title: Essays in public finance and political economy
Creators: name: Dray, Sacha
Publisher: name: London School of Economics and Political Science (LSE)
Year: 2022

description: This thesis consists of three independent chapters that explore aspects of tax policy and the determinants of responsiveness to a public health shock. Chapter 1 explores the importance of tax revenue for future revenue collection capacity, spending, and growth of local governments. Using newly collected financial data of more than 300 U.S. cities over 1899-2000, I leverage source-specific variation in revenue through a shift-share research design. I report three main results. First, additional tax revenue causes greater spending on services than same-sized non-tax revenue, despite partial earmarking of non-tax revenue for this purpose. Second, tax revenue generates persistence in revenue. An initial increase in tax revenue has a 81% persistence on total revenue 10 years later, while similar non-tax revenue increase has dissipated after 3 years. This persistence can be explained by fiscal capacity improvements through higher effective tax rates, better enforcement and increased spending on revenue collection. Third, reliance on taxes has long-run effects on municipal finances and growth. Cities with initially higher tax revenue per capita in 1910-1936 have greater revenue and expenditure per capita throughout the next 60 years, as well as a higher median household income, larger population and migration. Chapter 2 studies the role of free media in the responsiveness of governments and the public during the COVID-19 pandemic. Using a panel data of daily COVID-19 deaths, mobility and lockdown decisions for all countries, we show that, as the initial number of deaths increased, governments were more likely to impose a lockdown and citizens reduced their mobility. To account for inaccuracies in reporting deaths, we calibrate a SEIR model to create an instrument for reported deaths. Using this approach, we find that responsiveness to deaths was limited to governments and citizens in free-media countries, and differences in responsiveness account for 40% of the variation in lockdown decision and mobility. In support of the role of free media, we show that differences in responsiveness are not explained by a range of other country characteristics such as the level of income, education or democracy. We also find evidence that citizens with access to free media were better informed about the pandemic and had more responsive levels of online searches about COVID-19. These findings can be explained by a simple model of policy-making whereby free-media raises awareness about health risks and helps coordinate decisions. Chapter 3 measures the role of salience in the behavioral response of taxpayers. I focus on the 3 2011 reform of the UK income tax that introduced both salient changes in the tax schedule (a new marginal tax rate of 50% on income above £150,000) as well as nonsalient changes (the withdrawal of tax-free personal allowance for income above £100,000). I develop a conceptual framework to account for inattention as a form of optimization friction when estimating the elasticity of taxation income, provide testable predictions, and derive a measure of attention. Empirical evidence from administrative data confirm the importance of tax inattention. I also find significant learning over time, reducing inattention by 40% up to 10 years after the introduction of the reform. These results have implications for measuring the elasticity of taxable income, and suggest only short-run gains from using salience as a policy parameter.