That’s the title of a piece forthcoming in Tax Law Review by Wolfgang Schoen (Max Planck Institute), here is the (long) abstract:

Political economy assumes that taxation and democracy interact beneficially when there exists “congruence” or “equivalence” among those who vote on the tax, those who pay the tax, and those who benefit from the tax. Yet this only holds true when we look at the community of taxpayers as an aggregate, not at the position of the individual taxpayer. Individuals might regard democratic decision-making as a tool for the majority to exploit the minority. They might also perceive powerful special interest groups to extract preferential tax treatment to the detriment of other constituencies.

In the international situation, the notion of “congruence” or “equivalence” comes under additional strain. Why do most countries allow citizens abroad to vote without being subject to tax while resident aliens are subject to tax without the right to vote? In recent years, tax competition has exerted even more pressure on democratic discourse: Is the “exit” option for individuals a source of irritation for democratic tax legislation or is it rather a useful device to protect the individual against being overtaxed? To what extent shall outside investors take into account the redistributive policies of States? These issues do not only challenge the traditional balance of taxation and democracy. They also challenge our views on how we perceive the State and how we define the community of taxpayers as agents of social justice. In tax law, the borderline between “us” and “them” has to be addressed as unlimited tax liability involves a notion of solidarity that is hard to capture in a globalized world.

Against this background, this article explores the constitutional framework of taxation and democracy in a comparative fashion. It presents two major pathways for the protection of the individual in fiscal matters: protection by “content” (material tax principles) and protection by “consent” (voting rights) as they have evolved since the days of Hobbes and Locke. While the United Kingdom and the United States largely rely on the protective value of democratic consent, countries in Europe and in Latin America have resorted to hard-wired constitutional constraints on tax legislation, ensuring a high-degree of judicial review by constitutional courts. This constitutional framework comes under increased pressure once a country opens itself to the globalized world. It remains to be seen to what extent material principles – like the principle of equality – are in the position to restrain a country’s engagement in international tax competition.

For more democracy and taxation, see also public finance readings for the 4th of July here.

Partially, at least according to “Crowd-Out, Education, and Employer Contributions to Workplace Pensions: Evidence from Canadian Tax Records” published in Review of Economics & Statistics by Derek Messacar (Statistics Canada). Here is the abstract:

This study assesses whether workplace pensions help individuals overcome knowledge barriers to saving for retirement. Using administrative data from Canada and exploiting unique features of the pension system, I find compelling evidence that each $1 contributed to workplace pensions partially crowds out other retirement saving by approximately $0.50—among interior savers—in a regression kink design, centering on unionized workers for methodological reasons. Further analysis indicates that active versus passive decisions are influenced by education, exploiting compulsory schooling reforms for identification. I conclude by showing that pension and education reform are both viable mechanisms for boosting saving from a life cycle perspective.

Among first principles taught in economics is that the statutory incidence of a tax (i.e. who writes the check to remit the payment) is independent with the economic incidence of the tax (i.e. who is actually harmed). Asking me to pay a $1 tax per gallon of gasoline will have the same welfare effects as asking the gas station to remit a $1 tax per gallon they sell me, all other things equal.

Of course, not all other things are equal, and there may be political or administrative reasons for choosing the statutory incidence. For starters, the ability to evade the tax might differ between the two groups, lowering the effective incidence of the tax. But do market institutions, like norms in the price haggling process, matter as well?

Apparently they do, at least if comparing double auction to posted price markets, according to this experimental new paper in Public Finance Review by James Cox (Georgia State), Mark Rider (Georgia State), and Ashta Sen (Sonoma State). Here is the abstract:

According to economic theory, the incidence of a unit tax is independent of the statutory assignment of the liability to pay the tax. However, the theory is silent on the possible effects of market institutions on tax incidence. We report data from an experiment designed to address two questions. Is tax incidence independent of the assignment of the liability to pay tax to sellers or to buyers? Is tax incidence independent of market institutions? We conduct laboratory experiments with double auction (DA) and posted offer (PO) markets. Based on the results of nonparametric and parametric tests of prices generated by laboratory markets, we conclude that the answer to both questions is “no.” We report that observed differences from liability-side equivalence are statistically significant and economically meaningful. We also report that the incidence of the same tax differs between DA and PO markets with the same demand and supply schedules.

So in conclusion, changing market institutions might meaningfully effect the distribution of the tax burden.

For those of us who teach federalism, we often make the case for having decentralized local governments on the basis of the idea that preferences for public goods and services differ across place. A populace in North Dakota might want to maintain an outdoor ice rink, while another in Florida a public swimming pool. The potential gains to decentralization depend then on the degree of preference divergence and their spatial correlation. How much of that potential is realized partially depends on the quality of local government. A lot of research is directed at identifying local government failure, particularly in the form of tests for “fiscal illusion.” In these models, scholars look for variables that should not affect some public expenditure or public revenue outcome, like the salience of the tax rates, confusing property tax rates with levies, or the presence of renters. Very often, but not always, these variables matter and are taken as evidence that voters are systematically fooled by local politicians in an exploitable way. This increases the case for state provision and/or oversight of local government services.

I (along with co-authors Vikki Perez and Kosali Simon) have a new working paper that tries to do the opposite of this previous research in that we look for evidence that local governments respond to exogenous shocks in a way that plausibly represents local preferences. We compare local governments’ own expenditures on hospitals from 2006 to 2015. During this period, some states expanded Medicaid generosity under the incentives of the Affordable Care Act. If low income people gain access to coverage through Medicaid expansion, it becomes cheaper for local governments to support hospital services that are more likely to be reimbursed through a 3rd party payer. A local government could respond to this change by spending more on these services, or it could use the cost savings to spend on other goods, including private consumption via lower taxes. We find evidence that local governments in areas that voted for Obama in the 2012 election responded to the ACA with greater levels of spending on hospitals, while those in areas voting Romney tended towards reducing property taxes. We take this as evidence that local governments do a good job of representing local preferences. Here is the abstract:

Local governments participate in the health care system as both a patient care provider and third-party payer. In doing so, local governments represent the majority of the public health service economy, outspending state governments about $3-to-$2 on hospitals. Using data from the Census of Governments from 2006 to 2015, we employ a difference-in-difference framework to study the effect of the state decision to expand Medicaid on their local governments’ fiscal decisions. We find that local governments in areas that voted for Obama in the 2012 presidential election responded to their state’s Medicaid expansion by increasing expenditures on hospitals, whereas those that voted for Romney reduced hospital expenditures and used the savings to reduce property taxes. This finding is not driven by an urban/rural distinction. We then extend this analysis to determine (1) the extent to which observed changes in local government financing are affected by changes in hospital revenue; and (2) assess the effect of these changes in local government funding on the finances of surrounding hospitals. We rule out the possibility that changes in local government spending are a response to hospital competition and find evidence that hospitals in Medicaid expansion states observed increased profits, following the expansion. This paper provides evidence on the responsiveness of local governments to the preferences of their voters under incentives introduced by the Affordable Care Act (ACA).

This is not published work, so comments and suggestions by email on how to improve the paper are welcome and appreciated.

 

The NTA has announced winners for their various awards to be presented at the upcoming November meetings:

2018 Outstanding Doctoral Dissertation in Government Finance and Taxation

David Schönholzer, University of California, Berkeley
Essays on State Capacity and Local Public Goods

Honorable Mention

Steven Hamilton, University of Michigan
Essays in Tax Policy Evaluation

Benjamin Hyman, The Wharton School at the University of Pennsylvania
Essays in Public Economics and International Trade

The Outstanding Doctoral Dissertation award recognizes exemplary dissertation research in government finance and taxation.

2018 Daniel M. Holland Medal

Michael Keen, International Monetary Fund

The Daniel M. Holland Medal recognizes outstanding contributions to the study and practice of public finance.

2018 Davie-Davis Public Service Award

Donald Kiefer, U.S. Department of the Treasury

The Davie-Davis award honors members who serve the public through the provision of expert analyses and objective advice to elected officials, other policy makers, and the general public.

2018 Steven D. Gold Award

Therese McGuire, Kellogg School of Management, Northwestern University

The Steven D. Gold award honors professionals who have made significant contributions to state and local fiscal policy.

2018 NTJ Richard Musgrave Prize

Trevor Gallen and Casey Mulligan, “Wedges, Labor Market Behavior, and Health Insurance Coverage under the Affordable Care Act,” National Tax Journal, 71:1

The annual Richard Musgrave prize highlights the most outstanding paper published in the National Tax Journal.

2018 NTJ Referee of the Year Award

Andrew Hanson, Congressional Budget Office
Nick Turner, Board of Governors of the Federal Reserve System

 

In preparation for ABFM’s upcoming conference in Denver, I am doing a series of profiles on the doctoral students on the job market.

Ngoc Dao (SPEA – Indiana University) is presenting “The New Federal Minimum Wage Mandates on Homecare Workers: Its Impact on Cost of Homehealth Services” in the Saturday 11:15 session on Non-Profit Finance and its Implications. Here is the abstract:

The rapid growth of the home care industry coincides with increases in the proportion of the population over 65 years of age and more likely to need assistance with basic daily activities due to illness or disability. Yet the growth in home care use has been accompanied by concerns about the quality of the care provided. Higher wages and better legal protection might improve the quality of home health care services. This study examines the 2013 Home Care Rule promulgated by the Department of Labor, which added home care workers to the groups covered under the Federal Minimum Wage Mandate with minimum hourly and overtime rates. Taking advantage of a variation in state minimum wage laws before and after the new Rule took place, I use a conventional Difference-in-Differences approach to estimate its impact on various labor outcomes including employment (extensive and intensive margin), hourly wage rates, income, and social program participation. Findings from this study suggest that there was little effect on the extensive margin (employment), but on the intensive margin, fulltime employment and worked hours decreased by 3-5%. The results also show that although wages increased substantially (8-16% depending on treatment status) among homecare workers, the Home Care Rule was ineffective in reducing the reliance on public assistance programs such as food stamp and Medicaid at least in the short-run.

Brad Heim is chairing her dissertation, which is on a variety of federal policies and their effects on social programs.

You can find Ngoc Dao’s CV here.