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.
Estimating Local Fiscal Multipliers [REVISED]
(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.
State Taxes and Spatial Misallocation [REVISED]
(with P. Fajgelbaum, E. Morales, and O. Zidar), May 2018, Resubmitted, 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 losses. Harmonizing state taxes increases worker welfare by 0.5 percent if government spending is held constant, and by 1.0 percent if government spending responds endogenously. Regional harmonization of state taxes achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed state tax reforms.
The Limits of Meritocracy: Screening Bureaucrats Under Imperfect Verifiability [REVISED]
(with X-Y. Wang and S. Zhang), March 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. Meritocracies that aim to identify high-ability bureaucrats are less effective when performance is imperfectly observed. First, we show meritocratic governments forgo output maximization when they design incentives that screen for ability. This trade-off has empirical implications that reveal whether governments prioritize screening. We show Chinese governments used the One Child Policy to screen mayors, implying a meritocratic objective. Second, we show misreporting limits bureaucratic screening. Using a non-manipulated measure of performance, we show mayors misreported performance metrics, and that promoted mayors were not of higher ability. We thus challenge the notion that meritocratic promotions were effective substitutes for democratic institutions.
Notching R&D Investment with Corporate Income Tax Cuts in China [REVISED]
(with Z. Chen, Z. Liu, and D. Xu), March 2018↳ (1) Paper, (2) BIB
↳Abstract. We analyze the effects of a large fiscal incentive for R&D investment in China that awards a lower average corporate income tax rate to qualifying firms. The sharp incentives of the program generate notches, or jumps, in firm values, and vary over time and across firm characteristics. We exploit a novel link between survey and administrative tax data of Chinese firms to estimate investment responses, the potential for evasion, as well as effects on productivity and tax payments. We find large responses of reported R&D using a cross-sectional "bunching" estimator that is new in the R&D literature. We also find evidence that firms relabel administrative expenses as R&D to qualify for the program, and that about a third of the increase in R&D may be due to relabeling. These effects imply user cost elasticities of 2 for the reported response, and 1.3 for the real response. Using the panel structure of the data, we estimate that the program increased firm productivity by 1.2% for targeted firms. Finally, we estimate a structural model of R&D investment and relabeling, and simulate the effects of counterfactual policies. We recover an elasticity of real R&D to TFP of 9.8%, and show that the cost-efficiency of the program depends on the selection of firms into the program. These results are crucial ingredients for designing policies that trade-off corporate tax revenue with productivity growth.
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds [REVISED]
(with D. Garrett, A. Ordin, and J.W. Roberts), October 2017, under review↳ (1) Paper, (2) BIB
↳Abstract. We show that the effect of tax advantages of municipal bonds on the market microstructure of municipal bond auctions 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. Non-parametric evidence shows that strategic participation and bidding in imperfectly-competitive auctions generates this greater-than-unity passthrough. Using a structural auction model to evaluate the efficiency of Obama and Trump administration proposals, we find that the reduction in municipal borrowing costs is 2.8-times the revenue cost of the tax advantage.
The Structure of State Corporate Taxation and its Impact on State Tax Revenues and Economic Activity (with O. Zidar), February 2018, Resubmitted, Journal of Public Economics↳ (1) Paper, (2) BIB
↳ In Media: IB Times, Tax Notes
↳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.
Corporate Tax Cuts Increase Income Inequality [NEW]
(with S. Nallareddy and E. Rouen), May 2018, under review↳ (1) Paper, (2) BIB
↳ In Media: Op-Ed in The Hill, WSJ, Vedomosti (Russia)
↳Abstract. This paper studies the effects of corporate tax changes on income inequality. Using state corporate tax rate changes as a setting, we show that cutting state corporate tax rates leads to increases in income inequality. This result is robust to using regression and matching approaches, and to controlling for a host of potential confounders. Contrary to the effects of tax cuts, we find no effects of tax increases on income inequality at the state level. We then use data from the IRS Statistics of Income to explore the mechanism behind the rise in income inequality. We find tax cuts lead to higher reported capital income and a decrease in wage and salary income. These effects are concentrated among top earners, and we find no effects for those reporting less than $200,000 in income. This result provides evidence that one mechanism for the relation between tax cuts and inequality is that wealthy individuals shift their income to reduce taxes while others do not. Finally, we explore the effects of corporate tax cuts on capital investment using data from the Annual Survey of Manufactures. We find that tax cuts lead to an increase in real investment, suggesting a trade-off between investment and inequality at the state level.
- ↳ (1) Paper, (2) BIB
↳Abstract. Do tax havens reduce domestic economic activity? This paper explores the effects of unilateral efforts to combat profit shifting on domestic investment and employment. We develop a model of multinational investment that shows profit shifting generates tax complementarities between tax havens and high tax countries. We then analyze the effects of the repeal of Section 936 of the Internal Revenue code as a natural experiment that limited profit shifting activities for US multinationals with operations in Puerto Rico. Using data from the Annual Survey of Manufacturers, we show that industries that were more exposed to § 936 reduced investment in the US. We then use Compustat data to show exposed firms shifted investment to foreign affiliates. These investment responses had large effects on local labor markets. We create a measure of exposure to § 936 for each local labor market that exploits the establishment networks of US multinationals. We find that labor markets with a greater exposure experienced a decline in employment and income growth that persisted even after the phase-out of § 936. These results show that unilateral efforts to combat profit shifting may have large unintended consequences on domestic economic growth.
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.