This dissertation is an empirical investigation of the effects of fiscal policies in the U.S. Two fiscal policies are covered. The first two chapters examine the distributional effects of income tax changes. In the third chapter, I investigate the effects of mean-tested transfers on local economic activity.
The literature on the effects of taxes on output has consistently established that an income tax cut has expansionary effects on the GDP. Yet, it is not clear how these gains in GDP are distributed across households. The first chapter looks at the big-picture question of how cuts in the average tax rate affect income and consumption inequality. To provide a causal interpretation of their effect, I build on the narrative tax changes literature to isolate income tax changes in the US that are unrelated to contemporaneous economic conditions. I study the effects of policy-induced changes in federal tax liabilities using Romer and Romer (2010) and Mertens and Ravn (2013)'s narrative-identified shocks for average income taxes in the U.S. I compute quarterly level Gini indexes from the Consumer Expenditure Survey and find that an average tax cut of one percentage point increases inequality in gross and disposable income by twelve percent and consumption inequality by seven percent, as measured by Gini indexes, a year after the cut. I find that increases in the labor supply at intensive margins in top income quintiles can explain the persistence of income inequality. My analysis also provides some policy implications: policies that cut top marginal tax rates do not increase the bottom 60% of incomes in the medium term, and tax cuts and tax increases do not have symmetric effects on income inequality.
Given that oftentimes a fiscal reform modifies the marginal tax for different income brackets, I look at the spillover effects of the average marginal tax rates across income percentiles in the second chapter. I analyze the spillover effects of top marginal tax cuts on bottom income groups and vice-versa using Mertens and Montiel Olea (2018)'s counterfactual marginal tax rates as instruments. I present new short-run cross elasticities of taxable income and examine income dynamics after five years of a marginal tax cut. I find that “trickle-down” effects are only concentrated on the top incomes: a tax cut in the top 1% only increases income in the short run for the top decile. In contrast, a tax cut in the bottom 90% increases income in the top decile after four years.
Finally, given the theoretical equivalency between income tax cuts and increases in transfer payments, in the third chapter, I examine whether changes in means-tested transfers affect local economic activity. I study the case of a plausible exogenous permanent change in the generosity of housing vouchers in 2005. I leverage adjustments to generosity thresholds that can be attributed to measurement errors from rent estimates. I show these adjustments are unrelated to past local economic trends and use the geographical variation across MSAs in the U.S. to instrument changes in housing transfers. I find that a 1% increase in the MSA average housing transfer decreases the proportion of income that voucher holders spend on rent by 0.05 percentage points and increases the beneficiaries' household income by 1 percent. The effects on beneficiaries, however, do not seem to have meaningful general equilibrium effects, as the effects on GDP and personal income per capita at the MSA level cannot be distinguished from zero.
