The January 2019 issue of Public Finance Review is now available online:

Optimal Fiscal Policy in Overlapping Generations Models

Carlos Garriga

 

Natural Limits of Wealth Inequality and the Effectiveness of Tax Policy

Scott S. Condie, Richard W. Evans, and Kerk L. Phillips

 

Calculating Value Added of Prostitution with Multiple Data: A New Approach for Belgium

Stef Adriaenssens and Jef Hendrickx

 

Optimal Government Policies Related to Unemployment

Chia-Hui Lu

 

Millionaires or Job Creators: What Really Happens to Employment Growth When You Stick It to the Rich?

Ahiteme N. Houndonougbo and Matthew N. Murray

 

Adjusting State Public School Teacher Salaries for Interstate Comparison

Dan S. Rickman, Hongbo Wang, and John V. Winters

 

What Are the Financial Implications of Public Quality Disclosure? Evidence from New York City’s Restaurant Food Safety Grading Policy

Rachel Meltzer, Michah W. Rothbart, Amy Ellen Schwartz, Thad Calabrese, Diana Silver, Tod Mijanovich, and Meryle Weinstein

The December 2018 issue of the National Tax Journal is focused on research relevant to last year’s Tax Cuts and Jobs Act:

A Preliminary Assessment of the Tax Cuts and Jobs Act of 2017  William Gale, Hilary Gelfond, Aaron Krupkin, Mark J. Mazur, and Eric Toder Income-Based Effective Tax Rates and Choice-of-Entity Considerations under the 2017 Tax Act  Bradley T. Borden Tax Policy and Organizational Form: Assessing the Effects of the Tax Cuts and Jobs Act of 2017 Erin Henry, George A. Plesko, and Steven Utke Examining S-Corporation Losses and How They Are Used  Katherine Lim, Elena Patel, and Molly Saunders-Scott Pass-Through Entity Responses to Preferential Tax Rates: Evidence on Economic Activity and Owner Compensation in Kansas  Jason DeBacker, Lucas Goodman, Bradley T. Heim, Shanthi P. Ramnath, and Justin M. Ross The Consequences of the Tax Cut and Jobs Act’s International Provisions: Lessons from Existing Research Dhammika Dharmapala The Business Cycle and the Deduction for Foreign Derived Intangible Income: A Historical Perspective  Tim Dowd and Paul Landefeld Assessing U.S. Global Tax Competitiveness after Tax Reform Andrew B. Lyon and William A. McBride Missing the Mark: Evaluating the New Tax Preferences for Business Income  Ari Glogower and David Kamin Mandating Health Insurance Coverage for High-Income Individuals Paul D. Jacobs

 

The call for proposals is here.

Through its Joint Statistical Research Program (JSRP), the Statistics of Income (SOI) seeks to enable the use of tax microdata by qualified researchers outside the Federal government. Such research can provide new insights and advance the understanding of the ways that existing tax policies affect individuals, businesses, and the economy. It can also provide a new understanding of taxpayer behavior that can aid in the administration of the U.S. tax system. Finally, such research can lead to the development of new datasets useful for future tax administration research, as well as new tabulations that can be released to the public. SOI is a division of the IRS’s Research, Applied Analytics, and Statistics (RAAS) office.

The following subjects are of particular interest to the IRS and the tax research community:
• Tax administration in a global economy
• Taxpayer needs and behavior, particularly the roles of information, complexity, salience, engagement, and compliance costs
• Filing, payment, and reporting compliance measures, behaviors, and drivers
• Taxpayer response to policy changes, particularly taxpayer responses to changes in incentives
• Role of complex business structures in tax planning
• Application of new research methods for tax administration, particularly data science, behavioral insights, or other interdisciplinary approaches

SOI has a strong preference for research projects that generate new datasets and new tabulations that can be replicated and produced on a regular basis. We will accept research proposals for the 2018 JSRP beginning November 12, 2018 and ending December 31, 2018. A panel will evaluate all proposals; evaluations will be based on a number of factors, including the resources available within SOI to support the proposed work. We will announce our final selections by March 29, 2019.

Selected research projects will be performed under formal IRS agreements, which will include a description of the topics and data to be analyzed, term of the projects, regular reporting requirements, and applicable restrictions, including the requirement that SOI review and approve all presentation materials and papers prior to publication or dissemination. Our review is intended to ensure that the product produced is limited to the outlined tax-administration focused objectives, protects confidential IRS processes, and ensures that no individual taxpayer data are disclosed either directly or indirectly based on compliance with IRS published disclosure limitation guidelines. RAAS has a strict policy of neither censoring nor vetoing research findings. All RAAS sponsored research projects are policy neutral. Derivative works produced using publicly released RAAS research papers are not subject to RAAS review.

Working in collaboration with IRS research partners helps ensure accuracy in the interpretation of data items and brings essential domain knowledge to the teams without seeking to promote particular outcomes. SOI staff will participate in all phases of the projects, including research, analysis, and presentation of findings.

Please note that it is unlikely that work on the selected research projects will begin before October 1, 2019. Researchers should plan to complete their research within 2 years from the date they are granted access to the relevant data.

SOI recognizes that the level of data access required by non-IRS researchers may differ across projects based any number of factors. Projects for which a non-IRS researcher will access only aggregated information compiled by the IRS will be conducted under a simple memorandum of understanding. Projects that require a non-IRS researcher to work with statistical microdata will have more substantial contractual arrangements and require U.S. citizenship, a background check, and annual training on IRS data and computer security procedures. Access to tax microdata will occur in an IRS facility using IRS equipment only.

All research projects should result in publishable papers suitable for presentation at a professional conference and for inclusion in the printed proceedings, as appropriate. Your final paper will be made publicly available as a working paper via SOI’s Tax Stats Web page at http://www.irs.gov/statistics. You may also submit your final paper for publication in academic and professional journals.

The University of Illinois-Chicago’s new Government Finance Research Center (College of Urban Planning and Public Affairs) has announced that it will continue the spring public finance miniconference series. The conference will be Thursday May 2 to Friday May 3 in 2019 and will take place at the Federal Reserve Bank of Chicago.

From the call:

Although the Great Recession ended a decade ago, many city governments have yet to see their revenue streams return to pre-recessionary levels. In addition, local governments across the United States, as well as many states, are grappling with the cost of legacy liabilities, meeting service demands, creating sustainable fiscal systems, and ensuring efficiency and equity in the design of fiscal models and programs. As such, there is concern about how well equipped state and local governments are to weather the next economic downturn, which many market watchers are predicting. The field of public finance is also being challenged to think about these issues in conjunction with concerns of social justice, intergenerational equity, place-based equity, and income and other disparities.

This conference will focus on topics that we think will be front and center in the policy debate in the coming years. We invite proposals for papers that examine these and other policy issues at the national and subnational levels in domestic and international contexts utilizing a variety of methodological approaches. Proposals will be reviewed and competitively selected.

Possible areas include, but are not limited to:
• Preparation for the next financial downturn
• Legacies of austerity
• Constraints on fiscal policy behavior and service provision
• Gendered or raced impacts of particular tax or revenue-generating policies
• Cost and consequences of deferred maintenance
• Changing fiscal fortunes of suburban communities

The deadline for proposals is February 1, 2019, see the call for further details.

This is the 5th of an informal miniconference series, which SPEA of Indiana University and AYS of Georgia State University have alternately hosted since 2015, so it is great to see the line-up expand to include UIC, and hopefully that continues.

Here are the most recent previous programs:

Spring 2018 at GSU: “Public Finance and The New Economy”
Spring 2017 at IU: “Applied Research in Public Finance“

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.