Rugoz wrote:When looking at the effect on GDP ("the context") it obviously doesn't compare to an event like the German reunficiaton.
Ah, yes, that is true. But then, one would need to look at other outcomes if you consider the tax was not designed to collect much - such as measuring wealth inequality over time (a hard task).
Rugoz wrote:Back to square one?
Abadie is quite insistent on being careful when putting together the donor pool. Overfitting is obviously always an issue, but he also mentions shocks and interpolation bias, which I already touched upon before. E.g.:
I'm not familiar with the interpolation bias, but the other two are clear to me.
But you do that by removing covariates where the treated unit is the outlier - because you cannot interpolate it using the other donors anyway. Another issue with the paper is that it doesn't include the weights for each covariate, which is kind of odd if you ask me - wouldn't knowing those also be of interest? At least the traditional R package (synth) will include those in the output.
Of course, if other units were also treated then you would need to remove them (although in this particular case, it's trickier to decide what the treatment is. Is the treatment defined as "having a wealth tax" or "having a wealth tax, repealing it, putting a different version of it after"? France wasn't treated during the whole post-treatment period after all). That goes without saying. As for including "only units that are otherwise similar to the treated one", this is... Complicated. After all, you would need to then make a subjective call on that matter (if you ask me), and furthermore somehow argue that they should be excluded even though they help with model fit after cross-validation. I don't see why wouldn't one let the fitting algorithm sort that out, since this is based on the available data.
In this case, the subjective call would be to say that only OECD countries should be included. It's subjective because 1) if we took this seriously only those in the OECD by 1982 should be included - the measure of similarity is supposed to refer to the pre-treatment period, 2) you're assuming OECD membership is somehow based on economic similarity only. It's not.
Rugoz wrote:Besides, economists usually want to tell a story, hence a mere statistical relationship isn't good enough.
Indeed, and another thing economists love is to demolish someone else's story by arguing it has statistical issues.
Rugoz wrote:Let me rephrase it then: Using OECD countries (excluding Mexico, Chile and Turkey, i.e. only industrialized countries) as donors for France is perfectly reasonable.
You could rephrase it even better: Using capitalist industrialized countries circa 1982 may be reasonable. In this case, it would materially affect some of the results since Mexico has large weights.
But, one may argue that criterion may not be good enough. For instance, should one really include industrialized countries with a GDP structure that was radically different from France's, again, in 1982? Or why include covariates for which France is an outlier? When does the trimming of the donor pool (of units and covariates) stop?
Also, why would you do that when similar units will tend to have greater weights anyway? Aren't weights a data-based indicator of overall similarity up to an extent? And, at last, doesn't the data sort of "trim itself" in a way? After all, there are many countries that don't have long series anyway, even more so if the treatment begins before 1990. So even your largest possible donor pool may be tiny in practice, even more so after you remove other units that were treated.
Rugoz wrote:I'm not familiar with the US pension system, but I suppose the interest paid is not taxed, hence excluding pension funds from a wealth tax makes no conceptual difference vis-a-vis a capital income tax. Although it might with different returns..
Private pension funds stocks are counted as wealth in the literature as far as I'm aware. The issue has to do with the funds in PAYGO system only.