In this my second installment of recently published social science research of potential interest to Austrians, let me alert you to three papers (HT: Kevin Lewis at National Affairs).
The first, “Dynamic Scoring, Tax Evasion, and the Shadow Economy” suggests that taxes significantly affect the level of tax evasion. So powerful is this effect that a tax reduction can generate enough additional revenues from the increase of reported activity to largely make up for the revenue losses of a lower tax rate.
Also on the topic of taxes, the second paper, “Capital Taxation during the Great Depression”, argues that a bevy of taxes imposed on corporations, primarily on dividends, helps explain why the economy continued to slump during the 1930′s. This result is in line with the Austrian view that government intervention during the 1930′s prolonged the Depression.
The third paper — “In Search of the Multiplier for Federal Spending in the States during the New Deal” — also helps account for the persistence of high unemployment during the Depression. It does so by demonstrating that the Keynesian multiplier effect — the additional spending generated by government expenditures — was too low to noticeably impact employment.
Here are the abstracts. I have bolded the main take-aways.
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Dynamic Scoring, Tax Evasion, and the Shadow Economy
John Robert Stinespring
Public Finance Review, January 2011, Pages 50-74
Abstract:
Measuring the impact of tax policy on tax evasion is crucial in estimating government revenues. In the United States, the government estimates that $300-$400 billion is lost each year to tax evasion. This article combines dynamic scoring with household preferences for tax evasion à la Feige and McGee to measure the macroeconomic feedback effects from tax cuts to changes in output and government revenues. Using a simple dynamic scoring model based on Mankiw and Weinzierl (2006), the feedback effects are divided into their constituent substitution, income, and evasion effects for an analysis of individual behavior at the microeconomic level. Calibrating the model to U.S. data reveals that the growth effects of income tax rate cuts can offset a significant percentage of the potential revenue losses.
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Capital Taxation During the U.S. Great Depression
Ellen McGrattan
NBER Working Paper, December 2010
Abstract:
Previous studies of the U.S. Great Depression find that increased taxation contributed little to either the dramatic downturn or the slow recovery. These studies include only one type of capital taxation: a business profits tax. The contribution is much greater when the analysis includes other types of capital taxes. A general equilibrium model extended to include taxes on dividends, property, capital stock, and excess and undistributed profits predicts patterns of output, investment, and hours worked more like those in the 1930s than found in earlier studies. The greatest effects come from the increased tax on corporate dividends.
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In Search of the Multiplier for Federal Spending in the States During the New Deal
Price Fishback & Valentina Kachanovskaya
NBER Working Paper, November 2010
Abstract:
If there was any time to expect a large peace-time multiplier effect from federal spending in the states, it would have been during the period from 1930 through 1940 when unemployment rates never fell below 10 percent and there was ample idle capacity. We develop an annual panel data set for the 48 continental states from 1930 through 1940 with evidence on federal government grants, loans, and tax collections and a variety of measures of economic activity. Using panel data methods we estimate a multiplier, defined as the change in per capita economic activity in response to an additional dollar per capita of federal funds. For personal income, which includes transfer payments as income, the estimate ranges from 0.91 for the combination of government grants and loans to 1.39 when only grants are considered. It is important to distinguish between the effects of farm subsidies and the combination of public works and relief grants. The personal income multiplier for public works and relief was around 1.67, while the effect of farm payments to take land out of production reduced personal income by 0.57. Multipliers for a more production-based measure of state income per capita after removing nonwork relief transfers and adding back payroll taxes are about 10 to 15 percent smaller. The multiplier for wages and salaries was substantially less than one, as was the multiplier for retail sales. The impact of the federal spending on employment was negligible and may have been negative. The results may help explain why measures of income have recovered more rapidly than measures of employment in both the 1930s and in the current era.
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