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Taxation in Kind with special attention to Military Manpower Conscription by Casey B. Mulligan.

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1 Taxation in Kind with special attention to Military Manpower Conscription by Casey B. Mulligan

2 Taxation in Kind examples –conscription of manpower by the military or civil service –conscription of materials and factories by the military –eminent domain (land, intellectual property) –jury duty –human organs –nationalization of industry –regulatory taking? how do these taxes affect the economy? what is the optimal use of in-kind taxes? what is the political economy of in-kind taxes? despite work on cash vs. in-kind transfers, practically no work on in-kind taxes –exception: Vietnam era literature on volunteer vs drafted army and more recent law & econ work on eminent domain

3 Efficient Outcomes with Taxation In Kind: An Example military manpower recruitment model –Becker (1957), Sjaastad & Hansen (1970), Warner & Asch (2001) –m soldiers needed –young men differ in terms of their opportunity cost r, which is distributed G –r is private information –efficient allocation recruits only those with r < G -1 (m) two recruitment systems –use monetary tax revenue to fund volunteer army with market clearing wage G -1 (m) –draft all young men, and levy a fine in the amount G -1 (m) on those who do not report for duty –both obtain efficient recruitment (in the model) –the volunteer system spends revenue, the draft obtains it

4 Two approaches prohibit sorting mechanisms (in the theory) –also assume that conscripts are unpaid –volunteer system is (by assumption) more selective –in-kind taxation (by assumption) spends less revenue –Warner, Ashe, Johnson, Barro, Oi, Friedman, Shavell my approach –in-kind taxation is selective, but must spend revenue in order to maintain incentives. –without incentives, taxpayers take actions to avoid the in- kind tax  private property rights create public sector value (see also Innes 2000 and Stroup 1997 on public land use) Vietnam era draft dodging –join a protected occupation, enroll in college, have children –move to Canada –gain weight, embellish medical conditions –obtain political favors

5 Warner-Ashe-Johnson-Barro-Oi-Friedman-etc argument: selectivity vs. monetary tax dwc volunteer army offers selection and longevity, but incurs the dwcs of tax collection –volunteer salaries are a transfer from civilians to military, with a deadweight cost in the process dwc of salaries is on top of dwcs of other government spending if there are conscripts, don’t pay them (just adds to dwc) dwcs are convex –> most important for large armies –volunteer army selects the people most willing to serve –volunteer army turns over less, which is important due to the expense of military training this argument also appears in the legal literature on eminent domain (e.g., Shavell)

6 Selectivity vs dwc Argument m = personnel per capita 10 S(m)S(m) (convex) deadweight cost of military payroll (approx. linear) gain from market selection avg social cost of random selection

7 Figure 3. The Policy Possibility Frontier Revenue The Figure displays two policy possibility frontiers, each corresponding to different model parameters. The circle indicates the combination of revenue and allocative inefficiency available under all-volunteer recruitment. The square indicates the combination available with a random in- kind tax. 0 allocative inefficiency RVRV I I random in-kind tax government indifference curve

8 In-Kind vs Monetary Taxation as Alternative Means of Achieving Efficient Sorting in-kind taxation can achieve efficient sorting –regulation –bribes –permits and licenses –buyout/commutation and replacement options –Mulligan and Shleifer find such mechanisms used around the world for military conscription. Commutation also used for U.S. recruitment during the Revolutionary War, and in the Civil War (both sides) Vietnam era sorting, despite the draft –selected young, males –potentially strong sorting. among young males: 75+% of draft eligible did not serve, 10% of ineligible did serve –drafted military arguable more white, less schooled modeling the dwcs of in-kind taxation –some resources are un-fit for public use. e.g., obese soldiers, land that is not a desirable habitat for endanger species –resources can be converted from unfit to fit (at cost  ) or vice versa (at cost  ). Initial distribution is  fit and (1-  ) unfit –private value r distributed G –m units needed for public use

9 Efficient Sorting public sector selects low private value resources –among those selected, unfit are converted to fit –fit threshold is higher by the amount of the conversion cost (i.e., more fit are selected for public use) –no fit are converted to unfit

10 Figure 1. Efficient Allocation to Public Use cum. density The Figure illustrates the efficient allocation of fit and unfit resources to public use. G(r) is the distribution of private values, which is the same for both fit and unfit.  is the cost of converting unfit resources to fit. 0 r = private value r u = r f -  rfrf G(r)G(r) Area = fraction of unfit resources converted to fit and used publicly Combined area = fraction of unfit resources retained for private use Area = fraction of fit resources retained for private use Combined area = fraction of fit resources used publicly

11 Figure 2. Aggregate Marginal Opportunity Cost Curve r The Figure illustrates the aggregate opportunity cost S(m) of public use, assuming efficient sorting into the public sector. G(r) is the distribution of private values, which is the same for both fit and unfit.  and  are the costs of converting unfit resources to fit and vice-versa, respectively. 0 m = public use  G -1 (m/  ) G()G()  1 S(m)S(m) G()G()  least incentives needed prevent destruction encourage conversion

12 In-Kind vs Monetary Taxation as Alternative Means of Achieving Efficient Sorting “all-volunteer” system: offer a wage to all fit resources that volunteer in-kind tax system: take all resources. Let any owner “buy out” at b f and b u. Compensate those that remain, at different rates for fit and unfit in-kind taxation obtains revenue R I. All-volunteer system obtains revenue R V, where  is a per-interaction administrative cost both systems obtain the same sorting  conscripts must be compensated enough and the buyout rate be sufficiently low to obtain efficient supply [see Table 1] i n-kind obtains more (spends less) revenue when: –m is large or  I is small –  or  are large;  is small –private values are large  positive theory of taxation in kind based on factor supply conditions transaction/administrative costs are boring, but critical when considering the efficient assignment of property rights

13 Table 1: In-Kind Tax Parameters that Induce Efficient Sorting m <  G(  )m  [  G(  ),  G(  )]m >  G(  ) conscript wage, unfit000 conscript wage, fit = w0 S(m) -  buyout price, unfit = b u 00 S(m) -  buyout price, fit = b f S(m)S(m)  S(m) -  revenue = R I (m) (  -m)S(m) -  I  - mS(m) -  I (1-m)S(m) -  -  I revenue advantage = R I (m) - R V (m)  S(m) +  V m -  I  +  V m -  I S(m) -  +  V m -  I

14 Table 1: In-Kind Tax Parameters that Induce Efficient Sorting Unfit: need incentive to return to pvt sector, or incentive to become fit m <  G(  )m  [  G(  ),  G(  )]m >  G(  ) conscript wage, unfit000 conscript wage, fit = w0 S(m) -  buyout price, unfit= b u 00 S(m) -  buyout price, fit = b f S(m)S(m)  S(m) -  revenue = R I (m) (  -m)S(m) -  I  - mS(m) -  I (1-m)S(m) -  -  I revenue advantage = R I (m) - R V (m)  S(m) +  V m -  I  +  V m -  I S(m) -  +  V m -  I

15 m <  G(  )m  [  G(  ),  G(  )]m >  G(  ) conscript wage, unfit000 conscript wage, fit = w0 S(m) -  buyout price, unfit = b u 00 S(m) -  buyout price, fit = b f S(m)S(m)  S(m) -  revenue = R I (m) (  -m)S(m) -  I  - mS(m) -  I (1-m)S(m) -  -  I revenue advantage = R I (m) - R V (m)  S(m) +  V m -  I  +  V m -  I S(m) -  +  V m -  I Table 1: In-Kind Tax Parameters that Induce Efficient Sorting Fit: need incentive to return to remain fit, given that unfit are let free

16 Figure 3. The Policy Possibility Frontier Revenue The Figure displays two policy possibility frontiers, each corresponding to different model parameters. The circle indicates the combination of revenue and allocative inefficiency available under all-volunteer recruitment. 0 allocative inefficiency RVRV I I

17 Public Project Size Encourages In-Kind Taxation volunteer expenditure increases with m in-kind expenditure is not monotonic, but necessarily increases less with m than it does for the volunteer system –administrative cost is marginal for volunteer, fixed for in-kind –supply price is a revenue inflow for the in-kind tax, outflow for the volunteer system in-kind taxation likely inferior at m = 0, superior at m = 1, and the two systems are equivalent at some critical m between 0 and 1 other reasons for size effects –political/legal scale economies (Mulligan-Shleifer) –insurance scale economies –alleviate deadweight costs of monopsony (later) –relative composition of volunteer and drafted resources (1970s literature)

18 Efficient Project Size U(m) is the social benefit of the project  is the extra weight the government puts on revenue –set  = 0 to calculate first-best efficient –set  = marginal dwc of monetary taxes for second-best efficient –other  ’s can be interpreted politically given m, choose the system with the most revenue, regardless of the magnitude of   monetary dwcs actually encourage the volunteer system for small m  monetary dwcs encourage in-kind taxation for large m  the proper empirical specification interacts  with m

19 The Scope and Conduct of Taxation in Kind hold out –relative to labor and materials, land is more efficiently taken because labor and materials are not subject to hold out: they are usually supplied in a competitive resale market, or can be produced from raw materials gender, region, and occupation –local projects will have strictly limits on the buyout rate and conscript compensation in order to achieve efficient sorting  national projects more likely to tax in kind unskilled occupations more likely to be subject to taxation in-kind women less likely to be drafted cross-country data on military conscription

20 Observations on Conscription Use and the Deadweight Costs of Monetary Taxes yes, the size of the force (per capita) predicts the use of conscription –across countries –USSR fall followed by European shifts to voluntary army –but, the force effects come out of many theories proxies for dwc of taxes do not seem to be correlated with conscription use –amount of nonmilitary spending –nonmilitary “demand” shifters (e.g., elderly) –GDP per capita (i.e., development leads to more efficient taxes, but not less conscription) –why are conscripts paid? –why aren’t more occupations drafted? my approach answers these questions, and replaces the simple correlation prediction with an interaction term

21 Figure 4. Benefits are Convex in the Amount of Public Use revenue = max{R I,R V } The Figure illustrates comparative statics for revenue with respect to the total resources m demanded by the public sector. I denotes in-kind tax revenue (not necessarily negative) and A denotes volunteer revenue (necessarily negative). 0 m = amount of public use RVRV RIRI

22 Figure 5. Benefits are Convex in Private Opportunity Cost revenue = max{I,A} The Figure illustrates comparative statics for revenue with respect to the total resources m demanded by the public sector. I denotes in-kind tax revenue (not necessarily negative) and A denotes volunteer revenue (necessarily negative). 0 mean of G A I

23 Regulatory Complementarity and Increasing Returns regulations have some costs that are fixed in the sense that they grow less-than-proportionally with the population to be regulated –adoption: testing the law, reaching a political consensus –administration, enforcement some regulatory resources are general (i.e., apply to many regulatory areas) –mobilized interest groups –networks of compliance officials costs of conscription –“The costs to government of implementing and using replacement decreased in some ways over time, as central government enlarged its bureaucratic and coercive reach.” –“The habit of regular and thorough communication between different levels of administration.”  legal origin and population should have similar “effects”

24 Types of Military Manpower Systems all-volunteer (since 1970, about 1/3 of countries) –hereafter, “volunteer” –0 countries in our sample are all-conscript –lowest %s volunteer are Senegal (5%), Switzerland (9%), and Turkey (15%) universal or random conscription (20%) –entire population of able young men –no exemptions for college, special occupation, etc. conscription with exemptions or deferrals (30%) conscription with buyouts or substitutes (8%) [impressment]

25 Countries with Buyouts (c. 1996) Albania, Argentina, Bolivia, China, Ecuador, Egypt, Iran, Iraq, Jordan, Paraguay, Syria, Tunisia, Turkey have (probably) legal buyouts e.g., Iran –“PhDs and men with BAs who left Iran before March 1990 may get exempted on paying a fee of USD 16, Men who left Iran after 1990 may get exempted on paying a fee of USD 1,000-3,000.” e.g., Iraq –“It is possible to get exempted from service by paying a sum of money. In 1998 this was believed to be 10,000 USD.” e.g., China –“Given the economic prosperity of [some] areas, young people seem quite willing to pay the fines imposed for non- compliance with the conscription law.”

26 manpower cost envelope

27 Data Sources Military Balance (1985, 90, 95) from the International Institute for Strategic Studies in Sweden –whether any draftees –number of personnel, number drafted –[also military equipment] –cross-checked with United Nations Commission on Human Rights War Resisters International 1upinfo.com child-soldiers.org War Resisters International: indicates type of system`

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30 Monopoly and Monopsony In-Kind vs. Monetary taxation is partly a question of property rights changing property rights does not eliminate market power on either side of the market, but it does change the effects of that power –e.g., as the sole employer of military personnel, the government would consider either the effects of m on the volunteer wage or on the commutation fee –however, commutation fee effects are offsetting first effect is unique: increase m in order to increase the size of the lump sum tax second effect is same as volunteer: reduce m to hold down the volunteer wage the first effect dominates: even without admin costs, the volunteer system recruits less –two recruitment systems compared on the basis of the dwcs of monopoly/monopsony volunteer m is too small, in-kind m is too large in-kind S(m) is closer to efficient larger m increases this case for in-kind taxation the lump sum tax effect is limited by possibilities for in-kind tax avoidance hold out: government sometimes has to purchase from a factor market monopolist –how can hold out be distinguished from heterogeneous private values? … the case of Mrs. MillerMrs. Miller –hold out has two efficiency effects: dwcs of monetary taxes (by reducing Treasury revenue) and reducing public project scope (via imperfect information)

31 In-Kind Taxation for Private Use Historical examples –WWII BMW factor workers –urban renewal –utility company easements should the public sector auction off the power of eminent domain? reasons for a higher standard for private use –market power: private beneficiaries are usually not factor market monopsonists  they face a more elastic factor market supply –efficient sorting: private beneficiaries have even less reason than the public sector to consider aggregate efficiency (i.e., would choose the wrong point on the policy possibility frontier) –holdout: private beneficiaries can assemble land in secrecy other comparative statics are the same

32 ordered probit model

33 Three Main Empirical results military manpower systems are ordered –out of 12 possible, (v,u,x,r) and (v,u,r,x) fit the best –“fairness” ordering (u,x,v,r) fits worst population and civil law have similar effects –on various manpower margins –on other regulations (business entry procedures, labor law index) “deadweight tax cost” variables matter only when the armed force is large

34 Why Nixon Drafted, but Bush didn’t U.S. has common-law origin is noncommunist and democratic 1970: population was 205 million –about 18 million men aged –armed forces were 3.1 million –our model predicts 58% draft likelihood 2003: population was 290 million –about 21 million men aged –armed forces were 1.4 million –our model predicts 43% draft likelihood –if armed forces doubled, only 53% likely

35 Further Readings on this Approach Mulligan and Shliefer –“Conscription as Regulation.” American Law and Economics Review. 7(1), Spring 2005: –“The Extent of the Market and the Supply of Regulation.” Quarterly Journal of Economics. 120(4), November 2005: Glaeser and Shliefer –“Legal Origins.” Quarterly Journal of Economics. 117(4), November 2002:


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