Leaving Money On The Table
Can Deficits Finance Themselves?
George-Marios Angeletos, Chen Lian & Christian Wolf
Econometrica, September 2024, Pages 1351-1390
Abstract:
We ask how fiscal deficits are financed in environments with two key features: (i) nominal rigidity, and (ii) a violation of Ricardian equivalence due to finite lives or liquidity constraints. In such environments, deficits can contribute to their own financing through two channels: a boom in real economic activity, which expands the tax base; and a surge in inflation, which erodes the real value of nominal government debt. Our main theoretical result establishes that this mechanism becomes more potent as fiscal adjustment is delayed, leading to full self-financing in the limit: if the monetary authority does not lean too heavily against the fiscal stimulus, then the government can run a deficit today, refrain from tax hikes or spending cuts in the future, and still see its debt converge back to its initial level. We further demonstrate that a significant degree of self-financing is achievable when the theory is disciplined by empirical evidence on marginal propensities to consume, nominal rigidities, the monetary policy reaction, and the speed of fiscal adjustment.
Putting the "Finance" into "Public Finance": A Theory of Capital Gains Taxation
Mark Aguiar, Benjamin Moll & Florian Scheuer
NBER Working Paper, September 2024
Abstract:
Standard optimal capital tax theory abstracts from modeling asset prices, making it unsuitable for thinking about capital gains and wealth taxation. We study optimal redistributive taxation in an environment with asset price changes, adopting the modern finance view that asset prices fluctuate not only because of changing cash flows, but also due to other factors ("discount rates"). We show that the optimal tax base (i) generally differs from the case with constant asset prices, and (ii) depends on the sources of asset-price changes. Whenever asset prices fluctuate, and are not exclusively driven by cash flow changes, taxes must target realized trades and generally involve a combination of realization-based capital gains and dividend taxes. This result stands in contrast to the classic Haig-Simons comprehensive income tax concept, as well as recent proposals for wealth or accrual-based capital gains taxes.
Universal Basic Income: Inspecting the Mechanisms
Nir Jaimovich et al.
Review of Economics and Statistics, forthcoming
Abstract:
We examine the mechanisms driving the aggregate and distributional impacts of Universal Basic Income (UBI) through model analysis of various UBI programs and financing schemes. The main adverse effect is the distortionary tax increase to fund UBI, reducing labor force participation. Secondary channels are a decline in demand for self-insurance, depressing aggregate capital, and a positive income effect that further deters labor force participation. Due to these channels, introducing UBI alongside existing social programs reduces output and average welfare. Partially substituting existing programs with UBI mitigates the adverse effects, increases average welfare, but does not deliver a Pareto improvement.
Credit Scores: Performance and Equity
Stefania Albanesi & Domonkos Vamossy
NBER Working Paper, September 2024
Abstract:
Credit scores are critical for allocating consumer debt in the United States, yet little evidence is available on their performance. We benchmark a widely used credit score against a machine learning model of consumer default and find significant misclassification of borrowers, especially those with low scores. Our model improves predictive accuracy for young, low-income, and minority groups due to its superior performance with low quality data, resulting in a gain in standing for these populations. Our findings suggest that improving credit scoring performance could lead to more equitable access to credit.
Wage-price spirals: What is the historical evidence?
Jorge Alvarez et al.
Economica, October 2024, Pages 1291-1319
Abstract:
How common are wage-price spirals, and what has happened in their aftermath? We construct a new historical database of wage-price spirals -- identified as episodes with consumer price inflation and average nominal wage growth rising jointly for at least a year -- going back to the 1960s for a large sample of advanced economies. We find that only about a quarter of such episodes were followed by sustained accelerations in wages and prices. Instead, nominal wage growth and inflation tended to stabilize at a higher level on average, and then gradually revert, with real wage growth broadly unchanged. A decomposition of average wage dynamics during wage-price spiral episodes using a wage Phillips curve suggests that nominal wage growth normally stabilizes at levels consistent with observed inflation and labour market tightness. After historical episodes exhibiting rising inflation, falling real wages, and tightening labour markets -- similar to what was observed in the early post-COVID-19 recovery in 2021 -- inflation tended to decline and nominal wage growth to rise, allowing real wages to gradually catch up. Our findings suggest that an acceleration of nominal wages against a backdrop of rising inflation does not necessarily signal that a persistent wage-price spiral dynamic is taking hold.
The Effect of Capital Gains Taxes on Business Creation and Employment: The Case of Opportunity Zones
Alina Arefeva et al.
Management Science, forthcoming
Abstract:
The Tax Cuts and Jobs Act of 2017 established a new program called Opportunity Zones (OZs) that reduces or eliminates capital gains taxes on investment in a limited number of low-income Census tracts. We provide a model illustrating how a change in capital taxation affects employment in existing and new establishments. We then use establishment-level data to show that, in its first two years, the OZ designation increased employment growth relative to comparable tracts by between 3.0 and 4.5 percentage points in metropolitan areas. The job growth occurred in multiple industries and persisted into 2021 rather than quickly disappearing. However, most of the jobs created by the program were likely taken by residents who live outside of the designated tracts, consistent with only 5% of U.S. residents working in the same Census tract as the one in which they live.
Taxation and Household Decisions: An Intertemporal Analysis
Mary Ann Bronson, Daniel Haanwinckel & Maurizio Mazzocco
NBER Working Paper, August 2024
Abstract:
How do different income taxation systems affect household decisions and welfare? We answer this question by first documenting the strong labor supply disincentives for secondary earners of the U.S. tax system and by using variations from the Bush Tax Cuts to assess their effects on intra-household specialization. We then develop a lifecycle model incorporating labor supply, marriage and divorce decisions with limited commitment, household production, human capital accumulation, and assortative mating. After estimating and validating the model with various datasets, we evaluate four tax systems: a U.S.-like income-splitting system, an individual taxation system, a flexible general joint system, and an income-splitting system with secondary-earner deductions. We find that the individual taxation system provides higher welfare than income splitting but increases inequality. The general joint system offers the highest welfare but is complex to implement. The income-splitting system with a secondary-earner deduction improves welfare and reduces inequality while maintaining simplicity.
Did Banks Pay Fair Returns to Taxpayers on TARP?
Thomas Flanagan & Amiyatosh Purnanandam
Journal of Finance, October 2024, Pages 2909-2941
Abstract:
Financial institutions received investments under the Troubled Asset Relief Program in a bad state of the world but repaid them in a relatively good state. We show that the recipients paid considerably lower returns to taxpayers compared to private-market securities with similar risk over the same investment horizon, resulting in a subsidy of over $50 billion on the preferred equity investment by the government. Ex-post renegotiation of contract terms limited the upside gains received by taxpayers in good times and contributed to the subsidy. These findings have important implications for the design and implementation of future bailouts. Our simple methodology for calculating the subsidy can be applied to evaluate the financial costs of other bailouts.
Are Bankruptcy Professional Fees Excessively High?
Samuel Antill
Review of Financial Studies, forthcoming
Abstract:
Chapter 7 is the most popular bankruptcy system for U.S. firms and individuals. Chapter 7 professional fees are substantial. Theoretically, high fees might be an unavoidable cost of incentivizing professionals. I test this empirically. I study trustees, the most important professionals in chapter 7, who liquidate assets in exchange for legally mandated commissions. Exploiting kinks in the commission function, I estimate a structural model of moral hazard by trustees. I show that a policy change lowering trustee fees would harm trustee incentives, reducing liquidation values. Nonetheless, such a policy would dramatically improve creditor recovery, increasing small-business-lender recovery by 15.7%.
Dissolving Districts: Did Property Values Fall When California Terminated Its Redevelopment Agencies?
Huixin Zheng et al.
Economic Development Quarterly, forthcoming
Abstract:
California pioneered the use of tax increment finance (TIF) to promote redevelopment, but in 2012 all redevelopment agencies in the state were simultaneously (and unexpectedly) dissolved, essentially eliminating TIF-supported redevelopment in California. This paper uses hedonic methods to analyze changes in residential property values associated with the dissolution of TIF districts in five cities in northern Orange County. If TIF is necessary for (re)development in the TIF districts, then the unexpected elimination of TIF-funded redevelopment should have reduced property values. The authors find that, within the study area, the elimination of TIF was not associated with decreases in residential values within TIF districts, and quality-adjusted home prices in and near former TIF districts continued to grow at a rate at least comparable to citywide rates in the aftermath of the dissolution. These findings raise the concern that TIF may function as a tool for revenue capture before the TIF districts reach the anticipated expiration dates. In the absence of significant regulatory safeguards, TIF may be used to capture revenue from overlapping governments, instead of serving as an engine of economic development.