Results for “corporate tax” 239 found
Invest in People with Income Contingent Loans
Three entrepreneurs are offering a share of their life’s income in exchange for cash upfront and have banded together to form the Thrust Fund, an online marketplace for such personal investments.
Kjerstin Erickson, a 26-year-old Stanford graduate who founded a non-profit called FORGE that rebuilds community services in Sub-Saharan African refugee camps, is offering 6 percent of her life’s income for $600,000.
(quoted here). A closer look reveals that this is more of clever marketing play to interest donors in supporting a philanthropy. What, for example, does Kjerstin want do with the money? She writes:
Some people may think that it's crazy to give up a percentage of your income for the sake of scaling a nonprofit venture. But to me, it makes perfect sense.
Well it does make perfect sense for Kjerstin but not so much for a profit-seeking investor (moreover any income would be taxed twice, a problem with equity financing in general but especially so here without corporate tax breaks.) Investing in just one entrepreneur is also risky – why not subdivide the investment and invest in many?
Jeff at Cheap Talk raises a larger but closely related issue, "Why don’t we replace student loans with student shares?" In fact, Milton Friedman advocated income contingent loans in 1955.
The counterpart for education would be to "buy" a share in an individual's earning prospects: to advance him the funds needed to finance his training on condition that he agree to pay the lender a specified fraction of his future earnings. In this way, a lender would get back more than his initial investment from relatively successful individuals, which would compensate for the failure to recoup his original investment from the unsuccessful. There seems no legal obstacle to private contracts of this kind, even though they are economically equivalent to the purchase of a share in an individual's earning capacity and thus to partial slavery
…One way to do this is to have government engage in equity investment in human beings of the kind described above. …The individual would agree in return to pay to the government in each future year x per cent of his earnings in excess of y dollars for each $1,000 that he gets in this way. This payment could easily be combined with payment of income tax and so involve a minimum of additional administrative expense. The base sum, $y, should be set equal to estimated average–or perhaps modal–earnings without the specialized training; the fraction of earnings paid, x, should be calculated so as to make the whole project self-financing.
Another Nobelist of a more liberal stripe, James Tobin, helped to implement an income-contingent tuition program at Yale in the 1970s. Alas, the program was terminated largely due to rent-seeking when many Yale graduates become so successful that the repayment amounts became substantial and the nouveau riche chose to default (also here).
Bill Clinton later tried to take the idea national but it didn't get very far in the United States. (Not coincidentally Clinton had been a beneficiary of the Yale program.)
Australia, however, implemented an income contingent loan program in 1989. Australian students don't pay anything for university when they attend but once their
income reaches a certain threshold they are charged through the income tax system. Many other countries are experimenting with income contingent loans.
Hat tip to Alexander Ooms.
The Rich Pay for the Federal Government
Despite all the deductions, loopholes and clever accountants the federal income tax is strongly progressive. Moreover the federal tax system remains progressive even if you include the payroll tax, corporate taxes and excise taxes. The chart below with data from the Congressional Budget Office, shows the effective tax rate by income class from all federal taxes. Effective tax rates are considerably higher on the rich than the poor.
The effective tax rate is higher on the rich and the rich
have more money – put these two things together and we can calculate who pays
for the federal government. The final
column in the table shows the share of the 2.4 trillion in federal tax
revenues that is paid for by each income category. The remarkable finding is that the rich and
especially the very rich bear by far the largest share of the federal tax
liability. The top 10% of households by
income, for example, pay more than half of all federal taxes and the top 1% alone pay over a quarter of all federal taxes.
(Click the table if it is not clear.)
Alan Reynolds on *Income and Wealth*
…The
architects of these estimates, Thomas Piketty of École Normale
Supérieure in Paris and Emmanuel Saez of the University of California
at Berkeley, did not refer to shares of total income but to shares of
income reported on individual income tax returns-a very different
thing. They estimate that the top 1% (1.3 million) of taxpayers
accounted for 16.1% of reported income in 2004. But they explicitly
exclude Social Security and other transfer payments, which make up a
large and growing share of total income: 14.7% of personal income in
2004, up from 9.3% in 1980. Besides, not everyone files a tax return,
not all income is taxable (e.g., municipal bonds), and not every
taxpayer tells the complete truth about his or her income.
For
such reasons, personal income in 2004 was $3.3 trillion, or 34.4%,
larger than the amount included in the denominator of the Piketty-Saez
ratio of top incomes to total incomes. Because that gap has widened
from 30.5% in 1988, the increasingly gigantic understatement of total
income contributes to an illusory increase in the top 1%’s exaggerated
share.The same problems affect Piketty-Saez estimates of share of
the top 5%, which contradict those from the Census Bureau (which also
exclude transfer payments). Piketty and Saez figure the top 5%’s share
rose to 31% in 2004 from 27% in 1993. Census Bureau estimates, by
contrast, show the top 5%’s share of family income fluctuating
insignificantly from 20% to 21% since 1993. The top 5%’s share has been
virtually flat since 1988…
Unlike
the Census Bureau, Messrs. Piketty and Saez measure income per tax unit
rather than per family or household. They maintain that income per tax
unit is 28% smaller than income per household, on average. But because
there are many more two-earner couples sharing a joint tax return among
high-income households, estimating income per tax return exaggerates
inequality per worker.…the
amount of income Messrs. Piketty and Saez attribute to the top 1%
accounted for 10.6% of personal income in 2004. That 10.6% figure looks
much higher than it was in 1980. Yet most of that increase was, as they
explained, "concentrated in two years, 1987 and 1988, just after the
Tax Reform Act of 1986." As Mr. Saez added, "It seems clear that the
sharp, and unprecedented, increase in incomes from 1986 to 1988 is
related to the large decrease in marginal tax rates that happened
exactly during those years."
That 1986-88 surge of reported high
income was no surprise to economists who study taxes. All leading
studies of "taxable income elasticity," including two by Mr. Saez,
agree that the amount of income reported by high-income taxpayers is
extremely sensitive to the marginal tax rate. When the top tax rate
goes way down, the amount reported on tax returns goes way up. Those
capable of earning high incomes had more incentive to do so when the
top U.S. tax rate dropped to 28% in 1988 from 50% in 1986. They also
had less incentive to maximize tax deductions and perks, and more
incentive to arrange to be paid in forms taxed as salary rather than as
capital gains or corporate profits.The top line in the graph shows
how much of the top 1%’s income came from business profits. In 1981,
only 7.8% of the income attributed to the top 1% came from business,
because, as Mr. Saez explained, "the standard C-corporation form was
more advantageous for high-income individual owners because the top
individual tax rate was much higher than the corporate tax rate and
taxes on capital gains were relatively low." More businesses began to
file under the individual tax when individual tax rates came down in
1983. This trend became a stampede in 1987-1988 when the business share
of top percentile income suddenly increased by 10 percentage points.
The business share increased again in recent years, accounting for
28.4% of the top 1%’s income in 2004.As was well-documented years
ago by economists Roger Gordon and Joel Slemrod, a great deal of the
apparent increase in reported high incomes has been due to "tax
shifting." That is, lower individual tax rates induced thousands of
businesses to shift from filing under the corporate tax system to
filing under the individual tax system, often as limited liability
companies or Subchapter S corporations.
IRS economist Kelly
Luttrell explained that, "The long-term growth of S-corporation returns
was encouraged by four legislative acts: the Tax Reform Act of 1986,
the Revenue Reconciliation Act of 1990, the Revenue Reconciliation Act
of 1993, and the Small Business Protection Act of 1996. Filings of
S-corporation returns have increased at an annual rate of nearly 9.0%
since the enactment of the Tax Reform Act of 1986."
Switching income
from corporate tax returns to individual returns did not make the rich
any richer. Yet it caused a growing share of business owners’ income to
be newly recorded as "individual income" in the Piketty-Saez and
Congressional Budget Office studies that rely on a sample individual
income tax returns. Aside from business income, the top 1%’s share of
personal income from 2002 to 2004 was just 7.2%-the same as it was in
1988.
In short, income shifting has exaggerated the growth of top
incomes, while excluding a third of personal income (including transfer
payments) has exaggerated the top groups’ income share. [emphasis added]
There are
other serious problems with comparing income reported on tax returns
before and after the 1986 Tax Reform. When the tax rate on top salaries
came down after 1988, for example, corporate executives switched from
accepting stock or incentive stock options taxed as capital gains
(which are excluded from the basic Piketty-Saez estimates) to
nonqualified stock options reported as W-2 salary income (which are
included in the Piketty-Saez estimates). This largely explains why the
top 1%’s share rises with the stock boom of 1997-2000 then falls with
the stock market in 2001-2003.In recent years, an increasingly
huge share of the investment income of middle-income savers is accruing
inside 401(k), IRA and 529 college-savings plans and is therefore
invisible in tax return data. In the 1970s, by contrast, such
investment income was usually taxable, so it appears in the
Piketty-Saez estimates for those years. Comparing tax returns between
the 1970s and recent years greatly understates the actual gain in
middle incomes, and thereby contributes to the exaggeration of top
income shares.
In a forthcoming Cato Institute paper I survey
a wide range of official and academic statistics, finding no clear
trend toward increased inequality after 1988 in the distribution of
disposable income, consumption, wages or wealth. The incessantly
repeated claim that income inequality has widened dramatically over the
past 20 years is founded entirely on these seriously flawed and greatly
misunderstood estimates of the top 1%’s alleged share of
something-or-other.
Opinions? I am embarrassed to admit I have yet to read Pikaetty and Saez. If you would like an alternative perspective from that offered by Reynolds, here is Paul Krugman.
Addendum: Here is Greg Mankiw on same, with related links.
Grab bag of books
1. Vicki Howard, Brides, Inc.: American Weddings and the Business of Tradition. Weddings have become big business; this book tells you how and why.
2. Matthew D. Adler and Eric A. Posner, New Foundations of Cost-Benefit Analysis. There is not exactly a new thesis here, but it is the most intelligent discussion to date of the strengths and limits of cost-benefit analysis.
3. Nation-States and the Multinational Corporation, by Nathan M. Jensen. Rule of law and credibility, not low corporate taxes, are the key features in luring foreign investment. You pro-tax people might think this is good news, but it probably just means that the burden of those taxes falls on labor, or on consumers.
4. The Marketplace of Christianity, by Robert B. Ekelund, Robert Hebert, and Robert D. Tollison. This book is full of stimulating hypotheses, especially if you don’t flinch at chapters with titles like "The Counter-Reformation: Incumbent-Firm Reaction to Market Entry." The economics of religion remains one of the most exciting fields.
5. Democratic Constitutional Design and Public Policy: Analysis and Evidence, edited by Roger Congleton and Birgitta Swedenborg. This book offers the best minds in European public choice, Barry Weingast, and Roger.
Is American FDI more productive and am I dizzy?
Dan — As erg noted, I argue that the anecdotal evidence points to
corporate tax arbitrage as a key explanation. But if you come across
the definative b-school explanation, do let me know. So ask Bill Gates,
or the big pharma CEOs with big profits in Ireland for the answer, not
old George Soros.I’ll set aside my argument that investing in US dollar denominated
assets is actually very risky for a foreign investors looking to
maintain their real wealth in local currencies terms. The big current
account deficit and all. Not everyone agrees with it.But I don’t think the US just is good at borrowing at low cost to
buy high yielding assets argument works that well. For a couple of
reasons. First, US returns abroad really aren’t that good. The shocking
thing is that reported foreign returns on their FDI are really bad —
less than they would have gotten holding long-term Treasuries
generally. It isn’t US skill, at least not skill at anything other than
taking foreign direct investors for a ride that shows up in the data
(now if FDI in the US doesn’t want to show profits in the US for tax
reasons, the story changes … ). Second, most US FDI is just not in
risky markets, nor are most US debt securities claims on risky places.
Most US FDI is in the UK. lots more is in Switzerland. Throw in Japan,
Canada and the Eurozone and you have a decent mental image of US assets
abroad. Read the CBO report on this topic. Or look at the data the IMF
has assembled on the sources of FDI in China (hint — it ain’t mostly
coming from the US). US investors also own foreign bonds — but they
are mostly the securities issued in well developed markets that are
almost as liquid as our own. UK, Japan, Canada, eurozone and the like.We have lent tons of money to the Caymans too; I bet the Caymans
also invests a lot in the US …. hhmmm? Maybe some b-school prof can
help us out there. Or tax attorney.
Social security privatization, continued
Brad DeLong writes:
There is a bigger, unmentioned reason to be against private accounts. Ten years down the road or so, there will be pressure on Congress to allow people to borrow against their private accounts, or to withdraw them to buy a house, or to use them to meet unexpected medical expenses. Congress will bow to that pressure–it’s their money, after all. And in the end a lot of people will hit 70 having drained their Social Security private account dry. The rest of us will then have to decide whether to let them starve on the street, or tax ourselves a second time to give them Social Security benefits. As Dick Schmalensee says, “You have to ask yourself not just, ‘Is this good policy?’ but ‘Will this still be good policy after Congress does its worst to it?'” The Medicare drug benefit and the corporate tax boondoggle are powerful evidence that the Bush administration holds no leashes to use to control what this Congress does to policy proposals, while lobbyists can make this Congress roll over and beg.
Brad also takes on whether the government could finance the transition to a more private system by borrowing (also read Bruce Webb’s comment, number two in the list). After all, government debt would be higher but government long-term implicit obligations are lower. Would this simply be a wash? (Arnold Kling believes “yes”). I am skeptical. When it comes to government, measured nominal flows tend to be sticky. So say our government increases its borrowing today but lowers its SSA obligations for tomorrow. Even if the transaction can balance without a current increase in interest rates, the increased rate of borrowing (or taxation) will tend to stick in the long run. Plus there is a time consistency problem. If the new debt is placed smoothly, government has an incentive, ex post, to accept some new unfunded liabilities for the future. Knowing this in advance, the bond market will be suspicious about the new debt offering.
What should we do? Here is my previous post on social security privatization.
Why isn’t Brazil a first-world country?
I love Brazil, and there are few places where I feel more at home. That being said, the place can be a mess. Here is one reason why:
Unlike the United States, Brazil has chosen to collect most of its taxes through corporations. Thus today, taxes paid by corporations in Brazil are almost twice as high as in the United States. However, that’s not the right comparison. We should be making a comparison with the United States in 1913. That’s when the United States had the same GDP per capita as Brazil today. In 1913 the U.S. government spent only 8 percent of GDP. Thus, as a percentage of GDP, the corporate tax burden in Brazil today is seven times that of U.S. Corporations when the United States was at Brazil’s current GDP per capita.
Here are formal details on Brazilian corporate taxation. But the document does not stress the reality that half the firms shirk their burden and the more efficient firms must pay far more than they ought to.
It gets worse:
Brazil’s government spends about 11 percent of GDP on the government-run pension system compared with 5 percent in the United States today and close to zero in 1913. The government contribution to the pensions of Brazil’s government employees is 4.7 percent of GDP compared with 1.8 in the United States today….Brazil clearly has government employment it can’t afford.
Here is an article on Lula’s partial success in reforming Brazilian pensions, here is more detail.
The quotations are taken from William Lewis’s interesting The Power of Productivity.
To be continued…
Can this be true?
Here is a surprise:
So far there appears no evidence whatsoever of the “tax cut for the rich” charge. Changing regulations have reduced the burden of each income quintile except that at the very top. From the standpoint of all federal taxes, 2001 represents increased income progressivity as compared with the previous decades.
That’s Econopundit and here is the full post and data, thanks also to Bruce Bartlett for publicizing these results. The original source, I might add, is the non-partisan Congressional Budget Office. Note that the figures include the effects of excise, payroll, and corporate taxation, not just income taxes.
My take: We have to be careful how we interpret the figures. If “the rich are getting richer,” the top quintile can be paying more, in relative terms, even if the top marginal rates are falling. That being said, the top quintiles still appear to be carrying their share of the burden. Thanks to Brock Sides for a useful email.
Addendum: Here is some critical analysis, I am heading to my conference and don’t currently have time to evaluate it.
How free market is the Chilean miracle?
The major economic successes of Chile are commonly considered to be a free market miracle. To be sure, there is much truth to this characterization. The Pinochet regime engaged in extensive privatization and deregulation and moved to free trade. Agriculture, services, copper mining, and telecommunications all boomed. The Chilean economy has been the envy of Latin America for some time now. The country also has few problems with corruption.
The reality nonetheless is more complex than a simple market story may imply, read this thorough account. The Chilean state has grown stronger as the Chilean economy has prospered. In the 1990s, Chile has doubled corporate taxes, almost doubled its minimum wage, and more than doubled spending on health and education. Here is another account of how social spending has gone up during the 1990s. Chile also has maintained tight capital controls on foreign investment until 1999. The vaunted Chilean social security privatization in fact superimposed a system of private accounts on an already-existing governmental system, which did not disappear. Yet in the 1990s the country continued to prosper. Chile grew by an average of 5.9 percent a year.
The bottom line: The world has seen massive liberalizations over the last twenty-five years and all for the better. But with few exceptions these reforms have strengthened rather than overturned welfare states. New Zealand, for instance, also has not cut its welfare spending. Welfare states are, in part, the price we pay for public order, whether or not they always make economic sense. When it comes to economic development, the question is not state vs. market. Rather poorer countries need both stronger markets and stronger (as distinct from more tyrannical) states. Chile is generating strong institutions across the board, in both private and public realms. In contrast, look at Mexico, where government taxation takes only 12 percent of gdp. In Mexico the problem is not to cut the absolute size of government per se (although I can think of some obvious and good steps in this direction, such as introducing more electricity competition) as to reduce corruption and improve the quality of governance. Until market-oriented reformers understand this basic distinction, we will continue to give bad advice and generate only mixed results for market-oriented ideas.
Capitalism comes to Iraq
Most of the talk about the reconstruction of Iraq has been about US aid, a so-called “Marshall plan for Iraq.” But as Tyler pointed out the Marshall plan never did that much for Europe – what made the difference was economic liberalization (and recall that the key reform in Germany, Ludwig Erhard’s lifting of price controls, was done without the permission and against the wishes of the US administrators). It is heartening therefore that liberalization appears to be coming to Iraq. Here is the key information from The Economist (subscription required).
A shock programme of economic reforms signals a radical departure for Iraq. The changes, announced by the country’s provisional rulers at the annual World Bank/IMF jamboree in Dubai, could see its battered economy transformed abruptly into a virtual free-trade zone.
If carried through, the measures will represent the kind of wish-list that foreign investors and donor agencies dream of for developing markets. Investors in any field, except for all-important oil production and refining, would be allowed 100% ownership of Iraqi assets, full repatriation of profits, and equal legal standing with local firms. Foreign banks would be welcome to set up shop immediately, or buy into Iraqi ventures. Income and corporate taxes would be capped at 15%. Tariffs would be slashed to a universal 5% rate, with none imposed on food, drugs, books and other “humanitarian” imports.
Saturday assorted links
1. Liverpool man who inherited £100,000 lets 12 strangers give the money away.
2. Jonathan Eaton, RIP. And more on his work in trade economics.
3. ACX grants from Astral Codex. And new African School of Economics coming in Zanzibar.
4. The Monk and the Gun is a fun Bhutanese movie about the foundations of democracy (and markets).
5. Using AI to campaign and deliver your victory speech, while in jail.
6. Another 2014 post on Putin: “Putin is signaling to the Russian economy that it needs to get used to some fairly serious conditions of siege, and food is of course the most important of all commodities. Why initiate such a move now if you are expecting decades of peace and harmony?”
7. John Bruton, RIP (NYT, he negotiated peace with Northern Ireland and also set the corporate income tax rate low in Ireland and designed the referendum that overturned the country’s ban on divorce).
Can the School Choice Movement Liberate Childhood?
Richard Hanania has a very good post on the rapidly expanding school choice movement and his hopes for a radical rethinking of education.
The first thing to point out about public education is that it involves an extreme restriction of liberty beyond anything we usually accept. How common is it for government to force you to be in a certain place at a certain time? What I call “time-place” mandates are rare. Sometimes you have to go to the DMV, but even then you spend a short amount of time there, and can generally choose when to go. Sometimes people have to respond to subpoenas or jury duty, but those are uncommon events in most people’s lives. Government says to do your taxes, though you only have a deadline and can fill out the paperwork whenever and under whatever conditions you want.
The only substantial populations of individuals who have their lives structured according to time-place mandates in a free society like ours are prisoners, members of the military, and children. The mandates for children have gotten less strict over the years now that all states allow homeschooling, but opponents of school choice for all practical purposes want to do what they can to shape the incentive structures of parents so that they all use public schools (liberal reformers tend to like vouchers that can be used at charter schools, but not ESAs, which give parents complete control). Of course, children don’t have the freedom of adults, and so others are by default in control of how they spend most of their time. But it’s usually parents, not the government, that we trust in this role. Given the unusual degree to which public education infringes on individual liberty and family autonomy, the burden of proof has to be on those in favor of maintaining such an extreme institution.
…To me, the true promise of the school choice movement isn’t that it might simply save a bit of money or avoid the worst excesses of public education. Rather, it presents an opportunity to rethink childhood…On what basis did we as a society decide that the ideal way to spend a childhood was to attend government institutions 5 days a week, 7 hours a day, 9 months a year, for 12 years? That most of that time should be spent sitting at a desk, with say one hour for lunch and one for recess?
My hope is that states with universal ESAs will see radical experimentation. Maybe some parents would send their kids to a traditional school for six months of the year, and then have them apprenticing or interning in the workforce the rest of the time. Imagine having a few months experience working at a law firm during eighth grade, grabbing coffee for corporate executives in ninth grade, following around a pipe fitter in tenth grade, and helping around a gym in eleventh grade.
I too would like to see radical experimentation in education but I’m struck by how conservative and homogeneous schools are, regardless of their public or private status. Private schools, despite having the autonomy, have not pioneered novel teaching methods. Montessori was innovative but that was a hundred years ago. A few private schools have adopted Direct Instruction, but how many offer lessons in memory palaces, mental arithmetic or increasing creativity?
I am enthusiastic about developments coming out of Elon Musk’s school and Minerva but it’s still remarkable how similar almost all private schools are to almost all public schools. The global adoption of a nearly identical education model is also disturbing, as I harbor significant skepticism that we’ve reached an optimum. I see this as more of an outcome of world-elite consensus, similar to what we saw with COVID policy, with basically only Sweden bucking the trend and coming under intense pressure for doing so.
Online education and AI ought to greatly expand the potential range of experimentation but the demand for experimentation appears to be low.
Hanania has more of interest to say. Read the whole thing.
Competing for residents rather than businesses
Amazon is pulling back from its second headquarters expansion in Crystal City (yes I still call it that), and this will herald a new age of lesser competition for businesses and their main offices:
…the growing difficulty of courting corporations. If Amazon stiffs Northern Virginia, future politicians elsewhere may be less eager to promise tax breaks and infrastructure investments, not to mention spend their reputational capital. Politically speaking, it will be harder for urban and suburban leaders to rise to the top by attracting a new major corporate tenants. “Pro-business” local governments may be less common in the years to come.
Another relevant trend is the work-from-home and hybrid models. Why should a major corporation invest in more office space if a lot of that space will be used only part of the time?
It is worth thinking through how remote and hybrid work will affect regional evolution. There have already been “booms” in some relatively small resort areas, such as parts of Maine, Long Island and West Virginia. But there will be a more general impact as well. To the extent corporations give up on clustering their talent in big office buildings, people will spread out where they live. Not everyone will set down stake in the Hamptons or along the Irish coast. Plenty of people will want to live near family or where they were born, or perhaps a few hours away from the main office as part of a hybrid arrangement.
In this new world, it will be much harder for a well-governed region to rise to the top. Even if its leaders succeed in convincing a company to relocate, for instance, there may be fewer workers who do so. Or perhaps there will be the same number of workers but they will come into the office less frequently and live scattered in many directions, sometimes in other states or metropolitan areas.
There is nothing necessarily wrong with this outcome. But the potential parvenu region just won’t feel that exciting, and the level of activity won’t feed upon itself in terms of attracting more retail and cultural amenities.
And:
Overall, there may be less competition to attract corporations. At the same time, political competition for residents may become more intense, because more people will be able to choose where to live regardless of where they work. This competition could lead to improvements in schools and parks.
Here is the rest of my Bloomberg column.
Modeling persistent storefront vacancies
Have you ever wondered why there are so many empty storefronts in Manhattan, and why they may stay empty for many months or even years? Erica Moszkowski and Daniel Stackman are working on this question:
Why do retail vacancies persist for more than a year in some of the world’s highest-rent retail districts? To explain why retail vacancies last so long (16 months on average), we construct and estimate a dynamic, two-sided model of storefront leasing in New York City. The model incorporates key features of the commercial real estate industry: tenant heterogeneity, long lease lengths, high move-in costs, search frictions, and aggregate uncertainty in downstream retail demand. Consistent with the market norm in New York City, we assume that landlords cannot evict tenants unilaterally before lease expiration. However, tenants can exit leases early at a low cost, and often do: nearly 55% of tenants with ten-year leases exit within five years. We estimate the model parameters using high-frequency data on storefront occupancy covering the near-universe of retail storefronts in Manhattan, combined with micro data on commercial leases. Move-in costs and heterogeneous tenant quality give rise to heterogeneity in match surplus, which generates option value for vacant landlords. Both features are necessary to explain longrun vacancy rates and the length of vacancy spells: in a counterfactual exercise, eliminating either move-in costs or tenant heterogeneity results in vacancy rates of close to zero. We then use the estimated model to quantify the impact of a retail vacancy tax on long-run vacancy rates, average rents, and social welfare. Vacancies would have to generate negative externalities of $29.68 per square foot per quarter (about half of average rents) to justify a 1% vacancy tax on assessed property values.
Erica is on the job market from Harvard, Daniel from NYU. And they have another paper relevant to the same set of questions:
We identify a little-known contracting feature between retail landlord and their bankers that generates vacancies in the downstream market for retail space. Specifically, widespread covenants in commercial mortgage agreements impose rent floors for any new leases landlords may sign with tenants, short-circuiting the price mechanism in times of low demand for retail space.
I am pleased to see people working on the questions that puzzle me.
From Ryan Petersen at Flexport
“I just couldn’t sit around watching this humanitarian crisis in Ukraine without doing anything about it. So Flexport is organizing a massive airlift of relief goods to refugee camps in Eastern Europe starting next week.
You can read more about the full operation below. It’s inspiring stuff.
We’re looking to raise money to pay for more flights—Flexport is covering the first full cargo plane full of relief goods, but we’re asking others to donate including potential corporate sponsors to help us pay for more flights.
Donations are open at Flexport.org/donate and fully tax-deductible through our 501c3 partners.”