For whom the bill tolls
Tax competition among U.S. states: Racing to the bottom or riding on a seesaw?
Robert Chirinko & Daniel Wilson
Journal of Public Economics, November 2017, Pages 147-163
Dramatic declines in capital tax rates among U.S. states and European countries have been linked by many commentators to tax competition, an inevitable "race to the bottom," and underprovision of local public goods. This paper analyzes the reaction of capital tax policy in a given U.S. state to changes in capital tax policy by other states. Our study is undertaken with a novel panel data set covering the 48 contiguous U.S. states for the period 1965 to 2006 and is guided by the theory of strategic tax competition. The latter suggests that capital tax policy is a function of "foreign" (out-of-state) tax policy, preferences for government services, home state and foreign state economic and demographic conditions. The slope of the reaction function - the equilibrium response of home state to foreign state tax policy - is negative, contrary to casual evidence and many prior empirical studies of fiscal reaction functions. This result, which stands in contrast to most published findings, is due to two critical elements that allow for delayed responses to foreign tax changes and responses to aggregate shocks. Omitting either of these elements leads to a misspecified model and a positively sloped reaction function. Our results suggest that the secular decline in capital tax rates, at least among U.S. states, reflects synchronous responses among states to common shocks rather than competitive responses to foreign state tax policy. While striking given prior empirical findings, these results are fully consistent with the implications of the theoretical model developed in this paper and presented elsewhere in the literature. Rather than "racing to the bottom," our findings suggest that states are "riding on a seesaw." Consequently, tax competition may lead to an increase in the provision of local public goods, and policies aimed at restricting tax competition to stem the tide of declining capital taxation are likely to be ineffective.
Two Tales of Two U.S. States: Regional Fiscal Austerity and Economic Performance
Dan Rickman & Hongbo Wang
Regional Science and Urban Economics, forthcoming
The recent fiscal austerity experiments undertaken in the states of Kansas and Wisconsin have generated considerable policy interest. Using a variety of identification approaches within a difference-in-differences framework and examining a wide range of economic indicators, this paper assesses whether the experiments have spurred growth in the states as promised by the governors and legislatures which enacted them into law. The overall conclusion from the paper is that the fiscal experiments did not spur growth, and if anything harmed state economic performance. Among the identification approaches used, the synthetic control method (Abadie and Gardeazabal 2003; Abadie et al., 2010) is demonstrated to provide the most compelling evidence.
Does Fiscal Decentralization Affect Infrastructure Quality? An examination of U.S. States
Monica Escaleras & Peter Calcagno
Contemporary Economic Policy, forthcoming
A transportation network is vital to an economy. However, the U.S. highway infrastructure suffers from insufficient maintenance creating inefficiencies such as increased travel times and increase in accidents. The means to fund the infrastructure and their maintenance is a point of debate. In this paper, we examine the role of political institutions and decision-making on the quality of highway infrastructure by focusing on the role of fiscal decentralization. Using generalized linear model estimation on state data from 1992 to 2012, we find evidence that fiscal decentralization improves infrastructure quality. These results are robust to the choice of control variables and method of estimation.
Fiscal Stimulus and Fiscal Sustainability
Alan Auerbach & Yuriy Gorodnichenko
NBER Working Paper, September 2017
The Great Recession and the Global Financial Crisis have left many developed countries with low interest rates and high levels of public debt, thus limiting the ability of policymakers to fight the next recession. Whether new fiscal stimulus programs would be jeopardized by these already heavy public debt burdens is a central question. For a sample of developed countries, we find that government spending shocks do not lead to persistent increases in debt-to-GDP ratios or costs of borrowing, especially during periods of economic weakness. Indeed, fiscal stimulus in a weak economy can improve fiscal sustainability along the metrics we study. Even in countries with high public debt, the penalty for activist discretionary fiscal policy appears to be small.
Why Some Times Are Different: Macroeconomic Policy and the Aftermath of Financial Crises
Christina Romer & David Romer
NBER Working Paper, October 2017
Analysis based on a new measure of financial distress for 24 advanced economies in the postwar period shows substantial variation in the aftermath of financial crises. This paper examines the role that macroeconomic policy plays in explaining this variation. We find that the degree of monetary and fiscal policy space prior to financial distress - that is, whether the policy interest rate is above the zero lower bound and whether the debt-to-GDP ratio is relatively low - greatly affects the aftermath of crises. The decline in output following a crisis is less than 1 percent when a country possesses both types of policy space, but almost 10 percent when it has neither. The difference is highly statistically significant and robust to the measures of policy space and the sample. We also consider the mechanisms by which policy space matters. We find that monetary and fiscal policy are used more aggressively when policy space is ample. Financial distress itself is also less persistent when there is policy space. The findings may have implications for policy during both normal times and periods of acute financial distress.
How Taxing Is Tax Filing? Using Revealed Preferences to Estimate Compliance Costs
NBER Working Paper, October 2017
This paper uses a quasi-experimental design and a novel identification strategy to estimate the cost of filing income taxes. First, using US income tax returns, I observe how taxpayers choose between itemizing deductions and claiming the standard deduction. Taxpayers forgo tax savings to avoid compliance costs, which provides a revealed preference estimate of the compliance cost of itemizing. I find that this cost increases with income, consistent with a higher opportunity cost of time for richer house- holds. Second, using my estimates and estimates of the time required to file other schedules, I estimate the cost of filing federal income taxes. I find that this cost has been increasing since the 1980's and has reached 1.2% of GDP in the most recent years.
Sentiments and Economic Activity: Evidence from U.S. States
Jess Benhabib & Mark Spiegel
NBER Working Paper, October 2017
We examine whether sentiment influences aggregate demand by studying the relationship between the Michigan Survey expectations concerning national output growth and future economic activity at the state level. We instrument for local sentiments with political outcomes, positing that agents in states with a higher share of congressmen from the political party of the sitting President will be more optimistic. This instrument is strong in the first stage, and our results confirm a positive relationship between sentiments and future state economic activity that is robust to a battery of sensitivity tests.
Top marginal taxation and economic growth
Santo Milasi & Robert Waldmann
Applied Economics, forthcoming
The article explores the relationship between top marginal tax rates on personal income and economic growth. Using a data set of consistently measured top marginal tax rates for a panel of 18 OECD countries over the period 1965-2009, this article finds evidence in favour of a quadratic top tax-growth relationship. This represents the first reported evidence of a nonmonotonic significant relationship between top marginal income tax rates and economic growth. The point estimates of the regressions suggest that the marginal effect of higher top tax rates becomes negative above a growth-maximizing tax rate in the order of 60%. As top marginal tax rates observed after 1980 are below the estimated growth-maximizing level in most of the countries considered, a positive linear relationship between top marginal tax rates and GDP growth is found over the sub-period 1980-2009. Overall, results show that raising top marginal tax rates which are below their growth maximizing has the largest positive impact on growth when the related additional revenues are used to finance productive public expenditure, reduce budget deficits or reduce some other form of distortionary taxation.
Corporate Tax Havens and Transparency
Morten Bennedsen & Stefan Zeume
Review of Financial Studies, forthcoming
We investigate shareholders' reactions to the increased transparency of corporate tax haven activities in a hand-collected subsidiary data set covering 17,331 publicly listed firms in 52 countries. An increase in transparency through the staggered signing of bilateral tax information exchange agreements (TIEAs) between home countries and tax havens is associated with a 2.5% increase in the value of affected firms. The results are stronger for firms with more complex tax haven structures and weakly governed firms. Furthermore, firms that respond to TIEAs by haven hopping (i.e., they move subsidiaries from affected to nonaffected tax havens) do not experience an increase in firm value. These results are consistent with tax havens being used for expropriation activities that extend beyond pure tax-saving activities.
Transparency and Tax Evasion: Evidence from the Foreign Account Tax Compliance Act (FATCA)
Lisa De Simone, Rebecca Lester & Kevin Markle
Stanford Working Paper, September 2017
We examine how increased reporting requirements for U.S. individuals with offshore assets affect the location of hidden investment assets. Specifically, we study the Foreign Account Tax Compliance Act (FATCA). FATCA requires foreign financial institutions to provide information to the U.S. government regarding U.S. account holders for the purpose of reducing offshore tax evasion. Using annual country-level data on investments in U.S. securities by foreign account holders from 2006 to 2015, we document a significant decrease in foreign portfolio investment to the U.S. from tax haven countries after signing on to FATCA, consistent with a decrease in "round-tripping" investment activity attributable to U.S. investors' offshore tax evasion activities. However, we also find weak evidence of an increase in the amount of investment out of tax haven countries that did not agree to exchange information. These results suggest that some U.S. investors with hidden offshore assets moved assets to other countries that provide secrecy, thus enabling these investors to continue to evade U.S. tax liabilities. Our study contributes to both the academic literature on tax evasion as well as the analysis of similar yet controversial regulation being contemplated by numerous countries around the world.
Estimating the Manufacturing Employment Impact of Eliminating the Tangible Personal Property Tax: Evidence From Ohio
Sian Mughan & Geoffrey Propheter
Economic Development Quarterly, November 2017, Pages 299-311
Proponents of eliminating the tangible personal property tax often argue that doing so will boost employment in capital-intensive industries, presumably because businesses will invest some portion of the marginal tax savings in labor. Theory strongly suggests this reasoning may be flawed: reducing the tax on capital reduces its cost and therefore incents a substitution away from labor. This study is the first effort to estimate the employment impact of exempting tangible personal property from the property tax in the manufacturing sector in Ohio. Using the synthetic control method, we find that manufacturing employment in Ohio is lower than what it would have been had the tax not been eliminated. From our preferred model, the estimated effect is 19,300 fewer jobs per year on average, but we consider other models that produce estimates between 13,400 and 28,400 fewer jobs per year, on average.
Transit-oriented economic development: The impact of light rail on new business starts in the Phoenix, AZ Region, USA
Urban Studies, forthcoming
This article examines the impact of Phoenix's light rail system, which opened in 2008, on new firm formation in specific industries. Individual business data from 1990-2014 are used in a quasi-experimental adjusted-interrupted time series (AITS) regression to compare the impact of the transit system's construction on new business starts in 'treatment' and 'control' areas before and after the opening of the line. Findings show that the transit adjacency is worth an 88% increase in knowledge sector new starts, a 40% increase in service sector new starts and a 28% increase in retail new starts at the time the system opened, when compared with automobile-accessible control areas. However, the light rail also appears to suffer from a 'novelty factor'- after the initial increase in new establishment activity in adjacent block groups, the effect diminishes at the rate of 8%, 6% and 7% per year, respectively. The results also provide insight into the spatial extent of light rail impacts to new business formation, with areas 1 mile from stations observing 21% fewer retail new business starts and 12% fewer knowledge sector new starts than areas within a quarter of a mile of stations.