RESEARCH

QUANTITATIVE

POLICY GROUP

Research and published articles

 

 

How to mislead Illinoisans into accepting higher taxes

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

May 2018

 

Highlights from the report:

 

  • A progressive tax in Illinois will end up being a middle-class tax hike. Illinoisans can’t trust lawmakers to refrain from tax hikes under a progressive tax structure.
  • Illinois does not have a revenue problem. Illinois has a spending problem.
  • Higher tax progressivity would harm economic activity. Progressive taxation deters human capital investments, lowers growth and exacerbates the rise in income inequality.
  • States without a progressive income tax saw their economies grow so much faster than states with progressive income taxes that state and local governments actually had more resources available to serve their communities.

 

 

False Promises, real harm: why Illinoisans should reject a progressive income tax

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

March 2018

 

Highlights from the report:

 

  • A progressive income tax could cost Illinoisans an estimated 34,500 jobs and could cost the state economy $5.5 billion in the first year after enacted.
  • The progressive income tax proposal introduced by state Rep. Robert Martwick, D-Chicago, would constitute a tax hike for individuals earning as little as $17,300.
  • In exchange for inflicting harm on all income groups, the progressive tax would do very little to reduce income inequality: Martwick’s plan might only reduce the income gap between those making less than $50,000 and those making more than $500,000 by 0.8 percent.
  • States with progressive income taxes see greater income inequality. And over the past decade, inequality has risen faster in states with progressive income taxes. States without a progressive income tax, on the other hand, have seen faster economic growth, faster employment growth, and faster growth in wages and salaries over the past decade.
  • Since 2006, states without a progressive tax saw their gross state product grow by 14.7 percent, while states with a progressive tax have seen 10.8 percent GSP growth.
  • Nonfarm payrolls have increased 7.8 percent since 2006 in states without a progressive income tax, compared with 5.1 percent in states with a progressive income tax.
  • Since 2006, wages and salaries have increased 15.3 percent in states without a progressive income tax, compared with 12.6 percent in states with a progressive income tax.

 

The Illinois Policy Institute created an interactive calculator for families in Illinois to see just how much more they would pay under the proposed progressive tax. It can be found at http://illin.is/progressivetax.

 

 

Budget Solutions 2019: The Responsible Budget for Illinois

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

January 2018

 

Even after a 32 percent income tax hike, the Illinois General Assembly passed a state budget in 2017 that will generate an estimated $1.5 billion deficit in fiscal year 2018. That deficit is projected to grow to $2.15 billion in fiscal year 2019, according to the Governor’s Office of Management and Budget, or GOMB.

 

The state’s budget problems are serious, but they are solvable. The Illinois Policy Institute’s annual Budget Solutions policy proposals provide a guide to solving the state’s budget problems and providing relief for overburdened taxpayers.

 

The spending cap proposed in this paper was introduced as new legislation for the budget process in the state of Illinois with support from both Democrats and Republicans.

 

 

Capital taxation and employee compensation

Published by the Cayman Financial Review

Orphe Pierre Divounguy

January 2018

 

Can workers be made better off by taxing the owners of capital? The economic effect of tax and spending policy is nontrivial. On one hand, higher taxes on capital income discourage investments in productive capital. This reduction in productive capital causes workers to become less productive, thus causing the real wage to decrease.

 

Declining real wages make workers worse off and reduce the incentive for market work relative to leisure or home production. On the other hand, a lower after-tax income raises the need to work, save, and invest in order to maintain the same living standard. The first effect lowers economic activity – economists refer to it as the substitution effect – while the second effect normally raises activity through the so-called income effect. The impact of the tax hike depends on which one of these effects dominates the other in magnitude.

 

Consider a tax that lowers the real wage of workers and yet at the same time eliminates a negative income effect by providing workers with a windfall – lump sum transfer. Under such a tax scheme, the fall in the real wage generates a substitution effect that discourages work and the transfer mitigates some of the decline in income resulting in a substitution effect that exceeds the income effect in magnitude. For that reason, workers become less attached to paid market work and economic growth slows.

 

Tax hikes lower productivity, harming both capital owners and workers. This is because of a large negative response of capital investments to tax hikes. The decrease in investment results in declining living standards.

 

 

Why the 2017 tax hikes will harm Illinois'economy pt 1.

Why the 2017 tax hikes will harm Illinois'economy pt 2.

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

January 2018

 

This paper uses a neoclassical growth model to estimate the impact of taxes on labor and capital on economic activity.

 

 

What's dragging down Illinois'economy?

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

December 2017

 

This paper uses growth accounting to decompose economic growth into its primary contributions: labor inputs and labor productivity. The increase in in private and public consumption coupled with declining labor productivity and civilian employment growth are consistent with a decline in investment. It is clear that Illinois investment-killing tax changes - individual and corporate tax increases - are slowing economic growth in the state.

 

 

Building fairness and opportunity: The effects of repealing Illinois'prevailing wage law?

Published by the Illinois Policy Institute

Orphe Pierre Divounguy

December 2017

 

This paper uses data from the Current Population Survey to show that repealing the prevailing wage law is associated with an increase in construction sector employment.

 

 

What Do Labor Market Outcomes Reveal About The Burden of Occupational Licensing Requirements?

Orphe Pierre Divounguy

October 2017

 

Published by the Buckeye Institute as:

Still Forbidden to Succeed: The Negative Effects of Occupational Licensing on Ohio’s Workforce

 

This paper proposes a novel methodology to provide evidence of the disproportionate burden licensing requirements imposed on job seekers. Using a dynamic model of the labor market, this paper investigates: Can expected labor market outcomes alone explain the decision to choose a licensed occupation? What is the role of licensing costs in explaining selection into licensed occupations conditional on schooling attainment and work-life expectancy?

 

A comparison of efficient outcomes relative to the observed numbers of licensed individuals provides a hint of the disproportionate burden of licensing across different groups of job seekers. This costly licensing process explains why few workers obtain a license. Declining work-life expectancy reduces the value of a license to a worker. For this reason, younger workers are much more likely to seek a license and an increase in the licensing burden would disproportionately harm younger workers. The estimated model of the labor market also reveals that the current licensing regime is more harmful to less educated workers than to those with a college degree.

 

The model suggests that if the burden of licensing requirements were reduced, individuals would get licensed at a higher rate because of the wage premium for being a licensed worker. However, as the number of licensed labor increases, the employment premium enjoyed by licensed individuals would decrease. This illustrates the mechanism by which higher licensing costs secure better employment prospects for licensed individuals.

 

 

Protectionism, US manufacturing Jobs, and global capital flows

Published by the Cayman Financial Review

Orphe Pierre Divounguy

October 2017

 

The shift in American jobs away from manufacturing and into the service sector that can be attributed to foreign trade is small. However, the rewards from international trade have been reaped, directly or indirectly, by all Americans. The primary driver of this shift was technological innovation that made labor more productive, raised living standards and caused employment in the service sectors to grow by more than the overall decline of manufacturing jobs. Protectionism is unlikely to override automation and to reverse the declining trend in manufacturing employment.

 

 

Decomposing Economic Prosperity and the “Texas Miracle”

Rethinking Measures of Economic Freedom and The Role of Taxation

Orphe Pierre Divounguy

June 2017

 

[Preliminary and Incomplete]

 

ABSTRACT

How does production adjust, if taxes are changed? Can tax policy alone explain differences in economic outcomes across US states? In this paper, we use the balanced growth path of a neoclassical growth model to decompose differences in economic outcomes across states. Texas was chosen for its low tax regime and its relatively higher real per capita GDP. Ohio and Arkansas were chosen because of their weak economic performance and higher tax rates. Reducing the tax burden boosts investment and real economic output. However, we find that there exist large differences between states that cannot be overcome by tax policy alone. Factors such as Texas natural resources, reflected by the state’s large positive trade balance, account for less than half of the observed differences in real per capita output. Our findings provide quantitative support for a “Texas miracle”.

 

 

Taxation in the Global Economy: Balancing Competitiveness and Solvency

Published by the Cayman Financial Review

Orphe Pierre Divounguy

June 2017

 

According to Bloomberg’s Tracking Tax Runaways report, 57 corporations left the U.S. for more tax-friendly jurisdictions in the last 20 years. Ireland, with a corporate income tax rate of 12.5 percent, tops the list of recipient countries for US companies that shift their place of incorporation to another country. President Trump’s proposal to slash the corporate income tax to 15 percent aims to reverse this trend by making America competitive again. Fears of insolvency are unfounded. Fiscal solvency is a symptom of tax competitiveness while insolvency indicates a lack thereof. The bulk of evidence suggests that corporate tax cuts grow the tax base and improve aggregate welfare. This is precisely why good tax policy in a global economy begins with improving competitiveness.

 

 

Addressing Louisiana’s Budget Shortfall: Strategies for Growth

Published by the Pelican Institute

Orphe Pierre Divounguy

April 2017

 

ABSTRACT

Using a Small Open Economy Neoclassical Growth Model, we simulate the potential effects of various tax policies proposed by Louisiana's new Governor. We find that broadening the tax base by repealing some sales tax exemptions coupled with lowering the corporate income tax is the best strategy for growth. Eliminating the corporate income tax causes investment to increase and the state continues to benefit long after the policy is introduced.

 

The Impact of Renewables Portfolio Standards on The Ohio Economy

Orphe Pierre Divounguy with Rea Hederman Jr., Joe Nichols and Lukas Spitzwieser

December 2016

 

Why Dynamic State Revenue Estimates Really Matter

Theory and Measurement of the State Economy: A Case Study of Wyoming

Orphe Pierre Divounguy with Rea Hederman Jr.

December 2016

 

Fiscal policy, State Budgets and Dynamic Scoring: Why Many States Fall Behind

The Buckeye Institute

December 2016

 

Renewable Portfolio Standards and Their Consequences

The Buckeye Institute

November 2016

 

Tax Policy on the Road to the White House

The Buckeye Institute

November 2016

 

Renewable Portfolio Standards and Job Search: Can Energy Mandates Improve Employment Prospects?

Orphe Pierre Divounguy, Joe Nichols & Nicholas Umashev

July 2016

 

ABSTRACT

We construct a theory of the labor market where industry demand for electricity is modeled explicitly. The model is estimated to match hiring data and renewable electricity generation. The estimated cost of renewable generation exceeds that of conventional electricity. As a result, Renewable Portfolio Standards have a negative impact on electricity generation. Energy mandates lead to higher electricity prices and lower employment growth. While "green" jobs are not directly observed in the data, the model sheds light on the distribution of jobs before and after the introduction of the policy.

JEL Classification: J64, Q41

 

Public Assistance and the Labor Market: An equilibrium analysis

Orphe Divounguy

Preliminary

First Version: December 2015

 

ABSTRACT

In this paper,we construct an equilibrium search model of the labor market augmented to include lump sum taxes that finance government expenditures. Using the model, we can decompose the decline in labor force participation (LFP) into the policy effect (state provided income) and that of other factors such as declining economic output. The model is estimated using census data on labor market outcomes and welfare income in Ohio. We learn that if the economy resembled the pre-crisis period, the decrease in welfare income during the Kasich administration would have led to a small increase in LFP.

 

The Price of Safety: When Does Law Enforcement Become a Burden?

Orphe Divounguy

November 2015

 

ABSTRACT

In this paper, agents sacrifice some consumption for low risk of property crime. Our results suggest that the effect of an increase in the share of public spending that goes to law enforcement at the expense of Unemployment Insurance (UI) depends on which effect dominates: the deterrent effect of policing or the incentive effect of UI. The cost of crime reduction can cause aggregate welfare to decrease if this policy shift is not accompanied by an increase in productivity. When the government must run a balanced budget, spending on law enforcement requires a tax increase that when coupled with a decrease in UI, leave agents worse off in a safer, low crime regime.

Keywords: Directed Search, Crime

JEL Codes: H3, H4, H53, J01, K42

 

Illegal Status: A Brain Waste?

Orphe Divounguy and Jackline Wahba

November 2015

 

ABSTRACT

In this paper, we investigate whether legal status affects overseas human capital investments of temporary migrants. Our search model of the labor market with efficient on the job effort, calibrated to Egyptian micro-data reveals that documented migrants are more likely relative to undocumented migrants, to invest in new skills. Legal status has a long-run impact on workers productivity even after their return. Our findings show that undocumented migration leads to a penalty for the migrant and the country of origin.

Keywords: Directed Search, International Migration, Development, Brain Gain, Immigration Policy

JEL Codes: J08, J11, J21, J61, O15

 

Racist or Not? Auditing Police Stop and Search Activities

Orphe Divounguy

September 2015

 

ABSTRACT

In this paper, we investigate the extent of racist policing present in stop and search practices in the United Kingdom. We estimate a model of policing and criminal behavior using the Hampshire stop and search data. We learn that police are not indifferent between searching whites or non-whites. (1) The gains from search are not equal across both groups (2) The gains from search are lower for non-whites than for whites. These results suggest that police derive greater utility for searching whites relative to non-whites. We then ask: what would be the extent of statistical discrimination in the absence of this race related preference?

JEL Classification: K42

Keywords: Crime, Police Stop and Search, Discrimination

 

Raising Questions of Immigration Policy: Why We Educate Them and Lose Them

Orphe Divounguy

May 2015

 

ABSTRACT

Evidence from the UK suggests that although restricted immigrants (non-EEA) are more educated than EEA migrants, their fiscal contribution has been negative. Using a model of the labor market extended to include migration decisions, we find that restricted access to the labor market can cause the demand for student visas to increase. Migrants who become more educated are also less likely to choose to return. However, this policy of work restrictions that raised the quality of immigrants keeps them out of the market, thus contributing to their negative fiscal contribution. Alternatively, a less restrictive policy decreases the student visa incentive causing the stock of less skilled immigrant market participants to increase.

Keywords: Directed Search, Migration, Taxation, Tax Policy, Development, Brain Gain, Immigration Policy, Human Capital

JEL Codes: J08, J11, J21, J61, O15

 

Brain Drain into The Welfare State

Orphe Divounguy

August, 2015

 

ABSTRACT

This paper aims to contribute to the debate on the effects of state generosity on the skill composition of migrants. Firstly, higher UI in a more productive economy provides a subsidy for the exodus of the unemployed from a poorer state, causing the gains from migration to increase. Consistent with the brain drain literature, the migration opportunity increases the returns to schooling in the poorer state. However, since natives from the rich state are less likely to migrate, the returns to schooling decrease for natives from the rich state. A tax on human capital (progressive tax) exacerbates this effect. A higher tax burden on the most productive workers causes a decline in output in both states, while at the very least the unemployed in the rich state still enjoy higher unemployment compensation.

Keywords: Directed Search, Migration, Taxation, Tax Policy, Development, Brain Gain, Immigration Policy, Human Capital, Inequality

JEL Codes: J08, J11, J21, J61, O15

 

UK immigration policy and the economics of migration

Published by the Cayman Financial Review

March 2015

 

The Egyptian Labor Market in a Era of Revolution

Chapter 11 - Through the keyhole: International Migration in Egypt

Book Chapter Contribution with University of Southampton International Migration Expert Prof. Jackline Wahba

edited by Professor of Planning and Public Affairs Ragui Assaad, Caroline Krafft

 

Safety First! But hold on just one minute, Can the Policing Budget Become a Burden?

Orphe P. Divounguy

November 2015

 

The Truth about Why Capitalism Defused the Population Bomb

This article is a response to an article written by Chelsea German the managing editor of HumanProgress.org

Orphe Divounguy

April 2015

 

Ahead of the 2015 General Election: Is UK Immigration Policy Working?

Orphe Divounguy

January 2015

 

Inside MALAWI: A brief economic outlook and the case for Air Transportation

Orphe Divounguy

January 2015

 

Becker-Coase: Divorce Laws and Marriage Rates

Orphe Divounguy

June 2013

 

ABSTRACT

The divorce reforms of the 1970's introduced both unilateral divorce and equitable distribution. We use a simple directed search model of marriage with endogenous separations to compare marriage outcomes under two property division regimes: Community Property (CP) and Equitable Distribution (ED). We find that premarital differences consistent with a higher college premia in equitable states relative to community states can explain most of the observed differences across both regimes. We suggest an explanation for why empirical results from Rasul (2003) seem to suggest that unilateral divorce caused marriage rates to decrease more in one regime relative to the other. Our conclusions are consistent with the empirical results in Wolfers (2006). The observed effect of divorce laws is by no means an indication of the "breakdown" of bargaining within the married household as others had suggested in the existing literature.

Keywords: Directed Search, Marriage Markets, Divorce Laws, Match-specific investments

JEL Codes: J12, K36

Married Life and Household Production: Explaining the gender reversal in college completion

Orphe Divounguy

September 2012

 

ABSTRACT

Women are now more likely to invest in education than men compared to birth cohorts from the first half of the 20th century. Using a directed search model with premarital investments in schooling, we document relative changes in household values that are consistent with a gender reversal in college attainment as observed in the US data. The returns to household work have declined. The gains from marriage have decreased and more importantly, the decline of household output has had an asymmetric effect on the marital college premia. The marital college premium increased for women but decreased for men who now spend more time working in the household sector. The model predicts that holding household productivity fixed to early cohort levels for the new cohorts is counter-factual since it would have increased the gender schooling gap in favor of men rather than closed it.

Keywords: Directed Search, Marriage Markets, Divorce Laws, Match-specific investments

JEL Codes: J12, K36