David Gamage

Preventing State Budget Crises: Managing the Fiscal Volatility Problem

Forty-nine of the U.S. states have balanced budget requirements, and every state acts as though bound by such constraints. These constraints create fiscal volatility - the states must either cut spending or raise taxes during economic downturns, while doing the opposite during upturns. This paper discusses how states should cope with fiscal volatility on both the levels of ordinary politics and of institutional-design policy. On the level of ordinary politics, the paper applies principles of risk allocation theory to conclude that states should primarily adjust the rates of broad-based taxes as their economies cycle, rather than fluctuating public spending. States should raise their tax rates during economic downturns and lower them during periods of growth. On the level of institutional-design policy, the key question is how we define terms like “tax cuts” and “tax hikes.” By adopting a new baseline for defining these terms, states can increase the likelihood of using tax rate adjustments to cope with fiscal volatility rather than (more harmful) spending fluctuations.

Experimental Evidence of Tax Salience and the Labor-Leisure Decision: Anchoring, Tax Aversion, or Complexity?

Recent research in marketing and public economics suggests that consumers underestimate the effects of taxes and surcharges on total purchase prices when taxes and surcharges are made less salient. The leading explanation is that consumers anchor on base prices and underadjust for surcharges. We perform experiments that: extend the tax salience and price partitioning literatures to the labor supply context; test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work; and test whether responses to price partitioning result from imperfect calculation of all-inclusive prices or from deeper preferences. We reject the anchoring hypothesis and find that subjects are less willing to work both when their wages are partitioned with positive and with negative surcharge components. We also find evidence that partitioned pricing effects result from cognitive limitations and possibly from responses to complexity.

Experimental Evidence of Tax Framing Effects on the Work/Leisure Decision

The choice between a set of alternatives often depends on how those alternatives are described, as well as their actual economic costs and benefits. We report results from an experiment designed to evaluate the impact of different descriptions of the after-tax wage on both (1) subjects’ willingness to perform a work task rather than an alternative leisure option, and (2) the amount of work performed by those subjects selecting the work task. Utilizing an experimental design that facilitates both within and between-subject comparisons, we find that that subjects’ willingness to work varies with the framing of the after-tax wage and that, in particular, subjects are much less willing to work when the returns to work are framed as a low wage plus a bonus than when the returns are described as a high wage minus a tax. Along the intensive margin we find suggestive evidence that subjects stop working just before their wage becomes subject to a significantly higher marginal tax rate, but we do not observe similar clustering when gross wages become subject to an equivalent wage decrease that is not described as a tax increase.

Experimental Evidence of Tax Salience and the Labor–Leisure Decision

Recent research in marketing and public economics suggests that consumers underestimate the effects of taxes and surcharges on total purchase prices when taxes and surcharges are made less salient. The leading explanation is that consumers anchor on base prices and underadjust for surcharges. We perform experiments that (1) extend the tax salience and price partitioning literatures to the labor supply context, (2) test the anchoring hypothesis by examining the effects of positive and negative wage surcharges on willingness to work, and (3) test whether responses to price partitioning result from imperfect calculation of all-inclusive prices or from deeper preferences. We reject the anchoring hypothesis and find that subjects are less willing to work both when their wages are partitioned with positive and with negative surcharge components. We also find evidence that partitioned pricing effects result from cognitive limitations and possibly from responses to complexity.

Preventing Government Shutdowns: Designing Default Rules for Budgets

In nearly every area of law and governance, default policies exist when lawmakers cannot pass new legislation — typically, the status quo simply remains in effect. To its detriment, U.S. budget making at both the state and federal levels lacks effective defaults. If a new budget isn’t passed by year end, there is no budget. This lack of defaults, coupled with a dysfunctional era of budgetary politics, has led to a number of recent high-profile and costly state and federal government shutdowns.To date, legal scholarship has failed to address both the causes and costs of government shutdowns and near-shutdowns, and thus has also failed to consider possible solutions to prevent them. This Article seeks to fill this gap, exploring the history and sources of recent government shutdowns. Government shutdowns are the result of a perfect storm of contemporary politics: acrimonious budget making characterized by partisan brinkmanship, game-of-chicken-style negotiation strategies, and strong anti-tax sentiment among many conservative legislators. Drawing on political science work on legislative negotiation theory, this Article explains how these new fiscal politics result in regular budget negotiation failures, greatly increasing the risk of costly government shutdowns or near-shutdowns. From this diagnosis of budgetary dysfunction, this Article advocates for the adoption of default budget policies to maintain government operations in the event that legislators fail to pass a timely budget. This Article explains how default budget policies might be implemented to avert shutdowns and to stabilize the budget-making process. Drawing upon the experiences of several states with automatic continuing appropriations provisions, and the federal experience with sequestration, we explore how default budget policies might work in practice. Properly enacted, default budget policies have the potential to mitigate the harmful consequences of budget negotiation failures and to restore sanity to this era of new fiscal politics.

Taxation and Incentives in the Business Enterprise

This book chapter discusses the tax perspective on business enterprise law with a comparative focus on the U.S. and Japan.

Testimony Before the California State Assembly, Committee on Revenue and Taxation, Informational Hearing on Academic Perspectives on the Tax Recommendations of the Commission on the 21st Century Economy

Testimony and presentation by David Gamage, Assistant Professor at the UC Berkeley School of Law, before the California State Assembly Committee on Revenue and Taxation in October, 2009. The topic of the hearing was: Academic Perspectives on the Tax Recommendations of the Commission on the 21st Century Economy. The hearing was televised on the California Channel. Professors Alan Auerbach, Kirk Stark and Steven Sheffrin also testified.

California’s Tax System in Crisis and Beyond: Testimony Before the California State Assembly, Committee on Revenue and Taxation

Testimony and presentation by David Gamage, Assistant Professor at the UC Berkeley School of Law, before the California State Assembly Committee on Revenue and Taxation on March 23rd, 2009. The topic of the hearing was: Academic Perspectives on Reforming Californias Tax System in Crisis and Beyond. The hearing was televised on the California Channel. Professors Alan Auerbach and Charles McClure also testified.

Taxing Political Donations: The Case for Corrective Taxes in Campaign Finance

Command-and-control regulations are generally thought to be inferior to incentive-based alternatives. This essay proposes an incentive-based approach for regulating campaign finance. In place of our current regime of contribution ceilings, the essay calls for a graduated system of contribution taxes. Rather than capping the size of political donations at a specified dollar level, we should tax donations based on a schedule of graduated rates - the larger the size of a contribution, the higher the level of taxation.Contribution taxes generate two primary advantages over contribution ceilings. First, contribution taxes preserve more total surplus. This surplus can be shared by the donors and by society as a whole, with society benefiting from the tax revenue. Second, contribution taxes lead fewer donors to divert their contributions through loopholes. We cannot possibly prevent all diversions of this sort under our current constitutional precedents, and these diversions serve to undermine our system of campaign finance. This essay also refutes the arguments that contribution taxes would engender greater inequality or corruption; that contribution taxes would be found unconstitutional; and that contribution taxes would be defeated by our inability to quantify the harms caused by political donations.