Musgrave Prize

UM graduate student David Agrawal won the Musgrave prize for the best paper by an economist under 40 presented at the International Institute for Public Finance (IIPF) conference held in Ann Arbor last week.

Given that nearly everyone at the conference was under 40, and that there was stiff competition not only from faculty but also from some of our other graduate students, I would say that this is quite an honor.

So, congratulations David!

Oh, and David is on the job market this year. Hint, hint.

Addendum: not sure why the web page lists David's affiliation as the University of Copenhagen. He's not even Danish.

Addendum 2: the winning paper can be found on David's web page. It is the one about the tax gradient.

Tax holidays

Dan Hamermesh blogs about the economics of tax holidays on the Freakonomics blog.

Of course, recent Michigan economics Ph.D. Adam Cole is the world expert on tax holidays. You can find his papers about them on his web page.

Your date with the tax man

On the tax consequences of being paid to go on a date.

Via: instapundit

Taxes, taxes, taxes

MSNBC on the joyous tax regime in Denmark.

Hat tip: Lars Skipper

Explaining the variance in tax compliance

Casey Mulligan reports on a Chicago dissertation that examined how "tax compliance" - the formal term for whether or not you pay all the taxes you owe - varies with the amount of integrity required in different occupations, as rated by an external source.

My quick internet investigation suggests that Oscar now works at the Ministry of Finance in Mexico.

Entitlement reform

I don't usually sign the sorts of "500 economists agree with X" statements that I am invited to sign every few months, but I did decide to add my name to this one on entitlement reform.

I agree with basically all it has to say, though I would add that we also need a major rethink of, and reduction in, our ideas about military involvement overseas. Welfare to farmers and corporations should go as well. The bright side of having our public finances run by drunks for the last 10 years is that opportunities for budget cutting are literally everywhere.

Another reason I signed this particular petition is the involvement of Doug Holtz-Eakin, who is doing a very good thing indeed by devoting himself to improving public policy rather than cashing in on his experience in the Bush II administration.

Sales taxes on online purchases

A nice summary from Yahoo of the current state of play at the state level in regarding to taxing online purchases.

The simple public finance of the matter, of course, would have the taxes apply to online purchases in order to avoid the distortion associated with applying the tax to some sellers but not all.

A similar line of argument works against state laws that apply different sales tax rates to different goods. Perhaps the feds could pass a law allowing state collection of sales taxes for online purchases but only if they apply their sales tax equally to all purchases of whatever product from whatever seller.

Planned parenthood

I sure wish the Republicans could focus on what is important, which is the fiscal crisis. Instead, even now, there is time and political energy for symbolic anti-abortion politics.

Expenditures on planned parenthood almost by definition reduce future government expenditures on schools, TANF, SNAP, WIC, and, further in the future, prisons. That is not the place to be cutting.

Get serious people.

Inspiration: Sandy Black on Facebook

Thanks for the money, here's the blame

Lessons in fiscal federalism from local councils in the UK. There is a principle of public finance that says it is good to have the taxing and spending authority in the same hands. This article illustrates one of the reasons for that principle.

Elasticity of taxable income in Oregon

TaxProf Blog discusses the lower-than-expected returns from raising rates on the top brackets in Oregon.

Neither the discussion at the link nor the counter-discussion linked to at the bottom of the TaxProf blog post really satisfy. The TaxProf blog post focuses on long-term explanations for a short-term change in tax revenues. In the short run, one would not expect lots of residential or small business mobility, but one would expect reductions in consulting income as well as responses related to the timing of capital gains realization, the coding of business income and the like. Sorting out the short- and long-run responses to tax rate changes is hard, and something the literature is not very good at (and sometimes seems to forget entirely).

In contrast, the second of the two counter-views linked to by the tax prof seems to assume that the entire change is due to the recession, with no behavioral response at all. It offers no evidence for this view, which is inconsistent with the broader literature in public finance. Surely there is some mechanical effect of the recession, but it seems unlikely to be all or even most of the story.

More generally, one of the basic results in public finance is that you want to tax things that do not change much in response to the taxes, because the resulting distortions in individual choices that result are then small. Raising the top brackets is doing exactly the opposite of this, as there is pretty good evidence that the elasticity of taxable income increases with income.

Via: instapundit

CATO on excess burden

CATO makes the (easy) case for doing cost-benefit analysis correctly by taking account of the "excess burden" also known as the marginal social cost of public funds. A dollar of public funds costs society more than a dollar of output both because of the direct costs of running the tax system - IRS agents are not free - and because our tax system reduces the size of the pie by distorting individual choices away from their unconstrained optima. For example, income taxes distort individual choices between work and leisure.

There is nothing really political here, it is just that doing cost-benefit analyses incorrectly furthers the agendas of those who want the government to spend more on activities that do not pass cost-benefit tests.

Mankiw on taxes

A fine NYT column on taxes from Greg Mankiw.

The literature on optimal income taxation suggests higher rates on those who supply their labor inelastically so as to minimize the behavioral response to the taxation. This is, of course, just a special case of the general point that you want to tax things that will not change in response to the taxes. Rather obviously, this conflicts with distributional concerns, but it is worth keeping in mind nonetheless.

Greg's piece also implicitly points out that estate taxes are a boon for the higher education sector, as it allows wealth, or at least the capacity to create wealth, to be passed on without paying the inheritance tax.

Addendum: responses from Tyler Cowen and from Greg Mankiw.

I think Tyler is correct to raise the moral dimension. As marginal tax rates as high as 90 percent can have little justification other than incompetence or envy, it is hard not to see them as immoral as well as inefficient.

Legislators in the candy store

A funny NPR piece on how to define candy so that you can tax it.

The issues raised here are much more general than candy. I heard my colleague Joel Slemrod give a talk on the same basic conceptual issue but in the context of financial instruments rather than sweets. When making decisions about differential tax rates on different but related goods, the technological ease with which one good can be transformed into the other has a role to play in both how the distinct goods are defined and in the optimal tax differential between them.

Good stuff.

Via Jeff Miron

Cough, cough, eh.

For Adam Cole: the current state of play on evasion of cigarette taxes in Canada.

Taxing tobacco

Recent UM Ph.D. Adam Cole points me to this interesting study on tobacco taxes produced by the US Treasury Department.

For me, the most interesting bit is in the appendix. The study authors would like to estimate the volume of cigarettes consumed in the US on which tax has not been paid. One reasonable way to do this starts with using administrative data to determine the number of cigarettes on which federal taxes are paid. Administrative data works well here because federal taxes are paid at the production site and careful records are kept. The number of cigarettes consumed, in contrast, can be estimated using data from a nationally representative survey, in this case the National Health Interview Survey (NHIS), a data set widely used in research in health economics.

The problem is that when you do this, you discover that the number of cigarettes consumed lies well below the number on which taxes are paid - see Table 4. Given that cigarettes degrade in quality when stored reasonably rapidly, which indicates that the excess cigarettes are not being stored by consumers, this finding suggests that the NHIS measure of cigarette consumption has a downward bias, presumably due to "non-classical" measurement error in smoking incidence and/or (probably and) in number of cigarettes smoked conditional on reported incidence. The study does about the only thing one can do in this situation, which is to present estimates - see Table 5 - of the lost tax revenue as a function of assumptions about the downward bias in the NHIS consumption measure. One obvious recommendation here is to improve our knowledge of the degree of downward bias in smoking consumption measures by doing some sort of validation study. More generally, this study provides a nice example of how research on measurement, which might seem rather arcane, actually has a real world payoff.

The other bit of the study that stands out to me is this:

Recommendation 3: Allow enforcement officials to pay investigative expenses with proceeds gained through undercover operations.

Problem: Currently, tobacco tax enforcement programs are funded principally through agency appropriations or from forfeiture proceeds arising from asset forfeitures in concluded criminal cases. Additional funding through the use of proceeds gained through undercover investigations would expand investigative resources without the use of additional appropriated funds.

Recommendation: Existing law should be amended to authorize TTB to use proceeds gained from undercover tobacco tax enforcement operations to fund its investigations.

I disagree with this bit for the same reason I dislike asset forfeiture laws. I do not think that law enforcement should be a profit center for the government. Making it such strongly enhances the incentives for misbehavior by law enforcement officials.

Markets in everything

Not one but two instances of young women selling their virginity.

One is a California co-ed, the other a Romanian woman studying in Germany. Putting aside why anyone would want to pay for what I recall as being rather awkward and painful, why are the prices so different? The difference in attractiveness is not large to my eye, and I can imagine, depending on the relative weights assigned to different attributes such as looks and intellect, that one could prefer either one of the two capitalist virgins (or, at this point, former virgins).

The tax rate on earnings from sex work in Germany seems awfully high given that one could make a case for substantial positive externalities from happier, less horny and less stressed men and from a reduced spread of STDs, where the latter would come about if sex workers are more careful about not catching things than are, say, women picked up in bars (and if this is the relevant margin rather than, say, going it alone). Estimating the social optimal tax rate on sex work (under an assumption of legality) would make an interesting exercise for a gradual student.

More on Sweden

Swedish tax authorities are cracking down on webcam strippers who fail to pay tax, according to a BBC report. Says a Swedish bureaucrat:

"They are young girls, we can see from the photos. We think that perhaps they are not well informed about the rules," said Mr Hardyson, head of the tax authority's national project on internet trade.

Ah yes, young girls, so foolish as to not want to pay high marginal tax rates. No doubt it is all the result of spending too much time thinking about shoes and the latest reinvention of Aqua.

Apparently the Swedes were tipped off by the Danes, eager to protect their webcam strippers from the unfair competition of heretofore untaxed Swedish webcam strippers. Saith the Swedish bureaucrat:

He said the Swedish tax authorities had been tipped off about Swedish internet strippers by the Dutch authorities, who had started a similar investigation earlier.

Odd that webcam stripping is legal in Sweden but prostitution is not. Sweden's prohibition on prostitution is motivated by feminist concerns rather than traditional religious and moral ones, as reflected in the fact that in Sweden it is buying, rather than selling, sex that is illegal. I should think the same feminist arguments about the pernicious effects of objectification would apply to webcam stripping as well.

My favorite line, of course, is this one, again from the Swedish bureaucrat:

"When we investigated the sites manually it worked better," he added.

Who knew the BBC had a sense of humor?

Hat tip: marginal revolution

Taxes over time and up and down the income distribution

A remarkably good piece from MSNBC that (not a coincidence?) features Michigan's own Joel Slemrod, as well as Emanuel Saez and Thomas Piketty.

Of course, I do have a few comments:

First, MSNBC neglects to note that tax rates impact the size of the economic pie. Top marginal rates were a lot higher in 1960 and it does not take much imagination to think that reducing them is part of what led to the increase in measured incomes in the top percentiles of the distrubtion.

Second, MSNBC forgets all the increases in future taxes that have been accumulating over the period in question in the form of government debt. Someone does have to pay these taxes eventually, whether via income taxes, payroll taxes, excise taxes or taxes on cash balances (i.e. inflation).

Third, I suspect that the relative decline in excise taxes has served to increase the progressivity of the system. Surely someone has considered this in the literature; it would have been nice to learn about that research in the article.

Fourth, the normative pitch (you missed the flashing "author's message" at that point?) for additoinal progressivity (or, if you prefer, disproportionality) did not fit well with the rest of the piece. It would have made the article stronger for the author to just stick to the facts.

Still, pretty useful stuff for MSNBC. Good for making clear how much of the burden is borne by those with high incomes and also at illustrating some of the basic patterns over time in what get taxed.

Lump sum transfers in Namibia

BIG payments in Namibia. The BBC article is a puff piece but the idea is nonetheless an interesting one. This is not a negative income tax - it is lump sum transfers from outside the system. I think much of the action will lie in the long run when the BIG recipients come to view the money as normal rather than unusual.

Also, notice the BBCs suggestion at the end that by taxing the lump sum transfers they can become self-financing. I guess addition is not a requirement for employ at the BBC.

Hat tip (on the BBC piece): Jessica Goldberg