" contributions in total reported contributions and the price elasticity of "cheating" contributions. Second, we estimate those three sufficient statistics for optimal policy analysis using tax data from the United States and France. Using US tabulated tax statistics and micro-tax data, we build long term series of contributions and marginal tax rates for top US income groups since 1917. We use those series to obtain robust estimates of the standard price elasticity of reported charitable contributions. We use two tax enforcement reforms to estimate the two new parameters: the 1969 tightening of rules for contributions to private foundations in the United States and a 1983 French reform requiring taxpayers to document their contributions. In both cases, we find large responses to the tax enforcement regime implying that the share of "cheating" contributions that we estimate is significant. We also find that the price elasticity of reported contributions falls significantly after the 1983 French reform allowing us to back out the price elasticity of "cheating" contributions. A simple calibration based on our estimates shows that the issue of tax evasion through charitable contributions is a first order consideration for the design of optimal subsidies.
