Date of Award
Doctor of Philosophy (PhD)
Dougan, William R
Sauer , Raymond D
Tollison , Robert D
Tsui , Kevin K
The first two chapters of this dissertation are closely related and pertain to small business reactions to income tax changes. The final chapter investigates the value consumers place on residential community associations.
Small businesses file taxes in accordance with the personal income tax code because they are considered flow-through entities. Thus, personal income tax reforms directly affect the incentives small business owners face regarding employment and operations. I use the changes in personal income-tax rates during the 1993 and 2001-2003 reforms and micro-level data to estimate the effect of statutory tax-rate changes on small-business employment decisions. I add two contributions to the current literature: first, I allow for intertemporal tax planning and secondly, I allow the firm's decision to employ labor to be correlated with the firm's salary expense decision. Estimation of a Heckman selection model for salary expenses shows that the probability that a business will employ labor is 1.18% higher when current tax rates increase by one percentage point and 0.70% lower when future rates are expected to increase by one percentage point. Among firms that already employ labor, the median salary expense elasticity with respect to current tax rates is -0.64. These estimates are larger than those reported in previous research because my model includes future taxes and allows for correlation between the firm's employment and salary decisions. Omitting the intertemporal tax responses biases the estimates of previous researchers upwards, whereas assuming the two firm decisions are independent biases estimates towards zero.
After examining the employment responses of small businesses to income tax changes, I then estimate the marginal welfare cost associated with the behavioral changes. The marginal welfare cost of an increase in income tax rates affects small businesses in many ways. I examine one aspect of the cost of a tax increase on small business employers: the marginal welfare cost of reduced owner-effort exerted in the firm. The welfare cost of reduced owner-effort and the corresponding reduction in reported taxable business income can be estimated using the elasticity of taxable business income. The elasticity of taxable business income measures the long-run annual incremental cost of a permanent income tax increase, relative to the prior income tax regime. The permanent welfare cost of personal income tax increases on small business employers is $920 million for the 1993 tax reforms and $245 million for the 2001-2003 tax reforms. When small business employers supply less effort, they demand fewer productive inputs, including outside labor. Any outside labor displaced by the small business sector must transition to re-employment in the rest of the economy. The cost of displaced labor is in addition to the costs associated with the elasticity of taxable business income and is a one-time cost. I estimate the short-run cost of displaced labor to be $10 million for the 1993 reforms and $3.2 million for the 2001-2003 reforms. This cost is a one-time reduction in welfare from labor displacement when workers are not instantly absorbed by the rest of the economy.
Finally, in the third chapter, I examine sales price data on Spartanburg County homes both in and out of residential community associations to analyze the value of residential community associations. Comparable neighborhoods not in RCAs are included to estimate the value consumers place on RCA affiliation. RCAs appear to increase property values by 2.2% in the sample. I then examine one neighborhood with 120 houses that has a mandatory homeowners' association for 30 lakefront properties. Homes in this particular RCA sell at a 3.8% premium to the other homes in the neighborhood. This is the capitalized net benefit of living on, and accessing the lake. I also examine the existing empirical literature on the efficiency of residential community associations and discuss the theoretical problems of analyzing RCA efficiency. My analysis shows that the existing empirical research on the efficiency of RCAs lacks identification and suffers from omitted variable bias. Including a variable for 'property age' drastically changes the estimates and interpretations from the existing literature. Age is an important variable to include because it proxies for a host of factors like location, architectural-style, and projected maintenance costs, all of which influence property values. Omitting age downwardly biases the estimates.
Player, Kathleen, "Essays in Public Economics" (2012). All Dissertations. 884.