Tax Policy and the Economy

Gerald Carlino, Federal Reserve Bank of Philadelphia, and Robert P. Inman, University of Pennsylvania and NBER

Fiscal Stimulus in Federal Economies: What Role for States?

The Great Recession and the subsequent passage of the American Recovery and Reinvestment Act returned fiscal policy, and particularly the importance of state and local governments, to the center stage of macroeconomic policy-making. In this paper, Carlino and Inman address three questions for the design of intergovernmental macroeconomic fiscal policies. First, are such policies necessary? Analysis of U.S. state fiscal policies shows state deficits (in particular from tax cuts) can stimulate state economies in the short-run, but that there are significant job spillovers to neighboring states. Central government fiscal policies can best internalize these spillovers. Second, what central government fiscal policies are most effective for stimulating income and job growth? An SVAR analysis for the U.S. aggregate economy from 1960 to 2010 shows federal tax cuts and transfers to households and firms and intergovernmental transfers to states for lower income assistance both are effective, with one and two year multipliers greater than 2.0. Third, how are states, as politically independent agents, motivated to provide increased transfers to lower income households? The answer is matching (price subsidy) assistance for such spending. The intergovernmental aid is spent immediately by the states and supports assistance to those most likely to spend new transfers.

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Nathaniel Hendren, Harvard University and NBER

The Policy Elasticity

This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, Hendren terms them policy elasticities, to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio for non-budget neutral policies. Using existing causal estimates, he applies the framework to five policy changes: top income tax rate, EITC generosity, food stamps, job training, and housing vouchers.

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Michael Cooper, John McClelland, James Pearce, Richard Prisinzano, and Joseph Sullivan, Department of the Treasury; Danny Yagan, University of California, Berkeley and NBER; and Owen M. Zidar and Eric Zwick, University of Chicago and NBER

Business in the United States: Who Owns it and How Much Tax They Pay

"Pass-through" businesses like partnerships and S-corporations now generate over half of U.S. business income and account for over half of the post-1980 rise in the top 1% income share. Cooper, McClelland, Pearce, Prisinzano, Sullivan, Yagan, Zidar, and Zwick use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. The researchers present three findings. (1) Relative to traditional business income, pass-through business income is substantially more concentrated among high-earners. (2) The average federal income tax rate on U.S. pass-through business income is 19% — much lower than the average rate on traditional corporations. (3) Thirty percent of the income earned by partnerships — the largest pass-through form — cannot be unambiguously traced from the partnership that generated the income to an identifiable, ultimate owner. If pass-through activity had remained at 1980's low level, strong but straightforward assumptions imply that the 2011 average U.S. tax rate on total U.S. business income would have been 28% rather than 24%, and tax revenue would have been at least $100 billion higher.

Michael Chirico, Charles Loeffler, and John MacDonald, University of Pennsylvania, and Robert P. Inman and Holger Sieg, University of Pennsylvania and NBER

An Experimental Evaluation of Notification Strategies to Increase Property Tax Compliance: Free-Riding in the City of Brotherly Love

This study evaluates a set of notification strategies intended to increase property tax collection. To test these strategies, Chirico, Inman, Loeffler, MacDonald, and Sieg develop a field experiment in collaboration with the Philadelphia Department of Revenue. The resulting notification strategies draw on core rationales for tax compliance: deterrence, the need to finance the provision of public goods and services, as well as the appeal to civic duty. The authors' empirical findings provide evidence that both a moral appeal to finance public goods and services and an appeal to civic duty modestly improve tax compliance, while deterrence notifications are no different from standard notifications.

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Jeffrey Clemens, University of California, San Diego and NBER

Redistribution through Minimum Wage Regulation: An Analysis of Program Linkages and Budgetary Spillovers

Program linkages and budgetary spillovers can significantly complicate efforts to project a policy change's effects. Clemens illustrates this point in the context of recent increases in the federal minimum wage. Previous analysis finds that these particular minimum wage increases had significant effects on employment. Employment declines were sufficiently large that the average earnings of targeted individuals declined. Payroll tax revenues thus also fell. Clemens finds that transfers to affected individuals through programs including unemployment insurance, food stamp benefits, and cash welfare assistance changed little. These programs thus offset relatively little of the earnings declines experienced by individuals who lost employment. The author discusses how this broad range of spillovers matters for assessing the relevant minimum wage change's welfare implications.

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Severin Borenstein and Lucas W. Davis, University of California at Berkeley and NBER

The Distributional Effects of U.S. Clean Energy Tax Credits (NBER Working Paper No. 21437)

Since 2006, U.S. households have received more than $18 billion in federal income tax credits for weatherizing their homes, installing solar panels, buying hybrid and electric vehicles, and other "clean energy" investments. Borenstein and Davis use tax return data to examine the socioeconomic characteristics of program recipients. They find that these tax expenditures have gone predominantly to higher-income Americans. The bottom three income quintiles have received about 10% of all credits, while the top quintile has received about 60%. The most extreme is the program aimed at electric vehicles, where the researchers find that the top income quintile has received about 90% of all credits. By comparing to previous work on the distributional consequences of pricing greenhouse gas emissions, they conclude that tax credits are likely to be much less attractive on distributional grounds than market mechanisms to reduce GHGs.