Tax Policy and the Economy, Volume 16 (NBER Tax Policy and the Economy)

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ABSTRACT: Complementarity between performance pay and other organizational design elements has been argued to be one potential explanation for stark differences in the observed productivity gains from performance pay adoption. Using detailed data on internal organization for a nationally representative sample of firms, we empirically test for the existence of complementarity between performance pay incentives and decentralization of decision-making authority for tasks. To address endogeneity concerns, we exploit regional variation in income tax progressivity as an instrument for the adoption of performance pay.

We find systematic evidence of complementarity between performance pay and decentralization of decision-making from principals to employees.

Journal of Financial Stability

However, adopting performance pay also leads to centralization of decision-making authority from non-managerial to managerial employees. The findings suggest that performance pay adoption leads to a concentration of decision-making control at the managerial employee level, as opposed to a general movement towards more decentralization throughout the organization. This generates a potential role for public old-age pension systems to spread economic and demographic shocks among different generations. This paper evaluates how different systems smooth and propagate shocks to productivity, fertility, mortality and migration in a realistic OLG model.

We use reductions in the variance of wealth equivalents to measure performance, starting with the existing U. We find that system design and shock type are key factors. The German system and the benefit-adjustment-only U. Overall, the German system performs best, while the Swedish system, which includes a buffer stock to relax annual budget constraints, performs rather poorly. Focusing on the U. Contractionary monetary policy systematically increases inequality in labor earnings, total income, consumption and total expenditures.

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Furthermore, monetary policy shocks account for a non-trivial component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document some of the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.

ABSTRACT: Because of limitations in survey-based measures of household consumption, a growing literature uses an alternative measure of consumer expenditures commonly referred to as "imputed consumption. In this paper we use transaction-level retail investment data to assess the measurement error that can result in imputed consumption due to intra-year changes in asset values and composition.

We show that substantial discrepancies between imputed and actual spending can arise due to trading costs, asset distributions, variable trade timing, and volatile asset prices between two annual snapshots. While these errors tend to be quantitatively small and centered around zero on average, we demonstrate that they vary across individuals of different types and income levels and are highly correlated with the business cycle. We end by suggesting ways to minimize the impact of these imputation errors in future research and we discuss which research questions are least likely to suffer from such errors.

Using transaction-level data, we study how households interact with the universe of retailers following changes in income. Since these shifts do not average out across retailers, retailer choice has important implications for key financial and macroeconomic outcomes such as profitability and labor demand. ABSTRACT: Using comprehensive high-frequency state and local sales tax data, we show that shopping behavior responds strongly to changes in sales tax rates.

Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, consumers adjust in many dimensions. They stock up on storable goods before taxes rise and increase online and cross-border shopping in both the short and long run. The difference between short- and long-run spending responses has important implications for the efficacy of using sales taxes for counter-cyclical policy and for the design of an optimal tax framework.

Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. We provide additional evidence in favor of this new shopping-complementarity mechanism. Kellogg Insight. We find that the policy shifted young men's long-run preferences from hard to light drinks decades later and we estimate the age at which consumers form their tastes.

We show that the large beer market expansion in the late s had similar effects on young consumers' tastes, while older consumers' tastes remained largely unchanged. We then link these long-run changes in alcohol consumption patterns to changes in male mortality. The shift from hard to light alcohol reduces incidences of binge drinking substantially, leading to fewer alcohol-related deaths.


We conclude that the resulting large cohort differences in current alcohol consumption shares explain a significant part of the recent decrease in male mortality. Program impact evaluations that focus only on contemporaneous effects can therefore severely underestimate the total effect of such public policies which change preferences for goods. To answer these questions, this paper uses novel historical high-frequency data of tax-exempt municipal bonds and develops a model of the term structure of municipal yield spreads to taxable bonds as a function of future top income tax rates and a risk premium.

Testing the model using the presidential elections of , and shows that financial markets forecast future tax reforms remarkably well in both the short and long run.

Economy : Taxation (Part-1): Direct Taxes, Indirect Taxes & GST Explained in Hindi UPSC - HCS - RAS

Combining these market-based tax expectations or "tax news shocks" with data from the Consumer Expenditure Survey shows strong evidence of anticipation effects to future tax changes among higher-income consumers, well before the tax rates change. Consumer spending changes about one-for-one with changes in expected lifetime tax liabilities. These findings imply that ignoring anticipation effects can substantially bias estimates of the total effect of a tax change. This short primer explains what researchers who are interested in bond pricing should know about the taxation of fixed-income securities.

The different tax rules since are formalized within a simple asset pricing framework. We estimate how a representative panel of Canadian firms adjusts innovation activities, business strategies, and exit in response to large increases in Chinese imports between and On average, process innovation declines more strongly than product innovation.

A key driver of the influence of taxes on entrepreneurship is how it changes incentives to engage in effort on the margin. This is not relevant when evaluating the aggregate effect of a tax rate change on entrepreneurship overall, as entrepreneurs decide to move forward with ventures at the margin. In other words, it is the venture that is on the edge between being profitable and making a loss that will be sensitive to a tax rate increase, affecting the total amount of entrepreneurship in the economy. Fixed costs are expenses that do not change with an increase or decrease in the volume of goods or services sold by a firm.

Examples of fixed costs imposed on entrepreneurs include tax compliance and complexity, which must be navigated as a precondition of entry by an entrepreneur. Take, for example, an entrepreneur offering a new way to provide legal services to low-income families.

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The volume of services she provides will be determined by the point where the marginal cost of producing an additional hour of service equals the price she can command for the service, independent of the fixed cost imposed by tax complexity. This may be true even if the firm is running a loss.


It also lowers the total return expected from an investment at the beginning on a venture, which could deter firm entry if other opportunities would yield a higher return. Tax policy can influence the decisions entrepreneurs make to enter an industry, invest, and engage in risk-taking through two channels: the tax rates entrepreneurs face on their income and the structure of the tax code—for example, how the tax code treats losses and capital investments.

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The economic literature has found that tax rates have a mixed to negative effect on entrepreneurial activity. Corporate income tax rates are associated with lower levels of entrepreneurship. Economists have taken advantage of differences in state tax policy to understand how taxes interact with entrepreneurship.

Economic Policy Uncertainty and Corporate Policies Around the World

Personal income taxes also influence entrepreneurship. The reduction in marginal tax rates after the Tax Reform Act of led to an increase in hiring rates by entrepreneurs; a decrease in marginal tax rates by 10 percent was associated with a 12 percent increase in the mean probability of hiring workers. Some studies find a positive relationship between higher marginal income tax rates and entrepreneurship. This is a net subsidy to risk-taking, though rules exist to limit how often firms change organizational form and the amount of their tax loss harvesting. Innovative activity by entrepreneurs is also influenced by tax rates. Many of these innovators are not self-employed but instead work within large, often incumbent, firms. Risk-taking by inventors and innovators working in startups and incumbent firms is changed by personal income tax rates.

Expected incomes play a large role in individual decisions to enter an occupation with a high up-front cost to obtain necessary skills or education. As top marginal income tax rates rise, individuals may decide to avoid working in innovative occupations given the low payoff. Superstar inventors, those who create a disproportional amount of innovation as measured through patents and inventions, are sensitive to individual and corporate income taxes.

Tax policy is one of many considerations prospective innovators consider when deciding where to locate and whether to enter an innovative occupation. Inventors are less sensitive to tax rates in areas where there is more agglomeration, or an abundance of innovators already living and working closely together.