Economists Talk Taxes as Trump Heads to Washington

Soon-to-be President Donald Trump has said that he’ll slash corporate tax bills

The world's largest economy will swear in a new leader on Friday, a move that could herald policy changes that will reshape the U.S.'s growth trajectory and reverberate globally. 

Against that backdrop, this week’s research wrap focuses on what economics teaches us about social and fiscal policies. We'll take a look at the economics of corporate tax reform according to researchers at the Peterson Institute and Goldman Sachs, at how family policy affects women's labor market outcomes and at whether scholarships influence college enrollment.

Check this column every week for the latest in interesting economic research. 

American corporate taxes versus the globe

President-elect Donald Trump has vowed to fix America’s corporate tax system. So just how burdensome is it now? Peterson Institute researchers take a crack at quantifying it.

Using a proprietary database purchased from Thomson Reuters, they find that for corporations in the dataset the U.S.'s actual average tax rate for corporations in the dataset – the one counting for credits, deductions and loopholes – comes in around 31 percent. That’s higher than the average of their foreign sample, which consists of 68 countries sorted into 24 groups, and comes in at 28 percent. “High corporate taxation is a U.S. weakness, not only in attracting inward foreign direct investment but also in encouraging domestic investment,’’ the authors write.

While actual tax rates in Canada, France, Germany, Italy, Japan, Russia and the U.K. are within 2 percent of the U.S.’s, rates in most of those other countries have been dropping while America’s has been the exception, the authors note.

Lessons for U.S. Business Tax Reform From International Tax Rates
Published January 2017
Available at the Peterson Institute website

Taxing possibilities

Goldman Sach’s Daan Struyven, David Mericle and Alec Phillips take a look at how Trump and Congress might go about tax reform.

They examine four options: a cut in the statutory corporate tax rate, full capital expenditure­­­ expensing combined with a higher statutory rate, elimination of net interest deductibility combined with a lower statutory rate, and a destination-based tax with border adjustment (there's an explainer here on what that means) combined with a lower statutory rate.

Option one might boost investment, but it would also increase the deficit, they write. If one of the other options was enacted and made revenue-neutral, it "would very likely be positive for long-run growth," though the short-run effects are more ambiguous. Full expensing, for instance, could lift investment, though the higher statutory rate needed to offset it might incentivize companies to shift profits abroad.

U.S. Economics Analyst: The Economics of Corporate Tax Reform
Available to Goldman Sachs research subscribers
Published Jan. 14, 2017

Not all family policies are created equal

Maternity leave has a small effect on female employment in advanced economies, new research finds, and low-skilled workers drive what impact exists. "For college-educated women, longer parental leave seems instead associated to wider earnings gaps," the research by Boston College’s Claudia Olivetti and Queen Mary University of London’s Barbara Petrongolo finds.

By contrast, spending in early childhood education and care is associated with more equal labor market results for women. "A potential common theme here is that making it easier to be a working mother may matter more than the length of leave or the payments that new parents receive while out of the labor force."

The Economic Consequences of Family Policies: Lessons from a Century of Legislation in High-Income Countries
Published January 2017
Available at the NBER website

What Nebraska tells us about scholarships

Nebraska high-school students who attend the state’s public universities and colleges can access a generous scholarship package, with the largest amount coming in at more than $70,000 for five years in school. Researchers have mined that program for data on how student outcomes change when they have cash to pay for college.

As it turns out, enrollment increases are largest for non-white applicants, first-generation students, and those with the lowest grades and test scores in the eligible applicant pool, introducing an interesting merit-aid paradox. "Awards based on past achievement are likely to generate smaller gains than awards made to applicants who appear less college-ready," the authors write.

Evaluating Post-Secondary Aid: Enrollment, Persistence, and Projected Completion Effects
Published to NBER digest January 2017, published elsewhere in 2016
Available at the NBER website

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