Taxes and Transfers, Growth and Opportunity

Abstract

This dissertation aims to explore several features of tax-and-transfer systems that impact economic growth and opportunity.

In Chapter 1 “Benefits Cliffs in the Aggregate: Consequences for Welfare and Business Cycles”, I study sudden decreases in public benefits that may occur with a small increase in earnings – which may create incentives that impact upward mobility. Given these concerns, what are the consequences of benefits cliffs for welfare and the response to aggregate shocks in general equilibrium? I find the aggregate implications of benefits cliffs on output are small, but welfare gains from their elimination are large and concentrated. Using the American Community Survey and proprietary data from the Georgia Center for Opportunity, I find that individuals in households approaching benefits cliffs reduce their working hours by about 40 hours annually on average. I then build a business cycle model that matches this result, where my model design allows me to accurately capture the benefits cliffs of the US tax and transfer system. Benefits cliffs create labor supply rigidity and thus attenuate the output response to productivity shocks. In a counterfactual model that smooths over benefit cliffs, output increases about 1.6% more on impact in response to an aggregate productivity shock compared to the baseline model with benefits cliffs, but the welfare gain to formally-constrained households doubles.

Chapter 2, “Place-Based Policy and Optimal Income Transfers in a Federalist Framework with Labor Elasticities in Three Dimensions,” I ask what an optimal income transfer system would look like, considering the potential for both federal and state-level programs. I answer this question by building an optimal tax model that accounts for three margins of labor supply: participation, working hours, and mobility across states. I calibrate this model to the United States as a whole, as well as to individual US states. I find that, on average, states find it optimal to tax away federal income transfers, particularly when facing potential inter-state migration, reflecting fiscal constraints and a fear of attracting no or low-income earners. However, states with higher-income populations supplement federal transfers due to increased fiscal space. States with larger pools of no-income earners aim to increase the differences of consumption between those with no and earned income to encourage employment. Backing out implied welfare weights indicates that states must prefer more redistribution than the federal government in order to rationalize their tax-and-transfer systems, aside from top, mobile incomes.

Finally, in Chapter 3, “A Transparent Look at How Taxes Affect Growth: Evidence from Cross-Country Panel Data” – joint with Meng Hsuan Hsieh, Laura Kawano, and Joel Slemrod – we review the literature that estimates the effect of tax policy on economic growth using cross-country panel data and, in our own analysis, evaluate how different methodological choices affect the conclusions drawn. We find these analyses do not credibly support claims that tax rate changes have a statistically robust medium-term impact on national income. We further assess this literature in light of the recent econometric insights on estimation with staggered treatments. We show why the commonly-used linear projection approach yields biased estimates in this setting, and find that a causal estimate of the effect of tax rate changes again yields no statistically significant effect on economic growth at a five-year horizon.