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

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. --

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.

A Neglected Interdependency in Liability Theory

The standard economic model of bilateral precaution concludes that (in the absence of uncertainty, misperception, or error) all negligence-based liability rules induce socially optimal behavior by both injurers and victims. This paper generalizes the standard model to consider situations in which one party’s precaution affects not only expected accident loss, but also directly affects the other party’s effort—or cost—of taking precaution. If the injurer’s care affects the victim’s precaution costs (but not vice versa), most of the standard results continue to hold (except for strict liability with a defense of contributory negligence). If the victim’s precaution affects the injurer’s costs of care (but not vice versa), only strict liability with a defense of contributory negligence leads to the social optimum, while the other negligence-based rules lead to suboptimal outcomes. In the general case (where each party’s costs depend on both parties’ levels of precaution), none of the standard liability rules induce socially optimal behavior in both parties. The paper’s other main result concerns the possibility of self-interested, negligent behavior in equilibrium. Under negligence with a defense of contributory negligence, the only equilibrium is in the mixed strategies of both injurer and victim. This involves the parties choosing (with strictly positive probability) to behave negligently, and gives rise to the possibility of successful litigation in equilibrium, even though there is no uncertainty, misperception, or error. The paper concludes by considering the implications of these results for the design of liability rules.law and economics, and tort law

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.

Taxes, Institutions and Foreign Diversification Opportunities

Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflect efforts to bypass home country tax regimes and weak host country investor protections. The cross-country analysis indicates that a 10% decrease in a foreign country's corporate tax rate increases US investors' equity FPI holdings by 21%, controlling for effects on FDI. This suggests that the residual tax on foreign multinational firm earnings biases capital flows to low corporate tax countries toward FPI. A one standard deviation increase in a foreign country's investor protections is shown to be associated with a 24% increase in US investors' equity FPI holdings. These results are robust to various controls, are not evident for debt capital flows, and are confirmed using an instrumental variables analysis. The use of FPI to bypass home country taxation of multinational firms is also apparent using only portfolio investment responses to within-country corporate tax rate changes in a panel from 1994 to 2005. Investors appear to alter their portfolio choices to circumvent home and host country institutional regimes.

Which Countries Become Tax Havens?

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal. The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens -- and suggests that the range of sensible tax policy options is constrained by the quality of governance.