Voting, Lobbying, and the Decentralization Theorem

This paper revisits the fiscal "decentralization theorem", by relaxing the role of the assumption that governments are benevolent, while retaining the assumption of policy uniformity. If instead, decisions are made by direct majority voting, (i) centralization can welfare-dominate decentralization even if there are no externalities and regions are heterogenous; (ii) decentralization can welfare-dominate centralization even if there are positive externalities and regions are homogenous. The intuition is that the insensitivity of majority voting to preference intensity interacts with the different inefficiencies in the two fiscal regimes to give second-best results. Similar results obtain when governments are benevolent, but subject to lobbying, because now decisions are too sensitive to the preferences of the organised group.decentralization, majority voting, lobbying, local public goods

How should Financial Intermediation Services be Taxed?

This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production efficiency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this case.financial intermediation services, tax design, banks, monitoring, payment services

Incentive Schemes for Local Government: Theory and Evidence from Comprehensive Performance Assessment in England

This paper studies Comprehensive Performance Assessment, an explicit incentive scheme for local government in England. Motivated by a simple theoretical political agency model, we predict that CPA should increase service quality and local taxation, but have an ambiguous effect on the efficiency of service provision. We test these predictions using a difference in difference approach, using Welsh local authorities as a control group, exploiting the fact that local authorities in Wales were not subject to the same CPA regime. To do this, we construct original indices of service quality and efficiency, using Best Value Performance Indicators. We estimate that CPA increased the effective band D council tax rate in England relative to Wales by 4%, and increased our index of service quality output also by about 4%, but had no significant effect on our efficiency indices. There is evidence of heterogeneous effects of CPA on efficiency, with some evidence that CPA impacted more on less efficient councils, and the ‘harder test’ from 2005-8 having a much bigger effect.local government, incentives, efficiency, difference in difference, DEA

De Gustibus non est Taxandum: Heterogeneity in Preferences and Optimal Redistribution

The prominent but unproven intuition that preference heterogeneity reduces re-distribution in a standard optimal tax model is shown to hold under the plausible condition that the distribution of preferences for consumption relative to leisure rises, in terms of first-order stochastic dominance, with income. Given mainstream functional form assumptions on utility and the distributions of ability and preferences, a simple statistic for the effect of preference heterogeneity on marginal tax rates is derived. Numerical simulations and suggestive empirical evidence demonstrate the link between this potentially measurable statistic and the quantitative implications of preference heterogeneity for policy.

Chemical and Statistical Analysis of Karst Groundwater Basin Signatures - Springfield, Mo

Springfield, MO is located on the Springfield Plateau physiographic province. The Springfield plateau contains a number of Mississippian aged units and is mainly capped by the Burlington-Keokuk Formation. The Burlington-Keokuk is a highly fossiliferous limestone with nodular and interbedded chert. Beneath the Burlington-Keokuk lies the Elsey, Reeds Spring, and Pierson Formations respectively which comprise the Springfield Plateau aquifer hydrostratigraphic unit. Within the Springfield Plateau aquifer, a well-developed karst system includes springs, sinkholes, and caves. The Springfield Plateau aquifer is the predominant source for springs and seeps in the Springfield area. The purpose of this study was to understand the differences in water chemistry of individual karst groundwater basins. Different land use surrounding these groundwater basins as well as minute differences in the Burlington-Keokuk may lead to different water chemistry for each basin. Sampling was conducted at 12 sites in Springfield, MO from within what are believed to be five separate groundwater basins. Samples were collected over six months, and 11 variables were measured. Field tests included pH, temperature, conductivity, bicarbonate (as CaCO3), and flow. Lab analyses included major cations (calcium, magnesium, and sodium) and anions (chloride, sulfate, and nitrate). Statistical analyses were run using SAS 9.4 and included discriminant function analysis, factor analysis, and miscellaneous variable analyses. Results from two models suggest that there is enough difference in water chemistry between groundwater basins to develop statistical models that could accurately classify samples to the correct basin based on water chemistry

Sufficient Statistics for Nonlinear Tax Systems with General Across-income Heterogeneity

This paper provides general and empirically implementable sufficient statistics formulas for optimal nonlinear tax systems in the presence of across-income heterogeneity in preferences, inheritances, income-shifting capabilities, and other sources. We study unrestricted tax systems on income and savings (or other commodities) that implement the optimal direct-revelation mechanism, as well as simpler tax systems that impose common restrictions like separability between earnings and savings taxes. We characterize the optimum using familiar elasticity concepts and a sufficient statistic for general across-income heterogeneity: the difference between the cross-sectional variation of savings with income, and the causal effect of income on savings. The Atkinson-Stiglitz Theorem is a knife-edge case corresponding to zero difference, and a number of other key results in optimal tax theory are subsumed as special cases. We provide tractable extensions of these results that include multidimensional heterogeneity, additional efficiency rationales for taxing heterogeneous returns, and corrective motives to encourage more saving. Applying these formulas in a calibrated model of the U.S. economy, we find that the optimal savings tax is positive and progressive

Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions

Calculating the welfare implications of changes to economic policy or shocks requires economists to decide on a normative criterion. One approach is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference, as in the recent surge of “inverse-optimum” research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse-optimum inference on U.S. tax policy from 1979 through 2010 and argue that the results either undermine the normative relevance of the approach or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations

Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions

Calculating the welfare implications of changes to economic policy or shocks to the economy requires economists to decide on a normative criterion. One way to make that decision is to elicit the relevant moral criteria from real-world policy choices, converting a normative decision into a positive inference exercise as in, for example, the recent surge of so-called “inverse-optimum” research. We find that capitalizing on the potential of this approach is not as straightforward as we might hope. We perform the inverse- optimum inference on U.S. tax policy from 1979 through 2010 and identify two broad explanations for its evolution. These explanations, however, either undermine the reliability of the inference exercise's conclusions or challenge conventional assumptions upon which economists routinely rely when performing welfare evaluations. We emphasize the need for better evidence on society's positive and normative judgments in order to resolve the questions these findings raise

Stuck in the Middle: Impacts of Grade Configuration in Public Schools

We examine the implications of separating students of different grade levels across schools for the purposes of educational production. Specifically, we find that moving students from elementary to middle school in 6th or 7th grade causes significant drops in academic achievement. These effects are large (about 0.15 standard deviations), present for both math and English, and persist through grade 8, the last year for which we have achievement data. The effects are similar for boys and girls, but stronger for student s with low levels of initial achievement. We instrument for middle school attendance using the grade range of the school students attended in grade 3, and employ specifications that control for student fixed effects. This leaves only one potential source of bias—correlation between grade range of a student’s grade 3 school and unobservable characteristics that cause decreases in achievement precisely when students are due to switch schools—which we view as highly unlikely. We find little evidence that placing public school students into middle schools during adolescence is cost-effective

A Pilot Study of Uncertainty in Income Tax Forecasts

How confidently can taxpayers forecast the tax bill that they will face? We asked survey respondents to provide both point estimates and subjective probability distributions of items from the tax return that they will submit the following April. In a pilot study, consisting of a sample of 188 participants from Amazon Mechanical Turk, we find evidence of substantial uncertainty over both the final tax and its determinants. We discuss the implications of this uncertainty for both tax policy and economic modeling