A Median Voter Theorem for Postelection Politics

We analyze a model of "postelection politics", in which (unlike in the more common Downsian models of "preelection politics") politicians cannot make binding commitments prior to elections. The game begins with an incumbent politician in office, and voters adopt reelection strategies that are contingent on the policies implemented by the incumbent. We generalize previous models of this type by introducing heterogeneity in voters' ideological preferences, and analyze how voters' reelection strategies constrain the policies chosen by a rent-maximizing incumbent. We first show that virtually any policy (and any feasible level of rent for the incumbent) can be sustained in a Nash equilibrium. Then, we derive a "median voter theorem": the ideal point of the median voter, and the minimum feasible level of rent, are the unique outcomes in any strong Nash equilibrium. We then introduce alternative refinements that are less restrictive. In particular, Ideologically Loyal Coalition-proof equilibrium also leads uniquely to the median outcomePostelection politics; Median voter theorem; retrospective voting

Are Campaign Contributions a Form of Speech? Evidence from Recent US House Elections

This paper investigates the effects of the sources of candidates' campaign funding on their electoral outcomes, with particular emphasis on whether candidates who rely on a narrow base of funding suffer adverse electoral consequences. An extensive dataset consisting of over 650,000 contributions to House candidates in elections from 1980 to 1992 is used. The results reveal a negative relationship between the concentration of contributions and voteshare for open seat candidates and challengers. This may have significant implications for some of the empirical premises underlying the US Supreme Court's landmark {\em Buckley v. Valeo} decision. At very least the finding is an important stylized fact about US elections which is robust over the 1980's and early 1990's.Campaign finance, contribution limits, spending limits, free speech, Buckley v. Valeo, Herfindahl index

Estimating the Compliance Costs of Securities Regulation: A Bunching Analysis of Sarbanes-Oxley Section 404(b)

An extensive literature has analyzed the Sarbanes-Oxley (SOX) legislation enacted in 2002, but its social welfare consequences remain controversial. One of the most significant provisions of SOX – auditor attestation of internal controls under Section 404(b) – has been applied only to firms that have a public float (i.e. the market value of shares held by non-insiders) of at least $75 million. Public float is not reported in standard databases; this paper “scrapes” public float data from 10-K filings, resulting in about 161,000 observations at the firm-year level for the universe of reporting entities for fiscal years 1993-2015. The analysis compares the number of public float observations immediately below the$75 million threshold to a smooth counterfactual density estimated using a flexible polynomial fitted to the observed density away from the threshold. In the pre-SOX period, there is no detectable divergence between the actual and counterfactual density around $75 million. Since the enactment of SOX, there is substantial and statistically significant “bunching” below the threshold, exhibiting a bimodal pattern. The magnitude of bunching implies that firms around the threshold reduce their public float by about$1.7 million. This estimate is consistent with SOX 404(b) imposing a net compliance cost of about $4-$6 million (in present value terms) on firms in the region of the threshold. The results are robust to considering various alternative explanations for bunching, including the possibility that firms’ insiders avoid crossing the threshold in order to continue extracting private benefits of control. The paper also explores potential financial and economic consequences of bunching, in particular on the debt financing and investment choices of firms close to threshold

Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals

This paper presents a new approach to estimating the existence and magnitude of taxmotivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents' positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature. --

The Consequences of the TCJA’s International Provisions: A Conceptual Framework and Survey of the Evidence

The 2017 US tax legislation - widely referred to as the Tax Cut and Jobs Act (TCJA) - fundamentally transformed the US system of international taxation, introducing for instance a new tax on “Global Intangible Low-Taxed Income” (GILTI). This paper develops a simple conceptual framework that synthesizes and extends the theory of multinational corporations’ (MNCs’) responses to taxation. It also surveys the emerging empirical evidence on the consequences of the TCJA’s international provisions. The conceptual framework focuses on the efficiency costs of ownership distortions in analyzing the impact of the GILTI tax and the prior repatriation tax on foreign acquisitions by US MNCs. The paper derives a set of sufficient conditions under which changes in US MNCs’ foreign activity in response to the TCJA imply an unambiguous reduction in both US national welfare and global welfare. Drawing on the empirical literature on the impact of the TCJA, the paper documents five robust findings: the TCJA led to a general decline in US MNCs’ foreign acquisitions, increased US MNCs’ investment in routine foreign tangible assets, led (at most) to a decline in profit shifting to the extent expected from the TCJA’s tax rate reduction (suggesting no impact of its international provisions per se), reduced the market value of US MNCs relative to domestic US firms, and had no detectable impact on domestic US investment and wages. The first two of these findings correspond closely to the model’s sufficient conditions for an unambiguous decline in US and global welfare, while the other findings provide additional support for this conclusion. An illustrative calculation based on the magnitude of the first effect suggests that the TCJA nearly doubled the synergy losses associated with US taxation of US MNCs’ foreign activity

Overview of the Characteristics of Tax Havens

Tax havens have become a subject of great interest among policymakers, scholars and the general public, and are central to many important current policy debates. This chapter provides an overview of the scholarly literature on the characteristics and origins of tax havens. The earlier literature, used cross-country analysis and found evidence that tax havens tend to have stronger governance institutions than comparable nonhaven countries. The more recent literature analyzes the historical origins of tax havens and undertakes longitudinal analysis of their adoption of haven-like laws. This chapter also presents a descriptive analysis of the relationship between tax haven status and quantitative measures of countries’ historical characteristics. This descriptive analysis suggests that tax haven jurisdictions are not appreciably different from nonhavens in their historical experience of foreign rule and in other historical characteristics. This suggests some caution in attributing tax havens’ status to their colonial history or to other historical variables

Taxes and Portfolio Choice: Evidence from JGTRRA's Treatment of International Dividends

This paper investigates how taxes influence portfolio choices by exploring the response to the distinctive treatment of foreign dividends in the Jobs and Growth Tax Relief Reconciliation Act (JGTRRA). JGTRRA lowered the dividend tax rate to 15% for American equities and extended this tax relief only to foreign corporations from a subset of countries. This paper uses a difference-in-difference analysis that compares US equity holdings in affected and unaffected countries. The international investment responses to JGTRRA were substantial and imply an elasticity of asset holdings with respect to taxes of -1.6. This effect cannot be explained by several potential alternative hypotheses, including differential changes to the preferences of American investors, differential changes in investment opportunities, differential time trends in investment or changed tax evasion behavior.

Corporate Tax Avoidance and Firm Value

How do investors value managerial actions designed solely to minimize corporate tax obligations? Using a framework in which managers' tax sheltering decisions are related to their ability to divert value, this paper predicts that the effect of tax avoidance on firm value should vary systematically with the strength of firm governance institutions. The empirical results indicate that the average effect of tax avoidance on firm value is not significantly different from zero; however, the effect is positive for well-governed firms as predicted. Coefficient estimates are consistent with an expected life of five years for the devices that generate these tax savings for well-governed firms. Alternative explanations for the dependence of the valuation of the tax avoidance measure on firm governance do not appear to be consistent with the empirical results. The findings indicate that the simple view of corporate tax avoidance as a transfer of resources from the state to shareholders is incomplete, given the agency problems characterizing shareholder-manager relations.