Private debt overhang and the government spending multiplier: Evidence for the United States
Marco Bernardini & Gert Peersman
Journal of Applied Econometrics, June/July 2018, Pages 485-508
Using state‐dependent local projections and historical US data, we find that government spending multipliers are considerably larger in periods of private debt overhang. In particular, while multipliers are below or close to one in low private debt states, we find significant crowding‐in of private spending in periods of debt overhang, resulting in multipliers that are much larger than one. In high private debt episodes, more government purchases even reduce the ratio of government debt to gross domestic product. These results are robust for the type of shocks, and when we control for the business cycle, financial crises, deleveraging episodes, government debt overhang, and the zero‐lower‐bound.
The Missing Profits of Nations
Thomas Tørsløv, Ludvig Wier & Gabriel Zucman
NBER Working Paper, June 2018
By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world’s other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit shifting is highest among U.S. multinationals; the tax revenue losses are largest for the European Union and developing countries. We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places — in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the sizable costs involved for high-tax countries. We provide a new cross-country database of GDP, corporate profits, trade balances, and factor shares corrected for profit shifting, showing that the global rise of the corporate capital share is significantly under-estimated.
Rational Bubbles and Public Debt Policy: A Quantitative Analysis
David Domeij & Tore Ellingsen
Journal of Monetary Economics, June 2018, Pages 109-123
Do empirically plausible dynastic general equilibrium models admit bubbles and Ponzi-schemes under rational expectations? Contrary to conventional wisdom, the answer is affirmative. The central assumption is that current securities do not represent claims to all future profits. Calibrating the model to U.S. data, we find that it is consistent with the presence of rational bubbles. The observed level of public debt is entirely a Ponzi-scheme. There are large welfare gains from eliminating bubbles on private assets and lodging all the non-fundamental asset value in public debt. Paying off public debt benefits only a small group of wealthy individuals.
Fleeing a Lame Duck: Policy Uncertainty and Manufacturing Investment in U.S. States
Nathan Falk & Cameron Shelton
American Economic Journal: Economic Policy, forthcoming
It is found that electorally-induced policy uncertainty decreases manufacturing investment in US states. In a state with average partisan polarization, the elasticity of election-year investment to a specific measure of policy uncertainty is -0.027. When the incumbent governor is term-limited, there is greater uncertainty over the outcome, providing an instrument to demonstrate this effect is causal, not simply coincidental. Moreover, manufacturing investment does not rebound following the election. Rather, own-state uncertainty is associated with a large and significant coincident rise in neighboring states’ investment. These findings suggest that policy uncertainty at the sub-national level drives investment to alternate sites.
Legislative Capacity and Credit Risk
David Fortunato & Ian Turner
American Journal of Political Science, forthcoming
Legislatures differ in their institutional capacity to draft and enact policy. While strong legislatures can increase the congruence of policy outcomes to the electorate's preferences, they can also inject uncertainty into markets with their ability to alter the political economic landscape. We argue that this uncertainty will manifest in a state's ability to borrow and hypothesize a negative relationship between legislative capacity and creditworthiness. Using ratings of general obligation bonds issued by the American states over nearly two decades and data on the institutional capacity of state legislative assemblies, we find support for the claim that having a legislature that is better equipped to affect policy change increases credit risk evaluations. The results we present broaden our understanding of the importance of legislative institutions, the determinants of credit risk, and the economic implications of democratic responsiveness.
Internet Sales Taxes and the Discriminatory Burden on Remote Retailers – An Economic Analysis
Ike Brannon, Michelle Hanlon & Eric Miller
MIT Working Paper, March 2018
In the wake of South Dakota v. Wayfair et al. some commentators are calling for an Internet Sales Tax (IST) to “close the tax loophole” and “level the playing field” between internet sellers and local retail stores. This view is fatally flawed and based on a number of fundamental misconceptions about both modern retail and basic economics. First, the proposed IST is not a tax on “internet” retail sales, but rather a tax on remote small and micro enterprises that are already struggling to compete in a retail environment dominated by national retail chains, such as Amazon, Walmart, Target, or Home Depot. These mega retailers combine the use of state-of-the-art logistics and internet-enabled processes with local presence, and as such are already subject to sales tax liabilities. Second, the IST, if enacted, would be a discriminatory tariff on remote retailers, who would face significant compliance costs without reaping any benefits of being local, and without incurring any costs for local municipalities through their presence. Third, we deflate popular myths floated by the pro-IST coalition of local governments and local retail interests, including the flawed arguments that remote out-of-state retailers (i) are dominating the retail space; (ii) are responsible for the decline of family-owned brick-and-mortar retail stores, and (iii) deprive states and municipalities of billions of much-needed tax dollars. Finally, we provide an economic rationale for the simple truth that IST, if implemented, would harm, not help, the U.S. economy in the short- and long-term. We conclude that the current tax system is working as it should: businesses with a local presence and capabilities–imposing local costs, reaping local benefits, and reaching local consumers – are getting taxed as they should. Imposing such costs on remote retailers would be discriminatory and harmful for the U.S. economy.
Exploring the Influence of Federal Welfare Expenditures on State-Level New Economy Development Performance: Drawing From the Diffusion of Innovation Theory
Geiguen Shin & Jeremy Hall
Economic Development Quarterly, forthcoming
Functional theory suggests that each level of government expands in the arena in which it can best perform, reducing the price of federalism. Focusing on the functional pattern of American federalism, we suggest that increased federal welfare spending increases state government performance in the “new economy” development policy areas by helping states minimize welfare costs and divert more own-source resources into economic development. The central focus is on the direct and indirect empirical relationships between federal welfare spending and state new economy performance. The authors use an index of innovation capacity that reflects the cumulative performance of a myriad of overlapping and mutually dependent state policies intended to bring about new economy development; this index measures state new economy development performance by focusing on the observable outputs of such polices rather than the adoption, implementation, or substance of individual policy choices. Mediating variables, such as state fiscal comfort and administrative capacity, measure the indirect impact of federal welfare spending on state new economy performance. The authors find that federal welfare spending stimulates state new economy development directly, but also indirectly through its positive impact on both state fiscal comfort and administrative capacity. The findings suggest that federal intergovernmental transfers continue to be an important policy mechanism with spillover effects for state economies.
How Do Private Firms Respond to Corporate Taxes
Nathan Seegert et al.
University of Utah Working Paper, April 2018
We use administrative data on the population of corporations to investigate the distortion of corporate taxes on private firms, which account for 99% of all corporations. In response to a 9% increase in corporate tax rates, firms decrease income by 8.9% — 5.5% due to reporting differences (e.g., tax shields) and 3.4% due to real differences (e.g., investment). We find differences in agency costs, investment frictions, and tax aggressiveness between firms using cash and accrual accounting and among small and large firms. Our estimates suggest that lowering the corporate tax rate from 35% to 25% would increase firm value by 16%.
Does Policy Uncertainty Affect Mergers and Acquisitions?
Alice Bonaime, Huseyin Gulen & Mihai Ion
Journal of Financial Economics, forthcoming
Political and regulatory uncertainty is strongly negatively associated with merger and acquisition activity at the macro and firm levels. The strongest effects are for uncertainty regarding taxes, government spending, monetary and fiscal policies, and regulation. Consistent with a real options channel, the effect is exacerbated for less reversible deals and for firms whose product demand or stock returns exhibit greater sensitivity to policy uncertainty, but attenuated for deals that cannot be delayed due to competition and for deals that hedge firm-level risk. Contractual mechanisms (deal premiums, termination fees, MAC clauses) unanimously point to policy uncertainty increasing the target’s negotiating power.
The economic effects of U.S. presidential tax communication: Evidence from a correlated topic model
T.P. Dybowski & P. Adämmer
European Journal of Political Economy, forthcoming
We combine a probabilistic topic model and a dictionary-based sentiment analysis to construct a time series, which indicates when and how (positive vs. negative) the U.S. president communicates his tax policy news to the public. The econometric analyses show that optimistic tax policy statements stimulate consumption, investment, and output, even after controlling for tax foresight. We also find that consumer sentiment reacts positively to more optimistic tax news, suggesting that sentiment plays an important role in the transmission from U.S. presidential tax communication to economic activity.
An Analysis of Price vs. Revenue Protection: Government Subsidies in the Agriculture Industry
Saed Alizamir, Foad Iravani & Hamed Mamani
Management Science, forthcoming
The agriculture industry plays a critical role in the U.S. economy, and various industry sectors depend on the output of farms. To protect and raise farmers’ income, the U.S. government offers two subsidy programs to farmers: the Price Loss Coverage (PLC) program, which pays farmers a subsidy when the market price falls below a reference price, and the Agriculture Risk Coverage (ARC) program, which is triggered when farmers’ revenue is below a threshold. Given the unique features of PLC and ARC, we develop models to analyze their impacts on consumers, farmers, and the government. Our analysis generates several insights. First, while PLC always motivates farmers to plant more acres compared to the no-subsidy case, farmers may plant fewer acres under ARC, leading to a lower crop supply. Second, despite the prevailing intuition that ARC generally dominates PLC, we show that both farmers and consumers may be better off under PLC for a large range of parameter values, even when the reference price represents the historical average market price. Third, the subsidy that increases consumer surplus results in higher government expenditure. Finally, we calibrate our model with U.S. Department of Agriculture (USDA) data and provide insights about the effects of crop and market characteristics on the relative performance of PLC and ARC. We provide guidelines to farmers for enrolling crops in the subsidy programs, and show that our guidelines are supported by farmers’ enrollment statistics. We also show that if the economic and political frictions caused by running the subsidy programs is significant, the subsidy that benefits both consumers and farmers may actually result in lower social welfare.
The Short-Run and Long-Run Effects of Resources on Economic Outcomes: Evidence From the United States 1936-2015
Karen Clay & Margarita Portnykh
NBER Working Paper, June 2018
This paper draws on a new state-level panel dataset and a model of domestic Dutch disease to examine the short-run and long-run effects of oil & natural gas, coal, and agricultural land endowments on state economies during 1936-2015. Using a flexible shift-share estimation approach, where the shift is national resource employment and the share is state resource endowment, we find that different resources had different short-run effects in different time periods, across increases and decreases in resource employment, and across different outcomes. Using long differences, we find that long-run population growth was an important margin of adjustment over 1936-2015. States with larger coal and agricultural endowments per square mile experienced significantly slower population growth than states with smaller endowments per square mile. Resource endowments had no effect on long-run growth in per capita income.
Fiscal Secession: An Analysis of Special Assessment Financing in California
Mathew McCubbins & Ellen Seljan
Urban Affairs Review, forthcoming
Special assessments on property are a fiscal innovation employed by many local governments. Unable to raise property taxes due to limitations, localities have turned to these charges as an alternative method to fund local services. In this article, we seek to explain differential levels of special assessment financing through the analysis of property tax records of a sample of single-family homes in California. We theorize that special assessments, as opposed to other forms of taxation, will be used when residents hold anti-redistributive preferences. We show that annual assessment payments are correlated with the ethnic diversity and median family incomes of the census places within which they are located. We also show that assessments with narrow geographic ranges are levied extensively on expensive homes in poorer cities. We discuss the implications of special assessments for progressive taxation and the potential for fiscal secession within U.S. cities.
Public Contracting for Private Innovation: Government Expertise, Decision Rights, and Performance Outcomes
Joshua Bruce, John de Figueiredo & Brian Silverman
NBER Working Paper, June 2018
We examine how the U.S. Federal Government governs R&D contracts with private-sector firms. The government chooses between two contractual forms: grants and cooperative agreements. The latter provides the government substantially greater discretion over, and monitoring of, project progress. Using novel data on R&D contracts and on the geo-location and technical expertise of each government scientist over a 12-year period, we test implications from the organizational economics and contracting literatures. We find that cooperative agreements are more likely to be used for early-stage projects and those for which local government scientific personnel have relevant technical expertise; in turn, cooperative agreements yield greater innovative output as measured by patents, controlling for endogeneity of contract form. The results are consistent with multi-task agency and transaction-cost approaches that emphasize decision rights and monitoring.