Wednesday, January 31, 2018

Tax policy colloquium, week 3: Andrew Hayashi's "Countercyclical Tax Bases"

Yesterday at the colloquium, Andrew Hayashi presented an early draft of an interesting project that brings together two recently burgeoning (but still on balance underpopulated) sub-genres in tax policy scholarship. The first is looking at macroeconomic, or more specifically, Keynesian, policy considerations - in particular, the design of fiscal policy instruments to be automatically countercyclical (or at least not procyclical). The second is state and local taxation, which gets less attention in the literature (despite some excellent scholars) than its overall importance deserves, in part because it's harder to look at all 50 states than simply at the federal level.

Hayashi is interested in examining, from both a theoretical and an empirical perspective, the question of how the choice of tax base by local governments could affect the depth of recessions and speed of recovery within their borders.

In recent years, we have of course learned that serious recessions actually can and do still happen. Plus, they may be inadequately addressed at the federal level, despite the multiple tools of monetary policy, automatic fiscal policy adjustments, and discretionary fiscal policy responses. Plus, recessions may vary significantly in severity as between localities, even if geographical mobility within the United States is not quite so low as, say, that between distinctive parts of the EU.

So, even if one is skeptical of the potential of discretionary fiscal policy at the state and local level - if only due to balanced budget constraints on state and local governments - one might like to ask what automatic fiscal policy can do. Only, when one thinks about this, balanced budget constraints remain relevant.

State and local governments may face balanced budget legal requirements with varying degrees of rigor. But even if the legal constraints aren't binding, the governments may face market constraints since, their credit ratings can plummet if they don't take care (reflecting a long history of sub-federal defaults).

If a locality's balanced budget constraint is sufficiently binding, then a countercyclical reduction in tax revenues may be promptly (or even verging on simultaneously) offset by a procyclical reduction in government outlays. So then the question becomes, from the standpoint of countercyclical fiscal policy, which of these two sets of opposite changes is likely to have a greater business cycle effect.

Joseph Stiglitz and Peter Orszag have apparently argued that marginal changes in state and local government spending, amid a recession, tend to affect consumption levels more than marginal changes in state and local tax levels - reflecting that taxes may tend to be paid by higher-income households that respond to the tax changes via their savings levels.  If and insofar as this is true, one gets a seemingly paradoxical reversal of the standard wisdom regarding automatic fiscal policy.

If the tax side changed by itself, then the Keynesian macro standpoint would counsel the use by state and local governments of tax instruments that are relatively volatile and correlated with the business cycle. State and local income taxes are the classic example. By contrast, real property tax revenues tend to be extremely stable, even if home values are fluctuating. For example, property tax reassessments may be sporadic, may lean in practice against reducing the assessed value, and have enough discretion in the joints to permit keeping revenues steady. (Recent research by John Mikesell confirms that real property tax revenues were extremely stable during the Great Recession.)

So one has the paradigmatic choice between state and local taxes - income taxes, which fluctuate countercyclically but thereby draw procyclical spending changes, and real property taxes, which may fail to boost consumption in a recession, since they remain about the same, but have the virtue of not similarly drawing procyclical spending cuts.

A question of central interest in Hayashi's paper is whether one can find an empirical correlation between (a) the use of income taxation versus property taxation at the county level and (b) the severity of and speed of recovery from recessions. Then a second question is whether one can draw a causal arrow from (a) to (b), based on the above scenario in which volatile income taxes, but not stable property taxes, draw matching spending cuts. Early work, reflected in the draft discussed yesterday, suggests that there may indeed be some positive correlation between using property taxes and doing better in recessions, but much work remains to be done before any causal interpretation of the data can be confidently advanced.

5 comments:

Dr Purva Pius said...

I’m Charles David by name, i want to use this medium to alert all loan seekers to be very careful because there are scam everywhere, Few months ago I was financially strained, and due to my desperation I was scammed by several online lenders. I had almost lost hope until a friend of mine referred me to a very reliable lender called Dr Purva Pius ( A God fearing man) who lend me a loan of $237,000 under 72 working hours without any stress. I explain to the company by mail and all they told me was to cry no more because i will get my loan from this company and also i have made the right choice of contacting them i filled the loan application form and proceeded with all that was requested of me and to my shock I was given the loan, If you are in need of any kind of loan just contact him now via: {urgentloan22@gmail.com}

I‘m using this medium to alert all loan seekers because of the hell I passed through in the hands of those fraudulent lenders.

Thanks you Dr Purva Pius Loan service for your help.

Michelle Huxford said...


ALL THANKS TO UPSTART LOAN AM NOW FINANCIALLY STABLE . upstartloan@yahoo.com
I am Michelle Huxford from Casper, Wyoming. I was in a very chronic financial issue and terminal health situation some few weeks back. After all my search for assistance from friends and neighbors proved abortive, I feel there was no one who truly cares. I became so emaciated due to lack of good food and my 2 kids age 5 and 8 were not also good looking due to lack of proper care as a result of finance. One faithful morning I saw an old time friend of my late husband and I told him all I have been going through and he said the only way he could help was to direct me to a good loan agency that also helped him, He explained to me on how he was financially down and how he got boosted by this loan agency UPSTART LOAN INC ( upstartloan@yahoo.com ) who grant him 245,000 USD loan at an affordable rate. He further assured me that they were the only legit loan firm he found in the quest of seeking for loan after been scammed by various fake loan lenders online. He gave me their email: upstartloan@yahoo.com or text/call (574) 301-1639, That was how i applied and was also granted a loan and my life changed for the good. CONTACT THE ONLY GENUINE LENDERS( UPSTART LOAN INC) VIA email: upstartloan@yahoo.com or call +1 (574) 301-1639 to resolve your financial mess.

printing designs company in Frisco said...

Hello
Nice Article Thanks for sharing
tax services mckinney tx

Victoria Financier Loan Firm said...

TAKE A LOAN @ 2% INTEREST RATE with victoriafinancier@outlook.com

Do you need a loan?
Do you need a loan to pay off your debt?
Do you have bad credit?
Do you need a loan construction or to invest?
Do u you need loan to start doing business?
if yes,
VICTORIA FINANCIER LOAN FIRM
are Granting you personal loan, Business loan, mortgage loan,
Construction loan, Debt loan, Student loan, Auto loan, e.t.c.
Loan at any currency are range from $5,000 ''min'' to $100,000.000 ''max'' @ 2% interest rate
If you are interested kindly send
response to: { victoriafinancier@outlook.com }

*Full Name/Company Name:_________

*Address:_________

*Tell:_________

*loan amount:_________

*Loan duration:_________

*Country:_________

*Purpose of loan:_________

*Monthly Income:__________

*Occupation__________

*Next of kin :_________

*Email :_________

VICTORIA FINANCIER EMAIL: victoriafinancier@outlook.com
Best Regard
VICTORIA FINANCIER .

mounika said...


Hello
Nice article thanks for sharing with us
tax law changes for 2018 Mckinney