Zachary D. Liscow

How Income Taxes Should Change During Recessions

This paper offers recommendations for how the design of labor income taxes should change during recessions, based on a simple model of a recessionary economy in which jobs are rationed and some employees value working more than others do. The paper draws two counter-intuitive conclusions for maximizing social welfare. First, subsidize non-employment. This draws marginal workers out of the labor force, creating “space�? for those who really need jobs. Second, subsidize employers for hiring, not the employees themselves. The problem during recessions is having too few jobs; subsidizing employers creates more jobs, while subsidizing employees confers benefits on those who already won the job lottery. Tax policy in the recent recession has done a poor job of following these recommendations.

Innovation Snowballing and Climate Law

Findings at the frontier of economics suggest startling implications of an under-appreciated fact about technological development: innovation builds on itself, developing path dependencies in which past innovations attract similar, but more advanced, innovations. Innovation snowballs. The world economy is poised to undergo a dramatic transformation to avoid the potentially catastrophic effects of climate change. Policy to encourage this transformation should be sensitive to innovation snowballing. The conventional policy view has long been that, to address a social harm like pollution, the right response is simply to tax the behavior causing the harm, leading to a variety of responses including induced technological change. The Article shows that this view is incomplete. Rather, the most efficient response to climate change — and likely other social harms — requires a combination of taxes and a big push of government support to specifically redirect innovation toward technologies that alleviate social harm. Without a big push in cleantech innovation to change the trajectory of innovation, energy technology will tend to stay stuck in its high-pollution path. For climate policy and likely other pressing policy issues, the Article suggests a paradigm shift in the role of innovation policy: from broad to targeted. Otherwise, the transition to clean energy will be longer, more expensive, and riskier for the global climate. The Article shows how to efficiently deploy innovation policy to meet this challenge.

Are Court Orders Sticky? Evidence from School Finance Litigation

Whether welfare analysis of legal rule changes should evaluate distributional outcomes as well as efficiency depends crucially on how much their distributional impacts stick. That is, do court mandates ultimately affect the distribution of taxes and spending or do legislatures offset the distributional consequences of those court orders with other changes? Little is known about this question. To offer insight into it, I use an event study methodology to show how state revenues and expenditures respond to court orders to increase funding for schools. I find that the court orders’ distributional impacts do stick. The education spending is financed by tax increases that do not target the largest beneficiaries of the increased education spending, the poor and those with children. Thus, since the main beneficiaries of the school spending do not pay a disproportionate share of the costs, advocates for school finance reform are effective at transferring resources to poor families. The results suggest that welfare analysis of these legal rules should take into account not only efficiency but also distribution, in a departure from traditional economic analysis of legal rules.

Beyond Head of Household: Rethinking the Taxation of Single Parents

Under current law, unmarried taxpayers with children can take advantage of the head of household filing status (HHFS) to reduce their federal income taxes. We argue that the design of the filing status is largely obsolete, geared toward alleviating a “marriage penalty” in the tax code that is much less important than when the filing status was first established. At the same time, the growth in the fraction of Americans raising children outside of traditional two-parent households has dramatically raised the cost of the filing status to the fisc. In this article, we highlight two features of the design of HHFS that undermine its goal of providing support to single parent households. First, because it is designed as a filing status, HHFS provides a larger tax break to high-income taxpayers than to low-income ones: in 2013 HHFS saved qualifying taxpayers in the 25th percentile of the income distribution under

The Efficiency of Equity in Local Government Finance

100 a year compared to almost

Is Efficiency Biased

2,000 a year for qualifying taxpayer in the 75th income percentile. Second, the tax savings provided by HHFS bear no relation to the number of children a taxpayer supports, even though taxpayers supporting more children are likely to have less ability to pay. We propose reforming HHFS by replacing it with an expanded child tax credit for single parents and estimate that a revenue neutral reform along these lines would support a refundable tax credit of approximately

Counter-Cyclical Bankruptcy Law: An Efficiency Argument for Employment-Preserving Bankruptcy Rules

384 per child for households headed by single parents.

Are Court Orders Responsible for the 'Return to the Central City'? The Consequence of School Finance Litigation

The dominant economic model of local government law, the Tiebout model, suggests that financing services locally yields efficient outcomes, letting people vote with their feet and choose an optimal location and bundle of local services. This Article critiques a key, though underappreciated, assumption of the model: that there is no redistribution at the local level — in other words, that the well-off in cities do not help pay for services for the poor in their cities. The Article develops this critique of locally financing services and tests its importance by measuring how many people local-level redistribution deters from living in poor cities. The Article’s test is motivated by the recent resurgence in central cities’ populations. I propose and offer econometric evidence for a novel hypothesis — that recent changes in school finance have driven this resurgence. In particular, state fiscal aid for schools in poor cities, mandated by state courts, has made poor cities more desirable places to live by improving their schools and reducing their taxes. I test my hypothesis by taking advantage of the natural experiment resulting from the dramatic increase in transfers to some states’ poor cities in response to court-ordered school finance equalization, using Census data on over 20,000 cities and towns. The results show that state aid for schools had a large effect on urban population growth between 1980 and 2010, explaining about one-third of the “return to the central city.” This large increase in the population of poor cities indicates that local-level redistribution had previously discouraged many people from living in poor cities. Ultimately, the Article suggests the importance of considering two efficiency virtues of state aid to poor places in discussions on fiscal federalism. First, with state aid, individuals overall achieve a higher quality of life by removing the distortion to their location choices that results from having to pay for the costs of poverty in some places but not others. Second, the Article shows that school finance redistribution promotes the positive externalities associated with central city living. These arguments could be used in future legislative debates or litigation to support more school finance redistribution.

Does State Fiscal Relief during Recessions Increase Employment? Evidence from the American Recovery and Reinvestment Act

Efficiency is a watchword in policy circles. If we choose policies that maximize people’s willingness to pay, we are told, we will grow the economic pie and thus benefit the rich and poor alike. Who would oppose efficiency when it is cast in this fashion? However, there are actually two starkly different types of efficient policies: those that systematically distribute equally to the rich and the poor and those that systematically distribute more to the rich. Our collective failure to grasp this distinction matters enormously for those with a wide range of political commitments. Many efficient policies distribute more to the rich without the rich having to pay for their bigger slice. Because these “rich-biased” policies are ubiquitous, efficient policymaking places a heavy thumb on the scale in favor of the rich. Especially at this time of heightened concern about inequality, getting efficiency right should matter to a wide swath of the policymaking spectrum, from committed redistributionists to libertarians. We should support efficient policies only when the poor are compensated for their smaller slices or when efficient policies systematically distribute equally to the rich and the poor as we grow the size of the economic pie. This Article points a way forward in ensuring that a foundational tenet of the law does not follow a “rich get richer” principle, with profound consequences for policymaking.

Endogeneity in the Environmental Kuznets Curve: An Instrumental Variables Approach

Bankruptcy judges consider both value to creditors and harm to employees in deciding whether to liquidate or reorganize firms. This Article proposes to systematize what is currently an ad hoc trade-off by making bankruptcy law explicitly counter-cyclical—that is, placing more weight on preserving employment during times of high unemployment. Although the suggestion that bankruptcy law should consider employment effects runs counter to decades of economic analysis of bankruptcy law, this Article bases its analysis on the traditional law and economics efficiency norm. During times of high unemployment, significant social benefits flow from maintaining employment, as evidenced by the hundreds of billions of dollars that the government has recently spent to maintain employment. The simple argument of this Article is that when bankruptcy law can preserve employment more cheaply than government spending can, it should do so.