Labs of Democracy: Using Regional Variation to Understand Fiscal Policy Issues: Dissertation Summary

This dissertation uses a regional approach to assess the aggregate effects of cutting taxes on corporations and on taxpayers in different income groups. Determining the optimal course for economic policy critically depends on the efficiency and equity consequences of these policies. The first chapter estimates the incidence of state corporate taxes on workers, landowners, and firm owners in a spatial equilibrium model in which corporate taxes affect the location choices of both firms and workers. The second chapter investigates how tax changes for different income groups affect macroeconomic activity

Capitalists in the twenty-first century

Have passive rentiers replaced the working rich at the top of the U.S. income distribution? Using income tax data linking 11 million firms to their owners, this paper finds that private business owners who actively manage their firms are key for top income inequality. Private business income accounts for most of the rise of top incomes since 2000 and the majority of top earners receive private business income|most of which accrues to active owner-managers of mid-market firms in relatively skill-intensive and unconcentrated industries. Profit falls substantially after premature owner deaths. Top-owned firms are twice as profitable per worker as other firms despite similar risk, and rising profitability without rising scale explains most of their profit growth. Together, these facts indicate that the working rich remain central to rising top incomes in the twenty-first century

Labs of Democracy: Using Regional Variation to Understand Fiscal Policy Issues

This dissertation uses a regional approach to assess the aggregate effects of cutting taxes on corporations and on taxpayers in different income groups. Determining the optimal course for economic policy critically depends on the efficiency and equity consequences of these policies. The first chapter of this dissertation estimates the incidence of state corporate taxes on workers, landowners, and firm owners in a spatial equilibrium model in which corporate taxes affect the location choices of both firms and workers. Heterogeneous, location-specific productivities and preferences determine the mobility of firms and workers, respectively. Owners of monopolistically competitive firms receive economic profits and may bear the incidence of corporate taxes as heterogeneous productivity can make them inframarginal in their location choices. We derive a simple expression for equilibrium incidence as a function of a few estimable parameters. Using variation in state corporate tax rates and apportionment rules, we estimate the reduced-form effects of tax changes on firm and worker location decisions, wages, and rental costs. We then use minimum distance methods to recover the parameters that determine equilibrium incidence as a function of these reduced-form effects. In contrast to previous assumptions of infinitely mobile firms and perfectly immobile workers, we find that firms are only approximately twice as mobile as workers over a ten-year period. This fact, along with equilibrium impacts on the housing market, implies that firm owners bear roughly 40% of the incidence, while workers and land owners bear 35% and 25%, respectively. Finally, we derive revenue-maximizing state corporate tax rates and discuss interactions with other local taxes and apportionment formulae.The second chapter investigates how tax changes for different income groups affect macroeconomic activity. Using historical tax returns from NBER's TAXSIM, I construct a measure of who received (or paid for) Romer and Romer exogenous tax changes. I aggregate these tax changes by income group and state. Variation in the income distribution across U.S. states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the negative relationship between tax changes and growth is largely driven by tax changes for lower-income groups and that the effect of tax cuts for the top 10% on employment growth is small

Tax cuts for whom? Heterogeneous effects of income tax changes on growth and employment

© 2019 by The University of Chicago. All rights reserved. This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. Variation in the income distribution across US states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small

Who Profits from Patents? Rent-Sharing at Innovative Firms

This paper analyzes how patent-induced shocks to labor productivity propagate into worker compensation using a new linkage of US patent applications to US business and worker tax records. We infer the causal effects of patent allowances by comparing firms whose patent applications were initially allowed to those whose patent applications were initially rejected. To identify patents that are ex-ante valuable, we extrapolate the excess stock return estimates of Kogan et al. (2017) to the full set of accepted and rejected patent applications based on predetermined firm and patent application characteristics. An initial allowance of an ex-ante valuable patent generates substantial increases in firm productivity and worker compensation. By contrast, initial allowances of lower ex-ante value patents yield no detectable effects on firm outcomes. On average, workers capture 29 cents of every dollar of patent-induced operating surplus. This share is larger for men, employees who are listed as inventors, and firm stayers present since the year of application. Patent allowances lead firms to increase employment, but we find minimal evidence of quality upgrading or selection bias in workforce composition. Surprisingly, entry wages are insensitive to patent decisions, suggesting that the large earnings responses of incumbent workers may reflect performance pay

Rethinking How We Score Capital Gains Tax Reform

We argue the revenue potential from increasing tax rates on capital gains may be substantially greater than previously understood. First, many prior studies focus primarily on short-run taxpayer responses, and so miss revenue from gains that are deferred when rates change. Second, the composition of capital gains has shifted in recent years, such that the share of gains that are highly elastic to the tax rate has likely declined. Third, focusing on capital gains tax collection may understate fiscal spillovers from decreasing the preferential tax treatment for capital gains. Fourth, additional base-broadening reforms, like eliminating stepped-up basis and making charitable giving a realization event, will decrease the elasticity of the tax base to rate changes. Overall, we do not think the prevailing assumption of many in the scorekeeping community—that raising rates to top ordinary income levels would raise little revenue—is warranted. A crude calculation illustrates that raising capital gains rates to ordinary income levels could raise $1 trillion more revenue over a decade than other estimates suggest. Given the magnitudes at stake, scorekeeping procedures employed in evaluating capital gains should be made more transparent and be the subject of external professional debate and review

Replication Data for: 'Capitalists in the Twenty-First Century'

The programs replicate tables and figures from "Capitalists in the Twenty-First Century", by Smith, Yagan, Zidar, and Zwick. Please see the Readme file for additional details

State Taxes and Spatial Misallocation

© The Author(s) 2018. We study state taxes as a potential source of spatial misallocation in the U.S.. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6% if government spending is held constant, and by 1.2% if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms