The Federal Sales Tax That Was: American Miscellaneous Excise Taxes, 1940–1971
Journal of Policy History, Summer 2017, Pages 490-516
"In explaining why there was no federal-level sales tax here that could serve as the basis for a VAT, historians have focused on the early twentieth century, when Congress repeatedly rejected a general sales tax...Missing in this picture, though, is that as late as 1965 the United States, in addition to the state sales taxes, did in fact have a system of federal excise taxes on the sale of a wide range of goods, ranging from automobiles to musical instruments and furs. This was not a general sales tax with a flat rate, like the ones rejected earlier by Congress, but rather a highly progressive system of selective taxes on luxury items, which is precisely what allowed it to flourish in the political culture of the 1940s. It was also quite fruitful — in the early 1950s it raised just as much money as the general sales taxes at the state level, and as late as 1963–64 its yield was still 60 percent of that for the expanding state taxes. But the Excise Tax Reduction Act of 1965 eviscerated the federal excise tax system, with only the automobile sales tax limping on until finally being eliminated in 1971. It was this elimination of a progressive system of excises, which has been almost completely ignored by historians of the American tax system, rather than the earlier rejections of a general sales tax by Congress, that finally shut the door on the possibility of a federal VAT in the United States."
Take it to the Limit: The Debt Ceiling and Treasury Yields
David Cashin et al.
Federal Reserve Working Paper, May 2017
We use the 2011 and 2013 U.S. debt limit impasses to examine the extent to which investors react to a heightened possibility of financial contagion. To do so, we first model the response of yields on government debt to a potential debt limit "breach." We then demonstrate empirically that yields on all Treasuries rose by 4 to 8 basis points during both impasses, while excess yields on bills at risk of delayed principal payments were significantly larger in 2013. Perhaps counterintuitively, our model suggests market participants placed a lower probability on financial contagion resulting from a breach in 2013.
Is U.S. Corporate Income Double-Taxed?
Leonard Burman, Kimberly Clausing & Lydia Austin
Urban Institute Working Paper, May 2017
Using data from several sources, we show that the vast majority of corporate income is not double-taxed in the United States. We estimate that the taxable share of U.S. corporate equity has declined dramatically in recent years, from over 80 percent in 1965 to about 30 percent at present. We discuss the causes of these dramatic changes in the taxable share of corporate stock. Several factors explain the shift, including changes in retirement finance, demographic changes, changes in the prevalence of pass-through business organizations, and the increased globalization of capital markets. These findings are important for the development of corporate tax policy. Moving the capital tax burden to the individual income tax would either cause a large revenue loss or require a reform of tax preferences that currently exempt much corporate equity from taxation under the individual income tax. These findings also have implications for other important questions in public economics, including the measurement of the cost of capital, the importance of capital gains lock-in effects, the consequences of changes in dividend taxation, and the nature of clientele effects.
Grey Power and the Economy: Aging and Inflation Across Advanced Economies
Comparative Political Studies, forthcoming
What explains the cross-national variation in inflation rates across countries? In contrast to most literature, which emphasizes the role of ideas and institutions, this article focuses on electoral politics and argues that aging leads to lower inflation rates. Countries with a larger share of elderly exhibit lower inflation because older people are both more inflation averse and politically powerful, forcing parties seeking their votes to pursue lower inflation. Logistic regression analysis of survey data confirms that older people are more inflation averse and more likely to punish incumbents at the ballot box for inflation. Panel data regression analysis shows that social democratic parties have more economically orthodox manifestos in European countries with more elderly people, and that the share of elderly is negatively correlated with inflation in both a sample of 21 advanced economies and a larger sample of 175 countries. Aging therefore pushes governments to pursue lower inflation.
Social Security and Saving: An Update
Sita Slavov et al.
NBER Working Paper, June 2017
Typical neoclassical life-cycle models predict that Social Security has a large and negative effect on private savings. We review this theoretical literature by constructing a model where individuals face uninsurable longevity risk and differ by wage earnings, while Social Security provides benefits as a life annuity with higher replacement rates for the poor. We use the model to generate numerical examples that confirm the standard result. Using several benefit and tax changes from the 1970s and 1980s as natural experiments, we investigate the empirical relationship between Social Security and private savings and find little to support the strong predictions from the theoretical model. We explore possible reasons for the divergence between theoretical predictions and empirical findings.
World War II and the Industrialization of the American South
NBER Working Paper, June 2017
When private incentives are insufficient, a big push by government may lead to industrialization. This paper uses mobilization for World War II to test the big push hypothesis in the context of postwar industrialization in the American South. Specifically, I investigate the role of capital deepening at the county level using newly assembled data on the location and value of wartime investment. Despite a boom in manufacturing activity during the war, the evidence is not consistent with differential growth in counties that received more investment. This does not rule out positive effects of mobilization on firms or sectors, but a decisive role for wartime capital deepening in the South's postwar industrial development should be viewed more skeptically.
The Net Benefit of Demolishing Dilapidated Housing: The Case of Detroit
Dusan Paredes & Mark Skidmore
Regional Science and Urban Economics, September 2017, Pages 16-27
We conduct an analysis of the costs and benefits of public investment in demolishing dilapidated residential housing in Detroit. While we estimate a positive net impact of demolitions on nearby property values, we also calculate a low marginal impact on local property tax collections. Under existing housing market conditions in Detroit, demolition costs exceed the present value of additional property tax revenues resulting from demolitions over 50 years. Using efficiency as the criteria for justifying spending public funds on demolition, average property values would have to increase by a factor of five to justify the demolition program.
Sweat the Small Stuff: Strategic Selection of Pension Policies Used to Defer Required Contributions
Jeffrey Diebold, Vincent Reitano & Bruce McDonald
Contemporary Economic Policy, forthcoming
The administrators of state-sponsored defined benefit public pension plans have considerable discretion to determine the accounting and actuarial parameters used to calculate the normal cost contributions and amortization payments that, together, comprise the sponsoring state's annual required contribution amount. Using longitudinal data from the Public Pension Database and a fixed effects approach, we find evidence that suggests plan administrators decisions about cost and amortization methods are influenced by the normal cost and amortization payments, respectively. When these costs increase, administrators tend to use less prudent methods that defer, or keep low, the pension contributions required from the state while, simultaneously, and perversely, improving the appearance of the plan's funded status and the state's funding discipline.
Does Federal Disaster Assistance Crowd Out Flood Insurance?
Carolyn Kousky, Erwann Michel-Kerjan & Paul Raschky
Journal of Environmental Economics and Management, forthcoming
We empirically analyze whether federal disaster aid crowds out household purchase of disaster insurance. We combine data on annual household flood insurance purchases for the United States over the period 2000–2011 with data from the two main U.S. post-disaster federal aid programs (FEMA's Individual Assistance grants and SBA's low interest disaster loans). Estimating both fixed-effects and instrumental variable models to account for the endogeneity of disaster assistance grants, we find that receiving individual assistance grants decreases the average quantity of insurance purchased the following year by between $4,000 and $5,000. The reduction we find is roughly 3% of the mean insurance coverage in the sample but larger than the average flood-related IA grant in our sample, which is $2,984. IA is currently limited and larger grants could have different impacts. The crowding out is on the intensive margin; we find no impact on take-up rates, likely because there is a requirement that recipients of disaster aid purchase an insurance policy. We do not know how take-up rates might change without such a requirement. Low interest post-disaster government loans have no systematic effect on insurance purchases.
Culture, Compliance, and Confidentiality: Taxpayer Behavior in the United States and Italy
James Alm et al.
Journal of Economic Behavior & Organization, August 2017, Pages 176-196
This paper analyzes the impact of confidentiality of taxpayer information on the level of compliance in two countries with very different levels of citizen trust in government − the United States and Italy. Using identical laboratory experiments conducted in the two countries, we analyze the impact on tax compliance of “Full Disclosure” (e.g., release of photos of tax evaders to all subjects, along with information on the extent of their non-compliance) and of “Full Confidentiality” (e.g., no public dissemination of photos or non-compliance). Our empirical analysis applies a two-stage strategy that separates the evasion decision into its extensive (e.g., “participation”) and intensive (e.g. “amount”) margins. We find strong support for the notion that public disclosure acts as an additional deterrent to tax evaders, and that the deterrent effect is concentrated in the first stage of the two-stage model (or whether to evade or not). We also find that the deterrent effect is similar in the U.S. and in Italy, despite what appear to be different social norms of compliance in the two countries.
U.S. Multinationals and Cash Holdings
Journal of Financial Economics, August 2017, Pages 344-368
U.S. multinational firms hold significantly more cash than domestic firms. I study this cash differential using a dynamic model featuring corporate physical and intangible investment, cross-border decisions, and financial policies. I find that the cash differential diminishes by 42% if repatriation costs are set to zero. Hence, costly repatriation induces cash accumulation offshore. Further, firms that invest overseas have different ex ante cash policies from firms that do not. I examine this self-selection effect by eliminating heterogeneous intangibility across multinational and domestic firms, which reduces the cash differential by 28%. I also examine the likelihood of corporate inversion under federal regulations. The estimated annual tax loss to the U.S. Treasury from inversions is reduced from $2.2 billion to $1.3 billion if the requirements for foreign ownership are tightened from 20% to 50%.
Natural Capital and Wealth in the 21st Century
Eastern Economic Journal, June 2017, Pages 391–405
Extending the wealth accumulation model of Piketty and Zucman  to include net depreciation in fossil fuels, minerals, and forests produces two key indicators: the net national saving rate adjusted for natural capital depreciation, and the ratio of this rate to long-run growth. These indicators are applied to eight rich economies over 1970–2013 and developing countries for 1979–2013. Whereas in developing economies capital accumulation has largely kept pace with rising natural capital depletion, in the rich countries adjusted net savings have fallen to converge with the rate of natural capital depreciation, suggesting less compensation by net increases in other capital.