Tax Policy and the Economy 2015

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, I term 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, I apply the framework to five policy changes: top income
tax rate, EITC generosity, food stamps, job training, and housing vouchers.

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.

"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.

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.