Reforms and Quasi-Experiments: Empirical Research … · German data supports Mankiw (Buettner and...
Transcript of Reforms and Quasi-Experiments: Empirical Research … · German data supports Mankiw (Buettner and...
Reforms and Quasi-Experiments:Empirical Research on the Deadweight Loss of Taxes
THIESS BUETTNER
Univ. of Erlangen-Nuernberg
Annual Meeting of the Austrian Economic Association 2017
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Tax Ratio (OECD average) on Record Level
Total tax revenue as % of GDP, 1965-2014. Source: OECD Revenue Statistics (2017).
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Taxation as a Challenge
• Can this high level of tax revenues be sustained?
• How large is the deadweight loss?
• Can we reduce the deadweight loss?
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Policy Debate on Tax Cuts
• Political narrative: Large tax cuts could release so much economicactivity that revenue remains constant.
• “A reasonable rule of thumb, in my judgment, is that about one-thirdof the cost of tax cuts is recouped via faster economic growth.(NYT quote of Greg Mankiw, April, 2017)
• German data supports Mankiw (Buettner and Kauder, 2015)
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Revenue Estimates for German Tax Reforms
Reform estimate in % of revenues, Buettner and Kauder (2015).
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Revenue Estimates and Forecast Error
• Government produces static revenue estimates of tax reforms
• Estimates are added in revenue forecast for current year
• Results show that revenue estimate overpredicts revenue effects
• Tax cut by 1 Euro results in a revenue forecast error of 32 cents
• Results for individual taxes?
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Revenue Estimates and Forecast Error
Source: Buettner and Kauder (2015).
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Agenda
1. Deadweight loss and revenue effects
2. Methodological advances using individual tax files
2.1. Tax reforms
2.2. Kinks and Notches
3. Disassembly of tax-payer response
4. Implications for tax policy
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1. Deadweight Loss (DWL) Defined
• Ramsey tax problem with labor t and lump-sum taxes T
L = V (t,T ) + λ [tz + T − R0]
• Revenue substitution using labor taxes yields marginal deadweight loss
MDWL = t∂zc
∂(1− t)
• By linear approximation (Harberger, 1964)
DWL ' 1
2t2 ∂zc
∂(1− t)
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1. The Harberger Triangle
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z
compensatedlabor supply
e
DWL ' −12 t
2 ∂zc
∂(1−t)
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1− t
B
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1. Deadweight Loss (DWL) and Revenue Effects
• Tax revenue from income tax R = tz
• Tax rate has “mechanical” and tax-base effects
∂R
∂t= z︸ ︷︷ ︸
dM
− t∂z
∂(1− t)︸ ︷︷ ︸dB
• MDWL: (compensated) effect on tax base net of mechanical effect.
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1. Deadweight Loss (DWL) with Multiple Margins
• Tax revenue from income tax R = t (z − s)
• Resource cost of avoidance κ (s), with κ′ > 0, κ′′ > 0
• Optimal avoidance κ′ (s∗) = t
MDWL = t∂zc
∂(1− t)+ t
∂s∗
∂t
∂R
∂t= z − s︸ ︷︷ ︸
dM
−[t
∂z
∂(1− t)+ t
∂s∗
∂t
]︸ ︷︷ ︸
dB
• ETB (tdB/ (z − s)) or ETI (( 1−tt )ETB) reveal welfare loss
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1. ETI as Sufficient Statistic
• Reduced-form effect of tax-rate on revenues
• Multiple margins (Feldstein, 1999)
• Aggregation over heterogenous responses (Chetty, 2009)
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2. Methodological Advances
Empirical literature on revenue effects exploits
• Tax reforms
• Discontinuities in the tax code
• Combinations
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2.1. Tax Reform Studies
• Panel data of individual tax returns (e.g., Feldstein, 1995; Auten andCaroll, 1999; Gruber and Saez, 2002; Kopczuk, 2005; Weber, 2014)
• E.g., Sweden (Blomquist and Selin, 2010; Gelber, 2014), Germany(Doerrenberg, Peichl, Siegloch, 2015)
• Results point to larger elasticities than found by labor supply literature
• ... but differ substantially even for same countries/reforms
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2.1. Tax Reform Studies - US Studies
MEB: Marginal deadweight loss relative to marginal revenues at t = 30%
• Feldstein (1995), ETI of 1.10(3.05)– implying MEB of 1.9 (at least)
• Auten and Carroll (1999), ETI of 0.57– implying MEB of 1.3
• Gruber and Saez (2002), ETI of 0.4– implying MEB of 1.2
• Weber (2014), ETI of 1.046– implying MEB of 1.8
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2.1. Tax Reform Studies - Methodological Challenges
• Studies exploit tax variation at individual level
• Tax variation is contaminated by preferences (Saez, 2010)
• Tax burden is instrumented based on taxable income pre-reform
• Instrument captures mean reversion effects
• Rising income inequality conflicts with common trend assumption
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2.2. Discontinuity Studies
• Tax nonlinearities due to direct progression and welfare
Kink (Paetzold, 2017) Notch (Tazhitdinova, 2016)
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2.2. Discontinuity Studies
• Traditional approach: local linearization (e.g., Hausman 1981,MaCurdy, Green, and Paasch, 1990)
• Recent literature exploits discontinuities as a source of identification
• Kinks: e.g., Saez (2010); Chetty, Friedman, Olson, Pistaferri (2011)
• Notches: e.g., Kleven and Waasem (2013); Kopczuk and Munroe(2015)
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2.2. Kink-Point Analysis: Theory
• Tax payers differ by ability n with density h(n)
U (c , z) = c − ψ (z , n)
with ψz > 0 and ψzn < 0
• Nonlinear tax system
T =
{tz
tz0 + tH (z − z0)
• Bunching z0 reveals labor supply elasticity (Saez, 2010)
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2.2. Kink-Point Analysis: Illustration
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2.2. Kink Points: From Bunching to ETI
• Total amount of bunching B =∫ z0 + zH−z0
z0h (n) dz = (zH − z0) h (n0)
• Labor supply response of “marginal buncher” zH−z0z0
=(tH−t1−t
)ETI c
• With B, z0 and tax rates known strength of bunching reveals ETI c
• ETI c captures compensated elasticity (for small tH − t)
• Focus on intensive margin response
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2.2. Kink Points: Marginal Revenue
• Tax revenue
R = tL
(∫ nL
zh (n) dn +
∫nL
z0h (n) dn
)+ tH
∫nH
(z − z0) h (n) dn
• marginal increase in tH gives
∂R
∂tH=
∫nH
(z − z0) h (n) dn︸ ︷︷ ︸dM
−tH∫nH
∂z
∂(1− tH)h (n) dn︸ ︷︷ ︸
dB
• MDWL equal to (compensated) effect on the tax base net ofmechanical effect
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2.2. Kink-Point Analysis: Saez (2010)
Source: Saez (2010), Single Tax Filers, 1988-2020
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2.2. Kink-Point Analysis: Schaechtele (2017)
Source: Schaechtele (2017), Tax filers 30-59, Singles, FDZ der Statistischen Aemter desBundes und der Laender, Lohn- und Einkommensteuerstatistik 2007
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2.2. Results of Kink-Point Analysis
• Bunching at first tax bracket of the income tax, where ETI is 0.191
• No effect for higher incomes/tax bracket
• Small effects confirmed for Denmark (Chetty et al., 2011), where ETIis 0.01 (all wage earners, top bracket)
• Sweden (Bastani and Selin, 2014) with ETI of 0.004
• Austria (Paetzold, 2017) with ETI of 0.1
• Germany (Schaechtele, 2017) with ETI 0.06 at first bracket
• Netherlands (Dekker and Strohmaier, 2015) with ETI of 0.02
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2.2. Kink-Point Analysis: Varying Effects
Chetty et al. (2011) note that bunching gets stronger with
• higher tax differential
• number of tax payers affected
• certain occupations
→ Frictions and optimization errors may explain lack of bunching
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2.2. Analysis of Notches
• Potentially (much) stronger effects
• Clearly dominated region: bunching required to avoid net-losses
• With frictions observed < structural elasticity
• Lower and upper bounds for ETI (Kleven and Waasem, 2013)
• E.g., bunching hole method: tax payers in dominated region can beused to determine share of individuals with prohibitive adjustment cost
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2.2. Analysis of Notches: Illustration
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2.2. Analysis of Notches: Kleven and Waasem (2013)
Source: Kleven and Waasem (2013), Figure VI, Notch at 300K
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2.2. Analysis of Notches: Kleven and Waasem (2013)
• Support for optimizing frictions
• Share of individuals (from counterfactual density) in dominatedregions varies between 51 and 85%
• Implied structural elasticity still small,lower bound estimate:
• self employed: from 0.05 to 0.15• wage earners: from 0.024 to 0.035
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2.2. Analysis of Notches: Higher Dimensions
• Notches less common with income tax (Slemrod, 2013)
• Frequent in the context of social security, see Peichl et al. (2017)
• Roantree et al. (2017) use British data to exploit Lower EarningsLimit of National Insurance contributions
• Mass in dominated region helps to obtain structural elasticity
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3. Disassembly of Tax Payer Response
Sufficient statistic only a theoretical benchmark
• Tax externalities (Saez, Slemrod, Giertz, 2012)
• Externalities from deductions (Doerrenberg, Peichl, Siegloch, 2015)
• Intertemporal effects (le Maire and Schjerning, 2013)
• Tax evasion (Chetty 2009)
• Price effects (Chetty et al. 2011)
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3. Disassembly of Response: Tax Shifting
• Devereux, Liu, and Loretz (2014) consider UK corporate income tax
• Marginal corporation tax shows kinks at 10k and 300k
• Higher elasticity at lower kink (' 0.55) – consistent with US results(Patel, Seegert, Smith, 2016)
• Could reflect incentive to shift to personal income taxes
• Empirical analysis matches tax-return with accounting data
• Personal income tax kink enables to compute elasticity of the share ofincome reported as profit.
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3. Disassembly of Response: Real Responses vs. Reporting
Literature shows (much) stronger bunching
• For taxable income after deductions (e.g., Saez, 2010; Paetzold, 2017)
• For self-employed (e.g. Chetty et al., 2011; Bastani and Selin, 2014,Schaechtele, 2017)
• Taxpayer- vs employer-reported wage income (Mortensen andWhitten, 2016)
• Income components that can be retained or withdrawn (le Maire andSchjerning, 2013)
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3. Disassembly of Response: Tax Enforcement
• Cost function for tax avoidance κ (s;σ) influenced by tax policy andadministration
• Empirical response ∂s∗
∂t varies with σ
• ETI is not an immutable preference parameter(Slemrod and Kopczuk, 2002)
• Base broadening (Kopczuk, 2005)
• Fack and Landais (2016) using French income tax files: bunching atthe cap for donations declined considerably after a reform requiringreceipts
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4. Implications for Tax Policy
• Discontinuities provide causal evidence for behavioral effects
• Wave of exciting new empirical research: clean identification
• Bunching methods increasingly applied in other policy areas
• Interest in institutional knowledge
• Yet, highly localized effects
• Data availability as a constraint
• Tax policy involves rates, bases, enforcement and administration(Slemrod and Gillitzer, 2014)
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4. Implications: The Need for Integration
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4. Implications: Discontinuities as Bad Tax Design
• Discontinuities simplify tax administration?
• Politicians disregard behavioral responses
• Lack of integration
• Line drawing may limit (mechanical) cost of tax expenditures
• Tax discrimination
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4. Implications: Malas Notches (Lockwood, 2016)
• Tax revenue
R = tL
(∫ nL
zh (n) dn +
∫ nH
nL
z0h (n) dn
)+ tH
∫nH
zh (n) dn
• Marginal increase in tH gives
∂R
∂tH=
∫nH
zh (n)︸ ︷︷ ︸dM
−tH∫nH
∂z
∂(1− tH)h (n)︸ ︷︷ ︸
dB
− (tLz0 − tHz) h (nH)∂nH∂tH︸ ︷︷ ︸
dnH
• Marginal revenue effect includes third term – a revenue loss inaddition to the labor supply effect.
• Marginal excess burden increases
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4. Implication: Discontinuities as 2nd Best Policy
• Notches may provide local incentives (Blinder and Rosen, 1985)
• E.g., incentive for labor market participation
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4. Implications: Notching Participation
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4. Implication: Discontinuities as 2nd Best Policy
• Notches may provide local incentives (Blinder and Rosen, 1985)
• E.g., incentive for labor market participation
• Characteristics notches (Gillitzer, Kleven, Slemrod, 2017)
• Spatial: special economic zones
• Intertemporal: unconventional fiscal policy
• Careful empirical evaluation required
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Thanks for your attention!
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References (1)
• Auten, G., Carroll, R. (1999). The effect of income taxes on household income. Review ofeconomics and statistics, 81(4), 681-693.
• Bastani, S., Selin, H. (2014). Bunching and non-bunching at kink points of the Swedish taxschedule. Journal of Public Economics, 109, 36-49.
• Blomquist, S., Selin, H. (2010). Hourly wage rate and taxable labor income responsiveness tochanges in marginal tax rates. Journal of Public Economics, 94(11), 878-889.
• Blinder, A. S., Rosen, H. S. (1984). Notches. The American Economic Review, 75(4), 736-747.
• Buettner, T., Kauder, B. (2015). Political biases despite external expert participation? Anempirical analysis of tax revenue forecasts in Germany. Public Choice, 164(3-4), 287-307.
• Buhlmann, F., Loeffler, M., Peichl, A. (2017), Working Paper, ZEW Mannheim, cited inPeichl, A., Zur Rolle der klassischen Verteilungspolitik, Presentation at a Conference“Ungleichheit als wirtschaftspolitische Herausforderung” Berlin, 2017.
• Chetty, R. (2009). Is the taxable income elasticity sufficient to calculate deadweight loss? Theimplications of evasion and avoidance. American Economic Journal: Economic Policy, 1(2),31-52.
• Chetty, R., Friedman, J. N., Olsen, T., Pistaferri, L. (2011). Adjustment costs, firm responses,and micro vs. macro labor supply elasticities: Evidence from Danish tax records. The quarterlyjournal of economics, 126(2), 749-804.
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References (2)
• Doerrenberg, P., Peichl, A., Siegloch, S. (2015). The elasticity of taxable income in thepresence of deduction possibilities. Journal of Public Economics.
• Dekker, V., Strohmaier, C., (2015). Bunching at Kink Points in the Dutch Tax System,Working Paper, Univ. of Hohenheim
• Devereux, M. P., Liu, L., Loretz, S. (2014). The elasticity of corporate taxable income: Newevidence from UK tax records. American Economic Journal: Economic Policy, 6(2), 19-53.
• Fack, G., Landais, C. (2016). The effect of tax enforcement on tax elasticities: Evidence fromcharitable contributions in France. Journal of Public Economics, 133, 23-40.
• Feldstein, M. (1995). The effect of marginal tax rates on taxable income: a panel study of the1986 Tax Reform Act. Journal of Political Economy, 103(3), 551-572.
• Feldstein, M. (1999). Tax avoidance and the deadweight loss of the income tax. Review ofEconomics and Statistics, 81(4), 674-680.
• Gelber, A. M. (2014). Taxation and the earnings of husbands and wives: evidence fromSweden. Review of Economics and Statistics, 96(2), 287-305.
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References (3)
• Gillitzer, C., Kleven, H. J., Slemrod, J. (2017). A Characteristics Approach to OptimalTaxation: Line Drawing and Tax-Driven Product Innovation. The Scandinavian Journal ofEconomics, 119(2), 240267
• Gruber, J., Saez, E. (2002). The elasticity of taxable income: evidence and implications.Journal of public Economics, 84(1), 1-32.
• Harberger, A. C. (1964). The measurement of waste. The American Economic Review, 54(3),58-76.
• Hausman, J.A. (1981). Exact consumers surplus and deadweight loss, American EconomicReview, 71 (4), 662-676.
• Kleven, H. J., Waseem, M. (2013). Using notches to uncover optimization frictions andstructural elasticities: Theory and evidence from Pakistan. The Quarterly Journal ofEconomics, qjt004.
• Kopczuk, W. (2005). Tax bases, tax rates and the elasticity of reported income. Journal ofPublic Economics, 89(11), 2093-2119.
• Kopczuk, W., Munroe, D. (2015). Mansion Tax: The Effect of Transfer Taxes on theResidential Real Estate Market. American Economic Journal: Economic Policy, 7(2), 214-57.
• le Maire, D., and Schjerning, B. (2013). Tax bunching, income shifting and self-employment.Journal of Public Economics, 107, 118.
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References (4)
• Lockwood, B., (2016). Malas Notches, Working Paper, Univ. of Warwick.
• MaCurdy, T., Green, D., Paarsch, H. (1990). Assessing empirical approaches for analyzingtaxes and labor supply. Journal of Human Resources, 415-490.
• Mortenson, J. A., Whitten, A. (2016). How sensitive are taxpayers to marginal tax rates?Evidence from income bunching in the United States. Working Paper, Georgetown University.
• Paetzold, J. (2017). How do wage earners respond to a large kink? Evidence on earnings anddeduction behavior from Austria, Working Paper, Univ. of Salzburg.
• Patel, E., Seegert, N., Smith, M. G. (2016). At a loss: The real and reporting elasticity ofcorporate taxable income, Working Paper, Univ. of Utah.
• Roantree, B., Adam, S., Browne, J., Phillips, D. (2017), Frictions and the elasticity of taxableincome: evidence from bunching at tax thresholds in the UK, Working Paper, Institute forFiscal Studies.
• Saez, E. (2010). Do taxpayers bunch at kink points? American Economic Journal: EconomicPolicy, 2(3), 180-212.
• Saez, E., Slemrod, J., Giertz, S. H. (2012). The elasticity of taxable income with respect tomarginal tax rates: A critical review. Journal of economic literature, 50(1), 3-50.
• Schaechtele, S. (2017). Quasi-experimental evidence on income tax return behavior and theelasticity of taxable income, Working Paper, Univ. of Erlangen-Nuremberg
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References (5)
• Slemrod, J., Gillitzer, C. (2014). Tax systems. MIT Press.
• Slemrod, J., Kopczuk, W. (2002). The optimal elasticity of taxable income. Journal of PublicEconomics, 84(1), 91-112.
• Slemrod, J. (2013). Buenas notches: lines and notches in tax system design. eJournal of TaxResearch, 11(3), 259.
• Tazhitdinova, A. (2016), Adjust Me if I Can’t: The Effect of Firm Incentives on Labor SupplyResponses to Taxes, Working Paper, McMaster University.
• Weber, C. E. (2014). Toward obtaining a consistent estimate of the elasticity of taxableincome using difference-in-differences. Journal of Public Economics, 117, 90-103.
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