Public Finance in the Era of the COVID-19 Crisis
18-20 August 2021 | Online, Organized by University of Iceland, Reykjavík
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G03: Economics Consequences of COVID-19
4:00pm - 4:22pm
Information Revelation of Decentralized Crisis Management: Evidence From Natural Experiments on Mask Mandates
1University of Utah, United States of America; 2University of Utah, United States of America; 3University of Utah, United States of America; 4University of Utah, United States of America
We highlight the importance of signaling effects in determining whether public policy should be implemented at a decentralized or centralized level. For example, although a public policy may have the same direct effect if enacted at a state or county level, people may perceive these policies differently, leading to different indirect effects. We explore this mechanism using the patchwork of mask mandate orders in the U.S. from April to September 2020. State-wide mask mandates stimulate economic activity while also reducing COVID-19 case growth. Surprisingly, county-level mask mandates generally have the opposite effect, depressing economic activity. We argue that different unintended signaling effects can explain these differences in policy effects: households infer from county mask mandates that infection risks have increased in their local area and, therefore, socially distance more and spend less.
4:22pm - 4:45pm
The Impact Of COVID-19 On Formal Firms Micro Tax Data Simulations Across Countries
1The World Bank; 2The Institute for Fiscal Studies; 3University College London
How is the COVID-19 pandemic affecting firm profits and tax payments in developing countries? This paper uses administrative corporate tax records from 10 low- and middle- income countries around the world to provide plausible estimates. Modeling the lockdown-triggered revenue shock with simple and transparent assumptions, the analysis predicts that less than half of all firms will remain profitable by the end of 2020, about 5–10 percent of the formal aggregate annual payroll will be lost, and firm exit rates will double. As a result, it is expected that tax revenue remitted by the corporate sector will fall by at least 1.5 percent of baseline gross domestic product. Differences in sectoral composition and firms’ cost structures generate heterogeneity in the results across countries: wage subsidies are less effective in low-income countries and government revenue losses are smaller.
4:45pm - 5:07pm
Optimal Case Detection and Social Distancing Policies to Suppress COVID-19
Toulouse School of Economics, France
This paper finds that the combination of case detection and social distancing is crucial for efficiently suppressing a new infectious disease. Theoretically, I characterize the optimal elimination strategy as a simple function of observables, which eases its implementation. Together with the number of infected, optimal social distancing decreases over time. The fundamental trade-off is between its intensity and its duration. Quantitatively, I calibrate the model to the COVID-19 pandemic in Italy at the end of the first lockdown on May 10, 2020. Given the observed prevalence and detection efficiency, eliminating the virus costs 11 % of annual GDP. Efficient digital contact tracing reduces the cost to 0.4 %. This cost is by one order of magnitude lower than the cost of optimal mitigation strategies.
5:07pm - 5:30pm
How Well-Targeted Are Payroll Tax Cuts as a Response to COVID-19? Evidence From China
1Allard Law School, University of British Columbia, Canada; 2Vancouver School of Economics, University of British Columbia, Canada
Numerous countries cut payroll taxes in response to COVID-19. This includes China, which completely exempted most firms from social insurance (SI) contributions--an average tax cut of 21 percentage points on formal labor costs and approximately 20% of total tax remittances by firms. We use novel data on 900,000 firms in one province to document new facts about the structure of SI in China and evaluate payroll tax cuts as a COVID-19 relief measure. We calculate that labor informality causes 54% of tax-registered firms--24% of aggregate economic activity--to receive no benefits. Labor formality also increases with firm size, further skewing the benefit of these cuts towards large firms. But despite these facts, the benefit of the cuts relative to firms' operating costs and liquidity is larger both for smaller firms and in industries most affected by the shock because these firms and industries are more labor-intensive.
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