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)     

Effects of child support pass-through and disregard policies on in-kind child support

This paper examines whether states’ elimination of child support disregards for welfare payments after welfare reform caused non-custodial parents to increase in-kind support. I use longitudinal data from the Survey of Program Dynamics and take advantage of state and year variation in child support disregard policies before and after the 1996 welfare reform to identify effects of the disregard on in-kind support. I find that a $100 decrease in the disregard corresponds to a 3.2 percentage point increase in the probability a child will receive in-kind child support.     

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)     

Impact of the Child Support Performance and Incentive Act on child support order establishment

This paper examines the impact of the Child Support Performance and Incentive Act (CSPIA) of 1998 on the establishment of child support orders for never-married mothers who receive welfare assistance compared to those that do not. We primarily focus on the first year of motherhood after the birth of the first child. Using Survey on Income and Program Participation (SIPP) data, we find that CSPIA changed the provision of service by 12 percentage points between these two groups, largely due to a significant increase in child support orders for non-welfare families; CSPIA did not substantially alter the order establishment rate for families receiving welfare.     

COSTLY INTERMEDIATION AND CONSUMPTION SMOOTHING

This paper studies quantitatively how intermediation costs affect household consumption loans and welfare. Agents face uninsurable idiosyncratic shocks to labor productivity in a production economy with costly financial intermediation and a borrowing limit. Reducing intermediation costs has two effects: (1) For a given decrease in the interest rate on borrowing, agents' ability to smooth consumption over time improves. (2) The demand for loans increases, which increases the interest rate. The net welfare gain of reducing intermediation costs from 3.927% (U.S. level) to 1% is about 1.14% of equivalent consumption in the baseline economy for an endogenous interest rate and 1.90% for an exogenous interest rate. The gains are distributed unevenly: households at the bottom wealth decile improve welfare by 3.96% and 5.86% of equivalent consumption, while those at the top decile have welfare gains of 0.35% and 0.2%, respectively. Sufficiently high intermediation costs eliminate borrowing and hence the welfare gain of reducing costs is not substantial. The welfare analysis includes transitional dynamics between steady states. (JEL D91, E60, G38)     

Can Benefits and Work Incentives Counseling be a Path to Future Economic Self-Sufficiency for Individuals with Disabilities?

In this paper, I estimate the relationship between benefit counseling and work incentive services and various labor market outcomes in the case of Supplemental Security Income /Social Security Disability Insurance beneficiaries who from 2003 to 2009 participated in the Vocational Rehabilitation programs in New York State. Using the propensity score matching approach, I find that counseling services can increase the probability of successful case closure by 5.2 percentage points. At the same time, these services can increase the earnings and working hours of beneficiaries by $42 and 3.3 h per week, respectively. Moreover, there is a $0.59 per hour increase in the wage rate for service recipients. From these results I conclude that providing benefit counseling and work incentive services helps beneficiaries who have strong employment goals achieve financial independence.     

SINGLE MOTHERS WORKING AT NIGHT: STANDARD WORK AND CHILD CARE SUBSIDIES

This article examines the effect of child care subsidies on the standard work decision of single mothers. Results suggest that child care subsidy receipt is associated with about a 7 percentage point increase in the probability of working at a standard job. When the effect of subsidy receipt is allowed to differ between welfare recipients and nonrecipients, results indicate that subsidy receipt has a large and positive effect among welfare recipients, whereas the effect on nonrecipients is much smaller. These findings underscore the importance of child care subsidies in helping low-income parents, especially welfare recipients, gain standard employment. ( JEL J13, I38)     

Technological affluence and subjective well-being

This study measures the welfare effects of technological goods using a recent European pooled cross-sectional dataset. We find that fixed and mobile phones, music players and personal computers, including those with an Internet connection, are associated with significantly higher levels of well-being measured by individual self-reported life satisfaction. Further controlling for mobile and broadband country penetration levels, we provide evidence suggesting that the latter matters for life satisfaction, especially for the users who already possess the relevant devices. Keeping life satisfaction constant, we subsequently derive substantial GDP per capita estimates equivalent to a 10 percentage point increase in broadband and mobile phone penetration.     

Does Institutional Trust Increase Willingness to Pay More Taxes to Support the Welfare State?

We evaluate the effect of institutional trust on the willingness to pay more taxes to support the welfare state. We found a positive effect of institutional trust on the willingness to pay more taxes to support the welfare state irrespective of the empirical approach used. Our instrumental variable analysis shows that causality run from institutional trust to welfare state support. A one-unit increase in institutional trust leads to a 15 percentage point increase in the willingness to pay more taxes to help the needy. Similarly, a one-unit increase in institutional trust leads to a 16 percentage point increase in the willingness to pay more taxes to support public health care and education. Consequently, institutional trust should be viewed as one of the most important mechanisms that protect the welfare state from dismantling and retrenchment. We also found a stronger effect of support for more universal programs such as public health care and education than for helping the needy.     

THE EFFECTS OF MACROECONOMIC CONDITIONS AT GRADUATION ON OVEREDUCATION

This article shows that unfavorable economic conditions at graduation decrease the likelihood of a good job‐worker match over a worker's subsequent career. Mismatch is quantified in terms of overeducation by both industry and occupation. The German Socio‐Economic Panel and region‐level unemployment rates from 1994 to 2012 are used. Instrumental variables estimates account for endogenous graduation timing. A single percentage point increase in regional unemployment causes an increase in the probability of overeducation of 1.6–1.7 percentage points for university graduates. Effects for technical tertiary education and apprenticeship graduates are smaller. Labor market entry conditions affect workers for up to 9 years after graduation. (JEL J23, J22, E32, I23)     

Childhood Abuse and Welfare Use

Policies aimed at reducing welfare use focus solely on adults, yet welfare users very often report experiences of childhood abuse. Such abuse is known to have long-term psychological effects and may set the stage for later welfare use. This study uses a random sample of poor women to determine how a history of childhood abuse relates to the probability of receiving cash and in-kind assistance over a five-year period. It also investigate whether childhood abuse correlates with the length of receipt among program users. Women experiencing both physical and sexual abuse during childhood were 16–25 percentage points more likely than others to use both cash and in-kind programs as adults. Conditional on program use, there was no relation of childhood abuse to the extent of program use during the study period.     

Keeping up with the Joneses and the welfare effects of monetary policy

This paper examines the implications of “keeping up with the Joneses” preferences (jealousy) for the welfare effects of monetary policy. I develop a New Keynesian model, where households are jealous and the central bank follows the Taylor rule. I show that the welfare effects of monetary policy over time depend significantly on the relative strength of the consumption externality caused by jealousy and the monopolistic distortion. When a first-order approximation of the utility function is used, then the main result is the following: If jealousy (the monopolistic distortion) dominates, then a decrease in the interest rate reduces (increases) welfare in the short run, but increases (reduces) welfare in the medium run. However, the use of a second-order approximation changes the sign of the overall welfare effect of monetary policy if the initial level of employment is at the optimal level or just below it.     

A MODEL OF ADDICTION AND SOCIAL INTERACTIONS

Many consumer behaviors are both addictive and social. Understanding how these two phenomena interact informs basic models of human behavior, and matters for policymakers when the behavior is regulated. I develop a new model of demand that incorporates both addiction and social interactions and show that, under certain conditions, social interactions reinforce the effects of addiction. I also show how the dynamics introduced by addiction can solve the pernicious problem of identifying the causal effects of social interactions. I then use the model to illustrate a new and important identification problem for studies of social interactions: existing estimates cannot be used to draw welfare conclusions or even to deduce whether social interactions increase aggregate demand. Finally, I develop a method that allows researchers to distinguish between two common forms of social interactions and draw welfare conclusions. (JEL D11, H20)     

ENHANCED CITIZENSHIP VERIFICATION AND CHILDREN'S MEDICAID COVERAGE

This article examines a potential unintended consequence of the mandated Medicaid citizenship verification requirements of the 2005 Deficit Reduction Act (DRA). We investigate whether or not these new rules led to an increase in the Medicaid exit rate among enrollees using state administrative data from Georgia. We do this by comparing the exit rate for children enrolled in Medicaid whose first coverage recertification occurs just after implementation of the DRA (which we refer to as a “high impact” first recertification) with those whose first recertification occurs just prior (which we refer to as a “low impact” first recertification). Our analysis suggests that children in the high‐impact first recertification group were about 2 percentage points more likely to exit Medicaid than those in the low‐impact group. Furthermore, these additional exits occurred in racial and ethnic groups more likely to be citizens than noncitizens and prereform estimates suggest that there were very few (roughly 0.10%) noncitizen Medicaid enrollees to begin with. Taken together, our results suggest that the DRA‐enhanced citizenship verification rules led to an increase in Medicaid disenrollment, and thus a reduction in coverage, among citizens. (JEL I18, I38, J13)     

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)     

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)     

EXAMINING THE EXTERNALITY OF UNEMPLOYMENT INSURANCE ON CHILDREN'S EDUCATIONAL ACHIEVEMENT

I exploit differences in the generosity of unemployment insurance (UI) benefits across states and over time to investigate the link between UI and children's academic achievement. Estimates show that a 1% increase in maximum weekly UI benefits reduces the probability that a child repeats a grade by around 0.03 percentage points. The effect is concentrated among children of low‐ and middle‐income families. This paper's findings, which are the first in the literature to show evidence of a positive effect of UI on children's educational outcomes, provide insight into the role of UI in the human capital accumulation of children. (JEL I20, I38, J65)     

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)     

Intergenerational and program-induced effects of welfare dependency: Evidence from the national longitudinal survey of youth

This study uses data from the National Longitudinal Survey of Youth to examine intergenerational and program-induced effects of welfare dependency. Three research questions are asked: (a) How do parental Aid to Families with Dependent Children (AFDC) receipt and other family background characteristics affect subsequent dependency on AFDC? (b) How do attitudes about welfare and state AFDC benefit levels affect AFDC dependency? and (c) How do the patterns and factors associated with AFDC dependency vary across racial and ethnic lines? The results suggest that women who grew up in households that received welfare during the woman's adolescence are approximately twice as likely to be dependent on AFDC in young adulthood as women whose families did not received welfare. Further, state AFDC benefit levels are associated with higher risks of AFDC dependency, but the association is significant only for Anglo women. These analyses provide little support for the hypothesis that attitudes toward welfare and low-wage work increase the likelihood of welfare dependency.     

The earned income tax credit and union formation: The impact of expected spouse earnings

Using the Survey of Income and Program Participation from 2001, 2004, and 2008 and federal and state variation in earned income tax credit generosity over time, I investigate how changes in expected household earned income tax credit benefits associated with marriage affect cohabitation and marriage behavior among low-income single mothers. I simulate a marriage market to predict potential spouse earnings for a sample of single mothers in order to estimate the potential losses or gains in earned income tax credit benefits upon marriage. Using multinomial logistic regressions, I then analyze how the anticipated loss in earned income tax credit benefits upon marriage affects the likelihood of marrying or cohabiting. Results suggest that the average earned income tax credit-eligible woman can expect to lose approximately US$1,300 in earned income tax credit benefits in the year following marriage, or about half of pre-marriage benefits. Single mothers who expect to lose earned income tax credit benefits upon marriage are 2.5 percentage points less likely to marry their partners and 2.5 percentage points more likely to cohabit compared to single mothers who expect no change or to gain earned income tax credit benefits upon marriage. Despite recent policy efforts to reduce the size of the marriage penalty embedded in the earned income tax credit structure, these results suggest that the earned income tax credit still creates distortions in marriage and cohabitation decisions among low-income single mothers.