Public Dollars
The Partisan Politics of Rainy Day Fund Investment
Lauren Futter
Legislative Studies Quarterly, November 2025
Abstract:
When do legislatures save for disasters and economic downturns? How do electoral uncertainty and majority party agenda control influence these decisions? I develop a two-stage bargaining model of rainy day fund (RDF) investment. In the first stage, a legislator from the majority party proposes an allocation of the budget between an RDF, particularistic good, and public good. Before the second stage, there is an election and an economic crisis may occur. If a crisis occurs, the legislature can access an existing RDF to fund relief. The model predicts that a majority party is more likely to save when it is likely to remain in the majority, though saving remains below socially optimal levels. Supermajority and other requirements for larger voting coalitions incentivize RDF investment. Testing the results of the model empirically using measures of partisan competition reveal that states with stronger majorities are more likely to invest in their RDFs.
The Austerity Threshold
Vadim Elenev, Tim Landvoigt & Stijn Van Nieuwerburgh
NBER Working Paper, October 2025
Abstract:
We introduce a new indicator of fiscal capacity -- the “austerity threshold”: the debt-to-GDP level above which the government must raise fiscal surpluses to ensure debt safety. In a model with realistic risk premia, nominal rigidities, and an intermediary sector, calibrated to the U.S., we estimate this threshold at 189%. We highlight the roles of safety premia and intermediation-driven convenience yields. The threshold varies with the source of surpluses: spending cuts reduce inflation and allow low interest rates, while tax increases distort labor supply and raise inflation. Uncertainty over the austerity regime -- spending cuts or tax increases -- sharply lowers fiscal capacity. The expected austerity regime affects asset prices and macro outcomes even when debt-to-GDP is well below the threshold.
Capital Reallocation and Private Firm Dynamics
Anmol Bhandari, Paolo Martellini & Ellen McGrattan
NBER Working Paper, October 2025
Abstract:
We develop a theory of firm dynamics and capital reallocation in private firms and use it to study the taxation of business income, capital, and capital gains. Intangible assets -- such as customer bases and trade names -- are created using owners' time and are infrequently traded in bilateral meetings. We discipline the model with U.S. administrative data, which report purchase prices and counterparties in asset transfers, allowing us to calibrate the investment technology and output elasticity for otherwise unobservable intangible capital. The equilibrium features dispersion in marginal product of capital, transferable share of firm value, and return on business wealth. Introducing taxation, we find that capital gains taxes are most distortionary, primarily by discouraging entry and reallocation of capital, whereas income taxes are least distortionary.
Unintended Consequences of Anti-Money-Laundering Regulations
Fabrizio Colella, Keith Maskus & Alessandro Peri
Economic Journal, forthcoming
Abstract:
Tighter money-laundering regulations in offshore financial havens may inadvertently spur incentives to launder money domestically. Our study exploits regulations targeting financially based money laundering in Caribbean jurisdictions to examine their impact on the creation of front companies and other money-laundering (ML) practices in U.S. counties. Predictions on the effects are ambiguous: stricter regulations could either increase domestic ML through substitution or decrease it by disrupting laundering networks. We find strong evidence of substitution. Counties with prior financial exposure to these jurisdictions experience a rise in business activities after regulatory tightening. The effect is greater in sectors at high risk of ML, while firms hire fewer workers and inflate revenues. Exposed counties also see higher shares of cash-based and misvalued real-estate transactions. Our work provides the first indirect evidence of real and financial unintended effects of foreign money-laundering regulations.
How Does Removing the Tax Benefits of Debt Affect Firms? Evidence from the 2017 U.S. Tax Reform
Ali Sanati & Mehdi Beyhaghi
Review of Financial Studies, forthcoming
Abstract:
The impact of tax benefits of debt on firms remains an open question. The 2017 U.S. tax reform limited the tax advantage of debt for all firms except for small businesses with average sales below $25 million. A regression discontinuity design based on the exception threshold shows that, as tax benefits of debt shrink, corporate debt declines significantly, while equity does not increase sufficiently to offset the reduction. Treated firms also decrease their investments due to the higher cost of capital. Overall, we document a first-order role for tax incentives that affect the cost of capital in shaping corporate policies.
Who benefits from partnership flexibility?
Michael Love
Journal of Public Economics, November 2025
Abstract:
Partnerships (including LLCs) account for more than one-third of US business profits. A key feature they offer owners is the ability to allocate income and losses flexibly across partners rather than strictly in proportion to equity shares, which can reduce taxes if partners have different tax situations. Using anonymized tax records, I estimate over $200 billion of net tax benefits associated with this flexibility over stricter allocations of the same income between 2011–2020. These benefits are narrowly concentrated in only 6% of firms, generally larger and more complex firms, while the vast majority of firms -- especially smaller operating firms -- do not utilize this flexibility at all. I also estimate $100 billion of net tax benefits from carried interest and similar profit interest arrangements relative to ordinary compensation of service partners between 2011–2020.
The Effects of Personal Income Taxes on Organization Performance: Evidence from Name, Image, and Likeness Compensation Rules
Nathan Goldman & Martin Jacob
North Carolina State University Working Paper, October 2025
Abstract:
We examine whether personal income taxes affect organization performance. We use the 2021 introduction of Name, Image, and Likeness (NIL) compensation rules in U.S. college sports, which removed the ban for athletes to earn income for their sports performance while maintaining their eligibility, as a natural experiment. Exploiting novel performance data, we find that teams in low-tax rate states have approximately three more wins per season than schools in high-tax states post-NIL. The effects of personal income taxes on wins are more pronounced among elite conference schools and schools that can attract top recruits. We also find that if elite conference schools are located in low-tax-rate states, they are more likely to advance to the final stages of the championship tournament. Finally, we provide evidence for the mechanism behind improved organizational outcomes: We show that top-ranked recruits are significantly more likely to choose schools in low-tax-rate states after the implementation of NIL. Collectively, our findings show that individual taxation is linked to talent mobility and thus to organizational success.
LLM Survey Framework: Coverage, Reasoning, Dynamics, Identification
Jing Cynthia Wu, Jin Xi & Shihan Xie
NBER Working Paper, October 2025
Abstract:
We propose a new LLM-based survey framework that enables retrospective coverage, economic reasoning, dynamic effects, and clean identification. We recover human-comparable treatment effects in a multi-wave randomized controlled trial of inflation expectations surveys, at 1/1000 the cost. To demonstrate the framework’s full potential, we extend the benchmark human survey (10 waves, 2018–2023) to over 50 waves dating back to 1990. We further examine the economic mechanisms underlying agents’ expectation formation, identifying the mean-reversion and individual-attention channels. Finally, we trace dynamic treatment effects and demonstrate clean identification. Together, these innovations demonstrate that LLM surveys enable research designs unattainable with human surveys.
Real Effects of Non-Streamlined Sales Tax Administration: Evidence from the Florida Hotel Industry
Jennifer Brown et al.
Journal of Accounting Research, December 2025, Pages 1917-1951
Abstract:
We examine whether the local administration of sales taxes (as opposed to a more streamlined state administration) affects the real economy for businesses complying with the tax. We study this question in the Florida hotel industry, as counties in Florida can choose to locally administer the county-level tourist tax or have the state administer the county-level tax along with the state-level tourist tax. Local administration is popular because it supports local employment (of tax administrators) and provides more stringent enforcement on non-commercial operators (e.g., private rentals). State administration, however, has fewer compliance costs for hotels (e.g., reduced filings and fewer audits). Commentary from the profession suggests the incremental compliance costs of local administration can be considerable. We find that counties switching from state to local administration of tourist taxes is associated with slower growth in aggregate hotel payroll and employment, consistent with local tax administration increasing compliance costs to the point that affected businesses cut other services.