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Targeting In-Kind Transfers Through Market Design: A Revealed Preference Analysis of Public Housing Allocation
Author(s):
Daniel C. Waldinger, New York University and NBER
Abstract:

Public housing benefits are rationed through waitlists. Waldinger argues that the range of allocation policies used across US cities involves a trade-off between two policy objectives: maximizing welfare gains for tenants, and targeting the most economically disadvantaged applicants. Using waitlist data from Cambridge, MA, Waldinger develops and estimate a model of public housing preferences in a setting where heterogeneous apartments are rationed through waiting time. Counterfactual simulations show that the preferred mechanism depends on social preferences for redistribution. However, many cities use systems that would be sub-optimal in Cambridge for any value of redistribution.

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Tax Policy and Lumpy Investment Behavior: Evidence from China’s VAT Reform
Author(s):
Juan Carlos Suárez Serrato, Duke University and NBER
Daniel Xu, Duke University and NBER
Xian Jiang, Duke University
Zhao Chen, Fudan University
Zhikuo Liu, Fudan University
Abstract:

A universal fact of firm-level data is that investment is lumpy: firms either replace a considerable fraction of their existing capital (spike) or do not invest at all (inaction). Suárez Serrato, Xu, Jiang, Chen, and Liu incorporates the lumpy nature of investment into the study of how tax policy affects investment behavior. They show that tax policy can directly impact the lumpiness of investment and that the effectiveness of tax incentives in stimulating investment depends crucially on interactions with investment frictions. The researchers illustrate these results by studying one of the largest tax incentives for investment in recent history: China's 2009 VAT reform. Using administrative tax data and a difference-in-differences design, the researchers document that the reform increased investment by 36% and that this effect is driven by additional investment spikes. They then simulate the fiscal cost of stimulating investment through different tax policies using a dynamic investment model that is consistent with the reduced-form effects of the reform. Policies that directly reduce the likelihood of firm inaction (e.g., investment tax credits) are more effective at stimulating investment than policies that only reduce the tax cost of investment (e.g., corporate income tax cuts).

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Behavioral Responses to State Income Taxation of High Earners: Evidence from California
Author(s):
Joshua Rauh, Stanford University and NBER
Ryan J. Shyu, Amazon.com, Inc.
Abstract:

In November 2012, California voters passed increases to state marginal income tax rates of 1 to 3 percentage points for upper-income households at different points in the income distribution. Drawing on the universe of California income tax filings and the variation imposed by this tax policy change, Rauh and Shyu present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new 12.3% top tax bracket introduced by Proposition 30 moved out from full-year residency of California in 2013. The majority of this mobility is accounted for by taxpayers who persistently earn high incomes relocating to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, the researchers use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, the researchers estimate a substantial intensive margin response which begins in 2012 and persists through 2014 among California top-bracket taxpayers. This response is concentrated in non-investment income. The estimates imply an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform in 2013, with the extensive margin accounting for 9.5% of this total response.

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This paper was distributed as Working Paper 26349, where an updated version may be available.

Can Wealth Taxation Work in Developing Countries? Quasi-Experimental Evidence from Colombia
Author(s):
Juliana Londoño-Vélez, University of California, Los Angeles and NBER
Abstract:

Londono-Velez and Avila-Mahecha study individual responses to wealth taxation and enforcement using Colombian tax microdata linked with the leaked Panama Papers. They exploit reforms modifying wealth tax rates and enforcement. Individuals lower their reported wealth in response to wealth taxes, with an estimated (short-term) elasticity of 2. In addition, individuals avoid taxes by hiding assets offshore in neighboring tax havens. Yet noncompliance also responds to enforcement. A disclosure scheme encouraged evaders -- including 40% of the wealthiest 0.01% -- to reveal hidden wealth worth 1.7% of GDP. Furthermore, increased detection probability triggered by Panama Papers leak raised disclosures by 830%, improving wealth tax collection and progressivity.

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Is Spending on Schools Efficient? A National Study of the Capitalization of School Spending and Local Taxes
Author(s):
Patrick Bayer, Duke University and NBER
Peter Q. Blair, Harvard University and NBER
Kenneth Whaley, University of Houston
A Unified Welfare Analysis of Government Policies
Author(s):
Nathaniel Hendren, Harvard University and NBER
Ben Sprung-Keyser, Harvard University
Abstract:

Hendren and Sprung-Keyser conduct a comparative welfare analysis of 133 historical policy changes over the past half-century in the United States, focusing on policies in social insurance, education and job training, taxes and cash transfers, and in-kind transfers. For each policy, the researchers use existing causal estimates to calculate both the benefit that each policy provides its recipients (measured as their willingness to pay) and the policy's net cost, inclusive of long-term impacts on the government's budget. Hendren and Sprung-Keyser divide the willingness to pay by the net cost to the government to form each policy's Marginal Value of Public Funds, or its "MVPF". Comparing MVPFs across policies provides a unified method of assessing their impact on social welfare. The results suggest that direct investments in low-income children's health and education have historically had the highest MVPFs, on average exceeding 5. Many such policies have paid for themselves as governments recouped the cost of their initial expenditures through additional taxes collected and reduced transfers. The researchers find large MVPFs for education and health policies among children of all ages, rather than observing diminishing marginal returns throughout childhood. They find smaller MVPFs for policies targeting adults, generally between 0.5 and 2. Expenditures on adults have exceeded this MVPF range in particular if they induced large spillovers on children. The researchers relate their estimates to existing theories of optimal government policy and discuss how the MVPF provides lessons for the design of future research.

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Bidding for Firms: Subsidy Competition in the U.S.
Author(s):
Cailin R. Slattery, Columbia University
Abstract:

In the US, states compete to attract firms by offering discretionary subsidies, but little is known about how states choose their subsidy offers, and whether such subsidies affect firms' location choices. Slattery uses an oral ascending (English) auction to model the subsidy "bidding" process and estimate the efficiency of subsidy competition. The model allows state governments to value both the direct and indirect (spillover) job creation of firms when submitting bids, and firms to take both subsidies offered and state characteristics into account when choosing their location. To estimate the model, Slattery hand-collects a new and unique dataset on state incentive spending and subsidy deals from 2002-2016. Slattery estimates both the distribution of states' (revealed) valuations for firms that rationalizes observed subsidies, and firms' valuations for state characteristics. In order to allow states to value potential spillovers, Slattery estimates the effect of subsidy-winning firms' locations on the entry decision of smaller firms, using a discrete choice entry model. Slattery provides the first empirical evidence that states use subsidies to help large firms internalize the positive spillovers, in the form of indirect job creation, they have on the states. Moreover, subsidies have a sizable effect on firm locations. In particular, it is found that without subsidies approximately 68% of firms would locate in a different state, and the number of anticipated indirect jobs created would decrease by 32%. With subsidies, total welfare (the sum of state valuations and firm profits) increases by 22%, but this welfare gain is captured entirely by the firms.

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Payday Lending, Self Control, and Consumer Protection
Author(s):
Hunt Allcott, Microsoft Research and NBER
Joshua J. Kim, Stanford University
Dmitry Taubinsky, University of California, Berkeley and NBER
Jonathan Zinman, Dartmouth College and NBER
Rational Illiquidity and the Marginal Propensity to Consume: Theory and Evidence from Income Tax Withholding and Refunds
Author(s):
Michael Gelman, Claremont McKenna College
Shachar Kariv, University of California at Berkeley
Matthew D. Shapiro, University of Michigan and NBER
Dan Silverman, Arizona State University and NBER
Abstract:

Having low liquidity and a high marginal propensity to consume (MPC) are tightly linked. Gelman, Kariv, Shapiro, and Silverman analyze this linkage in the context of income tax withholding and refunds. A theory of rational cash management with income uncertainty endogenizes the relationship between illiquidity and the MPC, which accounts for the finding that households tend to spend tax refunds as if they valued liquidity, yet do not act to increase liquidity by reducing their income tax withholding. The theory is supported by individual-level evidence, including a positive correlation between the size of tax refunds and the MPC out of those refunds.

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