Tax Policy & the Economy

September 24, 2009
Jeffrey Brown: Organizer

Alberto F. Alesina, Harvard University and NBER; and Silvia Ardagna
Large changes in fiscal policy: taxes versus spending

Alesina and Ardagna study changes in fiscal policy, both fiscal stimuli and fiscal adjustments, in OECD countries from 1970 to 2007. They find that fiscal stimuli based on tax cuts are more likely to increase growth than those based on spending increases. As for fiscal adjustments, those based on spending cuts and not tax increases are more likely to reduce deficits and debt-over-GDP ratios than those based on tax increases. In addition, adjustments on the spending side rather than the tax side are less likely to create recessions.

Mihir A. Desai, Harvard University and NBER; Dhammika Dharmapala, University of Illinois; and Monica Singhal, Harvard University and NBER
Tax Incentives for Affordable Housing: The Low Income Housing Tax Credit

The Low Income Housing Tax Credit (LIHTC) represents a novel tax expenditure program that uses "investable" tax credits to spur production of low-income rental housing. While it has grown into the largest source of new affordable housing in the United States and its structure is now being replicated in other programs, the LIHTC has also drawn skepticism and calls for its repeal. Desai, Dharmapala, and Singhal provide estimates of tax expenditures under this program and discuss pricing, efficiency, and distributional effects of the program. They also consider the effects of the recent financial crisis on the LIHTC program and explore implications of resulting policy changes and proposals.

Gilbert E. Metcalf, Tufts University and NBER
Investment in Energy Infrastructure and the Tax Code

Federal tax policy provides a broad array of incentives for energy investment.Metcalf reviews those policies and estimates the marginal effective tax rates for different energy capital investments as of 2007. He finds that effective tax rates vary widely across investment classes. He then considers investment in wind generation capital and finds that wind investment is strongly responsive to changes in tax policy. Based on his estimates, the elasticity of investment in wind generation with respect to the user cost of capital is in the range of -1 to -2. Finally, Metcalf demonstrates that the federal production tax credit has played a key role in driving wind investment over the past 18 years.

Bruce D. Meyer, University of Chicago and NBER
The Effects of the EITC and Recent Reforms

Meyer first summarizes how the U.S. Earned Income Tax Credit (EITC) operates and describe the characteristics of its recipients. He then discusses empirical work on the effects of the EITC on poverty and income distribution, and its effects on labor supply. Then, he takes up a few policy concerns about the EITC: its possible negative effects on hours of work and marriage, and problems of compliance with the tax system. He also simulates the effects of the recent expansion of the credit that were part of the American Recovery and Reinvestment Act of 2009 for families with three or more children. He examines the key assumption of past work on the labor supply effects of the EITC, and finally briefly discusses the likely effects of further expanding the credit to non-custodial parents, as has been recently done in two jurisdictions.

Robert A. Moffitt, Johns Hopkins University and NBER; and John Karl Scholz, University of Wisconsin, Madison and NBER
Trends in the Level and Distribution of Income Support

Means-tested and social insurance programs in the United States have been transformed over the last 25 years, with expansions in the Medicare and Medicaid health programs, the Earned Income Tax Credit, and Supplemental Security Income, and with contractions in Temporary Assistance for Needy Families. Moffitt and Scholz examine the impact of these changes on benefits received by families in different demographic groups and with different incomes. They find that transfer program expenditures in total rose from 1984 to 2004 but that increase was spread unevenly across different demographic groups and income classes. Very poor elderly, disabled, and childless families received greatly increased expenditures, mostly arising from Social Security, SSDI, SSI, and the health programs. Very poor single parent and two-parent households experienced declines in expenditures, driven largely by lower recipiency rates, benefit receipt, or both in the AFDC/TANF and Food Stamp programs. For example, AFDC-TANF participation for one- adult families with children and market income below 50 percent of the poverty line fell from 58.1 percent in 1984 to 18.2 percent in 2004. However, expenditures received by one- and two- parent households further up the income scale increased, largely because of expansions of the EITC. Thus there was a redistribution of income from the very poor to the near-poor and non-poor for these one-parent and two-parent households, as well as an overall relative redistribution from them to the elderly, disabled, and childless.

Claudia R. Sahm, Federal Reserve Board; Matthew D. Shapiro, University of Michigan and NBER; and Joel B. Slemrod, University of Michigan and NBER
Household Response to the 2008 Tax Rebates: Survey Evidence and Aggregate Implications

Only about one-fifth of respondents in the Reuters/Michigan survey report that the 2008 tax rebates led them to mostly increase spending, while over half said it would lead them to mostly pay off debt. Of those in the mostly-spend category, the response was swift, with over 80 percent reporting increasing their spending within three months of receiving their rebate. Older households, households with higher wealth and higher income, and those expecting future income growth were generally more likely to spend the rebates. A review of other surveys confirms the general pattern of results and suggests that small changes in survey design do not have a major effect on the distribution of responses. The distribution of survey answers corresponds to an aggregate MPC after one year of about one third. Sahm, Shapiro, and Slemrod combine this survey-based estimate of the MPC with the survey-based estimate of the timing of spending to show that the rebates help explain the aggregate movements in saving, spending, and debt in 2008. Because the rebate was large and distributed over a short period, it had a non-trivial effect on total spending in the second and third quarters of 2008. Nonetheless, the results imply that the rebates provided only a modest stimulus to spending per dollar of rebate.

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