Treasury
The Costs of Corporate Tax Complexity
Eric Zwick
NBER Working Paper, March 2018
Abstract:
Does tax code complexity alter corporate behavior? This paper investigates this question by focusing on the decision to claim refunds for tax losses. In a sample of 1.2M observations from the population of corporate tax returns, only 37% of eligible firms claim their refund. A simple cost-benefit analysis of the tax loss choice cannot explain low take-up, which motivates an investigation of how tax complexity alters this calculation. A research design exploiting tax preparer switches, deaths, and relocations shows that sophisticated preparers increase the claiming behavior of small and mid-market firms. Tax complexity decreases take-up among large firms through interactions of refund claims with other tax code provisions and with the audit process.
The Effects of Collecting Income Taxes on Social Security Benefits
John Bailey Jones & Yue Li
Journal of Public Economics, forthcoming
Abstract:
Since 1983, Social Security benefits have been subject to income taxation, a provision that can significantly increase the marginal income tax rate for older individuals. To assess the impact of this tax, we construct and calibrate a detailed life-cycle model of labor supply, saving, and Social Security claiming. We find that in a long-run stationary environment, replacing the taxation of Social Security benefits with a revenue-equivalent change in the payroll tax would increase labor supply, consumption, and welfare. From an ex-ante perspective an equally desirable reform would be to make the portion of benefits subject to income taxes completely independent of other income.
Blue States and Red States: Business Cycle Divergence and Risk Sharing
David Parsley & Helen Popper
Vanderbilt University Working Paper, January 2018
Abstract:
We examine business cycle divergence and risk sharing within the United States. In doing so, we also separately examine states whose populations have consistently voted either Democrat (Blue) or Republican (Red) in national elections. We find that states' business cycles have diverged markedly since the start of this century: they are now more asynchronous than is typical across the international borders of distinct countries. This divergence is even more striking between Blue states and Red states. At the same time, we find that states smooth their consumption across these diverging business cycles: they share risk much more than is typical internationally. While they share most of their idiosyncratic risk through financial markets, Blue, Red and swing states share the remainder of their risk in very different ways. Red states smooth the remainder largely through fiscal flows (taxes and transfers), while they are left with more than twice the idiosyncratic risk of the other states. In contrast, swing states smooth the remainder largely through migration, while fiscal flows hardly matter at all. Finally, Blue states smooth the remaining idiosyncratic risk through a combination of fiscal flows, migration and the purchases of consumer durables; and they are left with little residual risk.
The effect of a state income tax on migration: The example of Connecticut
Whitney Afonso
Journal of Public Policy, March 2018, Pages 113-140
Abstract:
State-level income tax policy is a hotly debated topic in both academic and political spheres. Although economic theory and some empirical analyses suggest that larger income tax burdens affect migration decisions, there is also a good deal of empirical evidence showing that tax policy has little to no effect. This lack of consensus in the academic literature is echoed in the political world, where many states are debating whether to eliminate income taxes or reduce rates as a means of spurring economic growth. Connecticut’s adoption of an income tax policy in 1991 provides a unique opportunity to analyse the impact of a sizable income tax policy change on migration. The results suggest that Connecticut’s income tax deterred movement into the state but had no impact on exit from the state, resulting in a net loss in migration.
Spending Money to Make Money: CBO Scoring of Secondary Effects
Scott Levy
Yale Law Journal, February 2018, Pages 936-1008
Abstract:
Increased funding for federal enforcement and program integrity often pays for itself through what are called “secondary effects.” In some cases, the funding allows agencies to collect more revenue; in others, it enables agencies to reduce the amount of money lost to waste, fraud, and abuse. But despite these benefits, Congress regularly underfunds agency enforcement and program integrity. This Note argues that the problem of underfunding arises out of a little discussed feature of the congressional budget process: the scorekeeping guidelines. As a general matter, the scorekeeping guidelines tell the Congressional Budget Office (CBO) how to estimate or “score” the cost of legislation. This Note, however, focuses on two guidelines that direct the CBO not to score the secondary effects of increased funding for enforcement and program integrity. As a result of these guidelines, Congress only considers the costs of increased funding and not the resulting benefits. This Note argues that Congress should repeal these two guidelines and allow the CBO to score secondary effects that are justified by substantial evidence. In addition to generating savings, this proposal would eliminate distortions in the legislative process, improve agency enforcement, and reduce the arbitrary and regressive subsidies created by underenforcement.
Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initiatives on Evasive Foreign Accounts
Niels Johannesen et al.
NBER Working Paper, March 2018
Abstract:
In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. This paper uses administrative microdata to examine the impact of the enforcement efforts on taxpayers’ reporting of offshore accounts and income. Enforcement caused approximately 60,000 individuals to disclose offshore accounts with a combined value of around $120 billion. Most disclosures happened outside offshore voluntary disclosure programs by individuals who never admitted prior noncompliance. The disclosed accounts were concentrated in countries whose institutions facilitate tax evasion. The enforcement-driven disclosures increased annual reported capital income by $2.5-$4 billion corresponding to $0.7-$1.0 billion in additional tax revenue.
Who Benefits from Targeted Property Tax Relief? Evidence from Virginia Elections
Jeremy Moulton, Bennie Waller & Scott Wentland
Journal of Policy Analysis and Management, forthcoming
Abstract:
This study examines the market impact of targeted property tax relief, which is critical for understanding who exactly benefits from a widely used local policy. Specifically, we investigate this in the context of two statewide ballot measures in Virginia that provided property tax relief or heightened expectations for future relief intended to aid disabled veterans and seniors, respectively. Using residential multiple listing service microdata from Virginia, results from a regression discontinuity analysis show that once the 2010 tax relief measures passed on Election Day, property values rose sharply in response to the sudden increase in demand for homeownership among the targeted groups. We find that senior preferred housing and properties within areas with higher proportions of seniors and veterans experienced the highest price appreciation, while areas with fewer veterans or seniors saw little impact. The findings suggest that this type of policy provides an immediate benefit to current homeowners, thereby offsetting benefits for subsequent homeowners within the targeted groups. This effect represents an unintended consequence of targeted property tax relief as a policy tool more generally, as immediate capitalization into home prices subsequently increases the cost of housing for many individuals the relief was intended to help.
Natural disasters and relief assistance: Empirical evidence on the resilience of U.S. counties using dynamic propensity score matching
Daniele Bondonio & Robert Greenbaum
Journal of Regional Science, forthcoming
Abstract:
This paper utilizes a novel dynamic propensity score matching approach for multiple cohorts of U.S. counties between 1989 and 1999 to examine local economy resilience to rare natural disasters. Affected counties are sorted based on disaster intensity and are carefully matched to similar counties that did not experience a disaster. A difference‐in‐difference estimator compares trends of affected counties’ postdisaster business establishments, employment, and payroll to counterfactual trends in the matched counties. All affected counties experienced short‐run drops in economic activity that was particularly noticeable in higher‐intensity disasters. In the longer run, less distressed counties returned to their estimated counterfactual trends, but counties with lower predisaster socioeconomic conditions still lagged in growth, particularly in cases of lower‐intensity disasters. Policymakers can use this information to better prepare responses to future disasters.
The impact of public pension board of trustee composition on state bond ratings
John Dove, Courtney Collins & Daniel Smith
Economics of Governance, February 2018, Pages 51-73
Abstract:
The declining financial health of public pension systems is increasingly becoming a budgetary concern for many state and local governments. While the academic literature has identified several factors behind the growth in unfunded state and local public pension liabilities, there is mixed evidence on how the composition of a pension system’s board of trustees affects a pension’s financial health. This article contributes to this literature by measuring how public pension board composition affects fund financial health as measured by state bond ratings. With a panel dataset of state pensions between 2001 and 2014 our results indicate that elected board members are consistently associated with lower bond ratings (and thus higher borrowing costs) while appointed and ex-officio board members are associated with higher bond ratings. These results are robust to a number of specifications.
Tax compliance and fiscal externalities: Evidence from U.S. diesel taxation
Justin Marion & Erich Muehlegger
Journal of Public Economics, April 2018, Pages 1-13
Abstract:
Fiscal externalities across jurisdictions can arise from tax evasion and avoidance. While the tax competition literature has generally focused on base shifting and the resulting positive fiscal externalities, we show theoretically and empirically that negative fiscal externalities can dominate when the tax base is apportioned across jurisdictions. This can lead to a negative relationship between jurisdiction size and the desired tax rate. Interstate truckers in the United States owe state diesel taxes based on diesel consumption, which is apportioned based on the miles driven in each state. We find that own-state diesel sales fall when the diesel tax rates of other states rise, suggesting that tax base evasion is the predominant source of externalities. We then estimate a tax reaction specification, finding that the own-state tax rate is negatively correlated with the tax rates set in other states and with state size, both consistent with the sign of the estimated fiscal externality.