Juan Carlos Suárez Serrato

Work in Progress

Effects of International Tax Provisions on Domestic Labor Markets
(with D. Garrett and E. Ohrn)

↳ Please email for an advance draft.
↳ Abstract. How does international taxation impact domestic workers? We study two fundamental elements of international tax systems by analyzing US provisions that isolate these elements. The first provision---the 1997 "Check-the-Box" regulations---lowered effective tax rates abroad by facilitating profit shifting. The second provision---the 2004 "repatriation holiday"---decreased tax costs of repatriating foreign earnings. Using a dynamic difference-in-differences framework, we estimate that local exposure to Check-the-Box significantly reduced domestic employment and labor earnings. This result implies that multinationals substitute domestic with foreign activity in response to lower effective tax rates abroad. We find the repatriation holiday had no effects on labor markets, indicating foreign cash holdings of US MNCs are not an important source of financing for domestic business activity. Based on our analysis of both provisions, we conclude that policies that lower the foreign taxes of US MNCs are unlikely to benefit domestic workers.
Tax Planning and Multinational Behavior
(with R. Altshuler and L. Boller)

↳ Please email for an advance draft.
↳ Abstract. We study the adoption and use of a specific form of tax planning by US multinational corporations (MNCs). Using IRS data, we identify ``hybrid'' tax planning structures (HTPs) which can be used to avoid corporate income tax by targeting mismatches between US and Irish, Dutch, and Luxembourgish tax law. By 2016, more than 35\% of the foreign profits of US MNCs were linked to HTPs. Difference-in-differences models comparing adopting and non-adopting MNCs reveal that after adoption, MNCs intensify behaviors related to profit shifting, significantly increasing related-party loans, foreign intangible assets, and profits held abroad. These changes result in stark reductions in foreign effective tax rates. Adopting MNCs also experience larger increases in foreign tangible assets and in domestic R\&D, payroll, and investment. Finally, we develop and estimate a model that rationalizes the selection of MNCs into HTPs and their changes in economic activity.

Working Papers

Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach With Heterogeneous Firms: Further Results. (with O. Zidar), May 2023.

↳ (1) Paper
↳Abstract. This paper estimates the incidence of state corporate taxes using new data and methods for estimating the effects on profits. We extend Suarez Serrato and Zidar (2016) by developing two new identification approaches that use the effects of business taxes on the labor demand of incumbent firms and local productivity to identify profit effects. We estimate these reduced-form effects using data from Census, show how reduced-form moments identify incidence and parameters, and provide incidence estimates using a variety of reduced-form approaches as well as a structural model. Across these approaches, we find that owners bear a substantial portion of incidence. Our central estimate is that firm owners bear half of the incidence, while workers and landowners bear 35-40 percent and 10-15 percent, respectively.
The Race Between Tax Enforcement and Tax Planning: Evidence From a Natural Experiment in Chile
(with S. Bustos, D. Pomeranz, J. Vila-Belda, and G. Zucman), August 2023, under review

↳ (1) Paper, (2) BIB
↳Abstract. Profit shifting by multinational corporations is thought to reduce tax revenue around the world. While transfer pricing regulations are meant to curtail profit shifting, there have been rising concerns that a sophisticated tax advisory industry can limit their effectiveness. This paper provides a comprehensive analysis of how firms and tax advisors respond to the introduction of standard regulations aimed at limiting profit shifting. Using administrative tax and customs data from Chile in difference-in-differences event-study designs, we find that the reform was ineffective in reducing multinationals' transfers to lower-tax countries and did not significantly raise tax payments. At the same time, interviews with tax advisors reveal a drastic increase in tax advisory services. The qualitative interviews also allow us to identify and then quantitatively confirm a common tax planning strategy in response to the reform. These results illustrate that when enforcement can be circumvented by sophisticated tax planning, it can benefit tax consultants at the expense of tax authorities and taxpayers.
Capital Investment and Labor Demand
(with E. M. Curtis, D. Garrett , E. Ohrn, and K. Roberts), June 2022, under revision for American Economic Review

↳ (1) Paper, (2) BIB
↳ Abstract. We study how tax policies that lower the cost of capital impact investment and labor demand. Difference-in-differences estimates using confidential Census Data on manufacturing establishments show that tax policies increased both investment and employment, but did not stimulate wage or productivity growth. Using a structural model, we find that the primary effect of the policy was to increase the use of all inputs by lowering costs of production and that capital and production workers are complementary inputs in modern manufacturing. Our results show that tax policies that incentivize capital investment do not lead manufacturing plants to replace workers with machines.
Regulating Conglomerates in China: Evidence from an Energy Conservation Program
(with J. Chen, Z. Chen, Z. Liu, and D. Xu), September 2023, under revision for American Economic Review

↳ (1) Paper, (2) BIB
↳ Abstract. We study a prominent energy regulation affecting large Chinese manufacturers that are part of broader conglomerates. Using detailed firm-level data and difference-in-differences research designs, we show that regulated firms cut output and shifted some production to unregulated firms in their same conglomerate instead of improving their energy efficiency. To account for conglomerate and market spillovers, we interpret these results through the lens of an industry equilibrium model featuring conglomerate production. The policy raises welfare if the per-ton benefits of carbon reduction exceed $161. Alternative polices that exploit public information on business networks can increase aggregate energy savings by 10%.
Taxing Property in Developing Countries: Theory and Evidence from Mexico
(with A. Brockmeyer, A. Estefan, and K. Ramírez), September 2023, under review

↳ (1) Paper, (2) BIB
↳Abstract. We model and estimate the welfare effects of the property tax--the most under-utilized tax in developing countries. Our model shows property tax hikes impact welfare by reducing compliance and exacerbating liquidity constraints. Enforcement impacts welfare by subjecting non-compliant taxpayers to threats of fines and property seizure. The model yields a sufficient-statistics condition indicating when tax hikes raise welfare more than enforcement. In our setting, administrative data, sharp tax increases, and an enforcement experiment show both policies increase revenue. Tax hikes also raise welfare because revenue gains surpass liquidity costs. However, enforcement reduces welfare as threat costs overshadow revenue increases.
Unintended Consequences of Eliminating Tax Havens, December 2019, under revision for American Economic Review

↳ (1) Paper, (2) BIB, (3) NBER Reporter
↳ In Media: Bloomberg, Brookings Hutchins Roundup, City A.M., The Hill, The Hindu, Italia Oggi ↳Abstract. Eliminating firms' access to tax havens can have unintended consequences for their domestic economic activity. We study a policy that limited profit shifting by US multinationals and show it raised the tax cost of domestic investment. Firms affected by the policy responded by reducing investment and domestic employment. Firm-level responses were amplified to local labor markets through the establishment networks of profit-shifting firms. More exposed loca labor markets experienced declines in employment, income, and home values and saw increases in government transfers. Policy proposals that limit profit shifting should therefore consider effects on economic activity in addition to tax revenue.
A Kinky Consistency: Experimental Evidence of Behavior Under Linear and Non-Linear Budger Sets
(with E. Huet-Vaughn and E. McClure), January 2021, under revision for American Economic Journal: Microeconomics

↳ (1) Paper, (2) BIB
↳Abstract. Individuals face non-linear budget constraints in myriad situations. We test a fundamental assumption of economic analysis in such settings: that individuals display stable preferences when facing linear and non-linear incentives. We use a laboratory experiment to characterize how revealed preferences are affected by changes in the complexity of the budget set environment. We find that choices under kinked (piece-wise linear and convex) budgets exhibit a similar degree of rationality as choices under linear budgets--with very high levels of internally consistent behavior in each setting. However, for about half the subjects, individual choices across settings are not consistent with a unified decision rule. Relative to those who act consistently across settings, subjects displaying such arbitrary consistency exhibit large and significant changes in utility parameters, risk premiums, and price elasticities across settings. Finally, we show that subjects with initially more sophisticated decision rules are most susceptible to changes in complexity.
Estimating Local Fiscal Multipliers
(with P. Wingender), July 2016, under revision for Econometrica (3rd Round)

↳ (1) Revised Paper (July 2016), (2) BIB, (3) AEA Minority Report
Previous Version (March 2014)
↳Abstract. We propose a new source of cross-sectional variation that may identify causal impacts of government spending on the economy. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. Since a different method is used to estimate non-Census year populations, this change in methodology leads to variation in the allocation of billions of dollars in federal spending. Our baseline results follow a treatment-effects framework where we estimate the effect of a Census Shock on federal spending, income, and employment growth by re-weighting the data based on an estimated propensity score that depends on lagged economic outcomes and observed economic shocks. Our estimates imply a local income multiplier of government spending between 1.7 and 2, and a cost per job of $30,000 per year. A complementary IV estimation strategy yields similar estimates. We also explore the potential for spillover effects across neighboring counties but we do not find evidence of sizable spillovers. Finally, we test for heterogeneous effects of government spending and find that federal spending has larger impacts in low-growth areas.
Estimating the Incidence of Government Spending
(with P. Wingender), December 2014

↳ (1) Paper, (2) Slides, (3) BIB, (4) AEA Minority Report
↳ Policy Brief: SIEPR.
↳Abstract. This paper analyzes the economic incidence of sustained changes in federal government spending at the local level. We use a new identification strategy to isolate geographical variation in formula-based federal spending and develop three sets of results. First, we find that sustained changes in federal spending have significant effects on migration, income, wages, and rents, as well as on local government revenues and expenditures. Second, we show that the effects of a government spending shock are qualitatively different from those of a local labor demand shock. We develop a spatial equilibrium model to show that when workers value publicly-provided goods, a change in government spending at the local level will affect equilibrium wages through shifts in both the labor demand and supply curves. We test the reduced-form predictions of the model and show that workers value government services as amenities. Finally, we estimate workers' marginal valuation of government services and find that unskilled workers have a higher valuation of government services than skilled workers. We use these estimates to decompose the demand and supply components of a government spending shock and to evaluate the impacts on welfare that are produced by increasing government spending in a given area. Our estimates conclude that an additional dollar of government spending increases welfare by $1.45 in the median county.

Publications

Who Benefits from State Corporate Tax Cuts? A Local Labor Market Approach With Heterogeneous Firms: Reply. (with O. Zidar), August 2023, forthcoming at American Economic Review

↳ (1) Paper
↳Abstract. Suarez Serrato and Zidar (2016) estimate the incidence of state corporate taxes. Malgouyres, Mayer, and Mazet-Sonilhac (2022) highlight two errors--ignoring effects on firm composition and characterizing capital costs inconsistently. This reply corrects the structural model and corresponding incidence estimates. The incidence results are similar to the originally reported estimates and the confidence intervals widen for some estimates. In the corrected structural model, the firm owner incidence share estimate changes by 1.6 percentage points relative to the original version in SZ (i.e., 38.1 percent versus 36.5 percent). The worker share estimate is 35.0 percent. Landowners bear the remaining 26.9 percent.
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds (with D. Garrett, A. Ordin, and J.W. Roberts), The Review of Economic Studies, 90(2), March 2023, 815-851.

↳ (1) Paper, (2) BIB
↳ In Media: Brookings
↳Abstract. We study the interaction between tax advantages for municipal bonds and the market structure of auctions for these bonds. We show that this interaction can limit a bidder's ability to extract information rents and is a crucial determinant of state and local governments' borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3 pp lowers mean borrowing costs by 9-10%. We estimate a structural auction model to measure markups and to illustrate and quantify how the interaction between tax policy and bidder strategic behavior determines the impact of tax advantages on municipal borrowing costs. We use the estimated model to evaluate the efficiency of Obama and Trump administration policies that limit the tax advantage for municipal bonds. Because reductions in the tax advantage inflate bidder markups and depress competition, the resulting increase in municipal borrowing costs more than offsets the tax savings to the government. Finally, we use the model to analyze a recent non-tax regulation that affects entry into municipal bond auctions.
Tax Policy and Lumpy Investment Behavior: Evidence from China's VAT Reform (with Z. Chen, X. Jiang, Z. Liu, and D. Xu), The Review of Economic Studies, 90(2), March 2023, 634-674.

↳ (1) Paper, (2) BIB, (3) Vox Dev.
↳Abstract. We incorporate the lumpy nature of firm-level investment into the study of how tax policy affects investment behavior. We show that tax policies can directly impact the lumpiness of investment. Extensive-margin responses to tax policy are key to understanding the effects of different tax reforms and to designing effective stimulus policies. We illustrate these results by studying China's 2009 VAT reform, which lowered the tax cost of investment and reduced partial irreversibility---the price gap between new and used capital. Using administrative tax data and a difference-in-differences design, we estimate a 36% investment increase. This effect is driven by investment spikes, which is consistent with the reduction of VAT-induced partial irreversibility. Using a dynamic investment model that fits the reduced-form effects of the reform, we show that policies that directly reduce the likelihood of firm inaction are more effective at stimulating investment.
Do Corporate Tax Cuts Increase Income Inequality? (with S. Nallareddy and E. Rouen), Tax Policy and the Economy, Volume 36, University of Chicago Press, June 2021.

↳ (1) Paper, (2) BIB
↳ In Media: Op-Ed in The Hill, WSJ, Vedomosti (Russia), Fiscal Times
↳Abstract. We study the effects of corporate taxes on income inequality. Using state corporate taxes as a setting, we provide evidence that corporate tax cuts lead to increases in income inequality. This result is robust across regression, matching, and synthetic controls approaches, and to controlling for a host of potential confounders. We use Statistics of Income data from the IRS to explore mechanisms behind this result. We find tax cuts lead to higher income for both top and bottom earners, but the gains to capital income for top earners exceed the gains to total income for bottom earners. This result suggests that, while all earners appear to benefit from a corporate tax cut, the relation between tax cuts and inequality is positive, in part, because high income individuals shift their compensation to reduce taxes.
Notching R&D Investment with Corporate Income Tax Cuts in China (with Z. Chen, Z. Liu, and D. Xu), July 2021, American Economic Review, 2021, 111(7): 2065-2100 (Lead Article).

↳ (1) Paper, (2) BIB
↳ In Media: Vox China, Vox EU
↳Abstract. We study a Chinese policy that awards substantial tax cuts to firms with R&D investmentover a threshold or “notch.” Quasi-experimental variation and administrative tax data showa significant increase in reported R&D that is partly driven by firms relabeling expenses asR&D. Structural estimates show relabeling accounts for 24.2% of reported R&D and thatproductivity increases by 9% when real R&D doubles. Policy simulations show firm selection and relabeling determine the cost-effectiveness of stimulating R&D, that notch-based policiesare more effective than tax credits when relabeling is prevalent, and that modest spilloversjustify the program from a welfare perspective.
Industrial Energy Regulation: The Role of Business Conglomerates in China (with Q. Chen, Z. Chen, Z. Liu, and D. Xu), AEA Papers and Proceedings, 111, May 2021, 396-400.

↳ (1) Paper, (2) BIB
↳Abstract. This paper characterizes the importance of ownership networks of firms that are subject to a prominent energy regulation in China: the Top 1000 Enterprises Energy-Saving Program. We use data on the activities of regulated and unregulated firms that are part of the same conglomerate to study the overall importance of conglomerates as well as their geographic concentration. Accounting for business networks of regulated firms significantly increases the fraction of output that is affected by the regulation. We also document that most related firms of Top 1000 firms are located in the same province.
The Structure of Business Taxation in China (with Z. Chen, Y. He, Z. Liu, D.Y. Xu) Tax Policy and the Economy, Volume 35, University of Chicago Press, October 2020.

↳ (1) Paper, (2) BIB
↳Abstract. This paper documents facts about the structure of business taxation in China using administrative tax data from 2007 to 2011 from the State Taxation Administration. We first document the importance of different business taxes across industries. While corporate income taxes play an important role for manufacturing firms, these firms also remit a large share of their tax payments through the value-added tax system, through the excise tax system and through payroll taxes. Gross receipts taxes play an important role for firms in other industries, leading to spillovers that may affect the overall economy. Second, we evaluate whether the structure of China’s tax revenue matches its stage of development. A cross-country comparison of sources of government revenue shows that China collects a high share of tax revenue from taxes on goods and services and a high share of income tax on corporations. Finally, we study whether firm-level differences in effective tax rates can be an important source of allocative inefficiencies. Decomposing the variation in effective tax rates across firms, we find that government policies, including loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech firms, have significant explanatory power. Nonetheless, while effective tax rates vary along a number of dimensions, tax policy does not explain the large dispersion in the returns to factors of production across firms.
Tax Policy and Local Labor Market Behavior (with D. Garrett and E. Ohrn), American Economic Review: Insights March 2020, 2 (1), 83-100.

↳ (1) Paper, (2) BIB
↳ (3) NBER Working Paper Version with Additional Results
↳ (4) Replication Archive
↳ In Media: The Washington Post, Bloomberg, Op-ed in The Hill, WSJ: Real Time Blog, AEA Chart of the Week
↳Abstract.Since 2002, the US government has encouraged business investment using accelerated depreciation policies that significantly reduce investment costs. We provide the first in-depth analysis of this stimulus on employment and earnings. Our local labor markets approach exploits cross-industry variation in policy generosity interacted with county-level industry location data. This strategy identifies the partial equilibrium effects of accelerated depreciation. Places that experience larger decreases in investment costs see an increase inemployment and earnings. In contrast, the policy does not have positive effects on earnings-per-worker. Overall, our findings suggest federal corporate tax policy has large effects onlocal labor markets.
The Limits of Meritocracy: Screening Bureaucrats Under Imperfect Verifiability
(with X-Y. Wang and S. Zhang), Journal of Development Economics, 140, September 2019, 223-241.

↳ (1) Paper, (2) BIB
↳ In Media: Money Talks, The Economist, Financial Times
↳ Note: This replaces an earlier version of the paper titled "The One Child Policy and Promotion of Mayors in China."
↳Abstract. Does bureaucratic ability predict promotion in governments? We show that self-reported performance in enforcing the One Child Policy predicts mayoral promotion in China. However, misreporting handicaps screening a non-manipulated performance measure does not predict promotion. We show that this is consistent with a model where a government has a meritocratic objective but underestimates the imperfect verifiability of performance, rather than a model where a government is only interested in the illusion of meritocracy. Thus, despite meritocratic intentions, we challenge the notion that a successful promotion system effectively substituted for democratic institutions in explaining Chinese growth.
How Elastic is the Demand for Tax Havens? Evidence from the US Possessions Corporations Tax Credit (with D. Garrett), AEA Papers and Proceedings, 109, May 2019, 493-99.

↳ (1) Paper, (2) BIB (3) NBER Reporter
↳Abstract. Why do some firms adopt certain tax havens and how sensitive is the demand for tax havens? We address these questions by studying how the repeal of Section 936 tax credits affected firms with affiliates in Puerto Rico. We first describe the characteristics of US multinationals that were exposed to Section 936. We then show that the market value of exposed firms decreased after losing access to Section 936, implying that firms could not perfectly substitute to other tax havens. Finally, we find that firms exposed to Section 936 did not respond by expanding their network of tax havens.
State Taxes and Spatial Misallocation (with P. Fajgelbaum, E. Morales, and O. Zidar), The Review of Economic Studies, 86(1), January 2019, Pages 333-376.

↳ (1) Paper, (2) BIB
↳ In Media: VOX EU, WUNC
↳Abstract. We study state taxes as a potential source of spatial misallocation in the United States. We build a spatial general equilibrium framework that incorporates salient features of the U.S. state tax system, and use changes in state tax rates between 1980 and 2010 to estimate the model parameters that determine how worker and firm location respond to changes in state taxes. We find that heterogeneity in state tax rates leads to aggregate welfare losses. In terms of consumption equivalent units, harmonizing state taxes increases worker welfare by 0.6 percent if government spending is held constant, and by 1.2 percent if government spending responds endogenously. Harmonization of state taxes within Census regions achieves most of these gains. We also use our model to study the general equilibrium effects of recently implemented and proposed tax reforms.
The Structure of State Corporate Taxation and its Impact on State Tax Revenues and Economic Activity (with O. Zidar), Journal of Public Economics, Volume 167, November 2018, Pages 158-176

↳ (1) Paper, (2) BIB
↳ In Media: IB Times, Tax Notes, Chicago Booth Review ↳Abstract. This paper documents facts about the state corporate tax structure -- tax rates, base rules, and credits -- and investigates its consequences for state tax revenue and economic activity. We present three main findings. First, tax base rules and credits explain more of the variation in the state corporate tax revenue than tax rates do. Second, although states typically do not offset tax rate changes with base and credit changes, the effects of tax rate changes on tax revenue and economic activity depend on the breadth of the base. Third, as states have narrowed their tax bases, the relationship between tax rates and tax revenues has diminished. Overall, changes in state tax bases have made the state corporate tax system more favorable for corporations and are reducing the extent to which tax rate increases raise corporate tax revenue.
Broken or Fixed Effects? (with M. Urbancic and C. Gibbons), Journal of Econometric Methods, 2018, 8 (1), 2017002
↳ (1) Paper, (2) BIB (3) Replication Archive
↳Abstract. We replicate eight influential papers to provide empirical evidence that, in the presence of heterogeneous treatment effects, OLS with fixed effects (FE) is generally not a consistent estimator of the sample-weighted average treatment effect (SWE). We propose two alternative estimators that recover the SWE in the presence of group-specific heterogeneity. We document that heterogeneous treatment effects are common and the SWE is often statistically and economically different from the FE estimate. In all but one of our replications, there is statistically significant treatment effect heterogeneity and, in six, the SWEs are either economically or statistically different from the FE estimates.

↳ Stata and R Commands.
- To Install the R Command please use the devtools package. After loading that package, execute the following code:
  devtools::install_github('gibbonscharlie/bfe')
- To Install the Stata Command execute the following code:
  * Loads website
  net from https://www.jcsuarez.com/GSSU
  * Describes package
  net describe GSSU
  * Installs commands
  net install GSSU
  * Downloads example data
  net get GSSU
  * Installs required package for GSSUgetrdone.ado
  ssc install estout, replace
Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms (with O. Zidar), American Economic Review, 106 (9): 2582-2624, September 2016

↳ (1) Paper, (2) Slides, (3) NBER Working Paper, (4) NBER Digest Summary , (5) BIB (6) Replication Archive, (7) Reply to MMM-S Comment, (8) Weighted Incidence Shares
↳ In Media: Washington Post, Vox, Washington Post Wonkblog, Chicago Sun-Times, Washington Center for Equitable Growth, Wall Street Journal.
↳Abstract. This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners using variation in state corporate tax rates and apportionment rules. We develop a spatial equilibrium model with imperfectly mobile firms and workers. Firm owners may earn profits and be inframarginal in their location choices due to differences in location-specific productivities. We use the reduced-form effects of tax changes to identify and estimate incidence as well as the structural parameters governing these impacts. In contrast to standard open economy models, firm owners bear roughly 40% of the incidence, while workers and landowners bear 30-35% and 25-30%, respectively.