Friday, Jan. 6, 2017 10:15 AM – 12:15 PM
Sheraton Grand Chicago, Grant Park
- Chair: Susan Fleck, U.S. Bureau of Labor Statistics
Optimal Public Debt and Life Cycle Motives
AbstractIn seminal work, Aiyagari and McGrattan (1998) find that optimal government debt is equal to 67% of output in an infinitely lived agent model. This paper revisits their result using a life cycle model and finds that the government optimally saves 160% of output. In the infinitely lived agent model, government debt increases the interest rate, encourages agents to save and relaxes liquidity constraints. We find this mechanism is quantitatively smaller in the life cycle model. Agents begin life without savings but quickly accumulate assets not only to buffer against income shocks but also to finance post-retirement consumption. Our results show that in a life cycle model government savings improves welfare by crowding-in productive capital and therefore raising wages paid to working age agents. However, we can reconcile optimal policies in the life cycle model with the infinitely lived agent model if the government faces political economy constraints in the life cycle model. In this case, the government no longer chooses to hold savings but instead debt that is 90% of output. This level of debt is consistent with both Aiyagari and McGrattan's (1998) results and the level of debt in the US economy.
The Impacts of United States R&D Expenditures on United States Exports: Does R&D Tax Credit Policy Matter?
AbstractR&D tax credits have generally led to increases in R&D investments, which in turn can explain the positive link between U.S. exports and productivity growth. Previous research has focused on the impact of R&D tax credit on domestic R&D investments rather than on U.S. exports. This paper examines the effect of the R&D tax credit policy on U.S. exports by industry during the period of 2006 to 2012. We consider two U.S. R&D tax credit provisions: regular research credit (RRC) and alternative simplified credit (ASC). They differ in the qualification requirements and stipulated rates. We empirically determine whether a firm file for RRC or ASC in each industry and year. Given these qualifications we estimate augmented for R&D firm-level total factor productivity (TFP). We construct the user cost of R&D by using heterogeneous industry-level R&D depreciation rates, federal and state R&D tax credits. We estimate predicted R&D expenditure based on the user cost of R&D, which we use as an instrument in estimating TFP. Finally, we estimate elasticities of U.S. exports with the respect to trade barriers controlling for firm-level heterogeneity by the R&D credit type. There are several key findings, which matter for policy implications. First, we identify main characteristics of firms favored in the ASC over RRC. Second, firms that choose to file for ASC are more productive than firms that choose to file for RRC both within and across industries. Consequently, the implied firm-level heterogeneity has differential impact of trade barriers on U.S. exports that depends on the type of R&D credit. This finding implies that an R&D tax credit policy should be industry-specific to strengthen the U.S. competitiveness internationally.
Subchapter S Election and Bank Risk Taking
AbstractSubchapter S corporations are flow-through entities that avoid double taxation of corporate profit and dividends. Given the features of pass-through taxation, S-corporation owners face incentives to pay out a higher proportion of income as dividends and not to accumulate retained earnings as equity, leading to higher leverage of the bank’s balance sheet. Consequently, electing the S-corporation status not only increases the after-tax income of owners but also changes the riskiness of investment, which may influence the risk-taking appetite of bank owners. The Small Business Job Protection Act of 1996 for the first time allowed financial institutions to elect the Subchapter S corporation status. Taking advantage of this change as a quasi-natural experiment, this paper examines how banks that elect the S-corporation status evolve vis-à-vis other corporate banks that remain C corporations. Using longitudinal data that cover the universe of all commercial banks and savings institutions insured by the FDIC, I estimate changes in bank growth, composition of income sources, and portfolio compositions after the conversion using the difference-in-differences method. Between 1997 and 1999, banks that elect the S corporation status become more leveraged. In response, they grow less aggressively in revenues and total assets while relying more heavily on interest income rather than more volatile fee incomes. With respect to portfolio compositions, S-corporation banks exhibit a higher loan-to-assets ratio and generally safer compositions of assets and liabilities. I also find strong negative relationship among S-corporation banks between the past leverage ratio and growth rates and portfolio compositions suggesting higher leverage leads to slower growth and safer asset compositions. In sum, S-corporation banks operate more conservatively and rely on traditional banking and maintain safer asset portfolios as the balance sheets become highly leveraged. The results indicate the importance of risk considerations in evaluating the effects of taxes on corporate capital structure.
Federal Reserve Board
University of Minnesota
U.S. Census Bureau
U.S. Federal Deposit Insurance Corporation
- H2 - Taxation, Subsidies, and Revenue
- O0 - General