Budget Constraints
r-g before and after the Great Wars 1507-2023
Kenneth Rogoff & Paul Schmelzing
NBER Working Paper, November 2024
Abstract:
We present new long-run samples of r-g series over centuries for key economies in the international financial system. Across a wide variety of econometric approaches, and including duration-matched constructions, we demonstrate strong evidence of trend stationarity in these series. Although we confirm trend stationarity, we find robust evidence of a major structural break in the first third of the 20th century. A multi-century downward trend in r-g appears to have levelled off in the years around 1930, and since then r-g has shown high volatility coupled with clear upwards pressure: notably, though real interest rates may still appear favorably low, aggregate growth rates are drifting downwards in advanced economies since the interwar period, creating secular pressures on r-g and debt sustainability. Our results stand in contrast to much recent literature and suggest the need for much more caution in assuming benign trends in global public debt sustainability. At the same time, when adding riskier elements of capital returns, the data lend support for structurally increasing "dynamic efficiency". We then associate the key 1930s inflection to the establishment and growth of welfare states in advanced economies, and the surge in non-defense, non-interest expenditures.
The Consequences of Limiting the Tax Deductibility of R&D
Mary Cowx, Rebecca Lester & Michelle Nessa
Stanford Working Paper, July 2024
Abstract:
We study the tax payment and innovation consequences of limiting the tax deductibility of research and development ("R&D") expenditures. Beginning in 2022, U.S. companies are required to capitalize and amortize R&D rather than immediately deduct these expenditures. We utilize variation in U.S. firms' fiscal year ends to test the effects of the R&D tax change in a difference-indifferences framework. We first document that affected U.S. firms' cash effective tax rates increase by 11.9 percentage points (62%), on average. We then test and find decreases in R&D investment among domestic-only, research-intensive, and constrained firms. In aggregate, these estimates translate to a reduction in R&D of $12.2 billion in the first year among the most research-intensive firms. Further, we observe decreased capital expenditures and share repurchases among affected companies, suggesting that firms also reduced other types of investment and shareholder payout to meet the increased cash tax liability. The paper provides policy-relevant evidence about the significant real effects of limiting innovation tax incentives.
The Long-Run Impacts of Public Industrial Investment on Local Development and Economic Mobility: Evidence from World War II
Andrew Garin & Jonathan Rothbaum
Quarterly Journal of Economics, forthcoming
Abstract:
This paper studies the long-run effects of government-led construction of manufacturing plants on the regions where they were built and on individuals from those regions. Specifically, we examine publicly financed plants built in dispersed locations outside of major urban centers for security reasons during the United States' industrial mobilization for World War II. Wartime plant construction had large and persistent impacts on local development, characterized by an expansion of relatively high-wage manufacturing employment throughout the postwar era. These benefits were shared by incumbent residents; we find men born before WWII in counties where plants were built earned $1,200 (in 2020 dollars) or 2.5 percent more per year in adulthood relative to those born in counterfactual comparison regions, with larger benefits accruing to children of lower-income parents. The balance of evidence suggests that these individuals benefited primarily from the local expansion of higher-wage jobs to which they had access as adults, rather than because of developmental effects from exposure to better environments during childhood.
Alexander Hamilton's Report on Manufactures and Industrial Policy
Richard Sylla
Journal of Economic Perspectives, Fall 2024, Pages 111-130
Abstract:
Hamilton's 1791 state paper on manufactures is a forward-looking argument for US industrialization supported by public policies designed to encourage it. Conventional wisdom circa 1790, along with static considerations of comparative advantage indicated that the United States should stick to farming, export its agricultural surpluses, and import European manufactures. Mercantilist trade policies of the major European empires, however, were barriers to US exports. Hamilton therefore contended that US manufacturing using the latest machine technologies would alleviate the effects of European trade restrictions by creating domestic demand for agricultural surpluses. His report specifies industries worthy of support, and policy measures to encourage their development. During the century that followed, US governments adopted nearly all of Hamilton's recommendations. These measures contributed to an average annual rate of growth of industrial output of 5 percent during that century, helping the United States to become the world's leading manufacturing nation.
Social Transfers and Spatial Distortions
Mark Colas & Robert McDonough
Journal of Labor Economics, forthcoming
Abstract:
US social transfer programs vary substantially across states, incentivizing households to locate in states with more generous transfer programs. Furthermore, transfer formulas often decrease in income, thereby rewarding low-income households for living in low-paying cities. We quantify these distortions by combining a spatial equilibrium model with a detailed model of transfer programs in the United States. The current system leads to locational inefficiency of 4.88% of total transfer spending. A reform that both harmonizes transfer policies across states and indexes household income to local average earnings reduces this inefficiency by more than 60% while preserving the programs' means-tested nature.
Evaluating Minimum Taxation
James Hines
NBER Working Paper, November 2024
Abstract:
Minimum tax rules constrain only the lowest-tax jurisdictions. Because higher minimum tax rates expand the circle of affected countries and therefore the impact of any further changes, there can be dominated regions over which no parameter values would make a minimum tax efficient. Applying a Taylor approximation to the distribution of statutory corporate tax rates in 2020, the range 4%-27% is a dominated region: there may be an efficient minimum rate below 4%, or higher than 27%, but there is no efficient world minimum tax rate between 4% and 27%. Minimum taxes set at popular rates are particularly inefficient -- a minimum tax rate of 15% yields value that, when positive, is equivalent to offsetting less than one percent of the effect of tax competition.
The Spiderweb of Partnership Tax Structures
Ryan Hess et al.
Stanford Working Paper, September 2024
Abstract:
U.S. partnerships control more than $40 trillion in assets, vastly outnumber U.S. public firms, and contribute significantly to the U.S. tax non-compliance of pass-through entities, which is larger than the non-compliance of publicly traded corporations. However, the prior literature provides extremely little evidence explaining the pervasive use of such entities and which specific characteristics enable the lightly taxed nature of partnership business income. Using administrative U.S. tax data, we first create graphical organizational structures by tracing income through millions of partnership entities. We show that 80 percent of partnership groups are simple structures composed of one single partnership owned directly by individual taxpayers. In contrast, the most complex structures resemble "webs," characterized by multiple tiers of ownership and clusters of overlapping partners. Second, we determine the entity attributes associated with partnerships developing into complex organizations. Third, conditional on being selected for audit, complex partnerships are four percent less likely to be assessed additional tax, but the amount of assessments is larger. Fourth, we show that complex partnership audits have a high return-on-investment, generating $20 of assessments for each $1 spent, which is a rate over eight times that for corporations. Thus, beyond adding to the nascent literature explaining the prevalent use of partnerships, we provide new insights about the under-reporting of tax on U.S. business income and quantify the potentially large increases in tax revenue collection that could be obtained from increased enforcement of complex partnership businesses.
Cradle of Organized Firefighting
Janna Lu
George Mason University Working Paper, February 2024
Abstract:
Traditional economic theory holds that markets will undersupply public goods so governments should provide them instead. Starting in 1678, the town of Boston supplied fire engines and firemen. Bostonians still expended their own resources to organize a volunteer firefighting club in 1724, the first of its kind in America. At least 26 similar fire clubs existed between 1724 and 1826, adopting similar governance structures. Members pledged to protect each other's property in the event of a fire. Boston fire clubs unbundled fire protection to exclude non-payers. They minimized the total costs of contracting and ownership as a non-profit and overcame collective decision-making costs to supply goods with public attributes. By supplying the good for themselves, they mitigated information asymmetry and potential hold-up problems. I further argue that these fire clubs disappeared after the emergence of fire insurance and the reorganization of the fire department.
Min(d)ing the President: A Text Analytic Approach to Measuring Tax News
Lenard Lieb et al.
American Economic Journal: Macroeconomics, forthcoming
Abstract:
Economic agents react to signals about future tax policy changes. Consequently, estimating their macroeconomic effects requires identification of such signals. We propose a novel text analytic approach for transforming textual information into an economically meaningful time series. Using this method, we create a tax news measure from all publicly available post-war communications of U.S. presidents. Our measure predicts the direction and size of future tax changes and contains signals not present in previously considered (narrative) measures of tax changes. We investigate the effects of tax news and find that, for long anticipation horizons, pre-implementation effects lead initially to contractions in output.