Treasury bills
Alberto Alesina et al.
NBER Working Paper, January 2015
Abstract:
The conventional wisdom is (i) that fiscal austerity was the main culprit for the recessions experienced by many countries, especially in Europe, since 2010 and (ii) that this round of fiscal consolidation was much more costly than past ones. The contribution of this paper is a clarification of the first point and, if not a clear rejection, at least it raises doubts on the second. In order to obtain these results we construct a new detailed "narrative" data set which documents the actual size and composition of the fiscal plans implemented by several countries in the period 2009-2013. Out of sample simulations, that project output growth conditional only upon the fiscal plans implemented since 2009 do reasonably well in predicting the total output fluctuations of the countries in our sample over the years 2010-13 and are also capable of explaining some of the cross-country heterogeneity in this variable. Fiscal adjustments based upon cuts in spending appear to have been much less costly, in terms of output losses, than those based upon tax increases. The difference between the two types of adjustment is very large. Our results, however, are mute on the question whether the countries we have studied did the right thing implementing fiscal austerity at the time they did, that is 2009-13. Finally we examine whether this round of fiscal adjustments, which occurred after a financial and banking crisis, has had different effects on the economy compared to earlier fiscal consolidations carried out in "normal" times. When we test this hypothesis we do not reject the null, although in some cases failure to reject is marginal. In other words, we don't find sufficient evidence to claim that the recent rounds of fiscal adjustment, when compared with those occurred before the crisis, have been especially costly for the economy.
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Economic Freedom and the Size of Government
James Mahon
Williams College Working Paper, January 2015
Abstract:
This paper explores the relationship between government size and economic freedom, relating these patterns to theories of fiscal politics. In order to address current political controversies, it uses data on pre-1990 OECD members (minus Norway) for central government tax revenues and spending, as well as indicators of economic freedom derived from the Fraser Institute, ICRG, Heritage Foundation, and the World Bank. It finds that it matters a great deal whether we define size as expenditures or taxation. Spending has no relationship with freedom, or a negative one, across this data set. Initial tax revenue levels, however, positively predict subsequent changes in economic freedom. We find similar patterns using different measures of economic freedom and whether we use annual data (1995-2010) or overlapping six-year averages going back to 1970-75. These results challenge the common preconception that taxes and economic freedom are negatively related. In addition, the divergence between tax revenue and spending in this regard is more consistent with a “fiscal contract” model of the state, in which taxation and economic freedom go together, as governments attend to their legitimacy and the health of the private sector in order to increase revenue, but flag in these efforts when they enjoy sources of income other than taxes.
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Territorial Tax System Reform and Corporate Financial Policies
Matteo Arena & George Kutner
Review of Financial Studies, forthcoming
Abstract:
We examine the effect of a permanent change to a country corporate income repatriation tax system on corporate financial policies. In 2009, Japan and the United Kingdom switched from a worldwide system to a territorial system for the taxation of repatriated foreign earnings, effectively reducing the tax liabilities of most multinational firms when repatriating earnings. We find that after the change firms accumulate less cash, pay out larger amounts through dividends and share repurchases, and invest less abroad. We do not find that the tax system change has significantly affected domestic investments even when controlling for capital constraints.
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Homeowners, Renters and the Political Economy of Property Taxation
Eric Brunner, Stephen Ross & Becky Simonsen
University of Connecticut Working Paper, December 2014
Abstract:
Studies that examine the demand for local public services that are financed by a property tax consistently find that renters are more supportive of public spending than homeowners, a finding commonly referred to as the “renter effect.” In this paper we use detailed micro-level survey data to provide new evidence on the renter effect. The renter effect suggests that, all else equal, renters should prefer property taxation over other forms of taxation. We test that hypothesis using voter responses to two key questions: their willingness to pay higher property taxes to fund public services and their willingness to pay higher sales taxes to fund those services. Using a difference-in-differences estimation strategy, we find first that renters are approximately 10 to 18 percentage points more likely than homeowners to favor a property tax increase over a sales tax increase, a finding consistent with the presence of a renter effect. However, these results are not driven by the voting behavior of renters. Analysis based on separate regressions for renters and homeowners reveals that renters are indifferent between a property tax increase and either a sales tax or state income tax increase, while homeowners strongly oppose a property tax increase relative to either a sales tax or state income tax increase. Further analysis reveals that the strong opposition among homeowners to the property tax is not associated with the relative tax burden faced by homeowners. Examining the variation in tax burden created by Proposition 13 in California, we find that homeowner aversion to the property tax does not increase with the homeowner’s relative tax burden. These findings of homeowner aversion to property taxes are consistent with recent work suggesting that salience matters when voters evaluate taxes, but also suggest that increased salience does not necessarily lead to more careful consideration of individual tax burdens.
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The Legal Salience of Taxation
Andrew Hayashi
University of Chicago Law Review, Fall 2014, Pages 1443-1507
Abstract:
Before an injury becomes a legal dispute, the injury must be named, a party must be blamed, and a right against that injury must be claimed. What motivates people to do these things and use legal institutions to seek redress? I provide a partial answer to this question, using a unique dataset to identify the effect that the salience of a tax — that is, its psychological prominence — has on whether a taxpayer will use legal means to lighten the tax’s burden. I term this effect its “legal salience.” I find that reducing property tax salience makes homeowners less likely to appeal their property-value assessments, making it more likely that homeowners will remain overassessed and overtaxed. These overtaxed homeowners never perceive — are never able to “name” — their injury and consequently never obtain the relief to which they might be entitled. Moreover, I show that the selective use of appeals caused by legal salience shifts the tax burden to racial minorities, immigrants, and working families with children. Scholars and lawmakers operate as if only substantive law drives the distribution of a tax burden. But I show that legal salience is one of a number of factors that also affects the tax distribution by motivating only certain individuals to seek tax relief, and I argue that tax laws should be evaluated after taking into account the effects of legal salience.
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Zachary Liscow
Yale Working Paper, January 2015
Abstract:
Central cities’ populations have rebounded over the last few decades, but scholars are unsure why. I propose and offer econometric evidence for a novel hypothesis — legal changes have driven central cities’ resurgence. In particular, state fiscal aid for schools in poor cities, mandated by state courts, has made poor cities more desirable places to live by improving their schools and reducing their taxes. I test my hypothesis by taking advantage of the natural experiment resulting from the dramatic increase in transfers to some states’ poor cities in response to court-ordered school finance equalization, using Census data on over 20,000 cities and towns. The key threats to accurate measurement are that poor places may have grown differently than rich places in the absence of school finance redistribution, and places in high-redistribution states may have grown differently than places in low-redistribution states. To address these concerns, I use a continuous version of the “difference-in-difference-in-differences” econometric technique. The results show that redistribution had a large effect on urban population growth between 1980 and 2010, explaining about one-third of the “return to the central city.” I then conduct a case study on the local finances of Connecticut, and find that the state transfers for education led to tax reductions, as well as the intended increases in education spending. Finally, the paper suggests two reasons that state aid to poor places may be not only equitable but also efficient. First, financing schools locally discourages people from living in poor cities by requiring that their residents pay for the costs of providing services to the cities’ poor. The results show that the location choices of many people are affected by this local financing, suggesting that its efficiency costs may be large. Second, the paper shows that school finance redistribution promotes the positive externalities associated with central city living. These arguments could be used in future legislative debates or litigation to support more school finance redistribution.
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Kevin Wallsten & Gene Park
California Journal of Politics and Policy, forthcoming
Abstract:
California faced a tremendous fiscal challenge in the wake of the 2008 recession. With high political hurdles to raising taxes, the state and local governmentswere forced to appeal directly to voters through ballot initiatives. Debates over these ballot initiatives, however, took place against the backdrop of increassingly acrimonious disagreements about taxation at the federal level. Unfortunately, researchers have little idea about how the dynamics of public opinion on tax issues operate across these various levels of government. This article asks: do the factors that shape attitudes towards taxation in California vary depending on the level of government levying those taxes? Analyzing results from a 2012 poll, this article finds some differences and some commonalities in the determinants of tax attitudes at the federal, state and local level. More specifically, we find that: (1) attitudes toward taxes are more politicized at the federal level than at the state or local level; (2) confidence in government has a strong effect on tax attitudes but citizens draw clear distinctions between levels of government; (3) perceived self-interest does not influence tax attitudes at any level; and (4) there is a gender gap in attitudes toward taxation at the federal, state and local levels.
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The Window Tax: A Case Study in Excess Burden
Wallace Oates & Robert Schwab
Journal of Economic Perspectives, Winter 2015, Pages 163-180
Abstract:
The window tax provides a dramatic and transparent historical example of the potential distorting effects of taxation. Imposed in England in 1696, the tax — a kind of predecessor of the modern property tax — was levied on dwellings with the tax liability based on the number of windows. The tax led to efforts to reduce tax bills through such measures as the boarding up of windows and the construction of houses with very few windows. In spite of the pernicious health and aesthetic effects and despite widespread protests, the tax persisted for over a century and a half: it was finally repealed in 1851. Our purpose in this paper is threefold. First, we provide a brief history of the tax with a discussion of its rationale, its role in the British fiscal system, and its economic and political ramifications. Second, we have assembled a dataset from microfilms of local tax records during this period that indicate the numbers of windows in individual dwellings. Drawing on these data, we are able to test some basic hypotheses concerning the effect of the tax on the number of windows and to calculate an admittedly rough measure of the excess burden associated with the window tax. Third, we have in mind a pedagogical objective. The concept of excess burden (or "deadweight loss") is for economists part of the meat and potatoes of tax analysis. But to the laity the notion is actually rather arcane; public-finance economists often have some difficulty, for example, in explaining to taxpayers the welfare costs of tax-induced distortions in resource allocation. The window tax is a textbook example of how a tax can have serious adverse side effects on social welfare. In addition to its objectionable consequences for tax equity, the window tax resulted in obvious and costly misallocations of resources.
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Sung Hoon Kang, Mark Skidmore & Laura Reese
Real Estate Economics, forthcoming
Abstract:
In this article, we examine the effects of changes in property tax rates and school spending on residential and business property value growth in southeast Michigan. We use panel data for 152 communities in the five counties surrounding Detroit between the years 1983 and 2002, a period during which state government mandated major changes to school finance. Using the mandated changes to identify causality, we find that: (1) residential property values are more responsive to school spending changes than property tax rate changes; (2) business property values are more responsive to tax rate changes than school spending changes; and (3) business property values are more sensitive to changes in tax rates as compared to residential property. We also examine tax competition effects on property value growth, showing that tax competition plays an important role in property value growth in the southeast Michigan region.
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U.S. Casino Revenue Taxes and Short-Run Labor Outcomes
Kahlil Philander et al.
Journal of Policy Modeling, forthcoming
Abstract:
This study examines the effect of casino tax rate levels on short-run labor decisions by casino firms. Using a panel data set consisting of all states with legal commercial casino gambling from 1998 to 2009, a 2SLS fixed-effect model that also uses aggregate and sin-based excise taxes as instruments is estimated. We find that maximum casino tax rates negatively affect casino employment with an inelastic average effect of -0.6. We estimate state tax revenue changes per employee from a 1% increase in the gross gaming revenue tax, finding that states with comparatively low tax rates could increase public revenue with relatively small losses in employment. Nevada, New Jersey, and South Dakota – each with maximum tax rates currently below 10% – could increase tax revenue by more than $430,000 per estimated employee lost from the tax change. Results from this study should be included in future analysis of casino tax impacts on economic efficiency.
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As Certain as Debt and Taxes: Estimating the Tax Sensitivity of Leverage from State Tax Changes
Florian Heider & Alexander Ljungqvist
Journal of Financial Economics, forthcoming
Abstract:
Using staggered corporate income tax changes across U.S. states, we show that taxes have a first-order effect on capital structure. Firms increase leverage by around 40 basis points for every percentage-point tax increase. Consistent with dynamic tradeoff theory, the effect is asymmetric: leverage does not respond to tax cuts. This is true even within-firm: tax increases that are later reversed nonetheless lead to permanent leverage increases. The treatment effects are heterogeneous and confirm the tax channel: tax sensitivity is greater among profitable and investment-grade firms which respectively have a greater marginal tax benefit and lower marginal cost of issuing debt.
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Public debt, economic growth and nonlinear effects: Myth or reality?
Balázs Égert
Journal of Macroeconomics, March 2015, Pages 226–238
Abstract:
This paper puts a variant of the Reinhart-Rogoff dataset to a formal econometric testing to see whether public debt has a negative nonlinear effect on growth if public debt exceeds 90% of GDP. Using nonlinear threshold models, we show that finding a negative nonlinear relationship between the public debt-to-GDP ratio and economic growth is extremely difficult and sensitive to modelling choices and data coverage. In the very rare cases when nonlinearity à la Reinhart and Rogoff can be detected, the negative nonlinear correlation kicks in at very low levels of public debt (between 20% and 60% of GDP). These results, based on bivariate regressions for central government debt from 1946 to 2009, are confirmed on a shorter dataset including general government debt (1960-2010) using a multivariate growth framework and Bayesian model averaging.
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Municipal Housekeeping: The Impact of Women's Suffrage on Public Education
Celeste Carruthers & Marianne Wanamaker
NBER Working Paper, January 2015
Abstract:
Gains in 20th century real wages and reductions in the black-white wage gap have been linked to the mid-century ascent of school quality. With a new dataset uniquely appropriate to identifying the impact of female voter enfranchisement on education spending, we attribute up to one-third of the 1920-1940 rise in public school expenditures to the Nineteenth Amendment. Yet the continued disenfranchisement of black southerners meant white school gains far outpaced those for blacks. As a result, women’s suffrage exacerbated racial inequality in education expenditures and substantially delayed relative gains in black human capital observed later in the century.
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Lottery tax windfalls, state-level fiscal policy, and consumption
Zhi Da, Mitch Warachka & Hayong Yun
Economics Letters, April 2015, Pages 9–12
Abstract:
We find that lottery tax windfalls finance higher state-government expenditures on supplemental security income that increase consumption, but only during bust periods. Wealth transfers from lottery winners to low income households enable fiscal policy to stabilize consumption during bust periods.
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The Effects of Regulatory Scrutiny on Tax Avoidance: An Examination of SEC Comment Letters
Thomas Kubick et al.
University of Kansas Working Paper, December 2014
Abstract:
This study examines the tax avoidance behavior of firms prior to the issuance, and following the resolution, of SEC tax comment letters. We find that firms that appear to engage in greater tax avoidance are more likely to receive a tax-related SEC comment letter. We also find that firms receiving a tax-related SEC comment letter subsequently decrease their tax avoidance behavior consistent with an increase in expected tax costs. Additionally, we document evidence consistent with other firms which receive non-tax related comment letters reacting to multiple publicly disclosed tax-related comment letters within their industry by lowering their reported level of tax avoidance, consistent with an indirect effect of regulatory scrutiny. Finally, we present evidence that investors positively value within-firm increases in tax avoidance but assign lower valuations after receipt of a tax-related comment letter, consistent with investors anticipating additional tax-related costs from regulatory scrutiny.
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The Politics of Local Government Stabilization Funds
Douglas Snow, Gerasimos Gianakis & Jonathan Haughton
Public Administration Review, March/April 2015, Pages 304–314
Abstract:
The adoption, maintenance, and prudent use of budgetary stabilization funds are fundamental financial management precepts, yet the variables that influence the size of these funds are poorly understood. This article contributes to the stabilization fund literature by examining the extent to which variation in stabilization fund balances across municipalities and over time can be explained by a community's political culture and financial management capacity. The balanced panel research design includes archival data for 239 Massachusetts municipalities for each of 18 fiscal years. Stabilization fund balances are lower in communities with either an anti-tax or a pro-spending political culture. Stabilization fund balances are higher in communities that have the financial management capacity to accumulate budget surpluses that can be made available for appropriation to stabilization funds. Communities with the open town meeting form of government also have higher stabilization fund balances.
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Another look at tax policy and state economic growth: The long-run and short-run of it
Bebonchu Atems
Economics Letters, February 2015, Pages 64–67
Abstract:
We use a spatial Durbin model to estimate the effects of taxes on state economic growth. Results indicate that taxes have negative short-run and long-run own-state and spatial spillover effects on state growth.