The top 1 percent income share has more than doubled in the United States over the last thirty years, drawing much public attention in recent years. While other English speaking countries have also experienced sharp increases in the top 1 percent income share, many high-income countries such as Japan, France, or Germany have seen much less increase in top income shares. Hence, the explanation cannot rely solely on forces common to advanced countries, such as the impact of new technologies and globalization on the supply and demand for skills. Moreover, the explanations have to accommodate the falls in top income shares earlier in the twentieth century experienced in virtually all high-income countries. We highlight four main factors. The first is the impact of tax policy, which has varied over time and differs across countries. Top tax rates have moved in the opposite direction from top income shares. The effects of top rate cuts can operate in conjunction with other mechanisms. The second factor is indeed a richer view of the labor market, where we contrast the standard supply-side model with one where pay is determined by bargaining and the reactions to top rate cuts may lead simply to a redistribution of surplus. Indeed, top rate cuts may lead managerial energies to be diverted to increasing their remuneration at the expense of enterprise growth and employment. The third factor is capital income. Overall, private wealth (relative to income) has followed a U-shaped path over time, particularly in Europe, where inherited wealth is, in Europe if not in the United States, making a return. The fourth, little investigated, element is the correlation between earned income and capital income, which has substantially increased in recent decades in the United States.

HT: @eoinmcguirk

New environmental regulations lead to a rearrangement of production away from polluting industries, and workers in those industries are adversely affected. This paper uses linked worker-firm data in the United States to estimate the transitional costs associated with reallocating workers from newly regulated industries to other sectors of the economy. The focus on workers rather than industries as the unit of analysis allows me to examine previously unobserved economic outcomes such as non-employment and long run earnings losses from job transitions, both of which are critical to understanding the reallocative costs associated with these policies. Using panel variation induced by the 1990 Clean Air Act Amendments (CAAA), I find that the reallocative costs of environmental policy are significant. Workers in newly regulated plants experienced, in aggregate, more than $5.4 billion in foregone earnings for the years after the change in policy. Most of these costs are driven by non-employment and lower earnings in future employment, while earnings of workers who remain with their firm change little. The local unemployment rate is an important predictor of heterogeneity in earnings losses, which suggests that policy-induced labor reallocation may be much more costly in periods of high unemployment. Relative to the estimated benefits of the 1990 CAAA, these one-time transitional costs are small. However, the estimated costs far exceed the workforce compensation policies designed to mitigate some of these earnings losses.

Reblogged from owenzidar:

Reblogged from owenzidar:

So what do we know about who bears the corporate tax? Not enough in my view. Juan Carlos Suarez Serrato and I are currently working on a project on this exact question.

• Here’s Alan Auerbach on what we know about Who Bears the Corporate Tax.
• See Raj Chetty’s slides on tax incidence for more details on how little we know empirically on this issue.

The Voting Rights Act of 1965 (VRA) has been called one of the most effective pieces of civil rights legislation in U.S. history, having generated dramatic increases in black voter registration across the South. We show that the expansion of black voting rights in some southern states brought about by one requirement of the VRA – the elimination of literacy tests at voter registration – was accompanied by a shift in the distribution of state aid toward localities with higher proportions of black residents, a finding that is consistent with models of distributive politics. Our estimates imply an elasticity of state transfers to counties with respect to turnout in presidential elections – the closest available measure of enfranchisement – of roughly one. 

Why have profits been so strong in a weak economy? Why, with profits so high, don’t businesses find reason to invest more (equipment investment is actually fairly strong, but construction remains weak). (For the seriously wonkish, why do average and marginal q seem to be so different?)

His full post is here.

Because of endogeneity problems very few studies have been able to identify the incidence of corporate taxes on wages. We circumvent these problems by using an 11-year panel of data on 11,441 German municipalities’ tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with our theoretical model, we find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates, while the conventional indirect wage effect through reduced investment is empirically small due to regional labor mobility. High and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

We study the long run effects of one of the most ambitious place based economic development policies in U.S. history: the Tennessee Valley Authority (TVA). Using a rich panel dataset of counties, we conduct an evaluation of the dynamic effects of the TVA on local economies in the seventy years following the program’s inception. We find that the TVA led to short run gains in agricul- tural employment that were eventually reversed, while impacts on manufacturing employment continued to intensify well after the program’s subsidies had lapsed – a pattern consistent with the presence of agglomeration economies in the manufacturing sector. Economists have long cautioned that the local gains created by place based policies may be offset by losses elsewhere, yielding ambiguous effects on the U.S. as a whole. We develop a novel approach to assessing the aggregate consequences of place based policies. Our findings suggest that the TVA boosted national manufacturing productivity by roughly 0.3% and that the dollar value of these productivity gains substantially exceeded the program’s costs.

Here’s how they conclude:

This paper makes two primary contributions. Our substantive contribution is to estimate the local and aggregate effects of one of the largest place based policies in U.S. history. To our knowledge, we are the first to empirically quantify the long run social costs and benefits of a place based policy. A second contribution is methodological: we have developed a tractable empirical framework for evaluating the aggregate welfare effects of placed based policies, with the potential to be applied to many other settings.

Our empirical findings are policy relevant. The evaluation designs of Section 3 provide strong evidence that the TVA sped the industrialization of the Tennessee Valley and provided lasting benefits to the region in the form of high paying manufacturing jobs. Notably, the impact on manufacturing employment persisted well beyond the lapsing of the regional subsidies, suggesting the presence of powerful agglomeration economies. By contrast, the agricultural sector, which is unlikely to exhibit substantial agglomeration forces, retracted dramatically once subsidies terminated.

Our analysis in Section 6 suggests the TVA substantially raised the productivity of the U.S. manufacturing sector by roughly 0.3% between 1940 and 1960. We estimate that the stream of benefits associated with this increase exceeded the program’s costs, though this conclusion rests on several unverifiable assumptions regarding the functioning of labor markets.

Most of the national impact of the TVA on worker welfare is accounted for by the direct effects of the program’s vast investments in public infrastructure. Our finding of a roughly constant agglomeration elasticity suggests the program’s indirect effects were minimal. A noteworthy implication is that although agglomeration economies represents an important market failure at the local level, this failure does not provide a rationale for federal intervention in the spatial distribution of manufacturing activity.

We caution, however, that our findings do not necessarily apply to all contexts, as the strength and shape of agglomeration economies may well vary across industries, periods and levels of aggregation. Our results are specific to the manufacturing sector and a period of U.S. history when manufacturing employment was expanding and earnings were relatively high. An important task for future work is to assess whether similar qualitative results hold for modern development efforts, such as those centered on building high tech clusters.