Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms (with O. Zidar), American Economic Review, 106(9): 2582-2624, September 2016↳ (1) Paper, (2) Slides, (3) NBER Working Paper, (4) NBER Digest Summary , (5) BIB (6) Replication Archive
↳ In Media: Washington Post, Vox, Washington Post Wonkblog, Chicago Sun-Times, Washington Center for Equitable Growth, Wall Street Journal.
↳Abstract. This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners using variation in state corporate tax rates and apportionment rules. We develop a spatial equilibrium model with imperfectly mobile firms and workers. Firm owners may earn profits and be inframarginal in their location choices due to differences in location-specific productivities. We use the reduced-form effects of tax changes to identify and estimate incidence as well as the structural parameters governing these impacts. In contrast to standard open economy models, firm owners bear roughly 40% of the incidence, while workers and landowners bear 30-35% and 25-30%, respectively.
Broken or Fixed Effects? (with M. Urbancic and C. Gibbons), December 2017, Journal of Econometric Methods 2018; 20170002↳ (1) Paper, (2) BIB (3) Replication Archive
↳ Stata and R Commands
↳ To Install the R Command please use the devtools package. After loading that package, execute the following code:
↳ To Install the Stata Command execute the following code:
* Loads website
net from http://www.jcsuarez.com/GSSU
* Describes package
net describe GSSU
* Installs commands
net install GSSU
* Downloads example data
net get GSSU
* Installs required package for GSSUgetrdone.ado
ssc install estout, replace
↳Abstract. We replicate eight influential papers to provide empirical evidence that, in the presence of heterogeneous treatment effects, OLS with fixed effects (FE) is generally not a consistent estimator of the sample-weighted average treatment effect (SWE). We propose two alternative estimators that recover the SWE in the presence of group-specific heterogeneity. We document that heterogeneous treatment effects are common and the SWE is often statistically and economically different from the FE estimate. In all but one of our replications, there is statistically significant treatment effect heterogeneity and, in six, the SWEs are either economically or statistically different from the FE estimates.
The Structure of State Corporate Taxation and its Impact on State Tax Revenues and Economic Activity (with O. Zidar), Journal of Public Economics, Volume 167, November 2018, Pages 158-176↳ (1) Paper, (2) BIB
↳ In Media: IB Times, Tax Notes, Chicago Booth Review
↳Abstract. This paper documents facts about the state corporate tax structure -- tax rates, base rules, and credits -- and investigates its consequences for state tax revenue and economic activity. We present three main findings. First, tax base rules and credits explain more of the variation in the state corporate tax revenue than tax rates do. Second, although states typically do not offset tax rate changes with base and credit changes, the effects of tax rate changes on tax revenue and economic activity depend on the breadth of the base. Third, as states have narrowed their tax bases, the relationship between tax rates and tax revenues has diminished. Overall, changes in state tax bases have made the state corporate tax system more favorable for corporations and are reducing the extent to which tax rate increases raise corporate tax revenue.
State Taxes and Spatial Misallocation (with P. Fajgelbaum, E. Morales, and O. Zidar), The Review of Economic Studies, Volume 86, Issue 1, 1 January 2019, Pages 333-376.↳ (1) Paper, (2) BIB
↳ In Media: VOX EU, WUNC
↳Abstract. We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6 percent if government spending is held constant, and by 1.2 percent if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.
How Elastic is the Demand for Tax Havens? Evidence from the US Possessions Corporations Tax Credit (with D. Garrett), May 2019, AEA Papers and Proceedings, 109 : 493-99.
↳ (1) Paper, (2) BIB
↳Abstract. Why do some firms adopt certain tax havens and how sensitive is the demand for tax havens? We address these questions by studying how the repeal of Section 936 tax credits affected firms with affiliates in Puerto Rico. We first describe the characteristics of US multinationals that were exposed to Section 936. We then show that the market value of exposed firms decreased after losing access to Section 936, implying that firms could not perfectly substitute to other tax havens. Finally, we find that firms exposed to Section 936 did not respond by expanding their network of tax havens.
Tax Policy and Local Labor Market Behavior (with D. Garrett and E. Ohrn), May 2019, forthcoming, American Economic Review: Insights
↳ (1) Paper, (2) BIB
↳ (3) NBER Working Paper Version with Additional Results
↳ (4) Replication Archive
↳ In Media: The Washington Post, Bloomberg, Op-ed in The Hill, WSJ: Real Time Blog
↳Abstract.Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry variation in policy generosity interacted with county-level industry location data. This strategy identifies the partial equilibrium effects of accelerated depreciation. Places that experience larger decreases in investment costs see an increase inemployment and earnings. In contrast, the policy does not have positive effects on earnings-per-worker. Overall, our findings suggest federal corporate tax policy has large effects onlocal labor markets.
The Limits of Meritocracy: Screening Bureaucrats Under Imperfect Verifiability
(with X-Y. Wang and S. Zhang), May 2019, forthcoming, Journal of Development Economics↳ (1) Paper, (2) BIB
↳ In Media: Money Talks, The Economist, Financial Times
↳ Note: This replaces an earlier version of the paper titled "The One Child Policy and Promotion of Mayors in China."
↳Abstract. Does bureaucratic ability predict promotion in governments? We show that self-reported performance in enforcing the One Child Policy predicts mayoral promotion in China. However, misreporting handicaps screening a non-manipulated performance measure does not predict promotion. We show that this is consistent with a model where a government has a meritocratic objective but underestimates the imperfect verifiability of performance, rather than a model where a government is only interested in the illusion of meritocracy. Thus, despite meritocratic intentions, we challenge the notion that a successful promotion system effectively substituted for democratic institutions in explaining Chinese growth.
Estimating Local Fiscal Multipliers
(with P. Wingender), July 2016, R&R, Econometrica (3rd Round)↳ (1) Revised Paper (July 2016), (2) BIB
Previous Version (March 2014)
↳Abstract. We propose a new source of cross-sectional variation that may identify causal impacts of government spending on the economy. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. Since a different method is used to estimate non-Census year populations, this change in methodology leads to variation in the allocation of billions of dollars in federal spending. Our baseline results follow a treatment-effects framework where we estimate the effect of a Census Shock on federal spending, income, and employment growth by re-weighting the data based on an estimated propensity score that depends on lagged economic outcomes and observed economic shocks. Our estimates imply a local income multiplier of government spending between 1.7 and 2, and a cost per job of $30,000 per year. A complementary IV estimation strategy yields similar estimates. We also explore the potential for spillover effects across neighboring counties but we do not find evidence of sizable spillovers. Finally, we test for heterogeneous effects of government spending and find that federal spending has larger impacts in low-growth areas.
Estimating the Incidence of Government Spending
(with P. Wingender), December 2014↳ (1) Paper, (2) Slides, (3) BIB
↳ Policy Brief: SIEPR.
↳Abstract. This paper analyzes the economic incidence of sustained changes in federal government spending at the local level. We use a new identification strategy to isolate geographical variation in formula-based federal spending and develop three sets of results. First, we find that sustained changes in federal spending have significant effects on migration, income, wages, and rents, as well as on local government revenues and expenditures. Second, we show that the effects of a government spending shock are qualitatively different from those of a local labor demand shock. We develop a spatial equilibrium model to show that when workers value publicly-provided goods, a change in government spending at the local level will affect equilibrium wages through shifts in both the labor demand and supply curves. We test the reduced-form predictions of the model and show that workers value government services as amenities. Finally, we estimate workers' marginal valuation of government services and find that unskilled workers have a higher valuation of government services than skilled workers. We use these estimates to decompose the demand and supply components of a government spending shock and to evaluate the impacts on welfare that are produced by increasing government spending in a given area. Our estimates conclude that an additional dollar of government spending increases welfare by $1.45 in the median county.
Notching R&D Investment with Corporate Income Tax Cuts in China
(with Z. Chen, Z. Liu, and D. Xu), November 2019, under review↳ (1) Paper, (2) BIB
↳ In Media: Vox China, Vox EU
↳Abstract. We study a Chinese policy that awards substantial tax cuts to firms with R&D investment over a threshold, or notch. Quasi-experimental variation and administrative tax data show that firms significantly increase reported R&D, and that relabeling of expenses accounts for 30% of this increase. Accounting for relabeling is crucial to obtain unbiased estimates of the productivity effects of real R&D and to quantify the fiscal costs of stimulating R&D. We estimate a 9.8% productivity-to-R&D elasticity using a structural model of investment and relabeling. Policy simulations show that selection into the program and relabeling costs determine the cost-effectiveness of stimulating R&D.
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds
(with D. Garrett, A. Ordin, and J.W. Roberts), May 2018, R&R, The Review of Economic Studies↳ (1) Paper, (2) BIB
↳ In Media: Brookings
↳Abstract. We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show this interaction can limit the ability of bidders to extract informa- tion rents and is a crucial determinant of state and local governments' borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp. lowers mean borrowing costs by 9-10%, consistent with a greater-than-unity passthrough elasticity. We estimate a structural auction model to measure markups, and to illustrate and quantify how the interaction between tax policy and bidder strategic behavior leads to large passthrough elasticities. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. We find that the resulting increase in municipal borrowing costs is 2.8 times as large as the tax savings induced by these policies.
Do Corporate Tax Cuts Increase Income Inequality?
(with S. Nallareddy and E. Rouen), August 2019, under review↳ (1) Paper, (2) BIB
↳ In Media: Op-Ed in The Hill, WSJ, Vedomosti (Russia), Fiscal Times
↳Abstract. We study the effects of corporate taxes on income inequality. Using state corporate taxes as a setting, we provide evidence that corporate tax cuts lead to increases in income inequality. This result is robust across regression, matching, and synthetic controls approaches, and to controlling for a host of potential confounders. We use Statistics of Income data from the IRS to explore mechanisms behind this result. We find tax cuts lead to higher income for both top and bottom earners, but the gains to capital income for top earners exceed the gains to total income for bottom earners. This result suggests that, while all earners appear to benefit from a corporate tax cut, the relation between tax cuts and inequality is positive, in part, because high income individuals shift their compensation to reduce taxes.
Unintended Consequences of Eliminating Tax Havens, July 2018, under review↳ (1) Paper, (2) BIB
↳ In Media: Bloomberg, Brookings Hutchins Roundup, City A.M., The Hill, The Hindu, Italia Oggi
↳Abstract. We show that eliminating firms' access to tax havens has unintended consequences for economic growth. We analyze a policy change that limited profit shifting for US multinationals, and show that the reform raised the effective cost of investing in the US. Exposed firms respond by reducing global investment and shifting investment abroad -- which lowered their domestic investment by 38% -- and by reducing domestic employment by 1.0 million jobs. We then show that the costs of eliminating tax havens are persistent and geographically concentrated, as more exposed local labor markets experience declines in employment and income growth for over 15 years. We discuss implications of these results for other efforts to limit profit shifting, including new taxes on intangible income in the Tax Cuts and Jobs Act of 2017.
Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform
(with Z. Chen, X. Jiang , Z. Liu, and D. Xu), September 2019, under review
↳ (1) Paper.
↳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). This paper incorporates the lumpy nature of investment into the study of how tax policy affects investment behavior. We 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. We 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, we document that the reform increased investment by 36% and that this effect is driven by additional investment spikes. We 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).
Work in Progress
- ↳ Please email for an advance draft.
↳Abstract. Individuals face non-linear incentives in myriad situations including incentives for retirement savings, tax preferences for labor supply, bulk pricing of retail goods, as well as service rates that vary upon usage. How individuals respond to non-linear incentives is an empirical question with important economic consequences in a number of domains. This paper reports the results of a laboratory experiment designed to analyze individual choice in a setting of non-linear incentives characterized by kinked budget sets (i.e. piece-wise linear and convex) and answer questions that are beyond the reach of what market data can reveal. We find that, while choice data in kinked budget sets follows similar patterns of rationality as data from linear budgets, the choices from both settings cannot be explained by a common decision rule. Almost half of the subjects display such coherently arbitrary preferences that are, in turn, associated with significantly lower price-responsiveness when facing non-linear incentives. Finally, we show that this behavioral departure from the rational benchmark has important consequences for the welfare analysis of non-linear pricing schemes and non-linear taxes as well as for policies that advocate the provision of information regarding marginal incentives.
Monitoring Tax Compliance by Multinational Firms: Evidence from a Natural Experiment in Chile
(with Sebastián Bustos, Dina Pomeranz, José Vila-Belda, and Gabriel Zucman)
↳ Please email for an advance draft.
↳Abstract. Taxing multinational firms is a growing challenge for tax authorities around the world. Large resources have been devoted by the OECD and many tax authorities to strengthen the monitoring of international transactions within multinational firms in order to reduce transfer mispricing for profit shifting. This study evaluates the effect of a major reform in Chile implementing the OECD guidelines for tax enforcement on multinational firms. We analyze the impact of the reform on tax payments with an event study design using administrative tax data containing information on the cross- border real and financial transactions conducted by medium and large Chilean firms. Compared to domestic firms with similar characteristics, multinational firms have less taxable profits and pay lower taxes. The reform was not able to close that gap. Tax revenue only increased by 1.1%, which is not statistically significant and substantially below government expectations.
Optimal Property Taxation: Quasi-Experimental Evidence from Mexico
(with Anne Brockmeyer, Alejandro Estefan, and Karina Ramírez)
↳ Please email for an advance draft.
↳Abstract. This paper studies taxpayer compliance responses to property taxation. We argue that the compliance (i.e. payment) elasticity with respect to the tax rate is the key parameter for the optimal design of property tax schedules, as taxpayers cannot adjust the tax base in the short term. Exploiting quasi-experimental variation in property tax rates and tax records from two million properties in Mexico City, we estimate small compliance elasticities between 0.19 and 0.27. The elasticity increases with the size of the tax rate change, but is too small to reverse the mechanical effect of the higher tax rate. We thus conclude that current property tax rates in Mexico City are below the revenue-maximizing Laffer rate.