Income Tax Changes Research Articles

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Comment

Mertens and Ravn (2013) estimate impulse response functions (IRFs) from income tax changes in a structural vector autoregression (SVAR) by using narrative accounts of tax liability changes as proxy variables. To produce confidence intervals for their IRFs, they use a residual-based wild bootstrap, which has subsequently become popular in the proxy SVAR literature. We argue that their wild bootstrap is not valid, producing confidence intervals that are much too small. Using a residual-based moving block bootstrap that is proven to be asymptotically valid, we reestimate confidence intervals for Mertens and Ravn’s (2013) IRFs and find no statistically significant effects of tax changes on output, labor, and investment. (JEL E23, E62, H24, H25, H31, H32)

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply

In this reply to a comment by Jentsch and Lunsford, we show that the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods. (JEL E23, E62, H24, H25, H31, H32)

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment

This paper investigates how tax changes for different income groups affect aggregate economic activity. I construct a measure of who received (or paid for) tax changes in the postwar period using tax return data from NBER’s TAXSIM. Variation in the income distribution across US states and federal tax changes generate variation in regional tax shocks that I exploit to test for heterogeneous effects. I find that the positive relationship between tax cuts and employment growth is largely driven by tax cuts for lower-income groups and that the effect of tax cuts for the top 10 percent on employment growth is small.

Macroeconomic Effects of Discretionary Tax Changes in Canada: Evidence From a New Narrative Measure of Tax Shocks

In this paper we study the macroeconomic effects of changes in federal taxes for the Canadian economy for the time period 1961:1 - 2014:4. We employ the narrative methodology of Romer and Romer (2010) and Cloyne (2013) to identify exogenous changes in federal taxes. In particular, we study, in detail, all the budget documents for the Canadian economy and document all legislated tax changes and the motivations behind them. We then isolate those tax changes that were not motivated by contemporaneous movements in the economy and classify them as exogenous tax changes. Our main empirical result shows that an exogenous tax cut of 1 percent of GDP leads to a significant but short-run increase in output. Our analysis of disaggregated measures exogenous tax changes shows that 1) tax hikes associated with deficit consolidation have the biggest (contractionary) effects on output, 2) changes in personal income taxes have larger effects than changes in other types of taxes, 3) anticipated tax changes have strong expansionary announcement effects, 4) tax increases tend to have bigger (contractionary) effects on output than the (expansionary) effects of tax decreases, and 5) the effectiveness of tax policy has drastically decreased over time.

State-level implications of federal tax policies

The United States federal fiscal policy has differential impact across states. We construct a new quarterly state-level dataset that we use to analyze the impact of unexpected changes in federal personal and corporate income taxes. We find substantial heterogeneity across states, with more than half having no significant response to the tax cuts. In addition, less capital intensive states have larger responses to corporate tax cuts. Although puzzling in standard models, a model with corporate and non-corporate sectors is consistent with this evidence. Overall, our results suggest the importance of variation and reallocation across states in evaluating federal policy.

Group Taxation and Further Corporate Income Tax Changes Effective 2019

On 1 January 2019, Hungary introduced a number of noteworthy new regulations, in particular a group taxation regime, which are described in this article together with other corporate income tax developments.

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford

In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.

Changes in income taxes in Poland in the opinion of small and medium enterprises

Changes in income taxes in Poland in the opinion of small and medium enterprises

Income Tax Shocks, Political Cycles, and Asset Prices

Using two instruments of perceived probabilities of income tax changes, I show that the implications of tax news shocks on the economy and asset prices are asymmetric across the political partisan cycle. Tax shocks cause high wealth states during Republican administrations. To compensate for high amount of systematic risk during Republican terms, investors command a premium to hold assets that co-vary positively with tax shocks. In contrast, the wealth effect and premium for tax shocks are trivial during Democratic regimes. An investment strategy that exploits the time-varying premium across the political cycle generates significant returns over commonly used factor models.

The Timing of Income Tax Changes in the Face of Projected Debt Increases

AbstractThis article examines the time path of the income tax rate chosen by a hypothetical policy‐maker, in a model where an increasing ratio of government debt to GDP is projected in the absence of policy changes. The policy‐maker is assumed to maximise an objective function expressed in terms of a number of aggregate variables, including the excess burden of taxation and a desired debt ratio. Tax policy changes have feedback effects, as a result of incentives and other endogenous influences that impose constraints on the efficacy of those policies. Emphasis is given to the importance of uncertainty in devising an optimal policy and the consequent value of waiting instead of imposing a sharp initial increase in anticipation of otherwise higher future debt.

The Dynamic Effects of Personal and Corporate Income Tax Changes in the United States: Reply to Jentsch and Lunsford

In this reply to a comment by Jentsch and Lunsford, we show that, when focusing on the relevant impulse responses, the evidence for economic and statistically significant macroeconomic effects of tax changes in Mertens and Ravn (2013) remains present for a range of asymptotically valid inference methods.

Tax policy and housing prices: evidence from Vietnam using event study approach

This paper examines the effect of tax policy on housing prices in Vietnam for the period from October 2004 to September 2016 using event study approach. The authors find that all five key changes made to the personal income tax, corporate income tax and non-farm land use tax have caused the housing prices to decline on average 6-11% during the event window, but only the impact of the personal income tax changes is statistically significant. The fact that changes in housing prices are mostly seen prior to the effective date of the tax policy change implies that tax policy change indeed has influenced the housing prices in Vietnam. Although this research has not examined the mechanism through which tax policy has influenced the housing prices, the findings offer some implications for the government in terms of using tax policy for controlling housing prices in Vietnam. The research is also of very few papers in this literature that use the event study approach.

Book Reviews

Amanda Griffith of Wake Forest University reviews “The Economics of Tax Policy,” by Alan J. Auerbach and Kent Smetters. The Econlit abstract of this book begins: “Eleven papers, prepared for a conference held at the Brookings Institution in December 2015, plus commentary, present nontechnical reviews of insights gained from recent economic research that can inform the policy process and provide an overview of the major areas of tax analysis. Papers discuss tax reform in a changing economy; effects of income-tax changes on economic growth; environmental taxation; tax compliance and enforcement—an overview of new research and its policy implications; economic and distributional effects of tax-expenditure limits; tax benefits for college attendance; tax policy toward low-income families; the economics of corporate- and business-tax reform; US capital gains and estate taxation—a status report and directions for a reform; tax policy and retirement savings; and fundamental tax reform—a comparison of three options. Auerbach is Robert D. Burch Professor of Economics and Law and Director of the Burch Center for Tax Policy and Public Finance at the University of California, Berkeley. Smetters is Boettner Chair Professor with the Wharton School at the University of Pennsylvania.”

Microsimulation Tools for the Evaluation of Fiscal Policy Reforms at the Banco De Espaaa

This paper presents the microsimulation models developed at the Banco de Espana for the study of fiscal reforms, describing the tool used to evaluate changes in the Spanish personal income tax and also the one for the value added tax and excise duties. In both cases the structure, data and output of the model are detailed and its capabilities are illustrated using simple examples of hypothetical tax reforms, presented only to illustrate the use of these simulation tools.

Comparing the effects of discretionary tax changes between the US and the UK

Abstract The remarkable similarities of the effects of discretionary tax changes between the US and the UK, shown in (Cloyne, J. 2013. “Discretionary Tax Changes and the Macroeconomy: New Narrative Evidence from the United Kingdom. American Economic Review 103: 1507–1528.), raise the obvious concern whether the effects of tax changes at disaggregated levels in the UK still resemble those in the US. This paper investigates the issue along three dimensions – corporate and personal income tax changes, anticipated and unanticipated tax changes, and positive and negative tax changes. An important contribution of this paper is to construct a data set on exogenous changes of corporate and personal income taxes in the UK, identified from narrative sources along the lines of Cloyne (2013).

The marginal welfare cost of personal income taxation in New Zealand

ABSTRACTThis present paper reports estimates of welfare changes and the marginal welfare cost of income taxation for a wide range of income and demographic groups in New Zealand, in the context of a uniform increase in all marginal income tax rates. The results are obtained using enhancements to the NZ Treasury's behavioural microsimulation model, TaxWell-B, which uses discrete hours modelling to examine the labour supply responses of all individuals to an income tax change. Considerable variation is found in the marginal welfare costs for different groups, with an overall value of 12 cents per extra dollar raised. The paper also demonstrates the use of a money metric utility measure in a social welfare function evaluation. A smaller reduction in ‘social welfare’ is obtained compared with the use of net incomes.

Illinois Income Tax Changes from P.A. 100-22

Illinois Income Tax Changes from P.A. 100-22

IMPACT OF CORPORATE TAXATION ON UNEMPLOYMENT

We study the effect of corporate taxation on unemployment utilizing a dynamic panel covering 41 countries over 11 years. The purpose of this article is to investigate how changes in the corporate income tax affect unemployment. We employ system general method of moments (GMM) due to peculiarities of the data set and the endogeneity issues present in the research problem. We find that a rise in the effective average corporate tax rate significantly increases unemployment levels, which directly contradicts past findings of some seminal authors. In addition, the present research supports findings of past studies on capital tax elasticity that obtained similar insights using differing methodologies. This research lays the groundwork for future studies, which may take the same methodology and apply it to even larger international panels. This research implies that international tax competition is affecting unemployment, presumably through its effects on international capital investment. These results provide support for policy makers who may be wary of raising corporate tax rates in countries where capital is especially mobile because of the negative effects which may accumulate to the voting public in the form of unemployment.

RESPONSIVENESS OF INCOME TO LOCAL INCOME TAXES: EVIDENCE FROM INDIANA

This paper examines the extent to which incomes respond to changes in county level income taxes, using data from the Indiana Department of Revenue on county-level taxable incomes that span 1997–2013, matched to data on local income tax rates and other county characteristics. Fixed effects models show that county income tax rates have little impact on the county level aggregate taxable income. Changes in competitor tax rates, with competitors identified based on contiguity, similarity in population size, and migration patterns, do not affect county taxable income either. Overall, taxpayers are unresponsive to small changes in local income tax rates.

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth and Employment