NBER Reporter: Winter 2000/2001

Public Economics

The NBER's Program on Public Economics met in Cambridge on November 2-3. Program Director James M. Poterba of MIT served as organizer and chose the following papers for discussion:

Shlomo Yitzhaki, NBER and Hebrew University, "A Public Finance Approach to Assessing Poverty Alleviation"

Discussant: Holger Sieg, NBER and Duke University

Karen E. Dynan, Federal Reserve Board, Jonathan S. Skinner, NBER and Dartmouth College, and Stephen P. Zeldes, NBER and Columbia University, "Do the Rich Save More?" (NBER Working Paper No. 7906)

Discussant: Christopher D. Carroll, NBER and John Hopkins University

Louis Kaplow, NBER and Harvard University, "A Framework for Assessing Estate and Gift Taxation" (NBER Working Paper No. 7775)

Discussant: Antonio Rangel, NBER and Stanford University

Julie B. Cullen, NBER and University of Michigan, Steven D. Levitt, NBER and University of Chicago, and Brian Jacob, University of Chicago, "The Impact of School Choice on Student Outcomes: An Analysis of the Chicago Public Schools" (NBER Working Paper No. 7888)

Discussant: Cecelia E. Rouse, NBER and Princeton University

Francesco Caselli, NBER and Harvard University, and Massimo Morelli, University of Minnesota, "Bad Politicians"

Aaron Yelowitz, NBER and University of California, Los Angeles, "Public Housing and Labor Supply"

Discussant: Mark G. Duggan, NBER and University of Chicago

Roger H. Gordon, NBER and University of Michigan, and Young Lee, University of Maryland, "Do Taxes Affect Corporate Debt Policy? Evidence from U.S. Corporate Tax Return Data" (NBER Working Paper No. 7433)

Discussant: Mihir A. Desai, NBER and Harvard University

Yitzhaki compares cost-benefit analysis and tax reform. He shows that both concepts can be handled by the same method: in both, there is a need to define social distributional weights and to evaluate the marginal efficiency of public funds. He suggests that the social distributional weights be derived from popular indexes of inequality. This would enable the decomposition of the impact of tax reform on growth and redistribution, allowing one to evaluate the trade-off between the two.

The issue of whether households with higher lifetime incomes save a larger fraction of their income is important to the evaluation of tax and macroeconomic policy. Dynan, Skinner, and Zeldes consider the various ways in which life-cycle models can generate differences in saving rates by income groups: by changing Social Security benefits, time preference rates, non-homothetic preferences, bequest motives, uncertainty, and consumption floors. They find a strong positive relationship between personal saving rates and lifetime income. The data do not support theories relying on time preference rates, non-homothetic preferences, or variations in Social Security benefits. Instead, the evidence is consistent with models in which precautionary saving and bequest motives drive variations in saving rates across income groups. Finally, the authors illustrate how models that assume a constant rate of saving across income groups can yield erroneous predictions.

Whether and how estates and gifts should be taxed has long been a controversial subject, and the approach to estate and gift taxation varies among developed countries. Kaplow examines the conceptual basis for various arguments for and against the current estate and gift tax regime and proposed alternatives. He then considers the integration of policy analysis of transfer taxation with analysis of the rest of the tax system, notably, the income tax. How would it be optimal to tax transfers if they are viewed simply as one of many forms of expenditure by donors? And, how do the distinctive features of gifts and bequests alter the conclusions? Kaplow discusses the importance of different transfer motives and reconsiders the analysis in light of the importance of: human capital in intergenerational transfers; differences between inter vivos transfers and bequests; differences between gifts to individuals and gifts to charitable institutions; differences among gifts to donees having varying relationships to the donor; and the possibility that transfers are not explained by maximizing behavior.

Cullen, Jacob, and Levitt explore the impact of school choice through the open enrollment program of the Chicago Public Schools (CPS). Roughly half of the students within the CPS opt out of their assigned high school to attend other neighborhood schools or special career academies and magnet schools. Students who opt out are more likely to graduate than observationally similar students who remain at their assigned schools. However, except for those attending career academies, the gains appear to be driven by the fact that the more motivated students are disproportionately likely to opt out. Students with easy geographical access to a range of schools, other than career academies, are no more likely to graduate on average than students in more isolated areas. Open enrollment apparently benefits those students who take advantage of having access to vocational programs without harming those who do not.

Caselli and Morelli present a simple theory of the quality of elected officials. Quality has (at least) two dimensions: competence and honesty. Voters prefer competent and honest policymakers, so high-quality citizens have a greater chance of being elected to office. But low-quality citizens have a "comparative advantage" in pursuing elective office because their market wages are lower than the market wages of high-quality citizens (competence), and/or because they reap higher returns from holding office (honesty). In the political equilibrium, the average quality of the elected body depends on the structure of rewards from holding public office. Under the assumption that the rewards from office increase with the average quality of office holders, there can be multiple equilibriums in quality. Under the assumption that incumbent policymakers set the rewards for future policymakers, there can be path dependence in quality.

Yelowitz explores how public housing rules affect the work behavior of female-headed households. The public housing program's generosity varies by metropolitan area. It also varies over time, through year-to-year changes in the subsidy and income eligibility limit. And, unlike other welfare programs, the housing benefits vary based on the sex composition of the children. For example, a family with one boy and one girl gets a three-bedroom apartment or voucher, while a family with two boys or two girls gets a two-bedroom apartment or voucher. Yelowitz finds that the public housing rules induce labor supply distortions. Among female-headed households, a one-standard deviation increase in the subsidy reduces labor force participation by 3.6-4.2 percentage points from a baseline participation rate of 70-75 percent.

Using data on all U.S. corporations, Gordon and Lee estimate the effects of changes in corporate tax rates on the debt policies of firms of different sizes. Small firms face very different tax rates than larger firms, and relative tax rates also have changed frequently over time, providing substantial information to identify tax effects. Their results suggest that taxes have had a strong and statistically significant effect on debt levels. For example, cutting the corporate tax rate by 10 percentage points (for example, from 46 percent to 36 percent) and holding personal tax rates fixed will reduce the fraction of assets financed with debt by around 3.5 percent. Since small firms normally rely much more heavily on debt finance yet face much lower tax incentives to use debt, the estimated effect of taxes would be strongly biased downwards without controls for firm size.

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