Finding the Funds
Federal Tax Deductions and the Demand for Local Public Goods
Brent Ambrose & Maxence Valentin
Review of Economics and Statistics, forthcoming
Abstract:
The United States tax system allows taxpayers to deduct local taxes from their taxable incomes. Using school district referendum results, we employ a continuous treatment two-way fixed-effects framework to provide causal evidence of a positive relation between the demand for local public goods and the share of residents deducting local taxes. We find that a one-percentage-point decrease in the share of residents deducting property taxes reduces tax and bond referendum approval rates by approximately 0.97 percentage points. Because these federal tax deductions disproportionately benefit higher-income individuals, they potentially widen disparities in public service provision across jurisdictions.
Behavioral Responses to State Income Taxation of High Earners: Evidence from California
Joshua Rauh & Ryan Shyu
American Economic Journal: Economic Policy, February 2024, Pages 34-86
Abstract:
Using administrative data, we analyze the response to Proposition 30, a 2012 measure that increased California marginal tax rates by up to 3 percentage points for high-income households. Relative to baseline departure rates, an additional 0.8 percent of the residential tax base that landed in the top bracket left California in 2013. Using matched out-of-state taxpayers as controls reveals an income elasticity with respect to the marginal net-of-tax rate of 2.5-3.2 for high earners who stayed. These responses eroded 45.2 percent of state windfall tax revenues within the first year and 60.9 percent within 2 years, driven largely by the intensive margin.
Political Influence, Bank Capital, and Credit Allocation
Sheng Huang & Anjan Thakor
Management Science, forthcoming
Abstract:
Political influence on bank credit allocation is often viewed as being necessary to address social problems like income inequality. We hypothesize that such influence elicits bank capital responses. Our hypothesis yields three testable predictions for which we find supporting evidence. First, when banks observe election outcomes that suggest greater impending political credit-allocation influence, they reduce capital to increase fragility and deter political influence. Second, banks subject to greater political influence nonetheless increase lending that politicians favor, and household consumption consequently increases. Third, these banks exhibit poorer post-lending performance. Our study has implications for the interaction between politics, household consumption, and bank risk through a specific channel -- the interplay between credit-allocation regulation and bank capital structure.
Voter support for bond referenda: Does it matter if costs are presented as aggregate vs. personal costs?
Corey Lang, Shanna Pearson-Merkowitz & Zachary Scott
Public Budgeting & Finance, forthcoming
Abstract:
We explore whether voters' willingness to approve government spending in bond elections is affected by how costs are presented. Using an original survey experiment, we examine willingness to approve bonds, randomizing both the total cost of the bond and the framing of the cost as either a personal cost or an aggregate amount. We find that respondents are less supportive of bonds when the bond is framed as a personal expense and that respondents are more cost-responsive when they see personal costs. There is also substantial heterogeneity based on the respondent's partisanship and the policy domain of the bond.
Durables and Size-Dependence in the Marginal Propensity to Spend
Martin Beraja & Nathan Zorzi
NBER Working Paper, January 2024
Abstract:
Stimulus checks have become an increasingly important policy tool in recent U.S. recessions. How does the households' marginal propensity to spend (MPX) vary as checks become larger? To quantify this size-dependence in the MPX, we augment a canonical model of durable spending by introducing a smooth adjustment hazard. We discipline this hazard by matching a rich set of micro moments. We find that the MPX declines slowly with the size of checks. In contrast, the MPX is flatter in a purely state-dependent model of durables, and declines sharply in a two-asset model of non-durables. Finally, we embed our spending model into an open-economy heterogeneous-agent New-Keynesian model. In a typical recession, a large check of $2,000 increases output by 25 cents per dollar, compared to 37 cents for a $300 check. Large checks thus remain effective but extrapolating from the response out of small checks overestimates their impact.
Fire protection services and house prices: A regression discontinuity investigation
David Brasington & Olivier Parent
Regional Science and Urban Economics, March 2024
Abstract:
Despite its importance as a public good, little research studies how fire protection services affect housing markets or other economic outcomes. We focus on fire levies that are up for renewal so that the timing of the levy is exogenous, to help preserve the independence of votes. We use regression discontinuity to compare the price of houses in fire districts that barely pass and fail to renew a fire tax levy. House values drop at least 6.7% the year after a community votes to cut fire protection funding, which is a quarter of a standard deviation of sale price and larger than the capitalization of crime, school quality, or environmental quality. Tax levies representing more than the median 18.8% funding drop elicit a larger drop in house prices. The short-term decrease does not persist, though, suggesting limited awareness and a decline in risk perception over time by buyers and sellers.
The Effect of Bankruptcy Exemptions on Consumer Credit
Charles Romeo & Ryan Sandler
Journal of Law and Economics, November 2023, Pages 699-737
Abstract:
Chapter 7 of US bankruptcy law allows consumers to exempt a portion of the value of their homes and personal property from unsecured creditors. The levels of exemptions vary widely across states and change frequently. We study the effect of increases in these exemptions on the supply of and demand for credit card, mortgage, and auto loan credit. We use detailed account-level administrative data to directly observe applications for new credit and new accounts following the applications instead of using proxies such as debt loads as in prior literature on this topic. We find no effect of homestead exemptions on access to credit and only modest effects on access to credit and credit card interest rates from increases in nonhome property exemptions. We find no effect of changes in exemption rates on demand for credit.
Information Transmission in Groups: Peer Influence in High-Stakes, Irreversible Financial Decisions
Tom Ahn, Jesse Cunha & Patrick Veith
Review of Economics and Statistics, forthcoming
Abstract:
We study the influence of workplace peers on a high-stakes, irreversible retirement plan choice. Mid-career U.S. military personnel choose between higher future pension pay-outs, or an immediate bonus plus lower future pay-outs. With peers defined as those who have locked-in their choices and personnel assignment rules ensuring that peer groups are exogenously formed, we capture the causal impact of peers. Greater peer take-up of the bonus, which is difficult to compare to the alternative plan but often extremely costly over one's lifetime, discourages choosers from selecting the bonus. Peers are especially impactful within professional, race, and gender groups.
Reform Reconsidered: The Effects of Form of Government
Alexander Sahn
Journal of Historical Political Economy, Fall 2023, Pages 337-362
Abstract:
American municipalities have a wide variety of representative institutions, but do these differences drive policy outcomes? In this article, I investigate whether the relationship between the executive and legislative branches and their control over the bureaucracy affects fiscal outcomes. To do so, I construct a new panel of cities' form of government from 1900 to 1934, a time when two new types -- the commission and council-manager forms -- arose and were widely adopted. I find limited evidence that changes to the legislative branch's composition and relationship to the bureaucracy impacted cities' fiscal policy, as both expenses and revenues remain unchanged. However, I do find evidence insulating the bureaucracy from electoral control increased capital outlays. I further document that the fragmented control of the bureaucracy did not promote inefficiency, with little difference in spending between policy areas with and without a commissioner. These results highlight the muted effects of form of government institutions on policy.