Paying for it

Kevin Lewis

August 08, 2018

The revenue potential of a financial transaction tax for US financial markets
Robert Pollin, James Heintz & Thomas Herndon
International Review of Applied Economics, forthcoming

This paper estimates the revenue potential of a financial transaction tax (FTT) for US financial markets. We focus on analyzing the revenue potential of the Inclusive Prosperity Act that was introduced in the US House of Representatives in 2012 and the US Senate in 2015. The tax rates stipulated in this Act include 0.5% (50 basis points (bps)) for all stock transactions, 0.1% (10 bps) for all bond transactions and 0.005% (0.5 bps) on the notional value of all derivative trades. We examine three sets of evidence to generate potential revenue estimates: 1) the levels of transaction costs in US financial markets over time and within the range of financial market segments; 2) the extent of trading elasticities under various trading conditions; and 3) the current level of trading activity in US financial markets. Based on this evidence, we conclude that a US FTT operating at the tax rates stated above would generate about $220 billion per year, equal to about 1.2% of the current US GDP.

The Impacts of Tax Reform on Agricultural Households
Jayson Beckman, Munisamy Gopinath & Marinos Tsigas
American Journal of Agricultural Economics, forthcoming

Estimates of tax reform’s impacts usually concentrate on macroeconomic impacts, but attention at the industry or sectoral level is often limited. Our study uses a computable general equilibrium (CGE) model to estimate the disaggregated impacts of the Tax Cuts and Jobs Act (TCJA) of 2018, which lowered personal and corporate tax rates. Focusing on agriculture, we use survey data to calculate how the TCJA would change the tax rates faced by farmers at the sector level. We use Internal Revenue Service data to calculate tax rates for all other producers. We then simulate the economy-wide and sectoral effects of TCJA. We find that the TCJA would cause a reduction in agricultural output as resources would be reallocated to other sectors. Using our survey data, we extend the CGE results to measure the impacts to farm households—from changes in on- and off-farm income. We find that most farm households would have income gains from tax reform. Our tax reform scenario highlights the fact that investment weighs heavily on model results. That is, firms that are attractive to domestic and foreign investment have gains in demand for their products, while other sectors, such as primary agriculture, experience decreases in production. A sensitivity analysis that reduces the attractiveness of the United States in foreign investment shows smaller impacts of TCJA, especially for macroeconomic variables.

Tax Spillovers from US Corporate Income Tax Reform
Sebastian Beer, Alexander Klemm & Thornton Matheson
IMF Working Paper, July 2018

This paper describes, and where possible tentatively quantifies, likely tax spillovers from the U.S. corporate income tax reform that was part of the broader 2017 tax reform. It calculates effective tax rates under various assumptions, showing among other findings, how the interest limitation and the Foreign Derived Intangible Income provision can raise or reduce rates. It tentatively estimates that under constant policies elsewhere, the rate cut will reduce tax revenue from multinationals in other countries by on average 1.6 to 5.2 percent. If other countries react in line with historical reaction functions, the revenue loss from multinationals rises to an average of 4.5 to 13.5 percent. The paper also discusses profit-shifting, real location, and policy reactions from the more complex features of the reform.

Does charitable giving crowd out support for government spending?
Seth Werfel
Economics Letters, October 2018, Pages 83-86

Government spending has been shown to crowd out charitable giving. This article uses survey experiments to demonstrate that charitable giving can reciprocally crowd out support for government spending. Moreover, this crowding-out effect in public opinion varies by political ideology and by issue. In Study 1, survey respondents who were randomly assigned to read about charitable giving in a particular area were less likely to support additional taxation and government spending in that domain. This result was driven by liberals in the arts domain and moderates and conservatives in the human services domain. Study 2 leveraged data from the “Ice Bucket Challenge” to replicate this effect among very liberal respondents and show that crowding-out was attenuated when respondents perceived donations to have greater impact.

Unintended Consequences of Eliminating Tax Havens
Juan Carlos Suárez Serrato
NBER Working Paper, July 2018

We show that eliminating firms’ access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad — which lowered their domestic investment by 38% — and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. We discuss implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.

Political Embeddedness of Public Pension Governance: An Event History Analysis of Discount Rate Changes
Qiushi Wang & Jun Peng
Public Administration Review, forthcoming

State governments are frequently said to manipulate the discount rate assumption to make pension funding look better, reduce employers' and employees' pension contributions, or relieve fiscal stress. Building a model from the political embeddedness perspective and applying an event history analysis to the 81 largest state‐administered pension plans in the United States, the authors found that more politically embedded pension boards were actually more likely to reduce their plan's discount rate. Public union coverage and government political ideology, however, had no significant impact on discount rate changes. These findings reveal the effect of political embeddedness on pension planning decisions and provide useful insights into the intricate process of setting pension discount rates in a new era of more muted investment return expectations. This article points to both political and financial pressures facing pension boards and state governments for many years to come.

Risk Preferences Across Public and Private Sector Employees: Evidence From Mortgage Choices
Konstantinos Tzioumis
U.S. Department of the Treasury Working Paper, June 2018

Public sector employees have long been considered to be more risk-averse when compared with their private sector counterparts. Using data from mortgage applications, we offer novel evidence that casts doubt on this conventional view. After accounting for differences in applicants' demographic and creditworthiness characteristics, we find little, to no, differences between public and private sector employees in terms of their risky mortgage choices. The findings are robust to accounting for potential bias from unobservables and testing alternative measures of mortgage riskiness.

Excess Sensitivity of High-Income Consumers
Lorenz Kueng
Quarterly Journal of Economics, forthcoming

Using new transaction data, I find considerable deviations from consumption smoothing in response to large, regular, predetermined, and salient payments from the Alaska Permanent Fund. On average, the marginal propensity to consume (MPC) is 25% for nondurables and services within one quarter of the payments. The MPC is heterogeneous, monotonically increasing with income, and the average is largely driven by high-income households with substantial amounts of liquid assets, who have MPCs above 50%. The account-level data and the properties of the payments rule out most previous explanations of excess sensitivity, including buffer stock models and rational inattention. How big are these ‘mistakes’? Using a sufficient statistics approach, I show that the welfare loss from excess sensitivity depends on the MPC and the relative payment size as a fraction of income. Since the lump-sum payments do not depend on income, the two statistics are negatively correlated such that the welfare losses are similar across households and small (less than 0.1% of wealth), despite the large MPCs.

Partisanship, Political Institutions, and Debt Issues
Zachary Peskowitz & Suhas Sridharan
Journal of Law, Economics, and Organization, forthcoming

We investigate the effect of gubernatorial partisanship on municipal bond issues in the United States using a regression discontinuity design. Our unique dataset of individual bond issues allows us to precisely measure the issuing behavior of different entity types — states, state authorities, and localities — and examine how the response of debt issues to gubernatorial partisanship varies across jurisdictions. The election of Democratic governors results in higher levels of debt issuance, with an annual per capita increase of approximately $73–$147 in states that lack debt referenda requirements. In states with debt referenda requirements, the estimated per capita annual effect of a Democratic governor is approximately $23–$28. We find that governors are not able to circumvent debt referenda requirements by issuing debt through state authorities or local governments.

Does a lower (higher) labour force participation rate imply greater (lower) income tax evasion? An exploratory empirical inquiry for the U.S.
Richard Cebula
Applied Economics Letters, forthcoming

This exploratory study seeks to add to the income tax evasion literature by investigating a heretofore ignored potential determinant of aggregate federal personal income tax evasion in the U.S., namely, the labour force participation rate. It is hypothesized that the higher (lower) the labour force participation rate, the lower (greater) the degree of tax evasion. The empirical estimation supports this hypothesis, finding that a one unit (one percentage point) increase (decrease) in the labour force participation rate leads to a 9.1% decrease (increase) in income tax evasion. Thus, the declining labour force participation in recent years implies increased tax evasion problems for the U.S.

High cost of bias: Diminishing marginal returns on NIH grant funding to institutions
Wayne Wahls
University of Arkansas Working Paper, July 2018

Scientific output is not a linear function of amounts of federal grant support to individual investigators. As funding per investigator increases beyond a certain point, productivity decreases. This study reports that such diminishing marginal returns also apply for National Institutes of Health (NIH) research project grant funding to institutions. Analyses of data (2006-2015) for a representative cross-section of institutions, whose amounts of funding ranged from $3 million to $440 million per year, revealed robust inverse correlations between funding (per institution, per award, per investigator) and scientific output (publication productivity and citation impact productivity). Interestingly, prestigious institutions had on average 65% higher grant application success rates and 50% larger award sizes, whereas less-prestigious institutions produced 65% more publications and had a 35% higher citation impact per dollar of funding. These findings suggest that implicit biases and social prestige mechanisms (e.g., the Matthew effect) have a powerful impact on where NIH grant dollars go and the net return on taxpayers investments. They support evidence-based changes in funding policy geared towards a more equitable, more diverse and more productive distribution of federal support for scientific research. Success rate/productivity metrics developed for this study provide an impartial, empirically based mechanism to do so.

The Effect of Foreign Cash Holdings on Internal Capital Markets and Firm Financing
Lisa De Simone & Rebecca Lester
Stanford Working Paper, June 2018

Prior literature demonstrates that firms should use internal capital before accessing costly external finance. However, prior to 2018, the U.S. repatriation tax imposed an internal capital market friction on U.S. multinational firms (MNCs), thereby motivating companies to retain cash offshore. We quantify the extent to which U.S. MNCs used domestic financing rather than incur the repatriation tax to meet domestic cash needs. We find that firms with high tax-induced foreign cash have approximately 3.0 percent higher domestic liabilities relative to other MNCs, equivalent to $138.4 million more of domestic debt per firm, or approximately $89.9-$129.0 billion in aggregate. We also show that this effect occurs primarily for the subset of firms financing shareholder payouts, with weaker evidence for financing domestic M&A and R&D activity. The evidence informs expectations of responses to the recent U.S. tax law by quantifying the extent that firms will likely reduce domestic debt with repatriated funds as opposed to the intended responses of increasing domestic investment and employment.

Information, Tax Salience, and Support for School Bond Referenda
Eric Brunner, Mark Robbins & Bill Simonsen
Public Budgeting & Finance, forthcoming

We examine whether the salience of the property tax liability implications of voting yes on a school bond referendum affects bond approval rates. We exploit the fact that school districts in Minnesota are required to explicitly note the property tax implications of voting yes on bond referenda in bold capital letters on a ballot while districts in the neighboring state of Wisconsin are only required to inform voters of the amount of bonds to be issued. Using data on local school bond passage rates from Minnesota and Wisconsin over the period 2008–2017, we find that when the property tax implications of voting yes are more salient, the fraction of voters favoring bond passage declines by approximately four to seven percentage points and the probability of bond passage falls by approximately ten percentage points. These results are robust to numerous specification checks including propensity score weighting methods and leveraging the geographic distance between school districts in Minnesota and Wisconsin.

Beyond Spending Levels: Revenue Uncertainty and the Performance of Local Governments
Stéphane Lavertu & Travis St. Clair
Journal of Urban Economics, July 2018, Pages 59-80

Revenue uncertainty is a common concern among public administrators, but little research examines its effects on service delivery. Using a novel empirical strategy to capture how revenues deviate from administrators’ expectations, we estimate the impact of revenue uncertainty on Ohio public school districts’ educational effectiveness. We find that errors in districts’ revenue forecasts can have a significant negative impact on student achievement, beyond what one would expect based on changes in spending levels. In particular, a one percentage point increase in error involving revenue shortfalls can lead to declines in student achievement growth of up to 0.02 standard deviations during the following school year, which equates to about 8 days’ worth of learning. These effects are concentrated in large, non-rural school districts with relatively low fund balances.

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