Findings

Taxed and spent

Kevin Lewis

October 10, 2014

Does Transparency Lead to Pay Compression?

Alexandre Mas
NBER Working Paper, October 2014

Abstract:
This paper asks whether disclosing wages to the public changes wage setting at the top of the public sector income distribution. I evaluate a 2010 California mandate that required cities to submit municipal salaries to the State, to be posted on a public website. City managers - typically the highest paid employees - in cities that had not previously disclosed salaries experienced average compensation declines of approximately 8 percent relative to cities where at the time of the mandate manager wages were already in the public domain. This decline was largely accomplished through nominal pay cuts. The wage cuts were not the result of relatively greater financial stress, as the overall wage bill did not diverge between these sets of cities. Wages were cut irrespective of whether or not they were out of line with (measured) fundamentals. Consequently, the residual variance of manager wages did not decline. Following new disclosure the city manager quit rate increased by 75 percent, suggesting that transparency pressured cities to lower the wages that were already close to reservation levels. The evidence is more consistent with a "populist" response to perceptions of excessive salaries than with the effects of increased accountability.

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Pass the Bucks: Credit, Blame, and the Global Competition for Investment

Nathan Jensen et al.
International Studies Quarterly, September 2014, Pages 433-447

Abstract:
Both countries and subnational governments commonly engage in competition for mobile capital, offering generous incentives to attract investment. Existing economics research has suggested that these tax incentives have a limited ability to affect investment patterns and are often excessively costly when measured against the amount of investment and jobs created. In this paper, we argue instead that the "competition" for capital can be politically beneficial to incumbent politicians. Building off work on electoral pandering, we argue that incentives allow politicians to take credit for firms' investment decisions. We test the empirical implications of this theory using a nationwide Internet survey, which employs a randomized experiment to test how voters evaluate the performance of incumbent US governors. Our findings illustrate a critical political benefit of offering such incentives. Politicians can use these incentives to take credit for investment flowing into their districts and to minimize the political fallout when investors choose to locate elsewhere.

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The Direct and Indirect Effects of Small Business Administration Lending on Growth: Evidence from U.S. County-Level Data

Andrew Young et al.
NBER Working Paper, October 2014

Abstract:
Conventional wisdom suggests that small businesses are innovative engines of Schumpetarian growth. However, as small businesses, they are likely to face credit rationing in financial markets. If true then policies that promote lending to small businesses may yield substantial economy-wide returns. We examine the relationship between Small Business Administration (SBA) lending and local economic growth using a spatial econometric framework across a sample of 3,035 U.S. counties for the years 1980 to 2009. We find evidence that a county's SBA lending per capita is associated with direct negative effects on its income growth. We also find evidence of indirect negative effects on the growth rates of neighboring counties. Overall, a 10% increase in SBA loans per capita is associated with a cumulative decrease in income growth rates of about 2%.

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State Income Taxes and Interstate Migration

Roger Cohen, Andrew Lai & Charles Steindel
Business Economics, July 2014, Pages 176-190

Abstract:
This paper examines the comprehensive IRS data set of state-state migration flows for evidence that differences in state income tax rates are associated with migration patterns. Using annual data on moves between every pair of states, pooled time-series cross-section regressions indicate that in the 1992-2010 period states with higher top marginal income tax rates experienced relatively greater outmigration of taxpayers and gross income. To illustrate the magnitude of the tax effect, we estimate that by 2010 cumulative losses since the enactment of New Jersey's 2004 "millionaires' tax" were as much as 42,000 taxpayers and $6.9 billion in annual adjusted gross income. These results suggest that sustained, relatively high income tax rates could gradually erode a state's population and revenue base.

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The Heterogeneous Effects of Government Spending: It's All About Taxes

Axelle Ferriere & Gaston Navarro
NYU Working Paper, August 2014

Abstract:
Empirical work suggests that government spending does not crowd-out consumption. Most representative-agent models predict the opposite. In an environment with heterogeneous households and uninsurable idiosyncratic risk, progressivity of taxes is a key determinant of the effects of government spending. We show that a rise in government spending can be expansionary, both for output and consumption, if financed with more progressive labor taxes. We use large changes in military spending to provide evidence that US government spending has been expansionary only in periods of increasing progressivity. In this respect, the distributional impact of fiscal policy is central to its aggregate effects.

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Fiscal Multipliers in Recessions and Expansions: Does it Matter Whether Government Spending is Increasing or Decreasing?

Daniel Riera-Crichton, Carlos Vegh & Guillermo Vuletin
World Bank Working Paper, July 2014

Abstract:
Using non-linear methods, this paper finds that existing estimates of government spending multipliers in expansion and recession may yield biased results by ignoring whether government spending is increasing or decreasing. For industrial countries, the problem originates in the fact that, contrary to one's priors, it is not always the case that government spending is going up in recessions (i.e., acting countercyclically). In almost as many cases, government spending is actually going down (i.e., acting procyclically). Since the economy does not respond symmetrically to government spending increases or decreases, the "true" long-run multiplier for bad times (and government spending going up) turns out to be 2.3 compared to 1.3 if we just distinguish between recession and expansion. In the case of developing countries, the bias results from the fact that the multiplier for recessions and government spending going down (the "when-it-rains-it-pours" phenomenon) is larger than when government spending is going up.

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Tax News: Identifying Tax Expectations from Municipal Bonds with an Application to Household Consumption

Lorenz Kueng
NBER Working Paper, August 2014

Abstract:
Although theoretical models of household behavior often emphasize fiscal foresight, most empirical studies neglect the role of news, thereby potentially underestimating the total effect of tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with consumption data from the Consumer Expenditure Survey, I find that consumption of high-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime income, consistent with the basic rational-expectations life-cycle theory.

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How the West Was Bought: How a 'Simple' Payment to Compensate Local Governments Became an Uncontrollable Federal Subsidy

Devin Thomas Kenney
Michigan State University Working Paper, September 2014

Abstract:
The federal government owns and administers more than 1/4 of the land in the United States, most of which is located in the Western half of the country and most of which is not subject to local taxation. To counterbalance the negative fiscal impact of nontaxable federal land in the United States, Congress created a Payment in Lieu of Taxes program, known as PILT, to compensate local governments for the government services they provide. The U.S. Department of the Interior distributes PILT as lump-sum payments directly to local governments. In order to prevent overcompensation, PILT payments are limited by the amount that the local government units receive under other federal revenue sharing programs, many of which are based directly on the extraction of natural resources like oil, gas, and timber. PILT has one major problem though: the deduction provision doesn't work. This is because only funds received by the unit of local government are deducted from PILT. Therefore, if the funds are passed through to a smaller governing agency, known as a service district, there is no deduction. The U.S. Department of the Interior should, through notice-and-comment rulemaking, clarify its PILT regulations to discourage states and local governments from subdividing themselves into smaller and smaller entities in order to maximize the amount of federal monies they receive. Many interested parties, including the National Association of Counties, argue that PILT should be expanded to cover all federal lands and to remove the deduction provision, while others hew to the other extreme, arguing that PILT should be eliminated entirely. The first argument completely overlooks the very real abuses perpetrated under PILT today while potentially increasing overcompensation; the second ignores the reality that local communities foot the bill to provide government services on federal land. Administering PILT in a manner that adheres to the spirit of deducting double payments would remove the incentive for inefficient governance and create an incentive to manage, rather than exploit, public lands. The Article offers a tentative proposal for the form such reform could take, as well as explaining why other reforms, such as statutory amendment or stricter enforcement, might be complicated by political expediency.

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Economic policy uncertainty, financial markets and probability of US recessions

Lilia Karnizova & Jiaxiong (Chris) Li
Economics Letters, November 2014, Pages 261-265

Abstract:
We use probit recession forecasting models to assess the ability of economic policy uncertainty indexes developed by Baker et al. (2013) to predict future US recessions. The model specifications include policy indexes on their own, and in combination with financial variables, such as interest rate spreads, stock returns and stock market volatility. Both in-sample and out-of-sample analysis suggests that the policy uncertainty indexes are statistically and economically significant in forecasting recessions at the horizons beyond five quarters. The index based on newspaper reports emerges as the best predictor, outperforming the term spread at the longer forecast horizons.

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The Perception Of Social Security Incentives For Labor Supply And Retirement: The Median Voter Knows More Than You'd Think

Jeffrey Liebman & Erzo Luttmer
NBER Working Paper, October 2014

Abstract:
The degree to which the Social Security tax distorts labor supply depends on the extent to which individuals perceive the link between current earnings and future Social Security benefits. Some Social Security reform plans have been motivated by an assumption that workers fail to perceive this link and that increasing the salience of the link could result in significant efficiency gains. To measure the perceived linkage between labor supply and Social Security benefits, we administered a survey to a representative sample of Americans aged 50-70. We find that the majority of respondents believe that their Social Security benefits increase with labor supply. Indeed, respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual incentive. We also surveyed people about their understanding of various other provisions in the Social Security benefit rules. We find that some of these provisions (e.g., effects of delayed benefit claiming and rules on widow benefits) are relatively well understood while others (e.g., rules on spousal benefits, provisions on which years of earnings are taken into account) are less well understood. In addition, our survey incorporated a framing experiment, which shows that how the incentives for delayed claiming are presented has an impact on hypothetical claiming decisions. In particular, the traditional "break-even" framing used by the Social Security Administration leads to earlier claiming than other presentations do.

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The Empirical Content of Pay-for-Performance

Canice Prendergast
Journal of Law, Economics, and Organization, forthcoming

Abstract:
Empirical evidence on the effect of pay-for-performance on output has been scarce. We propose that worker responses to marginal pay-for-performance changes can be related to their response to a measure of taxes. Using this approach, we suggest a short-run elasticity of output with respect to incentive pay for high earners in the United States of 0.25 or lower, and it is difficult to rule out very low responsiveness.

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Public Pressure and Corporate Tax Behavior

Scott Dyreng, Jeffrey Hoopes & Jaron Wilde
Duke University Working Paper, July 2014

Abstract:
We examine whether public pressure related to compliance with subsidiary disclosure rules influences corporate tax behavior. ActionAid International, a non-profit activist group, levied public pressure on non-compliant U.K. firms in the FTSE 100 to comply with a rule requiring U.K. firms to disclose the location of all of their subsidiaries. We use this natural experiment to examine whether the public pressure led scrutinized firms to decrease tax avoidance and reduce the use of subsidiaries in tax haven countries relative to other firms in the FTSE 100 not affected by the public pressure. The evidence suggests that the public scrutiny sufficiently changed the costs and benefits of tax avoidance such that tax expense increased for scrutinized firms. The results suggest that public pressure from outside activist groups can exert a significant influence on the behavior of large publicly-traded firms. Our findings extend prior research that has had little success documenting an empirical relation between public scrutiny of tax avoidance and firm behavior.

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Customer Concentration and Corporate Tax Avoidance

Henry He Huang et al.
University of Kentucky Working Paper, May 2014

Abstract:
We examine the relation between customer concentration, a critically important aspect of a firm's business model, and the level of corporate tax avoidance. A firm with a concentrated corporate customer base needs to hold more cash, faces a higher likelihood of financial distress, has a stronger incentive to manage earnings upwards, and is likely to be more risk tolerant. Since tax planning can increase both cash flow and accounting earnings and risk tolerant firms are more likely to accept the risks inherent in tax avoidance activities, we hypothesize that corporate customer concentration is positively associated with tax avoidance. As predicted, we find that various measures of corporate customer concentration are positively related to tax avoidance as measured by effective tax rate and book-tax difference. We also document that this positive relation is more pronounced when the firm captures a lower market share in its industry, enjoys less revenue diversification, and engages in less real earnings management. By contrast, we contend that a governmental major customer provides stable cash flow to suppliers and thus alleviates their need for tax avoidance. Consistent with this reasoning, we find that firms engage in lower levels of tax avoidance when they have a governmental major customer, and this association is less pronounced under Democratic presidencies. Together, our findings indicate that a firm's business model (i.e., corporate and governmental major customer) has a significant effect on the extent to which it avoids taxes.

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Asymmetric responses to income changes: The payroll tax increase versus tax refund in 2013

Anat Bracha & Daniel Cooper
Economics Letters, September 2014, Pages 534-538

Abstract:
We examine low-to-middle income individuals' response to the 2013 payroll tax increase and their 2012 tax refund and find that consumption declines 90 cents per dollar lost to the tax increase, and rises 60 cents per additional tax refund dollar.

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If All You Have Is A Hammer: Finding Economic Development Policies That Matter

Laura Reese
American Review of Public Administration, November 2014, Pages 627-655

Abstract:
This research explores the relative effectiveness of a comprehensive set of local economic development incentives and focuses on two questions: What contributions do common development tools make to the economic health of municipalities?; and, Are there other types of local activities, not typically considered as development tools, that might be more effective in contributing to local economic prosperity? It finds that the factors most consistently and positively related to economic health are investments in the downtown, spending on basic local public services, and using no economic development incentives at all. These findings suggest one primary policy recommendation: the wisest course of action for most cities would be to eschew particularized development incentives, especially those that require tax expenditures.

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Do parking fees affect retail sales? Evidence from Starbucks

Kent Hymel
Economics of Transportation, forthcoming

Abstract:
Parking meters are a common feature of urban areas, yet their economic impacts are not well understood. Local governments use meters to raise revenue and to ration scarce parking spaces. On-street parking, however, is seldom priced at the market rate. When inefficiently priced, parking meters may negatively affect the businesses and individuals they are intended to serve. This paper uses a quasi-experimental research design and an observational data set to assess metered parking policy. Sharp twice-daily changes in parking meter enforcement provide a comparison of customer traffic to a popular retail area in free and metered parking environments. Regression discontinuity results suggest that when there is an excess supply of parking (i.e., many spaces are vacant), a small 50 cent per-hour parking fee deters commerce. At two separate Starbucks establishments, the meter fee reduced customer traffic by almost 30%. However, when there is excess demand for parking (i.e., all spaces are constantly occupied), there is no evidence that meters help to increase customer traffic. These results suggest that sub-optimal meter pricing can impose substantial costs on nearby businesses.

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How can government spending stimulate consumption?

Daniel Murphy
Review of Economic Dynamics, forthcoming

Abstract:
Recent empirical work finds that government spending shocks can cause aggregate consumption to increase. This paper builds on the framework of imperfect information in and to show how government spending can stimulate consumption. Owners of firms targeted by an increase in government spending perceive an increase in their permanent income relative to their future tax liabilities, while owners of firms not targeted remain unaware of the implicit increase in future tax liabilities, causing aggregate consumption to increase. I show that a testable implication of this model - namely that the value of firms should increase in response to government spending shocks, implying all else equal an increase in aggregate stock returns - is consistent with empirical evidence.


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