Available online at International Tax & Public Finance is “Switch toward tax centralization in Italy: a wake-up for the local political budget cycle” by Massimiliano Ferraresi, Umberto Galmarini, Leonzio Rizzo, and Alberto Zanardi. Here is the abstract:

Are the incentives to expand expenditure before local elections affected by the composition of local governments’ revenues? We explore this issue by exploiting the Italian government bill that in 2008 replaced the municipal tax on main residence with a vertical transfer. Relying on staggered dates of municipal elections to identify the effect of the reform, we find evidence of a political budget cycle, but only for municipalities that in 2008 were in their pre-electoral year. The result suggests that a lower degree of municipal tax autonomy strengthens the incentives to expand the size of the budget before the elections.

You get a sense of the identification strategy from the abstract, but it seems worth noting that the paper finds support for a political budget cycle in the broadest terms — that the revenues and expenditures are correlated with election cycles — than any specific political budget cycle theory. In particular, they find that after centralization both current expenditures and revenues from charges/fees increased by equivalent amounts. Under some theories of political budget cycles, governments become more deficit prone as they cut taxes and increase spending just prior to the election cycle to protect incumbents, but that isn’t obviously occurring here. The authors seem to think it is a relative change in the political price for own source revenues that translates into spending:

Our interpretation of the result is that the primary channel through which the reform prompted incentives for expanding the budget in pre-electoral years was by lowering the costs for financing expenditure increases with own revenue sources. Before the 2008 reform, the three main sources of own revenues of Italian municipalities were the property tax on main residence, whose burden is entirely borne by residents who are also voters at the local level, users’ fees and charges, whose burden is mostly borne by residents directly benefiting from municipal services, and the property tax on additional residence, whose burden is in some cases mostly borne by non-residents, as in municipalities located in touristic areas. Since taxing the main residence is highly unpopular, before 2008 most municipalities applied tax rates on main residence just above the minimum level imposed by the central government, while they exerted more effort in the taxation of additional residences and in the determination of fees and charges, though the room to rely heavily on the latter was narrow, since residents were already taxed on main residence. Under these conditions, local administrators had little capacity of making leverage on own revenues to finance expenditure expansions for electoral purposes. The 2008 reform changed the setting. By relieving local administrators from having to impose a burden on residents on their main property, and by substituting the revenue loss with a compensating transfer, the reform considerably reduced the political costs incurred by local administrators to make leverage on user fees and charges to finance pre-electoral expenditure hikes.

I’ve previously blogged recent research on PBCT in the post Research on Overlapping Political Budget Cycles.

The March 2019 issue of Public Finance Review has been published:

I teach public budgeting & finance as part of the core in our MPA program. Budgets are a managerial tool, but also a exercise in persuasion. Justifications are required on the terms of the decision makers, not your own. For that reason, I did a segment on political rhetoric (slides annotated with comments downloadable here) with an emphasis on three topics:

1. Traps in Talking Past One-Another
2. Logical Fallacies
3. Diagramming Arguments

I like to imagine these help contribute to a more civil and higher quality discourse. Feel free to make use of the slides (would appreciate knowing if you do), and I would welcome any feedback. A little about each topic…

Traps in Talking Past One-Another

If you and your counter party cannot understand each other you won’t get very far in persuasion. Furthermore, if you have at least a working understanding of the ideology you are dealing with (not their caricature), you can choose the more favorable frames and better anticipate their questions. I had the students read Arnold Kling’s Three Languages of Politics, which is $4 at Amazon or free at Cato, so in lecture we went through a news article on privatized firefighting in California.

Discussions of what constitutes a “Right” is another pitfall, so I provided the positive and negative right dichotomy, which is another good working conceptualization of rights provided you don’t overthink it.

Lastly, I discussed anecdotes. Anecdotes are perhaps the lowest status form of evidence, which is interesting in part because as a professor (a high status position in the world of evidence dispensaries) I use anecdotes all the time to teach. I think the problem is one of conflating the use of anecdotes to make a logical point versus a statistical one. I think gun control and border immigration control are good examples where groups talk past one another (perhaps deliberately) by differences in the intention of their anecdotes.

Logical Fallacies

There are hundreds of fallacies, but I went with ones I felt were most common in public economics debates:

• Genetic Fallacy
• Sunk Cost Fallacy
• Ecological Fallacy
• Fallacy of Composition
• False Analogy
• Ad hominem
• Motte and Bailey Tactic
• False Indicator Fallacy (Ok, I made this one up, it probably is already nested in another fallacy)
• Appeal to Tradition
• Post hoc ergo propter hoc
• Politician’s Syllogism
• Argument from Ignorance
• Fallacy Fallacy

Diagramming Arguments

We finished with a overview on how to diagram an argument. Of course this is helpful in preparing your own argument and in critiquing others. I distributed the recent NYT op-ed by Saez and Zucman and had them try their hand at it before showing them a rough sketch of my own.

From the call:

We are seeking papers for our 8th annual conference, to be held July 15-16, 2019, at the Brookings Institution. The Municipal Finance Conference aims to bring together academics, practitioners, and state and local government officials to discuss recent research on municipal finance and economic and fiscal issues affecting state and local governments more broadly. In recent years, paper topics have included changing rules for advance refunding, the impact of local newspaper closures on municipal borrowing costs, an analysis of the Kansas tax reform, pricing and ownership trends in U.S. green bonds, issues in financing public pensions, and changes in the municipal advisor market in the post Dodd-Frank era.

Understanding municipal markets means understanding what influences regional, state and local economic and fiscal conditions, so we are interested in a broad assortment of papers.

• Deadline for proposals is Friday, March 1, 2019.
• We are seeking proposals for a broad variety of topics on any aspect of state and local fiscal policy and finance.
• Papers do not have to be original to this conference. We welcome papers that have been presented elsewhere.
• Please send your proposal or abstract to Haowen Chen (hnchen@brookings.edu).
• Selection decisions will be made by Friday, April 5, and drafts of selected papers will be due by Friday, June 7.

Additional details about the conference can be found on its website – check back for updates.

Public Finance & Management has issued a call for paper proposals for a symposium themed “Behavioral Public Finance: New Approaches to Old Questions.” The Guest Editors are Salvador Espinosa (San Diego State University), Wie Yusuf (Old Dominion University), and Kenneth Kriz (University of Illinois-Springfield). Attendees of last fall’s ABFM conference might have caught their roundtable on a similar theme. Below is the call.

The “rational” model of decision-making has traditionally been the lens through which public finance decisions and outcomes have been studied. In this model, rational actors evaluate all possible outcomes and make decisions based on the expected utility of the outcomes. Risk or uncertainty is assessed through using objective weights representing the probability of events, producing risk-adjusted measures of potential outcomes.

However, scholars like Tversky and Kahneman (1974), Thaler (1991) have proposed another theoretical framework to understand how individuals make decisions. Behavioral economics stresses that economic actors approach uncertain decisions through the use of heuristics because of the overwhelming complexity of evaluating the outcomes and probabilities of even relatively small problems. In essence, in the behavioral approach the weights used in the decision making process are not objectively determined but rather subjectively determined and are influenced by which heuristic is chosen.

McCaffery and Slemrod (2006) suggested a possible intersection between behavioral economics and public finance. Their proposal was to analyze broad clusters of questions concerning the forms of public finance mechanisms, problems of inter- temporal choice, and models of taxpayer compliance.  While there have been attempts to incorporate behavioral principles to address applied public finance questions (see e.g., Kriz, 2005, 2004; O’Connell and Yusuf, 2011; Yusuf, et.al., 2018 and Brunner, Robbins and Simonsen, 2018) , there is a need for further research demonstrating the application of behavioral economics and finance theories to public finance issues.

Recognizing this need, Public Finance and Management invites scholars to contribute to a symposium issue of the journal. We invite article submissions that explore the many dimensions of public finance behavior, either theoretically or empirically.

Potential topics include (but are not limited to):

• Critical reviews of the pertinent literature;
• Theories and models of decision-making and their applicability to the public finance and management field;
• The effect of heuristics on public finance decisions;
• The impact of biases on support for public spending or taxes, tax compliance issues approached from a behavioral lens; and
• Behavioral approaches to public finance theory, and experimental results assessing public finance theories.

Proposals are due to kkriz4@uis.edu by February 28. Authors will be notified that they will be invited to submit a full manuscript by March 15. Final manuscripts are due August 15, 2019. Reviews and final acceptance will occur through October.

A ranking article of public finance journals including PFM can be found in the Journal of Public Economic Theory, 10 (1), 2008, pp. 55-76.

In addition, authors may choose to present (drafts of) their papers at the 11th Global Conference of the Forum for Economists International in Amsterdam, Netherlands, May 24-27, 2019 and receive comments additional to the peer review. Note that participation in the conference is optional and unrelated to the decision to accept or reject a manuscript for publication in PFM.

The Economics of Governing has published online “A Test of the Institutionally-Induced Equilibrium Hypothesis: On the Limited Fiscal Impact of Two Celebrity Governors” by Roger Congleton and Yang Zhou, both of West Virginia University. The paper looks at the election of Jesse Ventura and Arnold Schwarzenegger and as given away by the title it finds little impact on their state’s expenditures or deficits. From the introduction (footnotes omitted):

Our main interest in this study is the extent to which state level checks and balances tend to minimize the effects of changes in the individuals holding the post of governorship. The usual approach to do so empirically would be to adopt an international perspective and attempt to determine how differences in federal institutions affect a nation’s policies. An enormous body of international and intra-national empirical research supports the contention that institutions matter in the sense that they affect the kinds of policies adopted by a national government. Our approach is the reverse of the normal one in that we hold institutions constant and attempt to determine whether “shocks” in the forms of very unusual governors affect the fiscal policies of the states governed.

The main tool for the causal evidence is a new variant on the synthetic control method. Here is the full abstract:

The governorships of Jesse Ventura of Minnesota and Arnold Schwarzenegger of California provide two natural experiments for testing the institutionally induced stability hypothesis. Both men rose to their governorships through unique career and electoral paths that would reduce the stabilizing effects of partisan commitments and electoral competition, which would tend to increase their impact on public policy. Nonetheless, our evidence suggests that despite their unique backgrounds and paths to office neither governor had a statistically significant impact on their state’s expenditures or deficits.

Assuming one regards Trump as another celebrity executive, there is an interesting discussion to be had as to what can be learned from this study about the current federal government.

I am very pleased that Tima Moldogaziev has joined Public Finance Papers as an author. Tima is an associate professor of public administration and finance at the University of Georgia. He is a prolific scholar with over 30 peer reviewed journal articles and four books to his credit in the last eight years. I’ve previously blogged a paper of his on special districts in the fiscal commons here.

Welcome Tima!