Essays in macroeconomics with household and policy heterogeneity

Abstract

The first chapter of this thesis is "State Tax and Transfer Progressivity and the Consumption Response to Fiscal Stimulus". It studies the relationship between tax policies of US state governments and the marginal propensity to consume (MPC) out of stimulus checks. For the 2001 and 2008 stimulus episodes, I document striking regional discrepancies; the household average MPC in states with the most regressive taxes and transfers was between 23 and 59 cents per Dollar received but no different from zero in progressive states. I do not find evidence that other state policies, such as labor and credit market policies, or exogenous differences in earnings risk contribute to explaining MPC cross-state discrepancies. The second chapter "Federal, State and Local Tax Progressivity", coauthored with J. Heathcote, K. Storesletten and G. Violante, measures the progressivity of taxes and transfers for each of the US states and compares it to federal progressivity. Our findings are twofold. First, most nonfederal taxes, especially property taxes, are regressive. Second, state and local tax regressivity varies substantially; states which have more progressive tax and transfer systems tend to be Democrat-leaning, to be more ethnically diverse and to have lower income polarization. The third chapter "The Tax Progressivity of the Fifty Nifty: Evidence from America's Working Poor", coauthored with C. Simpson-Bell explores how insurance against transitory earnings shocks for households with low in- comes varies across US states. We overcome limitations in survey data by constructing a micro simulation model to measure the combined response of federal and state income taxes and transfers to a shock to pre-tax earnings. We account for the geographic uniformity of federal policies as well as regional variation in income distributions, price levels and net transfer policies of state governments. Our findings document large geographic differences in marginal tax rates faced by low-income households.