Right-sized government
Public‐Sector Unions and the Size of Government
Agustina Paglayan
American Journal of Political Science, forthcoming
Abstract:
Public‐sector unions are generally thought to increase the size of government through collective bargaining. This article challenges this idea for the case of teacher unions in the United States and argues that while collective bargaining institutions sometimes lead to increased education spending, this is not the norm. Using a new longitudinal data set spanning all states before and after they granted collective bargaining rights to teachers, the article shows that although states that mandate districts to bargain with teachers have higher education expenditures than states that do not, the differences precede collective bargaining. Difference‐in‐differences analyses find no evidence that introducing collective bargaining rights led to average increases in the level of resources devoted to education. Although existing theories cannot explain these null findings, the article shows one reason behind them is that most laws granting collective bargaining rights to teachers were not unambiguously pro-labor, but included both pro‐ and anti‐union provisions.
Tax Reform Made Me Do It!
Michelle Hanlon, Jeffrey Hoopes & Joel Slemrod
NBER Working Paper, November 2018
Abstract:
This paper examines corporations’ actions, and statements about actions, following the tax law change known as the Tax Cuts and Jobs Act (TCJA). Specifically, we examine four different outcomes - bonuses (or other actions that benefit workers), announcements of new investments, share repurchases, and dividend announcements. We find that 4% of public firms in our sample announced in Q1 2018 they would pay some portion of their tax savings toward workers. In terms of investment, we find that 22% of the S&P 500 firms in our sample mentioned in earnings conference calls that they would increase investment because of the TCJA. We find a general increase in share repurchases following the passage of the TCJA, but the increase is extremely concentrated in a small number of firms. We find only nine firms that announced a new share repurchase plan explicitly attributed the new plan to the TCJA. In regression analysis, we find that both political and economic variables explain TCJA-linked announcements. The analysis suggests that firms with greater expected tax savings from the TCJA are those most likely to announce payments to workers and plans to increase investment. Firms with a Political Action Committee that donates more to Republican candidates are also more likely to announce benefits to employees.
Explaining the slow U.S. recovery: 2010-2017
Ray Fair
Business Economics, October 2018, Pages 184-194
Abstract:
This paper argues that the slow U.S. recovery after the 2008-2009 recession was due to sluggish government spending. The analysis uses a structural macroeconometric model. Conditional on government policy, the errors in predicting output for the 2009.4-2017.4 period are within what one would expect historically. Productivity and labor force participation are endogenous variables in the model, and so their behaviors in this period are a consequence of the slow growth rather than a cause.
State government public goods spending and citizens' quality of life
Patrick Flavin
Social Science Research, forthcoming
Abstract:
A growing literature across the social sciences uses individuals' self-assessments of their own well-being to evaluate the impact of public policy decisions on citizens' quality of life. To date, however, there has been no rigorous empirical investigation into how government spending specifically on public goods impacts well-being. Using individual-level data on respondents' self-reported happiness and detailed government spending data for the American states for 1976-2006, I find robust evidence that citizens report living happier lives when their state spends more (relative to the size of a state's economy) on providing public goods. As an important spuriousness check, I also show that this relationship does not hold for total government spending or for government spending on programs that are not (strictly speaking) public goods like education and welfare assistance to the poor. Moreover, the statistical relationship between public goods spending and happiness is substantively large and invariant across income, education, gender, and race/ethnicity lines - indicating that spending has broad benefits across society. These findings suggest that public goods spending can have important implications for the well-being of Americans and, more broadly, contribute to the growing literature on how government policy decisions concretely impact the quality of life that citizens experience.
Income-Based Effective Tax Rates and Choice-of-Entity Considerations under the 2017 Tax Act
Bradley Borden
National Tax Journal, December 2018, Pages 613-634
Abstract:
This article uses a simple simulation to graphically present the effective tax rates at various income levels for small businesses (those with taxable income of $1,000,000 or less) under the Tax Cuts and Jobs Act of 2017 (TCJA) and compares them to effective tax rates at various income levels for small businesses prior to the TCJA. The graphical presentation reveals that the various tax rates under the TCJA complicate choice-of-entity analyses and undermine general rule-of-thumb concepts that drove choice-of-entity decisions prior to the TCJA. Under the TCJA, choice-of-entity preferences will likely be highly situational and may feature combinations of various entities. Using a typical business situation, this article illustrates how different types of entity can cause the effective tax rate on business income at the $1,000,000 level to vary from 21.36 to 34.60 percent. The most favorable effective rate results from an entity structure that combines a C corporation and passthrough entity. Rate variations based upon entity combinations portend subtle, carefully calculated, shifts in choice-of-entity actions following the TCJA.
Can successful fiscal adjustments only be achieved by spending cuts?
Rasmus Wiese, Richard Jong-A-Pin & Jakob de Haan European
Journal of Political Economy, September 2018, Pages 145-166
Abstract:
We re-examine the conventional view that to be successful, fiscal adjustments should rely on spending cuts and not on tax increases. We apply the Bai-Perron structural break filter to identify fiscal adjustments and their successfulness in 20 OECD countries. Our results suggest that the composition of fiscal adjustments is not related to their success. Furthermore, we find that political-economy variables considered are not robustly related to successful fiscal adjustments with one exception: the probability of a successful fiscal adjustment increases if left-wing governments rely on spending cuts and right-wing governments rely on tax increases.
Municipal Borrowing Costs and State Policies for Distressed Municipalities
Pengjie Gao, Chang Lee & Dermot Murphy
Journal of Financial Economics, forthcoming
Abstract:
Policies on financially distressed municipalities differ across US states, with some allowing unconditional access to Chapter 9 bankruptcy (Chapter 9 states) and others having proactive policies to assist distressed municipalities (Proactive states). These differences significantly affect borrowing costs. In Chapter 9 states, local municipal bond yields are higher, more cyclical, and more sensitive to default events than Proactive states. Default events have a contagion effect in Chapter 9 states, but not Proactive states. Lower local borrowing costs in Proactive states come at the expense of the state via higher intergovernmental revenue transfers in times of weak economic conditions.
The Impact of Dodd-Frank on True Interest Cost of Municipal Bonds: Evidence From California
Mikhail Ivonchyk
Public Budgeting & Finance, forthcoming
Abstract:
The Dodd-Frank Act of 2010 amended the Securities Exchange Act of 1934 and introduced new registration requirements and regulatory standards applicable to municipal financial advisors. The reform is intended to address some of the problems observed with the conduct of some municipal advisors, including the issuance of financial advice without adequate training or qualifications, and to help municipal debt issuers to raise capital more efficiently. This article explores potential implications of the policy for municipal borrowers. After reviewing the main policy provisions and discussing theoretical outcomes, it empirically tests the null hypothesis of no policy effect on the cost of municipal borrowing in California. The results suggest a significant decrease in true interest cost after the reform. The policy effect is more pronounced on negotiated debt. Thus, the federal regulation of municipal financial intermediaries may have helped to improve the average quality of advice in the market and lower the cost of borrowing.
Social Capital and the Municipal Bond Market
Pei Li, Leo Tang & Bikki Jaggi
Journal of Business Ethics, December 2018, Pages 479-501
Abstract:
We examine the influence of social capital in the municipal bond market. Defined as the norms and networks that encourage cooperation, social capital is a social construct which captures a region’s level of altruism, trustworthiness, and propensity to honor obligations. We expect that municipalities with high social capital are more trustworthy and likely to honor their debt obligations, which will result in lower bond yields. Our findings confirm that the bonds issued by municipalities located in high social capital counties exhibit lower yields compared to the municipalities located in low social capital counties. Our findings are also supported by bond prices in the secondary market, which shows that bonds from the municipalities located in high social capital regions have higher prices. Additional tests reveal that the influence of social capital is stronger for general obligation bonds, suggesting that social capital matters more for bonds where the willingness of municipalities to pay taxes is an important factor. Lastly, we document that the bonds of municipalities in high social capital areas are less likely to have insurance, suggesting that social capital may act as a substitute for bond insurance.
Government Debt and the Returns to Innovation
Mariano Croce et al.
Journal of Financial Economics, forthcoming
Abstract:
Elevated levels of government debt raise concerns about their effects on long-term growth prospects. Using the cross section of US stock returns, we show that (i) high-R&D firms are more exposed to government debt and pay higher expected returns than low-R&D firms, and (ii) higher levels of the debt-to-GDP ratio predict higher risk premiums for high-R&D firms. Furthermore, rises in the cost of capital for innovation-intensive firms predict declines in subsequent productivity and economic growth. We propose a production-based asset pricing model with endogenous innovation and fiscal policy shocks that can rationalize key aspects of the empirical evidence. Our study highlights a novel and distinct risk channel shaping the link between government debt and future growth.
Fiscal Institutional Externalities: The Negative Effects of Local Tax and Expenditure Limits on Municipal Budgetary Solvency
Benedict Jimenez
Public Budgeting & Finance, Fall 2018, Pages 3-31
Abstract:
This study explores the effects of state‐imposed local tax and expenditure limits or TELs on the budgetary solvency of city governments in the US. Most local TELs were enacted in the late 1970s and early 1980s, and have remained largely unchanged in the last three to four decades. These quasi‐permanent fiscal institutions do not take into account changes in voters’ fiscal policy preferences across time or the possibility of external fiscal shocks that require flexibility in changing tax and spending policies. Without this flexibility, TELs can lead to poor financial management practices that negatively affect budgetary solvency. The empirical analysis produces strong evidence supporting this argument. Whether TELs are assumed to be exogenously or endogenously determined, the results of the econometric analysis, including various robustness tests, indicate that TELs weaken city budgetary solvency.
Who Pays No Tax? The Declining Fraction Paying Income Taxes and Increasing Tax Progressivity?
David Splinter
Contemporary Economic Policy, forthcoming
Abstract:
Using federal individual income tax data, this paper presents the first long‐run estimates of the fraction paying no income tax. Between 1985 and 2015, the fraction of working age adults paying no tax increased from 20% to 36%. A decomposition shows that almost all of this increase resulted from changes in tax policy, especially from more generous tax credits. Increasing tax progressivity over the last three decades also resulted from more generous tax credits. The substantial federal tax changes enacted in 2017 are forecasted to temporarily increase both the fraction paying no tax and individual income tax progressivity.
Distance and Decline: The Case of Petersburg, Virginia
Raymond Owens & Santiago Pinto
Federal Reserve Working Paper, October 2018
Abstract:
Petersburg, Virginia, prospered over two centuries as a center of production and trade. However, the city experienced economic difficulties beginning in the 1980s as a large number of layoffs at production plants in the area coincided with an erosion of retail trade in the city. Prolonged economic decline followed. In contrast, somewhat similar shocks in other moderate-sized cities in Virginia were followed by gradual economic recovery. We examine these differing outcomes and offer an explanation that hinges on the proximity of Petersburg to its larger neighbor, the greater Richmond area. We find evidence suggesting that after the job declines, higher-skilled residents in Petersburg initially commuted to jobs nearer to Richmond, later relocating from Petersburg toward Richmond -- an option not readily available in the other Virginia cities considered. We suggest that, as a result, Petersburg suffered a sharp decline in tax revenues and that municipal costs could not be proportionately scaled down, leading to severe fiscal stress.