Fiscal spending multipliers: evidence from the 2009 American Recovery and Reinvestment Act

This paper estimates the “jobs multiplier” of fiscal spending using the state-level allocations of federal stimulus funds from the 2009 American Recovery and Reinvestment Act (ARRA). Specifically, I estimate the relationship between state-level federal ARRA spending and state employment outcomes from the time the Act was passed (February 2009) through the latest month of data (currently May 2010). Because actual state allocations of stimulus spending may be endogenous with respect to state economic outcomes, I instrument for stimulus spending using the state allocations that were anticipated immediately after the ARRA was passed, according to the Wall Street Journal and the Center for American Progress. To control for the counterfactual – what would have happened without the stimulus – I include several variables likely to be strong predictors of state employment growth. The results point to substantial heterogeneity in the impact of ARRA spending over time, across sectors, and across types of spending. The estimated jobs multiplier for total nonfarm employment is large and statistically significant for ARRA spending through March 2010, but falls considerably and becomes insignificant in April and May. The implied number of jobs created or saved by the spending is about 2.0 million as of March, but drops to 0.8 million as of May. Across sectors, the estimated impact of ARRA spending on construction employment is especially large, implying a 18.4% increase in employment (as of May 2010) relative to what it would have been without the ARRA. Lastly, I find that spending on infrastructure and other general purposes has a large positive impact, while spending on safety-net programs such as unemployment insurance and Medicaid reduces employment.American Recovery and Reinvestment Act of 2009 ; Fiscal policy - United States ; Employment

Tax competition among U.S. states: racing to the bottom or riding on a seesaw?

This paper provides an empirical analysis of the determination of capital tax policy by U.S. states based on new panel data, a new econometric technique, and a new theoretical model. The analysis is undertaken with a panel data set covering all 48 contiguous states for the period 1969 to 2004 and is guided by the theory of strategic tax competition. The latter suggests that capital tax policy is a function of out-of-state tax policy, in-state and out-of-state economic conditions, and, perhaps most importantly, preferences for government services. Using the Common Correlated Effects Pooled estimator to account for cross-section dependence, and time lags to account for delayed responses, we estimate this reaction function for three state capital tax instruments: the investment tax credit rate, the corporate income tax rate, and the state's capital weight in its multi-state income apportionment formula. We find the slope of the reaction function--i.e., the equilibrium response of in-state to out-of-state tax policy--is negative, contrary to many prior empirical results. We document that a positive slope is obtained when either aggregate time effects or time lags are omitted. We show that the positive slope found in misspecified models is the result of synchronous responses among states to common shocks rather than competitive responses to out-of-state tax policy. While striking given prior findings in the literature, these results are not surprising. The negative sign is fully consistent with qualitative and quantitative implications of the theoretical model developed in this paper. Rather than "racing to the bottom," our findings suggest that states are "riding on a seesaw." ; Formerly titled: Tax Competition and Capital Mobility: Evidence from the U.S. StatesTaxation ; State finance

A state level database for the manufacturing sector: construction and sources

This document describes the construction of and data sources for a state-level panel data set measuring output and factor use for the manufacturing sector. These data are a subset of a larger, comprehensive data set that we currently are constructing and hope to post on the FRBSF website in the near future. The comprehensive data set will cover the U.S. manufacturing sector and may be thought of as a state-level analog to other widely used productivity data sets such as the industry-level NBER Productivity Database or Dale Jorgenson’s “KLEM” database or the country-level Penn World Tables, but with an added emphasis on adjusting prices for taxes. The selected variables currently available for public use are nominal and real gross output, nominal and real investment, and real capital stock. The data cover all fifty states and the period 1963 to 2006.Manufactures

Keeping up with the Joneses and staying ahead of the Smiths: evidence from suicide data

This paper empirically assesses the theory of interpersonal income comparison using a unique data set on suicide deaths in the United States. We treat suicide as a choice variable, conditional on exogenous risk factors, reflecting one's assessment of current and expected future utility. Using this framework we examine whether differences in group-specific suicide rates are systematically related to income dispersion, controlling for socio-demographic characteristics and income level. The results strongly support the notion that individuals consider relative income in addition to absolute income when evaluating their own utility. Importantly, the findings suggest that relative income affects utility in a two-sided manner, meaning that individuals care about the incomes of those above them (the Joneses) and those below them (the Smiths). Our results complement and extend those from studies using subjective survey data or data from controlled experiments.Income distribution

Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states

The standard model of strategic tax competition – the non-cooperative tax-setting behavior of jurisdictions competing for a mobile capital tax base – assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers, given the political and electoral environments in which they operate, also may be influenced by the rent-seeking (lobbying) behavior of businesses. Firms recognize the factors affecting policymakers’ welfare and may make campaign contributions to influence tax policy. These changes to the standard strategic tax competition model imply that business contributions affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions. Thus, business campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. ; Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly$4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects.Taxation

Happiness, unhappiness, and suicide: an empirical assessment

The use of subjective well-being (SWB) data for investigating the nature of individual preferences has increased tremendously in recent years. There has been much debate about the cross-sectional and time series patterns found in these data, particularly with respect to the relationship between SWB and relative status. Part of this debate concerns how well SWB data measures true utility or preferences. In a recent paper, Daly, Wilson, and Johnson (2007) propose using data on suicide as a revealed preference (outcome-based) measure of well-being and find strong evidence that reference-group income negatively affects suicide risk. In this paper, we compare and contrast the empirical patterns of SWB and suicide data. We find that the two have very little in common in aggregate data (time series and cross-sectional), but have a strikingly strong relationship in terms of their determinants in individual-level, multivariate regressions. ; This latter result cross-validates suicide and SWB micro data as useful and complementary indicators of latent utility.Happiness ; Suicide

State investment tax incentives: a zero-sum game?

Though the U.S. federal investment tax credit (ITC) was permanently repealed in 1986, state-level ITCs have proliferated over the last few decades. The proliferation of state ITCs and other investment tax incentives raises two important questions: (1) Are these tax incentives effective in achieving their stated objective, to increase investment within the state?; and (2) To the extent these incentives raise investment within the state, how much of this increase is due to investment drawn away from other states? To begin to answer these questions, we construct a detailed panel data set for 50 states for 20+ years (depending on the series). The data set contains series on output and capital, their relative prices, and the number of establishments. The effects of tax parameters on capital formation and establishments are measured by the Jorgensonian user cost of capital that depends in a nonlinear manner on federal and state tax parameters. Cross-jurisdiction differences in state investment tax credits and state corporate tax rates entering the user cost, combined with a panel that is long in the time dimension, are key to identifying the effectiveness of state investment incentives. Three models are estimated: (1) a Capital Demand Model motivated by the first-order condition for profit-maximization; (2) a Spatial Discontinuity Model developed by Holmes (1998) that exploits the spatial discontinuity in tax policies that occurs at state borders; and (3) a Twin-Counties Model that matches counties to a cross-border "twin" and relates between county differentials in manufacturing activity to between-county differentials in tax policy. The first model relies on state-level data, while the latter two use county-level data. On balance, the models find a significant channel for state tax incentives on own-state economic activity and document the importance of interstate capital flows, a necessary element for meaningful tax competition. Whether state investment incentives are a zero-sum game among the states is less certain and depends on the definition of the set of competitive states.Tax incentives ; Taxation ; State finance

State Investment Tax Incentives: A Zero-Sum Game?

Though the U.S. federal investment tax credit (ITC) was permanently repealed in 1986, state-level ITCs have proliferated over the last few decades. Are these tax incentives effective in increasing investment within the state? How much of this increase is due to investment drawn away from other states? Based on a panel dataset for all 50 states, we find a significant channel for state tax incentives on own-state economic activity and document the importance of interstate capital flows. Whether state investment incentives are a zero-sum game is less certain and depends on the definition of the set of competitive states.state tax incentives, interstate tax competition, business taxes

Can Lower Tax Rates be Bought? Business Rent-Seeking and Tax Competition among U.S. States

The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers also may be influenced by the rent-seeking (lobbying) behavior of businesses. This extension to the standard strategic tax competition model implies that business contributions may affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions, thus enhancing or retarding the mobility of capital across jurisdictions. The model is estimated with panel data for 48 U.S. states and unique data on business campaign contributions. Among other results, we document a significant direct effect of business contributions on tax policy; the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is approximately$6.65.business campaign contributions, state business tax policy, rent-seeking, capital mobility