Fiscal Efficiency
Bidding for Firms: Subsidy Competition in the United States
Cailin Slattery
Journal of Political Economy, forthcoming
Abstract:
State and local governments in the United States compete to attract firms by offering discretionary subsidies. I use a private value English auction to model the subsidy bidding process and quantify the welfare effects of competition. The allocation of rents between states and firms depends on the heterogeneity in states’ valuations for firms and the substitutability of locations. I find that competition increases welfare by less than 5% over a subsidy ban, and states compete away the surplus, transferring all of the rents to firms. These findings dampen any interpretation of subsidy competition as an effective place-based policy.
The Long-Run Effects of Government Spending
Juan Antolin-Diaz & Paolo Surico
American Economic Review, July 2025, Pages 2376-2413
Abstract:
Military spending has large and persistent effects on output because it shifts the composition of public spending toward R&D. This boosts innovation and private investment in the medium term and increases productivity and GDP at longer horizons. Public R&D expenditure stimulates economic activities beyond the business cycle even when it is not associated with war spending. In contrast, the effects of public investment are shorter-lived, while public consumption has a modest impact at most horizons. We reach these conclusions using BVAR with long lags and 125 years of US data, including newly reconstructed series of government spending by main categories since 1890.
Economic literacy and public policy views
Jared Barton & Cortney Rodet
Journal of Economic Education, forthcoming
Abstract:
The authors measure economic literacy among a representative sample of U.S. residents, explore demographic correlates with the measure, and examine how respondents’ policy views correlate with it. They then analyze policy view differences among Republicans and Democrats and among economists and non-economists. They find significant differences in economic literacy by sex, race/ethnicity, and education, but little evidence that respondents’ policy views relate to their level of economic literacy. Examining heterogeneity by political party, they find that estimated fully economically literate policy views (i.e., predicted views as if respondents scored perfectly on the authors’ economic literacy assessment) for Democrats and Republicans are farther apart than respondents’ original views. Greater economic literacy among general survey respondents also does not result in thinking like an economist on policy.
Fiscal Externalities of Transaction Taxes: Evidence from the Los Angeles Mansion Tax
Daniel Green et al.
Harvard Working Paper, June 2025
Abstract:
We estimate the fiscal externalities of a property transfer tax, the Los Angeles “Mansion Tax”, on the revenues from property taxes when assessed values are closely tied to transactions. In California, as in over half of U.S. states, growth in tax assessments between transactions lags market values, so any reduction in transaction frequency reduces the growth of property tax revenue. The fiscal externality is sizable: the resulting property tax revenue loss conservatively offsets at least two-thirds of the revenue generated by the transfer tax. The net revenue loss is larger for high-value and commercial properties.
Firm Investment and the User Cost of Capital: New U.S. Corporate Tax Reform Evidence
Jonathan Hartley, Kevin Hassett & Joshua Rauh
NBER Working Paper, June 2025
Abstract:
The Tax Cuts and Jobs Act of 2017 (TCJA) marked the first time in three decades that material changes were made to the corporate tax code of the United States. We use TCJA as a quasi natural experiment to estimate the impact of changes in user cost of capital on investment. Following the method of Auerbach and Hassett (1991), using cross-sectional data we find that the user cost is associated with higher rates of investment consistent with previous studies. BEA asset types with greater reductions in user cost of capital and marginal effective tax rate (METR) after the 2017 TCJA had greater statistically significant increases in their investment rates several years after the tax reform. Specifically, we find the magnitude of a 1 percentage point decrease in user cost is associated with a 1.68 to 3.05 percentage point increase in the rate of investment, larger than prior estimates of the responsiveness of investment with respect to user cost of capital.
Public Debt and Private Sentiment: International Evidence from the Gallup World Poll
Christos Makridis
Stanford Working Paper, June 2025
Abstract:
This paper investigates whether and how public debt influences individual economic expectations and subjective well-being, using microdata from the Gallup World Poll spanning 2006 to 2024 across a broad set of countries. While macroeconomic research has increasingly focused on the sustainability of public debt and its effects on interest rates, investment, and inflation, far less is known about how rising debt levels shape public sentiment. Drawing on over a decade of harmonized survey responses linked with country-year fiscal indicators, I assess whether individuals' perceptions of the economy and institutions vary systematically with national debt-to-GDP ratios. I find robust evidence that higher debt levels affect economic expectations even after controlling for a wide array of demographics, country fundamentals, income shocks, and both country and year fixed effects. Debt also has stronger effects on expectations during times of economic hardship. These results suggest that high debt levels affect individual well-being through an expectations channel, rather than just an income.
AI and the Fed
Sophia Kazinnik & Erik Brynjolfsson
NBER Working Paper, July 2025
Abstract:
This paper examines how central banks can strategically integrate artificial intelligence (AI) to enhance their operations. Using a dual-framework approach, we demonstrate how AI can transform both strategic decision-making and daily operations within central banks, taking the Federal Reserve System (FRS) as a representative example. We first consider a top-down view, showing how AI can modernize key central banking functions. We then adopt a bottom-up approach focusing on the impact of generative AI on specific tasks and occupations within the Federal Reserve and find a significant potential for workforce augmentation and efficiency gains. We also address critical challenges associated with AI adoption, such as the need to upgrade data infrastructure and manage workforce transitions.
Fiscal illusion at the individual level
Kaetana Numa
Public Choice, April 2025, Pages 105-137
Abstract:
This study uses a survey experiment to test for fiscal illusion -- the idea that taxpayers systematically misperceive their tax liabilities and contributions to public services. To date, the voluminous literature on fiscal illusion has not analyzed how better information on personalized total tax liabilities and contributions to public services would influence fiscal preferences. This is the first study to inform participants of their individual fiscal balance sheets comprising all major taxes regularly paid by taxpayers and their allocation to public services, thus comprehensively covering both sides of the fiscal account. This aim is achieved by embedding a novel personalized fiscal calculator in an online survey experiment administered to a representative sample of UK employees. The experiment finds evidence of fiscal illusion: providing personalized fiscal information reduces support for higher taxes and spending and increases support for lower taxes and spending. These findings indicate that taxpayers underestimate both their tax liabilities and the costs of public services.
Consumer Response to Monetary Subsidies: A Structural Demand Analysis of the Supplemental Nutrition Assistance Program
Rudolf-Harri Oberg & Andrés Musalem
Marketing Science, forthcoming
Abstract:
There is growing debate about whether consumer subsidies related to nutrition programs should be more flexible. Additional flexibility increases consumer welfare but may hinder efforts toward achieving nutrition goals. We study how consumers would respond to subsidy designs with different spending restrictions. To simulate consumer behavior under different subsidies, we develop a direct utility model that integrates consumer decisions for brands, categories, and stores. This model is used to simulate consumer behavior for benefit designs that are not observed in practice but are often part of the policy debate. We apply the model to quantify the effects of supplemental nutrition assistance program (SNAP) benefits relative to alternative subsidy designs. Our findings indicate that SNAP benefits can be effective in driving food purchases, although on average only 70% of the subsidy would get spent, and only half of that would lead to greater food spending. The latter is driven by sizable spillovers toward other categories not covered under the program. To quantify the consumer welfare implications associated with alternative subsidy designs, we find that, on average, consumers would be willing to trade $1.00 in SNAP benefits for $0.29 in unrestricted cash benefits because of the spending restrictions associated with food stamps.
Compliance is taxing: A field experiment on tax abatement information in the United States
Nathan Jensen, Zhizhen Lu & Daniel Nielson
Business and Politics, forthcoming
Abstract:
In this paper, we examine a major transparency initiative affecting tax abatements for state and local economic development in the United States that has been plagued by noncompliance. Unlike academic studies examining government compliance with transparency rules such as Freedom of Information Act (FOIA) requests, we examine government and independent auditor responses to inquiries about information already posted, or not posted, in annual financial reports. Using a pre-registered experimental approach on cities, counties, and school districts in a single large-population state (Texas), we remind entities and their external auditors of their transparency obligations as well as our ability to check their compliance with this transparency rule and ask these entities follow-up questions about their required posts. Against expectations, we found that entities were not significantly more likely to comply with our request for information when we reminded them of their disclosure obligations and we found some evidence that nudges made entities less likely to comply. We argue these results provide novel insights into the limitations of transparency initiatives.