Essays in Macroeconomics and Public Finance

Abstract

The dissertation examines how fiscal policies adjust to economic states in a growth model where productions are mobile across jurisdictions and the corresponding consequences. In my work, I study the properties of optimal state-level corporate and labor income tax rates and how shocks in the federal tax rates affect the economy; and I endogenize the federal-level fiscal policies in a Stackelberg game setting where the federal government is the leader and the states are the followers. In “Fiscal Competition and Federal Shocks”, I answer such the question of “how a shock to federal tax rate affect the macro-economy”. The innovation is that I take into account the effects of factor mobility, state-federal interaction, and state-state interaction on the transmission mechanism of the federal shocks. By using the U.S. data set, I find the evidence that state-level tax rates will respond to changes in federal tax rates (known as vertical competition) and the neighboring state's policies (known as horizontal competition). To rationalize this finding, I develop a two-region growth model with benevolent state governments, integrated capital market, and sticky migration. My quantitative result indicates that omitting the endogenous responses of state-level policies leads to significant difference in response to a federal shock. This means that the central policy make has to consider the intergovernmental fiscal relations when designing federal fiscal policies. In “Optimal Policies in a Federation”, I examine the optimal federal and state fiscal policies in a dynamic macro model with policy commitment, integrated capital market, and inter-state migration. In modeled governance system, the federal government is the Stackelberg leader, the state governments are the followers and take the leader's policies as given. In the interior-point steady-state, the overall tax rate on corporate income is zero. However, the leader and followers impose different tax rates. The leader levies a positive and high tax rate, the followers levy negative tax rates. The zero (overall) tax rate result holds when the states are heterogeneous in their TFPs. If the federal government has to impose the same labor income tax rate on the states, the federal tax rates are independent of the degree of inequality and each state has a zero overall corporate tax rate. IF the federal labor tax system is nonlinear, the states impose different tax rates. But the tax-base-weighted overall tax rate in the economy is still zero. In addition, I find that increasing the federal corporate tax rate is the optimal response to foreign country's TFP becomes higher.