Corporate taxes and vertical tax externalities: Evidence from narrative federal tax shocks

Canadian J of Economics

2019

Can abundance of natural resources affect legislators' voting behaviour over federal tax policies? We construct a political economy model of a federalized economy with district heterogeneity in natural resource abundance. The model shows that representatives of natural resource-rich districts are more (less) willing to vote in favour of federal tax increases (decreases). This occurs because resource-rich districts are less responsive to federal tax changes due to the immobile nature of their natural resources. We test the model's predictions using data on roll-call votes in the US House of Representatives over the major federal tax bills initiated during the period of 1945-2003, in conjunction with the presence of active giant oil fields in US congressional districts. Our identification strategy rests on plausibly exogenous giant oil field discoveries and exploitation and narrative-based aggregate federal tax shocks that are exogenous to individual congressional districts and legislators. We find that: (i) resource-rich congressional districts are less responsive to changes in federal taxes and (ii) representatives of resource-rich congressional districts are more (less) supportive of federal tax increases (decreases), controlling for legislator, congressional district and state indicators. Our results indicate that resource richness is approximately half as dominant as the main determinant, namely party affiliation, in driving legislators' voting behaviour over federal tax policies. Résumé. Politiques fiscales fédérales, vote au congrès et ressources naturelles.L'abondance de ressources naturelles peut-elle avoir une incidence sur les comportements de vote relativement aux politiques fiscales fédérales ? Nous avons élaboré un modèle de politique économique basé sur une économie fédéralisée au sein de laquelle des disparités régionales en matière de richesses naturelles demeurent. Ce modèle montre que les élus Corresponding author: Ohad Raveh, ohad.

Section: Federal Tax Changes and Voting Datamentioning

confidence: 93%

“…Note that the former group may include tax changes that affect other tax bases (i.e., labour) as well, as long as capital is affected. In effect, this division methodology follows that employed in Reingewertz (2018). From the 50 tax changes studied, (29) 21 tax changes are classified as (non-)capital-related.…”

Section: Capital Divisionmentioning

confidence: 99%

Federal tax policies, congressional voting and natural resources

Canadian J of Economics

2019

“…We exploit these features in the empirical analysis. Last, the focus on RR's sample yields a clearer link to the existing related literature, in which several studies similarly focused on this set of federal tax changes, including Mertens and Ravn (2012), Mertens and Ravn (2013), Perez-Sebastian, Raveh, and Reingewertz (2016), and Reingewertz (2018).…”

Section: Federal Tax Changes and Voting Datamentioning

confidence: 97%

“…labor) as well, as long as capital is a¤ected. In e¤ect, this division methodology follows that employed in Reingewertz (2018). From the 50 tax changes studied, (32) 18 tax changes are classi…ed as (non-)capital-related.…”

Section: Capital Divisionmentioning

confidence: 99%

Federal Tax Policies, Congressional Voting, and the Fiscal Advantage of Natural Resources

2017

SSRN Journal

Can abundance of natural resources a¤ect legislators'voting behavior over federal tax policies? We construct a political economy model of a federalized economy with district heterogeneity in natural resource abundance. The model shows that representatives of natural resource rich districts are more (less) willing to vote in favor of federal tax increases (decreases). This occurs because resource rich districts are less responsive to federal tax changes due to the immobile nature of their natural resources. We test the model's predictions using data on roll-call votes in the U.S. House of Representatives over the major federal tax bills initiated during the period of 1945-2003, in conjunction with the presence of active giant oil …elds in U.S. Congressional districts. Our identi…cation strategy rests on plausibly exogenous giant oil …eld discoveries and exploitation, and narrative-based aggregate federal tax shocks that are exogenous to individual Congressional districts and legislators. We …nd that: i) resource rich Congressional districts are less responsive to changes in federal taxes; ii) representatives of resource rich Congressional districts are more (less) supportive of federal tax increases (decreases), controlling for legislator, Congressional district, and state indicators. Our results indicate that resource richness is approximately half as dominant as the main determinant, namely party a¢ liation, in driving legislators'voting behavior over federal tax policies.

“…The paper relates to three strands of literature. First, the empirical literature on vertical tax externalities, including Besley and Rosen (1998), Devereux, Lockwood, and Redoano (2007), Esteller-More and Sole-Olle (2001), Fredriksson and Mamum (2008), Goodspeed (2000), Hayashi and Boadway (2001), Hoyt (2001) and Reingewertz (2018), which examine the e¤ects of various federal tax shocks on di¤erent tax bases over multiple time periods and countries. The …ndings of these studies are jointly inconclusive, providing opposing evidence on the sign of the vertical tax externality.…”

Section: Introductionmentioning

confidence: 99%

What drives vertical fiscal interactions? Evidence from the 1980 Crude Oil Windfall Act

Regional Science and Urban Economics

2018

In economies with multi-level governments, why would a change in the …scal rule of a government in one level lead to a …scal response by a government in a di¤erent level? The literature focused primarily on the standard common-pool problem, while giving little attention to the potential role of complementarity or substitutability (CS) between the public goods supplied by the two governments. This paper …lls this gap by focusing on the latter channel. First, we illustrate its potential key role in determining the sign of the vertical reaction through a generic model of vertical …scal interactions. Second, we propose a novel strategy for identifying it, by considering an empirical design that con…nes the common-pool channel to speci…c locations. We implement this design through a quasi-natural experiment: the 1980 U.S. Crude Oil Windfall Act, which increased federal tax collections from sale of crude oil, thereby a¤ecting the tax base of oil rich states speci…cally. This latter feature enables attributing the vertical …scal reactions of the remaining states to the CS channel. Following this strategy, via a di¤erence-in-di¤erences approach, we decompose the sources of the vertical …scal reactions arising from this federal tax change and …nd that those attributed to the CS channel: (i) account for approximately 38% of the overall vertical …scal response; (ii) point at complementarity between state and federal public goods, most notably in transportation and welfare expenditures; (iii) are manifested primarily via changes in states'sales and income taxation.