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 execute the following code:
install.packages(’http://cgibbons.us/research/packages/GSSU.tar.gz’,type = ’source’,repos = NULL)
↳ 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), July 2018, Conditionally Accepted, Journal of Public Economics↳ (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), August 2018, Forthcoming, Review of Economic Studies↳ (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.
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.
The Limits of Meritocracy: Screening Bureaucrats Under Imperfect Verifiability
(with X-Y. Wang and S. Zhang), July 2018, under review↳ (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.
Notching R&D Investment with Corporate Income Tax Cuts in China
(with Z. Chen, Z. Liu, and D. Xu), June 2018, under review↳ (1) Paper, (2) BIB
↳ In Media: Vox China
↳Abstract. We analyze the effects of a Chinese policy that awards substantial corporate tax cuts to firms that increase R&D investment over a given threshold, or notch. We exploit this quasi-experimental variation with administrative tax data in order to shed light on longstanding questions on the effects of fiscal incentives for R&D. We find large responses of reported R&D using a cross-sectional "bunching" estimator that is new to the R&D literature. We also find significant increases in firm-level productivity, even though about 30% of the increase in R&D is due to relabeling of administrative expenses. Anchored by these reduced-form effects, we estimate a structural model of R&D investment and relabeling that recovers a 9.8% return to R&D. We simulate alternative policies and show that firm selection into the program and the relabeling of R&D determine the cost-effectiveness of the policy, and the effects on productivity growth.
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds
(with D. Garrett, A. Ordin, and J.W. Roberts), May 2018, under review↳ (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.
Corporate Tax Cuts Increase Income Inequality
(with S. Nallareddy and E. Rouen), June 2018, under review↳ (1) Paper, (2) BIB
↳ In Media: Op-Ed in The Hill, WSJ, Vedomosti (Russia), Fiscal Times
↳Abstract. This paper studies the effects of state corporate tax changes on income inequality. We find that corporate tax cuts increase income inequality using both regression and matching approaches. We find no effects of tax increases on inequality. We analyze potential mechanisms for this result and find tax cuts lead to higher reported capital income and lower salary income for top earners. This suggests that wealthy individuals respond by shifting their income to avoid taxes. Finally, we show that tax cuts lead to an increase in capital investment, which suggests a trade-off between investment and inequality at the state level.
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.
Work in Progress
Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform
(with X. Jiang and D. Xu)
↳ Please email for an advance draft.
↳Abstract. How do firms respond to fiscal incentives for investment? We study a corporate tax reform at the beginning of 2009 in China that affected the user cost of capital by changing the deductibility of fixed assets expenditures under the value-added tax (VAT) regime. The reform changed investment incentives by allowing firms to deduct input VAT, 17 percent of the purchase price, on eligible capital from taxable income. We show that firms increased investment in types of capital favored by the reform while decreased investment in types of capital that were not affected by the reform. In addition, compared to firms that were already benefiting from this policy due to a pilot project, non-pilot firms increased overall investment in the extensive margin. These results show that firms had significant responses to this policy that was designed to stimulate business investment during the financial crisis.
- ↳ 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.
How Elastic is the Demand for Tax Havens? Evidence from the US Possessions Corporations Tax Credit
(with D. Garrett), requested for AEA Papers & Proceedings
↳ Please email for an advance draft.
↳Abstract. Why do some firms adopt certain tax havens and how sensitive is the demand for tax havens? In this paper we address these questions by studying the decision of firms to take advantage of profit shifting activities through affiliates in Puerto Rico. We build on work by Slemrod and Grubert (1998) and Su�rez Serrato (2018) by identifying firms that could have exploited the US Possessions Corporations Tax Credit as a conduit for profit shifting. We study the firm characteristics that predict that a US corporation would establish an affiliate in Puerto Rico including firms� patenting activity, R&D intensity, as well as regulatory rules specific to the pharmaceutical industry. We then study whether these firms also exploited other tax havens by using data from SEC filing Exhibit 21 as well as global affiliate data from ORBIS to measure firms� access to tax havens. Finally, we study whether firms� access to other tax havens affected their response to the repeal of the US Possessions Corporations Tax Credit and, in particular, whether firms responded by expanding their network of tax haven affiliates.