THE CREDIT‐CHANNEL TRANSMISSION MECHANISM AND THE NONLINEAR GROWTH AND WELFARE EFFECTS OF INFLATION AND TAXES

With the credit‐channel effect driven by the central bank's open market operations, this paper's model easily gives rise to the nonlinear inflation‐growth nexus, which is evidenced by a number of cross‐country empirical studies. The threshold level of the inflation rate is found to be lower when tax rates are higher. The presence of the credit‐channel effect also provides the rationale for setting positive (and smaller than 1) tax rates on consumption, labor income, and capital income. The optimal tax rates rise as the inflation target declines. Under a fiscal policy rule where labor and capital income taxes move proportionally to each other, the optimal capital income tax rate could be higher than the optimal labor income tax rate. Under a sufficiently large central bank balance sheet, the credit‐channel effect will be so weak that inflation and all kinds of taxes are growth and welfare repressing. This provides a rationale for central banks that have implemented quantitative easing policies to shrink their balance sheets. (JEL E58, E62, O42)     

BUYING THEIR VOTES? A STUDY OF LOCAL TAX‐PRICE DISCRIMINATION

A population's demographic composition may affect political support for various public services. This article examines whether the aging‐in‐place of local residents decreases financial support for public schools in the United States. I expand on previous empirical work by examining whether tax‐price reductions offered to elderly homeowners moderate their effect on local school revenues. The results reveal that an aging population structure substantially decreases school revenues, unless elderly homeowners receive state‐financed reductions in their local tax‐prices. Sizable differences hold even when comparing school districts located near each other but on opposite sides of state borders. Given the imminent aging of the population structure in the United States and many other developed countries, governments' targeted tax reduction policies could have important effects on equilibrium school revenues. (JEL I22, J14, H71)     

THE CULTURE OF CORRUPTION,TAX EVASION,AND ECONOMIC GROWTH

This study uses a dynamic general equilibrium model to quantify the effects of corruption and tax evasion on fiscal policy and economic growth. The model is calibrated to match estimates of tax evasion in developing countries. The calibrated model is able to generate reasonable predictions for net tax rates, the corruption associated with public investment projects, and the negative correlation between corruption and tax revenue. The presence of corruption and evasion is shown to have significant, but not large, negative effects on economic growth. The relatively moderate effects help explain the absence of a robust negative correlation between growth and corruption in cross‐country data. The model also implies that cracking down on tax evasion before addressing corruption can be a bad idea and that higher wages for public officials can improve welfare. (JEL H3, O4)     

THE OPTIMAL TAXATION OF ASSET INCOME WHEN GOVERNMENT CONSUMPTION IS ENDOGENOUS: THEORY,ESTIMATION AND WELFARE

This paper derives the Ramsey optimal fiscal policy for taxing asset income in a model where government expenditure is a function of net output or the inputs that produce it. Extending work by Kenneth L. Judd, I demonstrate that the canonical result that the optimal tax on capital income is zero in the medium to long term is a special case of a more general model. Employing a vector error correction model to estimate the relationship between government consumption and net output or the factor inputs that generate it for the United States between 1948Q1 and 2015Q4, I demonstrate that this special case is empirically implausible, and show how a cointegrating vector can be used to determine the optimal tax schedule. I simulate a version of the model using the empirical estimates to measure the welfare implications of changing the tax rate on asset income, and contrast these results with those generated in a version of the model where government consumption is purely exogenous. The shifting pattern of welfare measurements confirms the theoretical results. I calculate that the prevailing effective tax rate on net asset income in the United States between 1970 and 2014 averaged 0.449. Hence abolishing the tax completely does generate welfare improvements, though only by the equivalent of between 1.103% and 1.616% permanent increase in consumption—well under half the implied welfare benefit when the endogeneity of the government consumption is ignored. The maximum welfare improvement from shifting part of the burden of tax from capital to labor is the equivalent of a permanent increase in consumption of between only 1.491% and 1.858%, and is attained when the tax rate on asset income is lowered to between 0.148 and 0.186. Allowing the tax rate to vary over time raises the maximum welfare benefit to 1.865%. All the results are very robust to a wide range of elasticities of labor supply. (JEL E62, H21, H50)     

THE TIMING OF EXEMPTIONS FROM WELFARE WORK REQUIREMENTS AND ITS EFFECTS ON MOTHERS' WORK AND WELFARE RECEIPT AROUND CHILDBIRTH

I quantify the effects of welfare work exemptions on women's labor force participation and welfare receipt. This study, which also examines the age of youngest child (AYC) exemption, is the first to investigate the pregnancy exemption. Between‐state and within‐state variations in exemption length allow me to estimate the heterogeneous effects of each exemption by its timing and strictness. I find that the effects on labor force participation are driven by employment for the pregnancy exemption, inducing relatively stable welfare receipts. In contrast, the effects are driven by unemployment for the AYC exemption, which triggers more reliance on welfare after birth. (JEL I38)     

HOW DOES GLOBALIZATION AFFECT THE IMPLICIT TAX RATES ON LABOR INCOME,CAPITAL INCOME,AND CONSUMPTION IN THE EUROPEAN UNION?

This article analyzes the effects of globalization on implicit tax rates (ITRs) on labor income, capital income, and consumption in the EU15 and Central and Eastern European New Member States (CEE NMS). We find supportive evidence for an increase in the ITR on labor income in the EU15, but no effect on the ITR on capital income. There is evidence of convergence in terms of the ITR on consumption, as countries with higher than average ITR on consumption respond to globalization by decreasing their tax rates. There are important differences among the welfare regimes within the EU15. Social‐democratic countries have decreased the tax burden on capital, but increased that on labor due to globalization. Globalization exerts a pressure to increase taxes on labor income in the conservative and liberal regimes as well. Taxes on consumption decrease in response to globalization in the conservative and social‐democratic regimes. In the CEE NMS, there is no effect of globalization on the ITR on labor and capital income, but we find a negative impact on the ITR on consumption in the CEE NMS with higher than average ITR on consumption. (JEL H23, H24, H25, F19, F21)     

EDUCATION'S GAMBLING PROBLEM: EARMARKED LOTTERY REVENUES AND CHARITABLE DONATIONS TO EDUCATION

I examine the impact that lotteries introduced to support education have on voluntary contributions to education. State lotteries, and the causes they are introduced to support, are highly publicized. This provides the opportunity to assess whether donors are crowded‐out by government spending of which they are almost certainly aware. Using donor‐level survey data and nonprofits' tax returns, I find that donations to education‐related organizations fall with the introduction of a lottery. This result is driven by donors' response to the new (highly publicized) government revenue source (rather than a decrease in nonprofit fundraising efforts). (JEL D64, H3, H75)     

HOTEL DEMAND BEFORE,DURING, AND AFTER SPORTS EVENTS: EVIDENCE FROM CHARLOTTE,NORTH CAROLINA

This paper uses daily hotel occupancy data to examine the effects of a wide variety of political and sporting events on the hotel room market of Charlotte, North Carolina from 2005 to 2014. Two political conventions and NASCAR auto races are associated with large increases in hotel occupancy, prices, and revenue, but many other events have no discernable effect on Charlotte's hotel market. The results also indicate that occupancy effects before or after most events are modest at best. Back‐of‐the‐envelope calculations show incremental hotel‐tax receipts fall short of the debt service incurred in constructing and maintaining the city's sports venues. (JEL H71, Z23, Z28)     

THE EFFECTS OF SINGLE MOTHERS' WELFARE USE AND EMPLOYMENT DECISIONS ON CHILDREN'S COGNITIVE DEVELOPMENT

We examine the effects of single mothers' welfare use and employment decisions on children's short‐run cognitive development, as measured by their preschool standardized math test scores. We control for three mechanisms through which these decisions might affect children's outcomes: direct monetary benefits, parental time invested in the child, and nonpecuniary benefits from in‐kind transfer programs such as Medicaid. We employ a correction function approach and control for state‐fixed effects to address the endogenous nature of welfare participation and employment decisions. Our estimates suggest that although each additional quarter of either mother's employment or welfare use results in only a small increase in a child's standardized math test score, the total effects after several quarters are sizable. We allow mothers' decisions to have varying effects on attainment by children's observed innate ability and by the intensity of welfare use and employment. A child who has the mean level of observed innate ability with a mother who simultaneously worked and used welfare in all 20 quarters after childbirth experiences an 8.25 standardized‐point increase in standardized scores. The positive impact is more pronounced for the more disadvantaged children, who tend to be born to mothers with low Armed Forces Qualification Test scores, or have lower birth weights. We also examine the effects using timing of employment and welfare use, as well as children's maturity and gender. (JEL I3, J13, J22)     

ON THE DESIRABILITY OF TAX COORDINATION WHEN COUNTRIES COMPETE IN TAXES AND INFRASTRUCTURE

This article contains two distinct messages. First, when jurisdictions compete in two independent strategic variables, the decision to coordinate on one variable (a tax rate) induces a carry‐over effect on the unconstrained instrument (infrastructure expenditures). Consequently, classical results of the tax coordination literature may be qualified. A second message is that the relative flexibility of the strategic instruments, which may depend on the time horizon of the decision making, does matter. In particular, tax coordination is more likely to be detrimental (in terms of revenue and/or welfare) when countries can compete simultaneously in taxes and infrastructure, rather than sequentially. The reason is that simultaneity eliminates strategic effects between tax and nontax instruments. (JEL H21, H87, H73, F21, C72)     

EFFECTS OF WELFARE REFORM ON WOMEN'S VOTING PARTICIPATION

This study investigates the effects of welfare reform in the United States in the 1990s on voting among low‐income women. Using the November Current Population Surveys with the added Voting and Registration Supplement for the years 1990 through 2004 and exploiting changes in welfare policy across states and over time, we estimate the causal effects of welfare reform on women's voting registration and voting participation during the period in which welfare reform unfolded. During this time period, voter turnout was decreasing in the United States. We find robust evidence that welfare reform led to smaller declines in voting (about 3 to 4 percentage points, which translates to about 10% relative to the baseline mean) for women who were exposed to welfare reform compared to several different comparison groups of similar women who were much less exposed. The robust findings suggest that welfare reform had prosocial effects on civic participation, as characterized by voting. The effects were largely confined to presidential elections, were stronger in Democratic than Republican states, were stronger in states with stronger work incentive policies, and appeared to operate through employment, education, and income. (JEL D72, H53, I38, J21)     

MANAGING RISK TAKING WITH INTEREST RATE POLICY AND MACROPRUDENTIAL REGULATIONS

We develop a model in which a financial intermediary's investment in risky assets—risk taking—is excessive due to limited liability and deposit insurance, and characterize the policies that implement efficient risk taking. In the calibrated model, combining interest rate policy with state‐contingent macroprudential regulations—either capital or leverage regulation, and a tax on profits—achieves efficiency. Interest rate policy mitigates excessive risk taking by altering the return and the supply of collateralizable safe assets. In contrast to commonly used capital regulation, leverage regulation has stronger effects on risk taking and calls for higher interest rates. (JEL E44, E52, G11, G18)     

CONSEQUENCES OF OFFSHORING TO DEVELOPING NATIONS: LABOR-MARKET OUTCOMES,WELFARE, AND CORRECTIVE INTERVENTIONS

Our parsimonious two-country (developed country and developing country) model of offshoring provides nuanced results. These include cases where wages monotonically improve, as well as where wages exhibit an inverted-U relationship with offshoring cost reductions. We identify conditions under which these relationships hold. Since global welfare always rises with improvements in offshoring technology, we find that there is a role for a minimum wage (alternatively, wage tax) in the developing country. We derive such a policy's optimal level. There is also the possibility of a developed country optimal offshoring tax for extracting terms-of-trade benefits. We, finally, analyze the two-country Nash equilibrium in policies. (JEL F11, F13, F16, F66, O19, O24)     

BANKS,DEBT AND RISK: ASSESSING THE SPILLOVERS OF CORPORATE TAXES

We find evidence of tax-driven strategic allocation of debt and asset risk across group entities of European banks. We evaluate the effects that establishing tax neutrality between debt and equity finance has on systemic risk, and show that the degree of coordination in implementing the hypothetical tax reform matters. In particular, a coordinated elimination of the tax advantage of debt would significantly reduce systemic losses in the event of a severe banking crisis. By contrast, uncoordinated tax reforms are not equally beneficial precisely because national tax policies generate spillovers through cross-border bank activities. (JEL G21, G28, H25)     

TAX RATES,GOVERNANCE, AND THE INFORMAL ECONOMY IN HIGH‐INCOME COUNTRIES

Approximately 16.7% of output in high‐income OECD (Organisation for Economic Cooperation and Development) countries is produced informally. I present a model economy where entrepreneurs decide how much of their production to keep informal. Informality carries a risk of getting caught, taxed, and fined. Results from a model with differences in tax rates alone only agree to approximately 23% with data on informality. Taking into account both governance quality and tax rates, agreement between the model's results and data increases to 72%. A policy experiment raising governance quality in Greece, Italy, Spain, and Portugal to Finnish standards reduces informality by 13 percentage points. (JEL E26, H26, J24)     

HAPPINESS,GROWTH, AND PUBLIC POLICY†

If society's goal is to increase people's feelings of well‐being, economic growth in itself will not do the job. Full employment and a generous and comprehensive social safety net do increase happiness. Such policies are arguably affordable not only in higher income nations but also in countries that account for most of the population of the less‐developed world. These conclusions are suggested by an analysis of a wide range of evidence on happiness in countries throughout the world. (JEL I31, I38, O21, F20, D60, E60)     

INTERNATIONAL NARCOTICS TRADE,FOREIGN AID,AND ENFORCEMENT

Using a general equilibrium model of a developing narcotics‐producing and ‐exporting economy, we analyze the economic effects of policies designed to restrict the production and trade of narcotics: foreign aid tied to anti‐narcotics law enforcement activities, demand reduction policies, and alternative development policies. We characterize the problem as one of serious factor market distortions introduced by illicit production and enforcement. While aid to enforcement generally reduces the production and export of narcotics, it is less effective for economies with market power, and under plausible conditions may raise narcotics output and have negative welfare implications for the recipient. (JEL F1)     

INTERGENERATIONAL EFFECTS OF WELFARE REFORM: ADOLESCENT DELINQUENT AND RISKY BEHAVIORS

This study investigates effects of welfare reform in the United States on the next generation. Most previous studies of effects of welfare reform on adolescents focused on high‐school dropout of girls or fertility; little is known about how welfare reform has affected other teenage behaviors or boys. We use a difference‐in‐difference‐in‐differences framework to identify gender‐specific effects of welfare reform on skipping school, fighting, damaging property, stealing, hurting others, smoking, alcohol, marijuana, and other illicit drugs. Welfare reform led to increases in delinquent behaviors of boys as well as increases in substance use of boys and girls, with substantially larger effects for boys. (JEL K42, I12, I31, I38)     

WHY DO GOVERNMENTS END UP WITH DEBT? SHORT‐RUN EFFECTS MATTER

This paper reconsiders the impact of public debt in an economy with heterogeneous households and incomplete markets to emphasize the short‐run effects of an increase in public debt. As compared to models that rest on steady‐state analysis, we show that the welfare gains of a public debt increase are substantially higher when transitional dynamics are accounted for. The additional debt issue allows for a temporary reduction in the income tax rate, which stimulates labor supply and generates an overshooting of the interest rate. The short‐run gains create a temptation to deviate toward higher levels of debt. Debt increases continue to generate welfare gains even when debt is considerably higher than its long‐run optimal level. (JEL E60, H60)     

CORPORATE TAX POLICY AND INDUSTRY LOCATION WITH FULLY ENDOGENOUS PRODUCTIVITY GROWTH

This paper considers how national corporate tax policy affects productivity growth through adjustments in geographic patterns of industry in a two‐country model of trade. With trade costs and imperfect knowledge spillovers between countries, production concentrates partially and innovation concentrates fully in the country with the lowest tax rate. A rise in the international corporate tax differential accelerates productivity growth through an increase in the production share of the low‐tax country that improves knowledge spillovers from industry to innovation. The paper also investigates the relationship between the corporate tax differential and the level of market entry, and analytically characterizes the effects of changes in tax policy on national welfare. (JEL F43, O30, O40, R12)