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  5. Distributional Effects of Taxes and Subsidies
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Distributional Effects of Taxes and Subsidies

Paper Session

Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)

Hilton Riverside, Commerce
Hosted By: American Economic Association
  • Chair: Sylvain Catherine, University of Pennsylvania

Baby Bonds, Universal Basic Income, and Public Opinion

David Vera
,
California State University-Fresno
Kevin Capehart
,
California State University-Fresno
Annabella España-Najera
,
California State University-Fresno

Abstract

As inequalities have grown in the United States and California, policies that might address poverty and inequality have been proposed and implemented to some extent. Yet it remains unclear what factors drive public support for policies that seek to address inequality. We ran two separate survey experiments in the CALSPEAKS March 2021 public opinion survey to test how political polarization, racial biases, and economic self-interest shape public opinion. The advantage of a survey experiment is that random assignment to treatment and control groups allows us to explore causal effects. In the first experiment, we look at public opinion on "baby bonds," a proposed policy that would give every newborn child a government-funded savings account. In the second experiment, we look at public opinion on Universal Basic Income (UBI).
For the baby bond experiment, preliminary results suggest support for a baby bonds program falls slightly when the potential of a targeted (rather than universal) program to reduce wealth inequality is noted. Support falls even further when noting the potential for a targeted program to reduce racial/ethnic wealth inequality. We also observe different levels of support among different racial/ethnic groups.
As for the UBI experiment, we find overall support for the implementation of an UBI program. The experimental setup suggests slightly larger support for UBI when it is framed in the context of allowing opportunities to pursue an alternative career.

Fiscal Rules, Austerity in Public Administration, and Political Accountability: Evidence from a Natural Experiment in Colombia

Maria Carreri
,
University of California-San Diego
Luis Roberto Martínez
,
University of Chicago

Abstract

Fiscal rules are a promising tool to overcome chronic public deficits, but their effectiveness and political feasibility remain unclear, particularly in weakly institutionalized settings. We leverage exogenous variation across Colombian municipalities in exposure to a fiscal rule that limits the operating expenditures of local governments. Our difference-in-differences analysis yields three main findings. First, the fiscal rule is highly effective at reducing operating expenditures and the probability of a current deficit. Second, there is no meaningful impact on local public goods or living standards. Third, the fiscal consolidation leads voters to be more satisfied with their local government and to re-elect the incumbent party at higher rates. These findings suggest that fiscal rules can reduce waste in public administration and can help to align fiscal policy with the preferences of voters in settings, like Colombia, with weak political parties and limited career concerns for local politicians.

Did the Tax Cuts and Jobs Act Reduce Profit Shifting by US Multinational Companies?

Javier Garcia-Bernardo
,
Utrecht University
Petr Janský
,
Charles University
Gabriel Zucman
,
University of California-Berkeley

Abstract

The Tax Cut and Jobs Act of 2017 reduced the US corporate tax rate and introduced provisions
to curb profit shifting. We combine survey data, tax data, and firm financial statements to study
how this reform affected the allocation of firms’ profits. The share of profits booked abroad by
US multinationals fell 3–5 percentage points, driven by repatriations of intellectual property to
the US. The share of foreign profits booked in tax havens remained stable around 50% between
2015 and 2020. Changes to the global allocation of profits are small overall, but some firms
responded strongly.

Impact of the GST on Corporate Tax Evasion: Evidence from Indian Tax Records

Shiv Dixit
,
Indian School of Business
Sumit Agarwal
,
National University of Singapore
Shashwat Alok
,
Indian School of Business
Tejaswi Velayudhan
,
University of California-Irvine

Abstract

In July 2017, India replaced its fragmented indirect tax structure with a nationwide Goods and Services Tax (GST). The change in the tax regime induced an increase in third-party reporting and introduced an enforcement notch. In this paper, we study the impact of the GST on tax compliance by businesses. We document that firms reported higher revenues and costs in response to the tax change. However, these effects can be attributed to both increased efficiency and greater tax compliance. To unpack the impact of the regime change on evasion, we focus on financial statement fraud. We find that while the GST reduced revenue underreporting, it also prompted evasion on other margins. In India, about two-thirds of wage employees are casual workers who do not receive social security benefits and are compensated daily. The wages of these workers lack a paper trail and lie outside the purview of tax authorities. We argue that the GST prompted firms to overreport such non-verifiable costs. We propose a novel technique to detect cost overreporting that exploits variations in the composition of firm inputs around tax exemption thresholds. We use our proposed method to show that labor-intensive firms overreported their wage bills in response to the regime change. Our results suggest that the presence of informal labor-intensive firms acts as a fly in the ointment of third-party reporting. Having a large pool of informal workers allows firms to inflate labor costs, which undercuts the rise in corporate taxable income that stems from the increased monitoring of final and intermediate goods. We develop a structural model that is consistent with these empirical patterns and use it to study several ways of increasing tax revenues.

Uniform Brand Variant Pricing and Tax Pass-through: Evidence from the Seattle Sugar Sweetened Beverage Tax

Danna Kang Thomas
,
University of South Carolina

Abstract

Many firms price soda products within the same brand uniformly--e.g., conditional on size and retailer, Coca Cola brand variants such as Diet Coke and Coca Cola Classic are sold at the same price. However, many localities with soda taxes such as Seattle exclude diet drinks from taxation, implying that uniform pricing firms that do not wish to increase the retail price of its diet brand variants may dampen tax pass-through.

Using grocery scanner data from the Seattle, I study the impact of uniform brand-variant pricing on the pass-through of Seattle's $0.0175/oz sugary beverage tax. I find that half of the retailers in the data continue to price diet and sugary brand variants uniformly after the tax is implemented, resulting in 13% pass-through of the tax onto all brand variants. The other retailers price the diet and sugary sodas differently, resulting in 94% pass-through of the tax to sugary sodas only.

These strong pricing complementaries by uniform pricing firms imply that taxing both diet and sugary beverages may be necessary to meet policy makers' goals to reduce sugary drink consumption. Therefore, I use a multinomial logit demand model to explore a counterfactual tax policy of taxing all brand variants. I find that relative to Seattle's current policy, taxing both sugary and diet brand variants reduces sugary soda consumption by an additional 20%.
JEL Classifications
  • H2 - Taxation, Subsidies, and Revenue