What loopholes reveal

When we talked about Tiebout and his theory on local expenditures as a means of preference revelation, we were mainly referring to individuals and to small communities within one state or country. However, by broadening the scope of his argument, analyzing Ireland as part of the world community and firms as individuals, I will proceed to discuss Irish tax regulations.

Firms and companies establish their location according to the laws of each city or community. They seek for the set of laws that best satisfy their business model in terms of regulations, free market, and most importantly, taxes. This is the case of companies in Ireland. For many years, Ireland has had the biggest tax loophole called the “Double Irish”, in which firms can transfer royalty payments for intellectual property to a country with no corporate-income tax. Because of the flexible tax system, many foreign firms such as Google, Apple and Facebook had had set Irish subsidiaries to help them shelter Irish profits from foreign subsidiaries, which revealed their preference for a tax-avoidance. But the rules of the game have recently changed:

In an effort to eliminate the Double Irish, the government established that all Irish companies are required to have tax domicile somewhere. For companies already registered in Ireland, this will be done with a transitional period of six years, giving them a chance to accommodate their business model to new tax regulations. This policy can have two consequences: either it enhances the pressure on neighboring tax-friendly countries to enforce more strict tax policies, as the article suggests; or it will cause foreign firms to find another country where the loophole can still be made. Because the government is interested in maintaining Ireland as an attractive location for investment, they have also developed a new tax break for intellectual property capital, hoping companies like Apple will choose to remain interested in the country. If companies decide to move out of Ireland, it will strengthen Tiebout’s argument claiming that local expenditures will better reveal the preferences of an individual. The elimination of the Double Irish will reveal if companies that were originally established in Ireland did so because of tax laws, or because they were attracted to Ireland’s market. Google has chosen to stay in Ireland; the eyes are now on Apple and other tech companies as to which decision they will make.

Just Like the Football Player

As a quick bonus post for this week:

This morning I came across an article about a new biography of Charles Tiebout and the biographer had this comment about his name:

If I could offer but one contribution to his memory, let it be to induce economists to pronounce his name correctly: It is "TEE-bow," the unstressed syllable sounding like the bow of cellos and arrows.

 The more you know.

Local Expenditures in Henrico

In October, Henrico County opened a new rec center as part of a building boom financed by a "$349.3 million bond referendum approved by county voters in 2005."  This article calls the Eastern Henrico Recreation Center the "jewel" of the project, which also included new and expanded fire stations.  The center is the product of a suggestion made by a 15-year-old high school student who thought a place like this might help cut down on crime and violence by teenagers in the area.  Now 28, Terrell Pollard is part of the Eastern Henrico Community Action Committee that had a lot to do with the project. 

The new rec center is located in an area of Henrico that is "home to a number of predominantly black neighborhoods that have long sought more public amenities, especially for their youth."  Henrico is a county with good schools, relatively high median household income, and all the benefits that come with being located near a city like Richmond.  However, the community that will benefit from the rec center is one that "feels like it has seen little of the county's riches."  In the same way, this rec center will mainly benefit this particular community and not the entire county, but Pollard hopes it will cut down on "crime and violence among teens in neighborhoods along Laburnum and Nine Mile and Creighton Roads," which would be a positive externality benefiting everyone.  I think this presents an issue with Tiebout's model of locally provided public goods, because if communities are  not homogenous it is impossible for consumer-voters to make decisions based on revenue-expenditure patterns about which community best approximates their preferences.  County-level governance is about as local as it gets, and it would seem that local public goods provision in Henrico has had some failings.  In Tiebout's model, where moving is costless, people in Eastern Henrico could just move, but they may just end up in another county where public goods are provided unevenly, and in reality moving would be extremely costly.  Maybe in this case the problem is that the county's funds are not being used for purely public goods, but either way it would seem that there is some kind of failure here.

How Tiebout is true in NYC

This article was published in the spring of 2009, and it focuses on various New Yorkers’ approach to their children’s education in the wake of the Great Recession that started in the fall of 2008. The article discusses how there has been an increase in interest and in applications for public schools in certain New York City areas because some families can no longer afford to pay private school tuition for their children. The areas mentioned in the article are ones that are typically thought of to be inhabited by wealthier families (like the Upper East Side and Upper West Side of Manhattan). The article also shows how some couples without children (but who plan on having them in the future) are now looking to buy/rent apartments in areas with established public school systems because the education of their future children is very important to them, and they do not know if the economy will have turned around by the time their future children reach school-age.

I felt as though this article tied in well with our discussion of Charles Tiebout’s “A Pure Theory of Local Expenditures” and the concept of “voting with one’s feet.” The article provides several examples of people who had purchased apartments in an area of New York before the recession hit, and their education preferences were not factored in to their apartment location because they assumed that they would send their children to private school. However, the recession is causing these families to alter their preferences to include their children’s public school education, as private school is no longer economically feasible. Many of the families mentioned in the article are either trying to sell/sublet their current apartment and move in/rent a new apartment located in a better public school zone. Although not all of the assumptions of Tiebout’s model hold in this article (some of the people interviewed mention the high costs associated with moving), Tiebout’s overall conclusion that people reveal their true preferences by their location is realized.

After reading this article, I was curious to see if the local government of New York responded to the changing preferences of these New York families. Not surprisingly, I found another article (which was published after the first one) about the opening of a new public middle school (the first new public school building built on the Upper East Side in almost 50 years!) in one of the areas mentioned in the first article that had seen an increase in public school applications. As Tiebout suggested, local provision and adjusting was done within the public school district by the voter based on where they live; the government saw both the movement of families to a certain area and the increase in public school applications in that area and responded by allowing a new public school to be built in said area. A pretty good real-life example of Tiebout’s argument in my opinion!