Empirical Essays in Public Economics

Abstract

This dissertation contains three empirical essays that study how government policies impact the economy. Chapter 1 measures how much higher income taxes on U.S. top 1% earners "trickle down" and reduce other workers' wages via geographically concentrated spillovers. While trickle-down effects feature prominently in tax policy debates, relatively little is known about their magnitude. The paper uses an exposure design that combines time-series variation in the federal marginal tax rate for top 1% earners with cross-sectional variation in the top 1% income share across local labor markets. Intuitively, the design asks whether workers in local labor markets where top 1% earners account for a larger share of economic activity are more adversely impacted by a large tax increase for top 1% earners. The results provide very little evidence of local trickle-down effects. The point estimates imply zero local trickle-down effects. At conventional levels of confidence, the estimates are statistically inconsistent with a one percentage point increase in the top tax rate reducing worker wages by more than -0.08%. These results undermine claims that trickle-down effects should be an important consideration in setting top tax rates.

Chapter 2 empirically studies the effect of local business taxes on business entry. Business entry has been linked to productivity growth, job creation and the magnitude of business cycles, highlighting the need for evidence on the impact of business taxes on business entry. The paper combines 5,111 local (municipal) business tax rate changes with administrative data on the universe of business (corporate employer establishment) entrants in Germany between 2004-2012. Using a dynamic difference-in-differences approach, the paper estimates that a one-percentage point increase in the local business tax rate reduces business entry by -4% over the medium term. Cumulated over a six-year period, the loss in business entry amounts to -18% of an entry cohort. The drop in entry is driven primarily by single-establishment firms with less than three employees.

Chapter 3 theoretically and empirically studies the role of firms in transmitting worker-level policies (e.g. mandated benefits, payroll taxes) into wages. A growing body of evidence suggests that firms have labor market power and contribute considerably to wage inequality. Less is known about the role of firms in determining how worker-level policies impact wages. When firms have labor market power, the wage impact of worker-level policies on a given type of worker can vary across firms. Using a static wage-posting model, I theoretically characterize the aspects of firms that determine how worker-level policies impact wages. Using administrative linked employer-employee data to study a German payroll tax reform, I find that similar workers experienced differential wage changes depending on the reform's impact on their employer's labor costs, one of the firm dimensions highlighted by the model.