On Balance
Sustainability and the Measurement of Wealth
Kenneth Arrow et al.
NBER Working Paper, December 2010
Abstract:
We develop a consistent and comprehensive theoretical framework for assessing whether economic growth is compatible with sustaining well-being over time. The framework focuses on whether a comprehensive measure of wealth - one that accounts for natural capital and human capital as well as reproducible capital - is maintained through time. Our framework also integrates population growth, technological change, and changes in health. We apply the framework to five countries that differ significantly in stages of development and resource bases: the United States, China, Brazil, India, and Venezuela. With the exception of Venezuela, significant increases in human capital enable comprehensive wealth to be maintained (and sustainability to be achieved) despite significant reductions in the natural resource base. We find that the value of "health capital" is very large relative to other forms of capital. As a result, its growth rate critically influences the growth rate of per-capita comprehensive wealth.
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Dynamic Scoring, Tax Evasion, and the Shadow Economy
John Robert Stinespring
Public Finance Review, January 2011, Pages 50-74
Abstract:
Measuring the impact of tax policy on tax evasion is crucial in estimating government revenues. In the United States, the government estimates that $300-$400 billion is lost each year to tax evasion. This article combines dynamic scoring with household preferences for tax evasion à la Feige and McGee to measure the macroeconomic feedback effects from tax cuts to changes in output and government revenues. Using a simple dynamic scoring model based on Mankiw and Weinzierl (2006), the feedback effects are divided into their constituent substitution, income, and evasion effects for an analysis of individual behavior at the microeconomic level. Calibrating the model to U.S. data reveals that the growth effects of income tax rate cuts can offset a significant percentage of the potential revenue losses.
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The Relationship between Defense Spending and Economic Growth in the United States
Uk Heo
Political Research Quarterly, December 2010, Pages 760-770
Abstract:
Recent increases in U.S. defense spending have renewed interest in the defense-growth nexus. The Feder-Ram-based models have traditionally been used in examining this relationship, but Dunn, Smith, and Willenbockel recommend the augmented Solow model because of several weaknesses inherent in the Feder-Ram model (including its static nature, simultaneity bias, and multicollinearity issues). The augmented Solow model addresses these issues, but it has weaknesses too. Thus, by employing both the Feder-Ram and augmented Solow models, the author tests the defense-growth nexus in the United States for 1954 through 2005. The results indicate that defense spending does not significantly affect the U.S. economy.
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Capital Taxation During the U.S. Great Depression
Ellen McGrattan
NBER Working Paper, December 2010
Abstract:
Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
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A Temporary Federal Discount Program to Stimulate Consumer Spending
Kenneth Lewis & Laurence Seidman
Business Economics, October 2010, Pages 244-252
Abstract:
In this paper, we evaluate a new proposal to stimulate recovery from the current recession: a temporary federal price discount on consumer goods. An attractive feature of the temporary federal discount program is that it gives consumers a price incentive to purchase more rather than simply giving consumers more disposable income, which they might choose to either spend or to save. According to our simulations with the Fair macro-econometric model, a temporary 20 percent federal discount on all consumer goods in a severe recession would significantly reduce the unemployment rate while causing only a small increase in federal debt as a percentage of GDP.
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Does Fiscal Policy Matter? Blinder and Solow Revisited
Roger Farmer & Dmitry Plotnikov
NBER Working Paper, December 2010
Abstract:
This paper uses the old-Keynesian representative agent model developed in Farmer (2010b) to answer two questions: 1) do increased government purchases crowd out private consumption? 2) do increased government purchases reduce unemployment? Farmer compared permanent tax financed expenditure paths and showed that the answer to 1) was yes and the answer to 2) was no. We generalize his result to temporary bond-financed paths of government purchases that are similar to the actual path that occurred during WWII. We find that a temporary increase in government purchases does crowd out private consumption expenditure as in Farmer (2010b). However, in contrast to Farmer's experiment we find that a temporary increase in government purchases can also reduce unemployment.
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Tax Compliance as an Evolutionary Coordination Game: An Agent-Based Approach
Kim Bloomquist
Public Finance Review, January 2011, Pages 25-49
Abstract:
Tax reporting compliance by small business owners is modeled in an agent-based framework using concepts and methods based on evolutionary dynamics. A business owner's ‘‘fitness'' is a function of net after tax (and post-audit) income. Business owners exhibit heterogeneous tax morale and compliance propensity following four stochastically assigned behavioral ‘‘archetypes'': Honest, Strategic, Defiant, and Random. The model is calibrated to observations from laboratory experiments and taxpayer random audits. The calibrated model is used to simulate evolutionary changes in a static population of 10,000 small business owners. A simulation using realistic parameters for the probability of audit and penalty rate finds that after fifteen time periods, the initial number of Honest business owners declines by approximately one-third and are displaced by proprietors having either Defiant or Strategic compliance behaviors.
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In Search of the Multiplier for Federal Spending in the States During the New Deal
Price Fishback & Valentina Kachanovskaya
NBER Working Paper, November 2010
Abstract:
If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940 when unemployment rates never fell below 10 percent and there was ample idle capacity. We develop an annual panel data set for the 48 continental states from 1930 through 1940 with evidence on federal government grants, loans, and tax collections and a variety of measures of economic activity. Using panel data methods we estimate a multiplier, defined as the change in per capita economic activity in response to an additional dollar per capita of federal funds. For personal income, which includes transfer payments as income, the estimate ranges from 0.91 for the combination of government grants and loans to 1.39 when only grants are considered. It is important to distinguish between the effects of farm subsidies and the combination of public works and relief grants. The personal income multiplier for public works and relief was around 1.67, while the effect of farm payments to take land out of production reduced personal income by 0.57. Multipliers for a more production-based measure of state income per capita after removing nonwork relief transfers and adding back payroll taxes are about 10 to 15 percent smaller. The multiplier for wages and salaries was substantially less than one, as was the multiplier for retail sales. The impact of the federal spending on employment was negligible and may have been negative. The results may help explain why measures of income have recovered more rapidly than measures of employment in both the 1930s and in the current era.
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Decentralization of Social Protection Expenditure and Economic Growth in the OECD
Roberto Ezcurra & Andrés Rodríguez-Pose
Publius, Winter 2011, Pages 146-157
Abstract:
This research note examines the effect of the degree of decentralization of social protection expenditure on economic growth, using panel data for twenty Organization for Economic Co-operation and Development countries over the period 1990-2005. Our results show a positive impact of the subnational share of total government expenditure in social protection on economic performance. This finding is robust to the inclusion of additional explanatory variables in the analysis and is not driven by any specific country.
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Policy Uncertainty and Household Savings
Francesco Giavazzi & Michael McMahon
Review of Economics and Statistics, forthcoming
Abstract:
Using German micro-data and a quasi-natural experiment, we provide evidence on how households respond to an increase in uncertainty. We find that household saving increases significantly following the increase in political uncertainty observed in the run-up to the 1998 German general election. We also find evidence of a labor supply response by workers who can use the margin offered by part-time employment. Our results are suggestive of the economic effects of "wars of attrition": when political disagreement leads to delays in adopting a reform, or the possibility that earlier reforms may be revoked, the increased uncertainty could slow the economy.
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Stepping on a rake: The role of fiscal policy in the inflation of the 1970's
Christopher Sims
European Economic Review, forthcoming
Abstract:
The inflation of the 1970's in the US is often discussed as if the only type of policy action that could have prevented the inflation were monetary policy actions and the only type of policy errors that might have induced the inflation were monetary policy errors. Yet fiscal policy underwent dramatic shifts in the 70's and economic theory makes clear that in an environment of uncertainty about future fiscal policy, monetary policy instruments may lose potency or have perverse effects. This paper documents the vagaries of fiscal policy in this period and argues that people at the time must have been uncertain about fiscal policy's future course. It also lays out a theoretical framework for understanding the effects of fiscal uncertainties on monetary policy and shows that fiscal variables have predictive value in dynamic models, even if traditional monetary policy indicators are included in the system.
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Other-Regarding Behavior and Taxpayer Preferences for Farm Policy
Brenna Ellison, Jayson Lusk & Brian Briggeman
B.E. Journal of Economic Analysis & Policy, 2010
Abstract:
Changes in the structure of agriculture have led some to rethink the purpose and nature of farm support programs, yet taxpayers are often left unheard in this debate. This paper determines how people would vote on particular farm policies and identifies the determinants of support/opposition to farm programs. Our results show the majority of people support farm subsidies, but voting outcomes are sensitive to the costs of the policy and the magnitude of the payouts to farmers. We find people act altruistically toward small farmers and that people are averse to inequality. Furthermore, we found the public's attitude toward maintaining a secure food supply is a significant determinant of support for farm programs. Finally, we found that information about farmers' average incomes and average production levels across different farm sizes had little effect on people's willingness to subsidize small or large farmers.
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Natural Expectations and Macroeconomic Fluctuations
Andreas Fuster, David Laibson & Brock Mendel
Journal of Economic Perspectives, Fall 2010, Pages 67-84
Abstract:
A large body of empirical evidence suggests that beliefs systematically deviate from perfect rationality. Much of the evidence implies that economic agents tend to form forecasts that are excessively influenced by recent changes. We present a parsimonious quasi-rational model that we call natural expectations, which falls between rational expectations and (naïve) intuitive expectations. (Intuitive expectations are formed by running growth regressions with a limited number of right-hand-side variables, and this leads to excessively extrapolative beliefs in certain classes of environments). Natural expectations overstate the long-run persistence of economic shocks. In other words, agents with natural expectations turn out to form beliefs that don't sufficiently account for the fact that good times (or bad times) won't last forever. We embed natural expectations in a simple dynamic macroeconomic model and compare the simulated properties of the model to the available empirical evidence. The model's predictions match many patterns observed in macroeconomic and financial time series, such as high volatility of asset prices, predictable up-and-down cycles in equity returns, and a negative relationship between current consumption growth and future equity returns.
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The tax-spending nexus: Evidence from a panel of US state-local governments
Joakim Westerlund, Saeid Mahdavi & Fathali Firoozi
Economic Modelling, forthcoming
Abstract:
We re-examine the tax-spending nexus using a panel of 50 US state-local government units between 1963 and 1997. We find that, unlike tax revenues, expenditures adjust to revert back to a long-term equilibrium relationship. The evidence on the short-term dynamics is also consistent with the tax-and-spend hypothesis. One implication of this finding is that the size of the government at the state-local level is not determined by expenditure demand, but rather by resource supply. This is consistent with the fact that many US state and local governments operate under constitutional or legislative limitations that seek to constrain deficits.
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Changhoon Jung & Suho Bae
American Review of Public Administration, January 2011, Pages 92-110
Abstract:
This article examines changing revenue and expenditure structures in a panel of 2,698 American counties during the past 30 years (1972-2002) at 5-year intervals. It also investigates factors affecting the degree of reliance on user charges in counties. The findings show that property taxes and total taxes as a percentage of total own source revenue began trending downward, whereas sales tax, user charges, and other taxes trended upward since 1977. The downward trend of property taxes and total taxes increased rapidly in the wake of tax and expenditure limitation (TEL) movements, which started in the late 1970s. With respect to the county expenditure structure and the growing role of counties as service delivery agents, the relative share of spending on traditional county services decreased slightly, whereas the share of municipal-type (local services) and regional-type services in general increased slightly. The findings also show that the presence of binding local TELs and the presence of state-level TELs led to an increase in the share of user charges and fees for traditionally charge-financed services. The findings also show that a modernized county structure led to an increase in the degree of reliance on user charges in counties.
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Taxpayer Reporting Responses and the Tax Reform Act of 1986
James Alm & Sally Wallace
Public Budgeting & Finance, Fall 2010, Pages 1-26
Abstract:
This paper examines the effects of the Tax Reform Act of 1986 on the reporting decisions of taxpayers, using microlevel information from the 1984 and 1989 Statistics of Income. We find that tax reform clearly mattered in the reporting decisions of individuals, with reporting elasticities that cluster between 0.3 and 0.7. However, our results also indicate that individuals' estimated responses vary in different ways for individuals with different income levels, in ways that differ by the types of incomes received by taxpayers, in ways that are sensitive to the estimation approach, and in ways that depend upon data adjustment methods.