Tax Policy and the Economy 2020

Economists typically check the robustness of their results by comparing them across plausible ranges of parameter values and model structures. A preferable approach to robustness -- for the purposes of policymaking and evaluation --is to design policy that takes these ranges into account. Lockwood, Sial, and Weinzierl modify the standard optimal income tax model to include the policymaker's subjective uncertainty over parameter values, and they characterize robust optimal policy as that which maximizes expected social welfare. After calibrating uncertainty over the elasticity of taxable income from past empirical work and novel survey data on economists' beliefs, the researchers compare the implied robust optimal marginal tax rates to the alternative benchmark policy based on the best point estimates of relevant parameters. Their results suggest that robust optimal marginal tax rates are typically more progressive than in benchmark analyses, raising top marginal tax rates by between 5 and 7 percentage points, and generating modest expected welfare gains.

This paper estimates the cost of filing taxes and assesses several policy proposals aimed at reducing these costs. Using US tax returns, a quasi-experimental method and additional extrapolations based on survey evidence, Benzarti uncovers three main findings. First, filing costs are large and have been steadily increasing over time. Second, part of this increase in filing costs can be attributed to an increase in the number of schedules filed per taxpayer. Third, pre-populating tax returns and offering free filing options can result in substantial cost savings for taxpayers.

This paper documents facts about the structure of business taxation in China using administrative tax data from 2007 to 2011 from the State Taxation Administration. Chen, He, Liu, Suárez Serrato, and Xu first document the importance of different business taxes across industries. While corporate income taxes play an important role for manufacturing firms, these firms also remit a large share of their tax payments through the value-added tax system, through the excise tax system and through payroll taxes. Gross receipts taxes play an important role for firms in other industries, leading to spillovers that may affect the overall economy. Second, the researchers evaluate whether the structure of China's tax revenue matches its stage of development. A cross-country comparison of sources of government revenue shows that China collects a high share of tax revenue from taxes on goods and services and a high share of income tax on corporations. Finally, they study whether firm-level differences in effective tax rates can be an important source of allocative inefficiencies. Decomposing the variation in effective tax rates across firms, Chen, He, Liu, Suárez Serrato, and Xu find that government policies, including loss carry-forward provisions and preferential policies for regional, foreign, small, and high-tech firms, have significant explanatory power. Nonetheless, while effective tax rates vary along a number of dimensions, tax policy does not explain the large dispersion in the returns to factors of production across firms.

Proposals to create a national health care plan such as "Medicare for All" rely heavily on reducing the prices that insurers pay for health care. These changes affect physicians' short-run incentives for care provision and may also change health care providers' incentives to invest in capacity, thereby influencing the availability of care in the long term. Clemens, Gottlieb, and Hicks provide evidence on these responses using a major Medicare payment change combined with survey data on physicians' time use. The researchers find evidence that physicians increase their time spent on capacity building when remuneration increases, and that they are subsequently more willing to accept new patients--especially those who may be the residual claimants on marginal capacity. These forces imply that short-run supply curves likely differ from long-run supply curves. Policymakers need to account for how major changes to payment incentives would influence the investments that determine health system capacity.

The Earned Income Tax Credit (EITC) is the cornerstone U.S. anti-poverty program, typically lifting over 5 million children out of poverty each year. Targeted to low-income households with children, and only available to those who work, the EITC includes strong incentives for nonworkers to become employed. Most of the existing economics literature focuses on federal EITC expansions in the 1980s and 1990s. This paper takes a longer view, studying all federal expansions since the program’s inception in 1975. Schanzenbach and Strain find robust evidence that EITC expansions increases the extensive margin of labor supply.

The Affordable Care Act (ACA) not only changed the landscape of health insurance coverage in the United States, but also affected the relationship between working decisions and health insurance. In this paper, Duggan, Goda, and Li estimate the impact of the ACA on the near-elderly (ages 60-64) in the five years after the implementation of its key provisions in early 2014. The researchers exploit variation across geographic areas in the pre-existing level of uninsurance and use 65-69 year olds, whose insurance coverage was unaffected by the ACA, as a within-region control group. Their findings indicate that the ACA increased health insurance coverage among the near elderly by 4.2 percentage points and reduced their labor force participation rate by 0.6 percentage points.