Essays in Public Economics by Dorian Carloni a Dissertation Submitted In
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Essays in Public Economics by Dorian Carloni A dissertation submitted in partial satisfaction of the requirements for the degree of Doctor of Philosophy in Economics in the Graduate Division of the University of California, Berkeley Committee in charge: Professor Alan J. Auerbach, Chair Professor Hilary W. Hoynes Professor Rucker C. Johnson Professor Emmanuel Saez Spring 2016 Essays in Public Economics Copyright 2016 by Dorian Carloni 1 Abstract Essays in Public Economics by Dorian Carloni Doctor of Philosophy in Economics University of California, Berkeley Professor Alan J. Auerbach, Chair This dissertation consists of three chapters and analyzes individuals' and firms’ response to tax and government spending policies. The first chapter focuses on the economic incidence of a large value added tax (VAT) cut in the restaurant industry in France. In particular it estimates the share of the tax cut falling on workers, firm owners and consumers by analyzing the VAT cut applied to French sit-down restaurants { a drop from 19.6 percent to 5.5 percent { in July 2009. Theoretically, we develop a standard partial equilibrium model of consumption tax incidence that includes consumption substitutability between the taxed good and an untaxed good, and markets for production inputs, which we allow to vary with the tax. Empirically, we use firm-level data and a difference-in-differences strategy to show that the reform increased restaurant profits and the cost of employees, and aggregate price data to estimate the decrease in prices produced by the reform. We compare sit-down restaurants to (a) non-restaurant market services and (b) non-restaurant small firms, and find that prices decreased by around 2 percent, the cost per employee increased by 3.9 percent and the return to capital increased by around 10 percent. Using these reduced-form estimates we conduct a welfare analysis and find that (1) the effect on consumers was limited, (2) employees shared around 20 percent of the benefit eighteen months after the reform, and 29 percent thirty months after the reform, and (3) the reform mostly benefited capital owners, who received around 50 percent of the tax cut, both in the short-run and in the long-run. The second chapter derives a more general result on the price effect of VAT changes. It shows that prices respond asymmetrically to increases and decreases in VAT. We combine monthly commodity price data with information on value added tax (VAT) rates across several European countries for the period 1996-2015 and show that prices respond more to VAT increases than to VAT decreases. We explain this asymmetric pass-through to prices with a simple fairness argument developed in the behavioral economics literature. Our finding cautions against using incidence estimates derived in previous studies without accounting for the direction of the tax change and questions the effectiveness of reductions in VAT to achieve redistribution or stimulate economic growth. 2 The third chapter of the dissertation focuses on a major government spending program in the United States: unemployment insurance (UI). Specifically, I use data on geographic mo- bility from the Survey of Income and Program Participation (SIPP) and state-year variation in unemployment insurance (UI) laws to evaluate the link between unemployment benefit generosity and mobility decisions of unemployed workers in the United States in the period 2001-2012. My empirical strategy uses a proportional hazard model to study whether the probability of moving during the unemployment spell depends on UI benefit generosity. I find that (1) higher UI weekly benefit amounts increase unemployed workers' geographic mobility, (2) the effect is stronger for more liquidity constrained unemployed workers (3) UI weekly benefit amounts are a stronger determinant of unemployed workers' geographic mo- bility than UI duration. Theoretically, I develop a spatial equilibrium model with risk-averse and liquidity constrained unemployed workers, and explain the empirical findings with the presence of high monetary moving costs. i To my parents, without whom I would have not been able to achieve this. To my wife Kristen, whose continuous support, encouragement and positive energy have helped me overcome many difficult times, and who push me every day to become a better person. ii Contents Contents ii List of Figures v List of Tables viii 1 Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France 1 1.1 Introduction . 1 1.2 Relation to Previous Literature . 4 1.3 Institutional Background . 6 1.4 A Model of Consumption Tax Incidence . 8 1.5 Incidence of the Tax . 12 1.6 Data . 14 1.7 Empirical Strategy . 16 1.8 Results . 18 1.9 Tax Incidence . 21 1.10 Tax Elasticities . 23 1.11 Hours Worked . 24 1.12 Heterogeneous Effects . 26 1.13 Firm Entry and Exit . 27 1.14 Discussion . 28 1.15 Robustness Checks . 31 1.16 Conclusion . 34 2 Do Prices Respond Differently to Increases and Decreases In Consump- tion Taxes? 67 2.1 Introduction . 67 2.2 Institutional Background . 69 2.3 Data . 70 2.4 Asymmetric Price Responses to VAT Changes . 72 2.5 What Explains Asymmetries In Pass Through? . 76 iii 2.6 Heterogeneous Effects . 79 2.7 Robustness Checks . 80 2.8 Conclusion . 81 3 Geographic Mobility of Liquidity Constrained Unemployed Workers 97 3.1 Introduction . 97 3.2 Previous Literature . 98 3.3 Institutional Setting . 100 3.4 Theoretical Framework . 101 3.5 Predictions of the Model . 104 3.6 Data . 106 3.7 Empirical Strategy . 108 3.8 Graphical Evidence . 110 3.9 Hazard Model Estimates . 111 3.10 UI Duration . 115 3.11 Alternative Measures of UI Weekly Benefit . 115 3.12 Local Cost of Living . 116 3.13 Placebo Tests . 117 3.14 Attrition . 117 3.15 Conclusion . 118 Bibliography 147 A Who Really Benefits from Consumption Tax Cuts? Evidence from a Large VAT Reform in France 153 A.1 Contrat D'Avenir Details . 153 A.2 2004-2009 Payroll Tax Reductions . 154 A.3 Employment Contract types . 156 A.4 Income and Payroll Tax Rates . 156 A.5 Model . 158 A.6 Data . 168 A.7 Figures . 169 A.8 Tables . 186 B Do Prices Respond Differently to Increases and Decreases In Consump- tion Taxes? 190 B.1 Data . 190 B.2 Figures . 193 B.3 Tables . 210 C Geographic Mobility of Liquidity Constrained Unemployed Workers 215 C.1 SIPP Sample Selection . 215 iv C.2 Local Cost of Living . 215 C.3 Model . 216 C.4 Welfare Analysis . 221 v List of Figures 1.1 Structure of the Model . 35 1.2 Effect of a Decrease in the VAT . 36 1.3 Welfare Effect of VAT Decrease on Consumers if Full Pass-Through . 37 1.4 Pass-Through of VAT on Prices . 38 1.5 Log-Difference in Prices: Sit-Down Restaurant Meals vs. Market Services . 39 1.6 Value-Added per Employee: Sit-Down Restaurants vs. Market Services . 40 1.7 Cost per Employee: Sit-Down Restaurants vs. Market Services . 41 1.8 Number of Employees per Firm: Sit-Down Restaurants vs. Market Services . 42 1.9 Cost of Materials per Employee: Sit-Down Restaurants vs. Market Services . 43 1.10 Profit per Employee: Sit-Down Restaurants vs. Market Services . 44 1.11 Return to Capital per Employee: Sit-Down Restaurants vs. Market Services . 45 1.12 Comparison of Estimated Effects . 46 1.13 Estimated Incidence of the VAT Reform . 47 1.14 Hours Worked during Reference Week by Trimester: Unconditional Means . 48 1.15 Hours Worked during Reference Week: Event-Time Estimates . 49 1.16 Firm Entry and Exit . 50 1.17 Goods Market Equilibrium after the Tax Change . 51 1.18 Capital and Labor Markets in the Short-Run and Long-Run . 52 1.19 Effect of the Reform by Firm Size and Tenure . 53 1.20 Effect by Market Concentration of Sit-Down Restaurants . 54 1.21 Prices Event-Time Estimates: Sit-Down Restaurants vs. Non-Restaurant Firms 55 1.22 Event-Time Coefficients: Sit-Down Restaurants vs. Small Firms . 56 2.1 Full Sample: Asymmetric Response of Prices to VAT Changes . 82 2.2 Restricted Sample: Asymmetric Response of Prices to VAT Changes . 83 2.3 Full Sample: Percent Change in Prices by Change in VAT rate . 84 2.4 Restricted Sample: Percent Change in Prices by Change in VAT rate . 85 2.5 Selected Individual Reforms . 86 2.6 Full Sample: Event-Study Estimates of Price Changes around VAT Reforms . 87 2.7 Full Sample: Event-Study Estimates of Price Changes and VAT Changes . 88 2.8 Restricted Sample: Event-Study Estimates of Price Changes around VAT Reforms 89 2.9 Restricted Sample: Event-Study Estimates of Price Changes and VAT Changes . 90 vi 2.10 Heterogeneous Asymmetry: Event-Study Estimates of Price Changes and VAT Changes using Full Sample . 91 2.11 Heterogeneous Asymmetry: Event-Study Estimates of Price Changes and VAT Changes using Restricted Sample . 92 2.12 Event-Study Estimates by Growth in GDP-per-capita . 93 3.1 Unemployment Insurance Benefits in the Period 2000-2013 . 120 3.2 Monthly UI Claims and the Unemployment Rate in the Period 2000-2013 . 121 3.3 Simulated State UI Weekly Benefit Amounts, 2001-2012 . ..