Federal Income Tax Rates Research Articles

The determinants of domestic right-wing terrorism in the USA: Economic grievance, societal change and political resentment

This study tests three categories of motivations for domestic right-wing terrorism in the USA: economic grievances, particularly those produced by economic restructuring; societal changes that challenge notions of white male privilege; and political and public policy elements that stoke resentments. Executing a series of negative binomial regression estimations on state-level data in the USA for the period 1970–2011, I find that measures of societal factors—specifically increase in abortion rates and growing female participation in the labor force—and political indicators such as Democratic Party control of the White House, precipitate right-wing terrorist attacks. Factors associated with economic hardships—such as poverty, the decline of manufacturing employment and the “Farm Crisis”—as well as growth of the non-white population, control of state government by the Democratic Party and growth of average Federal Income Tax rates—are not found to be significant predictors of right-wing terrorism.

Business in the United States: Who Owns It, and How Much Tax Do They Pay?

Executive Summary“Pass-through” businesses like partnerships and S-corporations now generate over half of US business income and account for much of the post-1980 rise in the top-1% income share. We use administrative tax data from 2011 to identify pass-through business owners and estimate how much tax they pay. We present three findings: (1) relative to traditional business income, pass-through business income is substantially more concentrated among high-earners; (2) partnership ownership is opaque: 20% of the income goes to unclassifiable partners, and 15% of the income is earned in circularly owned partnerships; and (3) the average federal income tax rate on US pass-through business income is 19%—much lower than the average rate on traditional corporations. If pass-through activity had remained at 1980’s low level, strong but straightforward assumptions imply that the 2011 average US tax rate on total US business income would have been 28% rather than 24%, and tax revenue would have been approximately...

Quantifying Legislative Uncertainty: A Case Study in Tax Policy

Whether a legislature will or will not enact law is often uncertain. This Article offers an empirical model for quantifying that uncertainty, and it develops this argument in the context of federal income tax rates. Specifically, we estimate a model of legislator preferences on tax rates and show that the political process can be well understood in terms of the preferences of key legislators. We use our statistical model to quantify the uncertainty of tax rates and forecast the direction of likely rate changes in the future. This argument has several implications for policymaking and the analysis of legislative uncertainty more generally. First, quantifying legislative uncertainty offers insight into the behavioral effects of the law. How people respond to the law depends on their perception of the law’s future trajectory. Second, our analysis allows us to explore the stability of major legislative reform. Our methodology allows us to demonstrate that reforms are sometimes predictably unstable. Such reforms can have the perverse result of increasing future legislative uncertainty.

The Underground Economy in the U.S.A: Preliminary New Evidence on the Impact of Income Tax Rates (and Other Factors)on Aggregate Tax Evasion, 1975-2008

This empirical study seeks to identify determinants of the underground economy in the U.S. in the form of aggregate federal personal income tax evasion over the period 1975-2008, with a specific focus upon the impact of higher federal income tax rates on tax evasion. In this study, we use the most recent data available on aggregate personal income tax evasion, data that are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI to reported AGI. Most other studies of federal income tax evasion for the U.S. do not use data this current. It is found that the impact of increases in the federal income tax rate on aggregate personal income tax evasion may, on balance, be ambiguous, possibly suggesting that the income effect is negative and outweighs the positive substitution effect for the representative taxpayer. It is also found that the degree of aggregate personal income tax evasion may be an increasing function of the percentage of federal personal income tax returns characterized by itemized deductions and a decreasing function of the Tax Reform Act of 1986 (during the first two years of implementation), the ratio of the tax free interest rate yield on high grade municipals to the interest rate yield on ten year Treasury notes, and higher audit rates of filed federal income tax returns (as a measure of risk from tax evasion) by IRS personnel. Finally, unpopular wars may provide a secondary benefit for and therefore act as an inducement for greater tax evasion. JEL Codes: G18, G28, H26 Keywords: tax evasion; substitution effect; income effect; incentives; disincentives

2013 Annual Global Tax Competitiveness Ranking: Corporate Tax Policy at a Glance

Canada is losing its appeal as a destination for business investment. Its ability to compete against other countries for investment slipped considerably this year in our global tax competitiveness ranking, down six spots among OECD countries, and down 11 spots among the 90 countries. While many governments around the world responded to the fallout of the global recession by significantly reducing corporate tax rates, certain policy moves in Canada have us headed in the opposite direction. Canada is in danger of repelling business investment, which can only worsen current economic and fiscal challenges.Canada’s fading advantage is the result of recent anti-competitive provincial tax policies that increased the cost of investment. This includes, most notably, British Columbia’s decision to reverse the harmonization of its provincial sales tax with the federal GST, as well as recent corporate income tax rate hikes in B.C. and New Brunswick.When economic calamity strikes, and workers and their families feel the pain of lost jobs and lost wealth, politicians know they can score populist points by targeting the corporate sector. After all, corporations do not vote and they do not have a human face. News stories about major multinational corporations using tax-avoidance techniques to minimize their tax bills, only feed the populism, leaving voters believing that companies are getting away without paying a “fair share” of taxes. But when the corporate sector is targeted, it is not only supposedly wealthy capitalists who pay, but also employees, through lost wages and jobs, and working-class people who have a stake in companies through pension plans and mutual funds. On a larger scale, it is the economy that suffers. The same profit-maximizing imperative that leads companies to seek ways to reduce their tax liabilities also motivates firms to redirect investment to competing, lower-tax jurisdictions. Populist policies aimed at squeezing businesses may win votes in the short term, but they come at significant costs.Yet, there are politicians calling for still higher taxes on corporations. The federal Opposition leader, Thomas Mulcair, of the New Democratic Party, wants to raise the federal corporate income tax rate from 15 to 22 per cent, making Canada’s combined federal-provincial tax rate (over 33 per cent) one of the highest in the world. Such proposals promise an easy source of new revenue at no cost to individual taxpayers. In reality, the cost to taxpayers is lost competitiveness, resulting in a shrinking corporate tax base that will only leave Canadians with a weaker economy, profit-shifting to other countries leading to little additional revenue available to Canadian governments and, inevitably, a larger tax burden to bear individually.The right direction for Canada is the other way: improving tax competitiveness and enhancing tax neutrality by broadening the corporate tax base to further fund rate reduction. The harmonization of provincial sales taxes with the federal GST, in those provinces that have yet to do so, would substantially improve Canada’s tax competitiveness, as would the elimination of economically inefficient tax breaks for favoured business activities. And Canadian governments should continue to lower corporate taxes across the board, whenever possible. Canada’s edge as a globally competitive investment destination has been hard won over many years. It would be a pity to now see it squandered by reckless populist politics.

Determinants of aggregate income-tax-evasion behaviour: the case of US

The determinants of aggregate income-tax-evasion behaviour as reflected in the size of the underground economy in the US are analysed. These factors include the federal personal income tax rate, the social security tax rate, the federal corporation income tax rate, the public's dissatisfaction with the government, IRS audit rates and IRS penalty assessments on detected unreported income. The results show that the size of the underground economy is an increasing function of federal personal income tax rate, the social security tax rate and the public's dissatisfaction with the government. However, the size is a decreasing function of IRS penalty payments on unpaid taxes. JEL Codes: H26, E26 Keywords: Research, Underground economy, tax evasion, US economy

Social Security Benefits Taxation: Issues And Present Status

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoBodyText"><span style="color: black; font-size: 10pt; mso-themecolor: text1;"><span style="font-family: Times New Roman;">Taxation of Social Security benefits was introduced in 1983 as part of a general restructuring of Social Security.<span style="mso-spacerun: yes;"> </span>As part of the 1993 Omnibus Budget Reconciliation Act, taxation of benefits was revised and expanded.<span style="mso-spacerun: yes;"> </span>Inclusion of social security benefits as part of taxable income is determined by comparing a modification of adjusted gross income and half of social security benefits to threshold amounts established in each tax law. <span style="mso-spacerun: yes;"> </span>Unlike most amounts used to determine tax, the thresholds were not subject to indexation or revision. <span style="mso-spacerun: yes;"> </span>This paper examines the current state of social security taxation in light of personal income changes, social security benefit revisions and federal income tax rate and bracket modifications that have taken place over the fourteen years since the last revision in taxation of benefits.</span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

America’s unreported economy: measuring the size, growth and determinants of income tax evasion in the U.S.

This study empirically investigates the extent of noncompliance with the tax code and examines the determinants of federal income tax evasion in the U.S. Employing a refined version of Feige’s (Staff Papers, International Monetary Fund 33(4):768–881, 1986, 1989) General Currency Ratio (GCR) model to estimate a time series of unreported income as our measure of tax evasion, we find that 18–23% of total reportable income may not properly be reported to the IRS. This gives rise to a 2009 “tax gap” in the range of $390–$540 billion. As regards the determinants of tax noncompliance, we find that federal income tax evasion is an increasing function of the average effective federal income tax rate, the unemployment rate, the nominal interest rate, and per capita real GDP, and a decreasing function of the IRS audit rate. Despite important refinements of the traditional currency ratio approach for estimating the aggregate size and growth of unreported economies, we conclude that the sensitivity of the results to different benchmarks, imperfect data sources and alternative specifying assumptions precludes obtaining results of sufficient accuracy and reliability to serve as effective policy guides.

An Empirical Analysis of Determinants of Recent Federal Personal Income Tax Evasion in the U.S.

Unaccounted for currency in die U.S. has been argued to reflect die presence of widespread income tax evasion. In turn, income tax evasion is especially problematic in this era of large government budget deficits and growing national debts which have led to debt crises. This empirical study seeks to identify determinants of recent federal personal income tax evasion in the U.S. using the most recent tax evasion data available, data that run through 2008 and are derived from the General Currency Ratio Model and measured in the form of the ratio of unreported AGI (adjusted gross income) to reported AGI. The empirical estimates find that personal income tax evasion is an increasing function of the maximum marginal federal personal income tax rate, the interest rate yield on three year Treasury notes, per capita real income, and a dummy variable for the years in which the second war in Iraq was conducted, while being a decreasing function of the Tax Reform Act of 1986, the ratio of the tax free interest rate yield on high grade municipals to the taxable interest rate yield on ten year Treasury notes, the audit rate by IRS (Internal Revenue Service) personnel, and the average IRS penalty on detected unreported income. Thus, among other things, this study finds that more aggressive IRS policies are effective tools in the war against personal income tax evasion.

The Influence of Income Tax Rates on the Market for Tax-Exempt Debt

Based on the indirect arbitrage opportunities afforded citizens by tax-exempt debt issue, this article presents a model establishing equilibrium in the market for tax-exempt debt. The model yields two predictions. Increases in Federal income tax rates increase the spread between taxable and tax-exempt interest rates, but have no effect on the equilibrium quantity demanded and supplied of tax-exempt debt. The latter prediction contrasts with a conventional point of view that increases in tax rates increase demand and supply of tax-exempt debt. The model’s predictions are supported by empirical evidence.

Investor Response to a Reduction in the Dividend Tax Rate: Evidence from the Jobs and Growth Tax Relief Reconciliation Act of 2003

ABSTRACT: This study examines investor reaction to the reduction in federal income tax rates on dividends resulting from passage of the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA or the Tax Act). We investigate the existence of a clientele shift associated with the JGTRRA by examining trading volume in dividend-paying stocks surrounding passage of the Tax Act. Also, we examine changes in shareholder composition of firms over the period between announcement in the press and final passage of the plan. We find dividend yield to be a significant predictor of abnormal trading volume around key dates, including the date the plan to reduce dividend taxes was first covered in the press. Furthermore, we find a large and statistically significant negative relationship between dividend yield and the change in institutional ownership. Taken as a whole, our results are consistent with expectations that investor clienteles form around tax characteristics associated with particular firms and the ways that those firms structure investor returns. In particular, our results suggest that passage of the JGTRRA resulted in observable shifts in shareholder clienteles for dividend-paying firms.

Do Payroll Taxes Matter in Estimating Taxable Income Elasticities?

A growing literature examines the responsiveness of taxable income to changes in federal income tax rates. The literature has found evidence of small but consistent taxable income elasticities to changes in federal tax rates. This article extends the analysis to examine the responsiveness of taxable income and labor income measures to changes in payroll tax rates. Using data to exploit the change in payroll taxes from 1979 to 1981, this article finds that taxpayers respond in the same way to changes in payroll taxes and individual income taxes.

Our Health Care System at the Crossroads: Single Payer or Market Reform?

Our Health Care System at the Crossroads: Single Payer or Market Reform?

WEALTH AND THE DISTRIBUTION OF INCOME: PERMANENT AND TRANSITORY EFFECTS

This paper examines the permanent and transitory effects of changes in wealth, the top federal marginal income tax rate, and capital gains tax rate on the distribution of Adjusted Gross Income (AGI). This paper establishes the importance of wealth in determining the distribution of AGI, and results here suggest that its effects can negate the permanent effect of a change in both tax rates. Of the two tax rates, the capital gains tax rate is the most important for AGI distribution. The marginal income tax rate is notably less important for long run behavior, but does have short run impacts.

Guns vs. Taxes? A Look at How Defense Spending Affects U.S. Federal Tax Policy

Although studies have shown a theoretical and empirical link between defense spending and economic growth and between economic growth and tax policy, the impact of defense spending on federal tax policy remains largely unexplored. This paper proposes a theoretical model and empirical test to explore the direct and indirect effects of defense spending on federal tax policy. The findings suggest that consumption expenditures for national defense directly influence the federal corporate income tax rate. However, the analysis finds no indirect relationship between defense spending and federal tax policy mediated through economic growth.

The taxpayer resentment and 'neo ultra-rationality' hypotheses

This study empirically investigates two hypotheses, the taxpayer resentment hypothesis and the neo ultra-rationality hypothesis, both of which argue that higher federal budget deficits induce an increase in the degree of aggregate federal personal income tax evasion. Using annual data on two alternative measures of aggregate federal personal income tax evasion for two periods, 1960-2002 and 1960-1997, and allowing for such factors as federal income tax rates, IRS tax return audit rates, and a variable measuring the public's general dissatisfaction with government, it is found that income tax evasion is an increasing function of the budget deficit. Important policy implications of this finding are provided in the concluding section of the study.

The Impact of Personal Income Taxation on Executive Compensation

This paper analyzes the effect of personal income taxation on the sensitivity of executive compensation to company performance and the use of stock option and restricted stock grants underlying this sensitivity. The theoretical model predicts that, if a single tax rate applies to the entire compensation package, an increase in the tax rate weakly diminishes the equilibrium level of managerial effort and the after-tax pay-to-performance sensitivity, with the effect on the pre-tax pay-to-performance sensitivity being ambiguous. When salary and option gains are taxed at a higher rate than stock gains, tax changes also induce shifting among the individual compensation instruments. Interestingly, this differential taxation leads to a positive amount of stocks in the compensation contract even in the absence of any desire to incentivize the manager. In addition, an increase in the tax rate applied to salary and option gains may increase the level of managerial effort in equilibrium. On the other hand, an increase in the tax rate applied to stock gains weakly decreases the equilibrium level of managerial effort and strictly decreases the amount of after-tax pay-to-performance sensitivity generated by stock grants. The second part of the paper exploits the variation in the U.S. federal personal income tax rate generated by the Omnibus Budget Reconciliation Act of 1993, as well as variation in the combined federal and state income tax rates during the period 1992-1996 to empirically evaluate the impact of personal income taxation on the pay-to-stock-price sensitivity generated by stock-option and restricted stock grants. The results show that an increase in the ordinary income tax rate decreases the pay-to-stock-price sensitivity generated by option grants when time series variation in the marginal tax rate is utilized in the identification, with the estimates retaining the same sign but being statistically insignificant when only the variation in the marginal tax rate originating from cross-sectional variation in the federal income tax rate and/or state tax rate changes is used in the estimation. On the other hand, stock grant sensitivity is found to be unresponsive to changes in the ordinary income tax rate.

Income Tax Evasion Revisited: The Impact of Interest Rate Yields on Tax-Free Municipal Bonds

1. IntroductionIncome tax evasion remains a timely issue, as evidenced by recently published studies (e.g., see Feige 1989, 1994; Alm, Jackson, and McKee 1992; Pestieau, Possen, and Slutsky 1994; Cebula 1997, 2001; Alm, McClelland, and Schulze 1999; Atkins 1999; Panteghini 2000; Ali, Cecil, and Knoblett 2001; Saltz 2001). In an effort to provide further insight into the determinants of tax evasion, this study hypothesizes that the tax-evasion decision may include an assessment of the tax-free interest rate yield on, say, high-grade municipal bonds relative to the taxable interest rate yield on alternative high-quality bond issues, such as 10-year Treasury notes. Presumably, the higher the interest rate yield on high-grade municipals (whose interest is legally exempt from federal income taxation) relative to the taxable interest rate yield on 10-year Treasury notes, the more attractive those municipals become, ceteris paribus. In effect, the interest paid on tax-free bonds, especially for households in higher tax brackets, may offer an attractive legal alternative (income tax avoidance) to illegal income tax evasion.1 Thus, it is hypothesized that the higher the tax-free interest rate yield on high-grade municipals relative to the taxable yield on 10-year Treasury notes (or equivalent taxable issues), the less the incentive for and, hence, the less the degree of income tax evasion.This study investigates empirically whether higher yields on tax-free municipals (relative to the taxable yields on 10-year Treasury notes) reduce the degree of aggregate federal personal income tax evasion. Section 2 provides the model, which includes a variety of variables already established in the literature to affect tax evasion. Section 3 describes the data. Sections 4 and 5 provide the empirical findings and concluding remarks.2. The ModelThe economy consists of agents who generate economic value that is reflected in the form of income and choose whether to report none, some, or all of their income to the Internal Revenue Service (IRS).The probability that the representative economic agent will not report taxable income, pnr, is treated as an increasing function of the expected gross benefits to the agent of not reporting income, eb, and a decreasing function of the expected gross costs to the agent of not reporting income, ec:(Formula Omitted. See article image.)The expected gross benefits from not reporting income to the IRS are hypothesized to be an increasing function of income tax rates. Unlike previous studies, this study focuses on both the average effective federal personal income tax rate (AEPT) and the maximum marginal federal personal income tax rate (MAX), such that(Formula Omitted. See article image.)Furthermore, as suggested by Feige (1994) and Cebula (2001), the higher the level of public dissatisfaction (DIS) with the perceived performance of government employees and elected government officials, the greater the subjective benefit taxpayers derive from tax evasion. Accordingly, becomes(Formula Omitted. See article image.)Finally, as explained in section 1, it is hypothesized in this study that the higher the tax-free interest rate yield on high-grade municipal bonds (TF) relative to the taxable interest rate yield on 10-year Treasury notes (TEN), the greater the incentive to engage in legal tax avoidance and the lower the incentive to engage in tax evasion. Thus, becomes(Formula Omitted. See article image.)The expected gross costs of not reporting income to the IRS are hypothesized to be an increasing function of the expected risks thereof. In this study, to the representative economic agent, the expected penalty from not reporting taxable income to the IRS, if said activity is detected by the IRS, is measured in part by the total pecuniary penalties (including both penalties per se and interest) previously assessed by the IRS on audited tax returns (PEN). …

Ticks and Tax: The Joint Effects of Price Discreteness and Taxation on Ex Dividend Day Returns

We examine ex-dividend day stock price behavior before and after the NYSE converted from discrete (1/16ths) to decimal pricing systems in early 2001, as well as the effect of equalizing the federal income tax rates on dividend and long-term capital gain income in May 2003. Prior literature reports a robust empirical result that share prices decrease on the ex-dividend day by less than the amount of the dividend, but there is little agreement about whether this incomplete price adjustment is caused by share price discreteness, differential taxation of dividend income relative to capital gains, or other factors. Two recent studies, Graham, Michaely and Roberts (2003) and Jakob and Ma (2004), report that declining price discreteness (e.g. from 1/16ths to decimal pricing) had no material effect on the cum- to ex-day price-drop-to-dividend ratio. Although we report similar findings for the price-drop ratio, we find that ex-day abnormal returns declined significantly as a result of decimalization in 2001, and declined further in response to tax rate equalization in May 2003. Thus, our findings support the view that both price discreteness and differential taxation affect ex-dividend day stock price behavior.

Budget deficits and real interest rates: Updated empirical evidence on causality

Using error-correction model (ECM) estimation, the paper empirically examines the causality relationship between the federal government budget deficit and the ex ante real interest rate yield on high grade long term tax free municipal bonds in the U.S. To clarify this deficit or interest rate relationship, the budget deficit is measured by the primary budget deficit, which excludes net interest payments by the Treasury. In a model that includes federal personal income tax rates and net international capital flows, as well as money supply growth, the ECM estimates strongly suggest a bi-directional relationship between the primary budget deficit and the ex ante real interest rate yield. Budget deficits apparently do matter! William Simon's concerns were justified.