TaxProf Blog

Thursday, April 15, 2004

Neil Buchanan (Rutgers-Newark) presents “What is Fiscal Responsibility?
Long-term Deficits, Generational Accounting, and Capital Budgeting” at the NYU Colloquium
on Tax Policy and Public Finance. Here is the conclusion:

“The traditional debate about budget deficits witnessed a divergence between the
economic analysis, which saw that deficits are poorly measured in the U.S. and argued
that certain deficits are beneficial for the economy, and the political view that every
deficit is evidence of moral failure. This unusual stalemate is currently on hold, as the
brief era of surpluses gave way to the (hopefully even more brief) era of terror, leading to
a decreased emphasis on fiscal orthodoxy.

In addition, an alternative approach to budgeting, Generational Accounting, has
emerged. Designed to correct some of the weaknesses of annual budgeting, GA purports
to provide an “early-warning system” to allow us to correct our long-term fiscal
imbalances before it is too late. Unfortunately, this theory is based on highly contestable
assumptions, makes questionable analytical choices, and is inherently incapable of
providing the useful baseline that its proponents promise.

Instead, a modified system of capital accounting should be used to guide
economic policy. This would emphasize case-by-case analysis, allowing legal analysts to
compare the likely costs and benefits of policy proposals while keeping a clear eye on the
importance of government investment in our future prosperity. If political concerns
about the potential abuse of capital budgeting prevent the federal government from
adopting an explicit capital budget, the best response would be to continue to rely on the
current (admittedly imperfect) budget measures, which at least provide some useful
guidance regarding the immediate effects of our fiscal policies.”

Thursday, April 15, 2004

Joseph Hotz (UCLA) presents two papers at the UCLA Tax Policy and Public Finance Workshop:

1. “The Effects of the EITC on the Employment of Low-Wage Populations: Are the Apparent Effects for Real?” Here is the conclusion:

“The EITC transfers a large amount of money to working poor families and reduces poverty. There is also a considerable amount of evidence that the credit not only redistributes resources, but also encourages employment, thereby avoiding one of the negative behavioral incentives of traditional income transfer programs. Our paper develops new evidence that calls into question the incremental employment effect of the EITC. Ours is the first EITC paper to use data from tax returns to help examine the employment effects of the credit, and the first paper to use longitudinal data, which avoids potentially troublesome compositional issues that may arise from repeated cross-sectional studies based on the CPS or SIPP.

Before examining tax data, we show that employment for families with two or more children increases relative to one-child families, and the temporal pattern of these increase mirror, with a lag, relative increases in the EITC for larger families. The descriptive patterns in the data and the identification strategy for our regression work are similar to several previous studies that suggest the EITC increases employment of low-skilled families. However, when examining tax return data, we see little evidence of a similar increase in tax filing or EITC claiming among families with two or more children relative to one-child families. Moreover, the “EITC-like” employment patterns hold as strongly in a sample that does not claim the EITC as they do in the overall data. These two facts lead us to conclude that the EITC is not causing the relative employment increase of families with two or more children in these data.

To this point we have not been able to answer the puzzle raised by our paper. Namely,
while our data show patterns consistent with the EITC increasing employment, tax data make it
clear that the EITC is not causing the observed patterns. Several other papers based on the CPS
and SIPP claim that the EITC increases employment. We are now more skeptical of these results.
But we have considerably more to do to reconcile the results of our paper with previous work.
Our second major longer run task is to use statewide administrative data from California,
covering more than 3 million adults, to further explore the robustness of these EITC results, and
develop new information on the employment effects of local labor market developments, GAIN
and other welfare policy choices at the county level, and the way these interact with the EITC.”

2. “The Earned Income Tax Credit” (with John Karl Scholz).