Public Economics

Members of the NBER's Public Economics Program met April 5-6 in Cambridge. Program Directors Raj Chetty of Stanford University and Amy Finkelstein of MIT and Faculty Research Fellow Stefanie Stantcheva of Harvard University organized the meeting. These researchers' papers were presented and discussed:

Simon Jaeger, MIT and NBER; Benjamin Schoefer, University of California, Berkeley; and Josef Zweimueller, University of Zurich

Marginal Jobs and Job Surplus: Evidence from Separations and Unemployment Insurance

Jaeger, Schoefer, and Zweimueller study the role of marginal jobs in employment adjustment, in three steps. First, the researchers provide evidence on job destruction in response to reductions in job surplus from improved worker outside options. Their design exploits a sharp quasi-experimental increase in unemployment benefits for older workers in Austria. The treatment effect is larger for workers with larger outside option increases, proxied for with their ex-ante risk of exhausting the pre-reform maximum benefit duration when unemployed. Second, they isolate and characterize the marginal matches driving this separation response, extending complier analysis to difference-in-difference settings. Jaeger, Schoefer, and Zweimueller find that marginal jobs originate from blue- collar occupations in industries with a high incidence of sickness and disability among older workers. Compared to surviving jobs, marginal jobs had lower earnings and lower worker fixed effects and were more prevalent in shrinking industries and firms. Taken together, their findings indicate that increasing workers' outside options destroys low-surplus jobs. Third, one direct implication is that outside options shift the composition of surviving jobs towards higher-surplus jobs. To test this prediction, the researchers exploit the abolition of the reform to show that the formerly-treated cohorts indeed exhibit lower extensive-margin aggregate elasticities to subsequent labor demand shocks – due to the missing mass of marginal matches the reform had previously destroyed.

Matthew C. Weinzierl, Harvard University and NBER

A Welfarist Role for Nonwelfarist Rules (NBER Working Paper No. 23587)

Weinzierl proposes and formalizes an argument for why economists working in the welfarist normative tradition should include nonwelfarist principles in how they judge economic policy. The key idea behind this argument is that the world is too complex, and our ability to model it too limited, for us to fully trace a policy's effects on welfare. Nonwelfarist principles can be valuable to a welfarist facing this limitation if they act as informational proxies, carrying accumulated knowledge about the effects of policy that otherwise cannot be considered. This argument can be seen both as extending a familiar logic for rule utilitarianism beyond the realm of individual ethics and as a specific version of a broader argument made for centuries by theorists from Hume to Hayek. Weinzierl also provides evidence of an example in which real-world policy judgments are consistent with this theoretical argument. Results from a novel U.S. opinion survey show that approximately half of respondents reject redistribution driven by envy even though it generates direct utilitarian gains. That share rises as the role of envy is made more salient, consistent with respondents using nonwelfarist principles to encode concerns about the unobservable consequences of policy.

Jeff Larrimore, Federal Reserve Board, and Jake Mortenson and David Splinter, Joint Committee on Taxation

Household Incomes in Tax Data: Using Addresses to Move from Tax Unit to Household Income Distributions

Tax return data have been limited by their inability to identify members of separate tax units living in the same household. Larrimore, Mortenson, and Splinter overcome this obstacle and present the first set of tax-based household income and inequality measures. They find that using tax units as a proxy for households overstates household income inequality, as measured by Gini coefficients, by 10 percent. Consistent with previous findings, the researchers also estimate that the CPS understates household income inequality by 6 percent. Compared to conventional tax unit level measures, the federal income tax code and EITC are less progressive when measured at the household level.

Ugo Troiano, University of Michigan and NBER

Do Taxes Increase Economic Inequality? A Comparative Study Based on the State Income Tax (NBER Working Paper No. 24175)

Troiano presents new quasi-experimental evidence on the relationship between tax policies and the distribution of income. They focus on the twentieth century United States, and on the state income tax, since its inception. They study three major policy events that, as the existing literature shows, significantly raised the revenues from the income tax: the introduction of the state income tax, the introduction of tax withholding together with third-party reporting, and the ntergovernmental agreements between the federal and state governments to coordinate tax auditing efforts. All the three policies were introduced in a staggered fashion and increased tax revenues, but had different fiscal consequences. Despite this, Troiano finds that income inequality raised after all the tax policy events. The result is robust to different measures of economic inequality and econometric specifications.

John Beshears, David Laibson, and Brigitte C. Madrian, Harvard University and NBER; James J. Choi, Yale University and NBER; and Bill Skimmyhorn, United States Military Academy

Borrowing to Save? The Impact of Automatic Enrollment on Debt

How much of the retirement savings induced by automatic enrollment is offset by increased borrowing outside the retirement savings plan? Beshears, Choi, Laibson, Madrian, and Skimmyhorn study a natural experiment created when the U.S. Army began automatically enrolling its newly hired civilian employees into the Thrift Savings Plan (TSP) at a default contribution rate of 3% of income. Four years after hire, automatic enrollment causes no significant change in debt excluding auto loans and first mortgages (point estimate = 0.9% of income, 95% confidence interval = [-0.9%, 2.7%]). Automatic enrollment does significantly increase auto loan balances by 2.0% of income and first mortgage balances by 7.4% of income. These secured liabilities have muted immediate effects on net worth because they are used to acquire assets, but their increase could signal that automatic enrollment previously decreased non-TSP assets. Larger secured loans could also decrease long-run net worth through greater depreciation and financing costs.

Matthew Davis, University of Pennsylvania, and Fernando V. Ferreira, University of Pennsylvania and NBER

Housing Disease and Public School Finances (NBER Working Paper No. 24140)

Housing disease is a fiscal externality from local housing markets in which unexpected booms generate extra revenues that schools administrators have incentives to spend. Using the timelines of housing booms to deal with reverse causality and changes in household composition, Davis and Ferreira estimate housing price elasticities of per-pupil expenditures of 0.16-0.20, which accounts for approximately half of the dramatic rise in public school spending of the 1990s and 2000s. School districts primarily spent the extra resources on instruction and capital projects, not on administrative expenditures, suggesting that the cost increase was accompanied by improvements in the quality of school inputs.

John Guyton, Kara Leibel, Mark Payne, and Brenda Schafer, Internal Revenue Service; Dayanand S. Manoli, University of Texas at Austin and NBER; and Ankur Patel, Department of the Treasury

Tax Enforcement and Tax Policy: Evidence on Taxpayers' Responses to EITC Correspondence Audits (NBER Working Paper No. 24465)

Each year, the United States Internal Revenue Service (IRS) contacts selected taxpayers who claim Earned Income Tax credit (EITC) benefits via mail and requests additional documentation to verify these claims. Guyton, Leibel, Manoli, Patel, Payne, and Schafer use administrative tax data to examine the impacts of these correspondence audits on taxpayer behavior. The quasi-experimental research design compares randomly selected audited taxpayers to taxpayers with similar risk scores who were randomly not selected for correspondence audits. The results indicate that, in the years following an audit, there are decreases in the likelihoods of claiming EITC benefits and filing returns. Taxpayers with self-employment income at the time of audit appear likely to increase wage employment following correspondence audits, while taxpayers with wage income at the time of audit appear likely to decrease labor force participation following disallowance of EITC benefits. Consistent with prior estimates, the results for wage earners indicate labor force participation elasticities of roughly 0.05 to 0.07.

Niels Johannesen, University of Copenhagen; Patrick Langetieg, Internal Revenue Service; Daniel Reck, London School of Economics; Max Risch, University of Michigan; and Joel Slemrod, University of Michigan and NBER

Taxing Hidden Wealth: The Consequences of US. Enforcement Initiatives on Evasive Foreign Accounts (NBER Working Paper No. 24366)

In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. Johannesen, Langetieg, Reck, Risch, and Slemrod use administrative microdata to examine the impact of the enforcement efforts on taxpayers' reporting of offshore accounts and income. Enforcement caused approximately 60,000 individuals to disclose offshore accounts with a combined value of around $120 billion. Most disclosures happened outside offshore voluntary disclosure programs by individuals who never admitted prior noncompliance. The disclosed accounts were concentrated in countries whose institutions facilitate tax evasion. The enforcement-driven disclosures increased annual reported capital income by $2.5-$4 billion corresponding to $0.7-$1.0 billion in additional tax revenue.

John L. Voorheis, U.S. Bureau of the Census

Air Quality, Human Capital Formation and the Long-term Effects of Environmental Inequality at Birth

A growing body of literature suggests that pollution exposure early in life can have substantial long term effects on an individual's economic well-being as an adult, however the mechanisms for these effects remain unclear. Voorheis contributes to this literature by examining the effect of pollution exposure on several intermediate determinants of adult wages using a unique linked dataset for a large sample of individuals from two cohorts: an older cohort born around the 1970, and a younger cohort born around 1990. The dataset links responses to the American Community Survey to SSA administrative data, the universe of IRS Form 1040 tax returns, pollution concentration data from EPA air quality monitors and satellite remote sensing observations. In both OLS and IV specifications, Voorheis finds that pollution exposure at birth has a large and economically significant effect on college attendance among 19-22 year olds. Using conventional estimates of the college wage premium, these effects imply that a 10 µg/m3 decrease in particulate matter exposure at birth is associated with a $190 per year increase in annual wages. This effect is smaller than the wage effects in the previous literature, which suggests that human capital acquisition associated with cognitive skills cannot fully explain the long term wage effects of pollution exposure. Indeed, Voorheis finds evidence for an additional channel working through non-cognitive skill -- pollution exposure at birth increases high school non-completion and incarceration among 16-24 year olds, and that these effects are concentrated within disadvantaged communities, with larger effects for non-whites and children of poor parents. Voorheis also finds that pollution exposure during adolescence has statistically significant effects on high school non-completion and incarceration, but no effect on college attendance. These results suggest that the long term effects of pollution exposure on economic well-being may run through multiple channels, of which both non-cognitive skills and cognitive skills may play a role.

Kavan J. Kucko, Boston University; Kevin Rinz, U.S. Bureau of the Census; and Benjamin Solow, Georgetown University

Labor Market Effects of the Affordable Care Act: Evidence from a Tax Notch

Kucko, Rinz, and Solow investigate whether taxpayers respond to a large, ACA-induced upward tax notch at the Federal Poverty Level. Using administrative tax data, they document bunching in the income distribution and provide estimates of the taxable income elasticity. Their estimates are the only ones using U.S. data that are identified by panel variation in budget constraints rather than functional form assumptions (Blomquist and Newey, 2017), a feature of the researchers' novel longitudinal estimator. Consistent with Saez (2010), they find bunching only among the self-employed. Analysis of linked tax and survey data suggests that bunching is likely not representative of changes in labor supply.

Adam Bee and Joshua Mitchell, U.S. Bureau of the Census

Do Older Americans Have More Income than We Think?

The Current Population Survey Annual Social and Economic Supplement (CPS ASEC) is the source of the nation's official household income and poverty statistics. In 2012, the CPS ASEC showed that median household income was $33,800 for householders aged 65 and over and the poverty rate was 9.1 percent for persons aged 65 and over. When Bee and Mitchell instead use an extensive array of administrative income records linked to the same CPS ASEC sample, they find that median household income was $44,400 (30 percent higher) and the poverty rate was just 6.9 percent. They demonstrate that large differences between survey and administrative record estimates are present within most demographic subgroups and are not easily explained by survey design features or processes such as imputation. Further, the researchers show that the discrepancy is mainly attributable to under-reporting of retirement income from defined benefit pensions and retirement account withdrawals. Using archived survey and administrative record data, the researchers extend their analysis back to 1990 and provide evidence of under-reporting from an earlier period. They also document a growing divergence over time between the two measures of median income which is in turn driven by the growth in retirement income under-reporting. Turning to synthetic cohort analysis, the researchers show that in recent years, most households do not experience substantial declines in total incomes upon retirement or any increases in poverty rates. Their results have important implications for assessing the relative value of different sources of income available to older Americans, including income from the nation's largest retirement program, Social Security. The researchers caution, however, that their findings apply to the population aged 65 and over in 2012 and cannot easily be extrapolated to future retirees.

Hunt Allcott, New York University and NBER; Benjamin Lockwood, University of Pennsylvania and NBER; and Dmitry Taubinsky, University of California, Berkeley and NBER

Ramsey Strikes Back: Optimal Commodity Taxes and Redistribution in the Presence of Salience Effects (NBER Working Paper No. 24233)

An influential result in modern optimal tax theory, the Atkinson and Stiglitz (1976) theorem, holds that for a broad class of utility functions, all redistribution should be carried out through labor income taxation, rather than differential taxes on commodities or capital. An important requirement for that result is that commodity taxes are known and fully salient when consumers make income-determining choices. Allcott, Lockwood, and Taubinsky allow for the possibility consumers may be inattentive to (or unaware of) some commodity taxes when making choices about income. They show that commodity taxes are useful for redistribution in this setting. In fact, the optimal commodity taxes essentially follow the classic "many person Ramsey rule" (Diamond 1975), scaled by the degree of inattention. As a result, to the extent that commodity taxes are not (fully) salient, goods should be taxed when they are less elastically consumed, and when they are consumed primarily by richer consumers. The researchers extend this result to the setting of corrective taxes, and show how nonsalient corrective taxes should be adjusted for distributional reasons.

Naomi Feldman, Federal Reserve Board; Elena Patel, Department of the Treasury; and Laura Kawano and Nirupama S. Rao, University of Michigan

Do Publicly-Traded Firms Invest Myopically? Evidence from U.S. Tax Data

It is often claimed that pressure from outside investors causes firms with publicly traded stock to sacrifice long-term investments to improve short-term financial results. Feldman, Kawano, Patel, Rao, and Edgerton investigate this hypothesis by comparing the investment behavior of publicly-listed and privately-held firms using data from U.S. corporate tax returns. They find that public firms invest more in long-term investments than their private counterparts. In particular, public firms invest more in R&D activities - a relatively risky investment. The researchers' results suggest that public stock markets facilitate long-term investment on average, perhaps because they allow for the pooling of funds and diversification of risks. However, it is still possible that policies or shocks that elicit firms to be public generate myopic behavior on the margin. The researchers illustrate this mechanism in a simple model.

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