RIP, John L. Mikesell


Last Thursday, John Mikesell passed away after a prolonged bout with cancer, about which I will just say that he was characteristically stubborn to the end.

As a walking encyclopedia of tax policy, John was a giant in public finance, collecting lifetime achievement awards from the National Tax Association and the Association for Budgeting and Financial Management. He was longtime editor of Public Budgeting and Finance, and served in numerous practitioner positions in service to the public. John was a Bloomington-born Indiana native, so he was particularly touched to receive the Sagamore of the Wabash award from the governor in recognition of his years of service in advising the legislature on public revenue forecasts and all manner of tax policy subjects.

If you’d like to walk through a “vintage Mikesell” article, you would do well with this working paper from last year on Retail Sales Taxation in the New Economy. He had a knack for exploring a topic in a way that cut directly to the questions policy makers were asking.  However, John was famous for his footnotes. I still read his papers all footnotes first, and if you follow in suit you’ll be rewarded with interesting anecdotes, historical details, and amusing jabs at legislators. My favorite “Mikesellian Footnote” is the first in a paper summarizing state programs that granted amnesty to self-reporting tax delinquents:

The first tax amnesty on record was reported on the Rosetta stone, an amnesty declared by Ptolemy V Epiphanes in Egypt, circa 200 BC. The stone itself expressed the appreciation of the priesthood for the program. It is not clear whether any state amnesties were based on this experience.

It is difficult to unite his work as he published on virtually every subject in public finance, but I will try to do so briefly. In my estimation, John was a very Schumpeterian scholar. Joseph Schumpeter is best known for his characterizing of capitalism as “creative destruction,” but what brings him and John together was their mode of inquiry in studying both history and how organizations really worked at a practical level. Schumpeter, for instance, required all of his econ PhD students to take accounting, rationalizing that anyone who didn’t understand t-accounts wouldn’t understand business production choices. John likewise approached subjects this way but to greater lengths. For John, to study something like sales taxes in the American states meant he studied how states taxed sales and he would start at the cash register. He would learn how everyone from the cashier, to the tax accountant, to the tax lawyer writing the legislation would have to do their job. Ideally, he would try to figure out how everyone’s jobs evolved over time. How did resource-constrained state tax collector’s enforce the use tax during the Great Depression? Pull over and search moving vans!

This approach began in his earliest work with his Masters thesis under John Due who, in addition to his father (also an IU public finance scholar), was an important professional role model for him. With admiration John said that Due in his sixties would arrive early in the morning so excited to get back to his work that he would run down the hallway when he’d reach his floor. John likewise loved his work and only sped up his research program in his retirement.

Not only did I never hear John once complain of his students or his teaching, he described it as his main reason for continuing his university employment. Research was fun, and service was a tolerable exchange for the gifts of teaching. His only reason for retiring was that he could not trust his health well enough to commit to teaching for a full semester. He liked writing exam questions, preparing notes, pulling examples from the news, etc. He thought serving as a member of the Indiana Revenue Technical Forecast Committee made him a better teacher even after many decades of service, so he stuck with that to the very end as well. He was proud of his students, and had a way of charming them with a gruff demeanor.

Speaking of demeanor, I think everyone who encountered John would come away with a story of him. For some he was an acquired taste and this was not hard to understand. A friendly colleague once remarked that he had the perfect mustache for his personality, an observation John would find amusing because this was not entirely unintentional. While he was outwardly very witty, I hope this anecdote conveys his subtle humor-behind-the-stern style that students would learn to love over a 16 week semester after perhaps fearing it in week 1. It has been my fortune to have had eleven years.


*The Lifecycle of the 47 Percent*

My previous post covered David Splinter’s “Who Pays No Tax” and so I’d like to point to another June publication, this one in the National Tax Journal, by Don Fullerton (University of Illinois at Urbana-Champaign) and Nirupama Rao (University of Michigan) on “The Lifecycle of the 47 Percent“, which of course refers to the Americans with no federal income tax liability. The highlights are in the abstract:

News that 47 percent of Americans in 2009 paid no federal income tax drew considerable attention. For a longer view of not paying tax and of receiving transfers, we use the Panel Survey of Income Dynamics. Over all individuals, we find that 68 percent owe no income tax at least one year, of which 21 percent pay the following year and 45 percent pay within five years. Also, overall, 60 percent receive transfers other than Social Security at least one year, of which nearly 47 percent stop the next year and more than 94 percent stop within 10 years.

The paper is gated at the link but seems to be ungated here.

*Who Pays No Tax?*

In the July Contemporary Economic Policy is “Who Pays No Tax? The Declining Fraction Paying income Taxes and Increasing Tax Progressivity” by David Splinter (Joint Committee on Taxation). Here is the 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.

One interesting takeaway from the paper is the historical context of these figures. Of course, the income tax started out vary narrow, but after it broadened it has hovered in that 30-35% range much of the time. Here is the fraction paying no tax from Splinter’s Figure 1:


Splinter uses a shift-share decomposition  to attribute the fluctuations in the share of non-payers to tax policy changes, demographic changes, and income distribution. The big driver, as noted in the abstract, turns out to be the tax policy changes (converting 2015 tax burdens into 1985 counterfactual tax burdens with changes to the EITC, new tax credits, and indexing of personal exemptions and standard deductions. These policy changes seem to account for much, about 13 of the 16 points, of the increase from 1985 to 2015. Working age distributions and household formation don’t do much work.

For all the attention put on top marginal income tax rates, it is also quite interesting to observe the correlation between the fraction paying no tax and individual income tax progressivity (as measured by the Kakwani Index), as in Splinter’s Figure 6:


And yes, you are reading correctly that the TCJA increased individual income tax progressivity, as the big-ticket potentially regressive elements were in revisions to corporate income and estate taxes.

David Splinter has several interesting pieces along these lines for subjects related to income inequality and income mobility, so his website is worth checking out. Here is Vox coverage last year of his back-and-forth with Saez and Piketty.

July (2019) issue of Public Finance Review released

Here is the link to the issue. I found particularly interesting the replication study by Calabrese and Gupta, as well as the fact that almost 60 percent of Germans oppose taxing inherited wealth (Bischoff and Kusa). Titles, authors, and abstracts below:


Should Wealth Transfers Be Taxed? Evidence from a Representative German Survey
Ivo Bischoff and Nataliya Kusa
In a representative survey, German citizens are asked whether inherited wealth beyond a certain amount should be taxed. Almost 60 percent state that it should not be taxed. Building on this survey, we identify factors that predict this opposition to the taxation of inherited wealth. We find monetary self-interest, redistributive preferences, and the adherence to traditional values to matter. Women are more likely to oppose wealth transfer taxes. We account for interdependencies to other intrafamilial transfers. Subjects’ attitude toward wealth transfer taxes does not depend on their personal experience in giving long-term care. Yet subjects who expect the typical German family to reward intrafamilial caregiving through higher wealth transfers are less likely to oppose the taxation of inherited wealth. The opposite holds for subjects who expect these taxes to incentivize earlier inter vivos transfers.


Evading the Catastrophic Costs of Nursing Home Care: A Theoretical Inquiry
Gideon Yaniv
While many countries operate publicly funded programs to help care-needing elderly people finance the catastrophic costs of nursing home care, eligibility to public assistance may be means tested. To qualify for a means-tested program, applicants must first exhaust (spend down) their financial assets on privately paying for nursing home care, thereby wiping out their lifetime savings and children’s inheritance. They may naturally consider the possibility of hiding assets from the health agency, consequently shifting the financial burden to taxpayers. The present article adjusts two classical tax evasion models to capture the decision to evade the costs of nursing home care, focusing on the implications on the evaded costs and the program’s deficit of attempting to cope with the escalating costs of nursing home care by imposing a cost-sharing premium on the applicants’ adult children. Some insights on the socially optimal level of the cost-sharing premium are finally discussed.


Fiscal Decentralization, Budget Discipline, and Local Finance Reform in Russia’s Regions
Michael Alexeev, Nikolay Avxentyev, Arseny Mamedov, and Sergey G. Sinelnikov-Murylev
Using a panel of Russian regions, we estimate the link between intraregional fiscal decentralization and regional budget deficits. Although Russia’s regions are not as autonomous (either politically or fiscally) as regions in some other federal states, we obtain robust and statistically and economically significant results. Specifically, expenditure decentralization has a positive effect on consolidated regional budget balances, while transfer dependence of municipalities is associated with higher deficits. The impact of revenue decentralization depends on whether a regional government can use its tax revenue assignments with the same high degree of discretion that generally characterizes explicit fiscal transfers. We show that a 2009 local finance reform that limited the discretion of regional governments to assign regional tax revenue to municipalities has changed the effect of tax decentralization on budget discipline.


Preferences over Public Good, Political Delegation, and Leadership in Tax Competition
Rupayan Pal and Ajay Sharma
Leadership (sequential choice) and political delegation are two mechanisms suggested to restrict “race-to-the-bottom” in tax competition. In this article, we analyze whether these two mechanisms when combined together would lead to unilaterally higher taxation or not. We show that political delegation with leadership in tax competition not only restricts race-to-the-bottom but also mitigates the possibility of overprovision of public good. In sequential choice game, only the follower region delegates taxation power to the policy maker but not the leader region. This puts a check on intensity of tax competition and restricts the under provision of public good.

Replication Studies

A Replication of “Agency Problems of Excess Endowment Holdings in Not-for-profit Firms” (Journal of Accounting and Economics, 2006)
Thad D. Calabrese and Anubhav Gupta
Core, Guay, and Verdi explore whether excessive levels of cash (“endowments”) are associated with nonprofits’ growth in program spending and fixed assets, agency problems, or donors’ monitoring efforts. We replicate their finding that excess endowments are unrelated to growth in program spending. However, unlike the original article, we find that persistent excess endowments are associated with growth in fixed assets. Further, when we alter the model specification to better align with theory, we find excess endowments increase program expense ratios and lead to higher growth in program service spending as well as capital investment. We are also able to replicate the original article’s finding that excess endowments are related to higher CEO and management compensation. However, when we again alter the model specification, we find excess endowments are associated with compensation declines. Overall, we find weaker evidence of a relationship between excess endowments and agency problems than the original article.


A Replication Study of “Openness, Country Size, and Government Size” (Journal of Public Economics 2009)
Andrew Musau
Ram (Journal of Public Economics, 93, 213-218, 2009) questions the body of influential research suggesting that there is a negative association between country size and government size, and country size and openness, which may account for the positive association between openness and government size. Using data from the Penn World Table (PWT), he shows that while openness is positively related to government size, fixed-effects estimates show little evidence of the aforementioned negative associations. We replicate Ram’s results using his data set and a newer revised version of the same data set and find that the ensuing government size–openness association is dependent on the version of the PWT data and the composition of the sample. In addition, we find some evidence of a negative association between country size and government size in the larger sample, but there remains no clear association between openness and country size.


Reply to “A Replication Study of ‘Openness, Country Size, and Government Size’ (Journal of Public Economics 2009)”
Rati Ram
Andrew Musau is able to replicate almost exactly Ram’s estimates from Penn World Table 6.1. Like Ram, Musau is also unable to show a significant negative association between country size and openness and between country size and government size of the kind postulated by Alesina and Wacziarg. To shed further light on the issue, fixed-effects estimates of the three core regressions are obtained from the widely used World Bank data for 174 countries covering the period 1990–2015. The estimates show a highly significant positive association between openness and government size, further reinforcing Ram’s estimates and those from Musau’s 189-country Penn World Table 7.1 sample. While the new country size estimates in openness and government size regressions are negative, the latter lacks significance at any meaningful level. Therefore, the substantive conclusion remains the same as indicated by Ram; while the predominance of evidence supports Rodrik’s thesis of a positive association between openness and government size, statistically significant evidence is lacking to support the Alesina–Wacziarg proposition that the aforesaid positive association is due to a combination of the negative association between country size and openness and between country size and government size.

*Political Budget Cycles and the Civil Service*

One of my internal motivations for starting this blog was to have a commitment device for staying current and broad in the public finance literature. One of the surprises that has come of this venture is the amount of good research on political budget cycles, a subject that I thought was basically dead. A year ago, I would have thought political budget cycle research was basically non-existent and what remained likely to be uninteresting.

The July issue of JPubE posses another example of how wrong I was in “Political Budget Cycles and the Civil Service: Evidence from Highway Spending in US States” by David Bostashvili (Amazon) and Gergely Ujhelyi (University of Houston). Here is the abstract

We study political budget cycles in infrastructure spending that are conditional on bureaucratic organization. Bureaucrats can facilitate or hinder politicians’ ability to engage in voter-friendly spending around elections. To test this idea, we use civil service reforms undertaken by US states in the second half of the 20th century to study political budget cycles in highway spending under civil service and patronage. We find that under patronage, highway spending is 12% higher in election years and 9% higher in the year before an election. By contrast, under civil service highway spending is essentially smooth over the electoral cycle. These findings provide a novel way through which civil service rules can stabilize government activity.

Of course if you’re still with me, you’re wondering how the authors define and identify “patronage” and “merit” systems in the states. The answer is that the authors are actually studying  the adoption of merit system adopted throughout the 20th century that mimicked legislation at the state level. These acts included a competitive civil service exam, prohibited mandatory political services from employees, and established a bipartisan civil service commission. Therefore, “patronage” systems are states that did not adopt those laws. Here is a neat preliminary figure the presents per capita highway spending over the state electoral cycle from 1960-1995 in the 44 states with 4-year election cycles:


And if you compare the 11 states that switch during their study period from patronage to merit, here is how they compare before and after:


The rest of the paper goes on to show that this analysis holds up when you use a regression to control for other factors so that you get these graphs but with confidence intervals.

Score one for the Deep State.

Fiscal Limits with Voter Overrides

A prominent feature of subnational governments in the US is that they face legal constraints that prevent them from raising taxes or spending levels by any amount they may want. Indiana, for instance, restricts the local budget levy to a fraction of statewide nonfarm personal income growth. There are ways to circumvent these limits, however, and a popular way is to allow for voter overrides. You will recognize this as something like “the city can increase its budget up to 5% without voter approval this year, but anything more than that will require a special voter referendum.”

A recent JPubE paper by Stephen Coate and Ross Milton investigates the optimal determination of the limits in the presence of voter overrides.

This paper studies optimal fiscal limits in the context of a simple political economy model. A politician chooses the level of taxation for a representative citizen but is biased in favor of higher taxes. A constitutional designer sets a tax limit before the citizen’s preferred level of taxation is fully known. The politician is allowed to override the limit with the citizen’s approval. The paper solves for the optimal limit and explains how it is impacted by the possibility of overrides. The paper also shows that the citizen’s welfare can be enhanced if the designer imposes a limit on the politician’s override proposals.

The authors take inspiration from the literature on the delegation problem, where an agent must choose a policy that impacts both principal and agent’s payoffs. The payoffs depend on a state of nature, which prior to the policy choice will only be observed by the agent. Here, the policy is the level of spending or taxation that impacts welfare of a representative citizen (the principal) and the politician (the agent) is assumed to be biased in favor of a larger spending. Coate and Milton extend this to determining the optimal fiscal limit, which sets up their main contribution: comparing to a extension where voters can override the limit. This is done by allowing the politician to propose a policy in excess of the limit which is subjected to the vote. If voters pass the proposal, this is adopted; if not they offer a second proposal which respects the limit. The primary tool here for the politician is agenda-setting power over the citizen. Here is their summary of the main results:

There are three main results. First, with overrides, the optimal limit is at least as stringent as without. […] Second, with overrides, the typical monotonic relationship in delegation models between the agent’s bias and the tightness of the limit does not necessarily arise. […] Third, the institutional arrangement consisting of a limit and an override provision can always be strictly dominated by an arrangement that also specifies an override limit. Limiting the proposal the politician can make at the override stage prevents him from fully exploiting his agenda-setting power. The availability of an override limit changes the calculus underlying the regular limit. Since a limit increases the benefit of overrides, the regular limit is often tighter, making overrides more likely.

NTA Spring Symposium 2019

It starts tomorrow at the National Press Club in Washington DC. I’ll be there both days and presenting on Friday, so say hello if you see me around.


8:45-9:00 am


Andrew Lyon, President, National Tax Association

9:00-10:30 am

UNCERTAINTY (A Panel Discussion)

Organizer: Kyle Pomerleau, Tax Foundation
Moderator: Richard Rubin, The Wall Street Journal
Jennifer Blouin, The Wharton School, University of Pennsylvania
Chye-Ching Huang, Center on Budget and Policy Priorities
Jeff Wrase, Senate Finance Committee

10:30-10:45 am


10:45-12:15 pm


Organizer: Jean-Pierre Aubry, Center for Retirement Research at Boston College
Moderator: Ranjana Madhusudhan, New Jersey Department of the Treasury

Will Pensions and OPEBs Break State and Local Budgets An Update (SLIDES)

Jean-Pierre Aubry, Center for Retirement Research at Boston College

How to Pay for Social Security’s Missing Trust Fund(SLIDES)
Geoffrey Sanzenbacher, Center for Retirement Research at Boston College

The Public Finance of State and Local Pension Sustainability
Jamie Lenney, Bank of England, Byron Lutz, Board of Governors of the Federal Reserve System, and Louise Sheiner, Brookings Institution

Discussant: Richard Johnson, Urban Institute

12:15-1:45 pm


Speaker: Lael Brainard, Member of the Board of Governors of the Federal Reserve System
Presentation of Davie-Davis Award for Public Service

2:00-3:30 pm


Organizer: George Plesko, University of Connecticut (for the American Tax Policy Institute)
Moderator: Mindy Herzfeld, University of Florida

Has TCJA Changed the Geometry of International Tax Planning A Riff on Circles, Squares, and Triangles (SLIDES)
Michael Donohoe, University of Illinois at Urbana-Champaign, Gary McGill, University of Florida, and Edmund Outslay, Michigan State University

Todd Castagno, Morgan Stanley
David Noren, McDermott Will & Emery LLP

3:30-3:45 pm


3:45-5:15 pm


Organizer: James Mackie, Ernst & Young LLP
Moderator: Larry Kotlikoff, Boston University
Summary of Results: Kerk Phillips, Congressional Budget Office
Seth Benzell, Boston University
John Diamond, Rice University
Richard Evans, University of Chicago
Jagadeesh Gokhale, Penn Wharton Budget Model
Rachel Moore, Joint Committee on Taxation
Brandon Pizzola, Ernst & Young LLP

5:15-6:15 pm



9:00-10:30 am


Organizer: Dennis Zimmerman, American Tax Policy Institute (for the American Tax Policy Institute)
Moderator: Roberta Mann, University of Oregon Law School

Using Climate Policy To Address Inequality Rethinking the Green New Deal (SLIDES)
Aparna Mathur, American Enterprise Institute

States’ Growing Dependence on Sin Taxes
Richard Auxier and Lucy Dadayan, Urban-Brookings Tax Policy Center

Wealth Taxation and Policy Uncertainty
Daniel Hemel, University of Chicago Law School

Len Burman, Urban-Brookings Tax Policy Center
Norton Francis, Director of Revenue Estimation, DC Office of the Chief Financial Officer
Jason Oh, UCLA School of Law

10:30-10:45 am


10:45-12:15 pm


Organizers: John Mikesell and Justin Ross, Indiana University
Moderator: Joseph Cordes, George Washington University

The Barriers Created by Complexity: A State-by-State Analysis of Local Sales Tax Laws in Light of the Wayfair Ruling 
Whitney Afonso, University of North Carolina

How Wayfair Changed Everything But Also Nothing (SLIDES)
Jared Walczak, Tax Foundation

After Wayfair What are State Use Taxes Worth (SLIDES)
John Mikesell and Justin Ross, Indiana University

The Pennsylvania Experience After Wayfair (SLIDES)
Amy Gill, Pennsylvania Department of Revenue

Ranjana Madhusudhan, New Jersey Department of Treasury
Felipe Lozano-Rojas, Indiana University

12:15-1:45 pm


Speaker: Dana Trier, Davis Polk & Wardwell

2:00-3:30 pm


Organizer: Itai Grinberg, Georgetown University Law Center
Moderator: Itai Grinberg, Georgetown University Law Center

Recent Developments in Digital Services Taxes: The UK Debate
John Vella, Oxford University

The Superiority of the Digital Services Tax to Significant Digital Presence Proposals (SLIDES)
Wei Cui, University of British Columbia

Superiority of the VAT to Turnover Tax as an Indirect Tax on Digital Services (SLIDES)

Superiority of the VAT to Turnover Tax as an Indirect Tax on Digital Services (Paper)

Karl Russo, PricewaterhouseCoopers LLP

What Do We Know About Global Residual Profit Allocation? A First Assessment of its Efficiency and Revenue Impact
Sebastian BeerRuud de MooijShafik HebousMichael Keen, and Li Liu, International Monetary Fund