This paper provides preliminary evidence on behavioral responses to taxation around the 2013 tax increase that raised top marginal tax rates on capital income by about 9.5 points and on labor income by about 6.5 points. Using published tabulated tax statistics from the Statistics of Income division of the IRS, Saez finds that reported top 1% incomes were high in 2012 and low in 2013, implying a large short-run elasticity of reported income with respect to the net-of-tax rate in excess of one. This large short-run elasticity is due to income retiming for tax avoidance purposes and is particularly high for realized capital gains and dividends, and highest at the very top of the income distribution. However, comparing 2011 and 2015 top incomes uncovers only a small medium-term response to the tax increase as top income shares have resumed their upward trend after 2013. Overall, Saez estimates that at most 20% of the projected tax revenue increase from the 2013 tax reform is lost through behavioral responses.
Many if not most Baby Boomers appear at risk of suffering a major decline in their living standard in retirement. With federal and state government finances far too encumbered to significantly raise Social Security, Medicare, and Medicaid benefits, Boomers must look to their own devices to rescue their retirements, namely working harder and longer. Unfortunately, the incentive of Boomers to earn more is significantly limited by a plethora of explicit federal and state taxes and implicit taxes arising from the loss of federal and state benefits as one earns more. Of particular concern is the potentially huge work disincentive facing those in their early sixties associated with Social Security's complex Earnings Test. This study measures the work disincentives confronting those age 50 to 79 from the entire array of explicit and implicit fiscal work disincentives. Specifically, the paper runs older respondents in the Federal Reserve's 2013 Survey of Consumer Finances through The Fiscal Analyzer -- a software tool designed, in part, to calculate remaining lifetime marginal net tax rates. These net tax rates tell us how much earning an extra $1,000, for example, raises the expected present value of lifetime spending. If the answer is, say, $700, the household faces a 30 percent marginal net tax rate. The Fiscal Analyzer includes all of the roughly 30 major federal and state fiscal systems, each of which was, it seems, established with no regard to its impact on overall work incentives. Auerbach, Kotlikoff, and Koehler find that working longer can raise older workers' sustainable living standards. But the impact is far smaller than suggested in the literature in large part because of high net taxation of labor earnings. The researchers also find that many Baby Boomers now face or will face high and, in very many cases, extremely high work disincentives arising from the hodgepodge design of the fiscal system. Although each fiscal system can, in many circumstances, pile on, the three greatest deterrents are losing one's disability benefits, losing one's Medicaid benefits, and losing one's Social Security's benefits via the Earnings Test. The Earnings Test is particularly significant, as, given the way it is likely perceived, it can strongly affect most workers who take Social Security benefits early. It places younger elderly into 50 percent higher perceived tax brackets. And it does so for no clear purpose since the Earnings Test was intentionally designed to collect no net revenue in present value. A second key finding is that the marginal net tax rate associated with a significant increase in earnings, say $20,000 per year, arising from taking a full-time or part-time job (which could a second job), can, for many elderly, be dramatically higher than that associated with earning a relatively small, say $1,000 per year, extra amount of money. This is due to the various income thresholds in the fiscal system, which when exceeded, lead to the partial or total loss of particular benefits. Another key finding is the enormous dispersion in effective marginal remaining lifetime net tax rates facing seeming identical households, i.e., households with the same age and resource level. Finally, the researchers find that traditional, current-year (i.e., static) marginal tax calculations relating this year's extra taxes to this year's extra income are woefully off target when it comes to properly measuring the elderly's disincentives to work.
In theory, the U.S. tax system aims to attribute and tax all business income to individuals. But the timing and treatment of this income varies. Pass-through income is taxed when earned; capital-gains income is taxed when realized; dividends when distributed; other forms of business income may escape taxation entirely. In addition, business owners often have control over the timing and character of their income: They can often choose, for example, between reporting business income or deducting it as wages or fringe benefits. Clarke and Kopczuk integrate a wide variety of tax data to document several large, long-run changes in the structure of business income and business taxation in the United States. These include the degree to which such incomes are taxed on a current versus an accrual basis, the extent to which taxation is deferred, and the share of business income that is ultimately subject to taxation. The researchers also document the evolution of individual income components — dividends, and capital gains — and how they interact over time with business incomes and business entities. And they consider how tax reforms affected income shifting between different types of entities and different components of those entities’ income and costs.
A recent wave of literature, partly motivated by Presidential campaign tax reform plans, analyzes tax expenditure limitation proposals. These reforms are often advanced not only, or even primarily, because they reduce distortions caused by favoritism for some types of expenditures over others. Largely they are urged for a number of other reasons: on distributive grounds, because the resulting broader base enables lower marginal tax rates and hence less distortion of labor effort and other margins, and to raise revenue without requiring higher marginal tax rates. It is generally recognized that the particular results on these dimensions are heavily dependent on what sorts of rate adjustments are used to return the proceeds to taxpayers. Often, revenue neutrality is assumed. In this commentary, Kaplow advances a complementary, distribution-neutral perspective on the analysis of tax expenditure limitations. Distribution-neutral implementation provides an illuminating benchmark against which to understand prior analysts’ large number of results and, more importantly, clarifies the analysis, particularly of the distribution-distortion tradeoff. The central lessons contradict the common belief that one can have less distortion of labor supply through supposedly lower marginal tax rates while also maintaining or enhancing progressivity.
In addition to the conference paper, the research was distributed as NBER Working Paper w22733, which may be a more recent version.
Facing Low-Income Families,
Kosar and Moffitt present new calculations of cumulative marginal tax rates facing low income families participating in multiple welfare programs over the period 1997-2007, the period after 1996 welfare reform but before the program expansions of the Great Recession. The researchers' calculations are for nondisabled, nonelderly families who pay federal and state income taxes and the payroll tax but receive benefits from up to four different transfer programs—Medicaid, Food Stamps, subsidized housing, and Temporary Assistance for Needy Families. The results show enormous variation in MTRs across families who participate in different combinations of welfare programs, who live in different states, and who have earnings in different ranges. For all families who participate in either no or only a few welfare programs, which constitutes the large majority of low income families, MTRs at low ranges of earnings ranges are negative or positive but modest. But those families usually face considerably higher MTRs at higher earnings ranges, often up to 80 percent and even occasionally over 100 percent. The smaller fraction of families participating in a large number of transfer programs are higher as well.
Trends in Cumulative Marginal Tax Rates Facing Low-Income Families, 1997-2007
Business Income and Business Taxation in the United States Since the 1950s
Is Uncle Sam Inducing the Elderly to Retire?
A Distribution-Neutral Perspective On Tax Expenditure Limitations