High-income Taxpayers Research Articles

Tax Sheltering Cost Among High-Income Taxpayers: Evidence From an Australian Tax Policy Change

Tax Sheltering Cost Among High-Income Taxpayers: Evidence From an Australian Tax Policy Change

The end of bank secrecy: implications for redistribution and optimal taxation

AbstractThis paper argues that the ability to enforce taxes on offshore income may shape the redistributional properties of the tax system through two channels. First, it mechanically raises tax progressivity for given parameters of the tax system because high-income taxpayers own most of the offshore wealth. In the US, recent comprehensive reporting by offshore banks suggests the mechanical increase in average tax rates may be around 1.5 percentage points for the top 0.01 per cent and virtually zero below the top 1 per cent. Second, it may further raise tax progressivity by changing the trade-offs underlying optimal taxation in favour of higher taxation of top incomes.

Taxing the Rich to Finance Redistribution: Evidence from a Permanent Tax Increase in Singapore

Based on a representative sample of consumer financial transaction data, this paper studies the consumption and savings response to a 2015 permanent increase in the marginal income tax of the high-income taxpayers. Using difference-in-differences regressions, controlling for individual and time fixed effects, we show robust results that the affected consumers experienced little change in their spending. The pattern is prevalent across consumer demographics and is found even among consumers who are sophisticated, have high levels of debt, or register little income changes. Furthermore, the tax increase financed fiscal redistribution leads to a long-lasting increase in the consumption of the lower-income population. This paper was accepted by Lukas Schmid, finance. Funding: The authors gratefully acknowledge financial support from Social Science Research Thematic Grant in Singapore [Future-Proofing Singapore: An Economic Approach MOE2019-SSRTG-024]. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.4823 .

Too Much SALT? The Nuanced Impact of the State and Local Tax Deduction Cap on Pass-Through Business Taxpayers

Perhaps the most controversial provision of the Tax Cuts and Jobs Act of 2017 is the state and local tax deduction limitation (or SALT cap), particularly with respect to how the cap impacts pass-through entities in high-tax states. This particular provision of the tax law has been criticized by opponents as deliberately punitive to small businesses in blue states, while proponents maintain that eliminating the SALT cap would primarily benefit high income taxpayers. Politicians from blue states have called for the repeal of the SALT cap, and some states have enacted various workarounds with questionable prospects of success. Still, many taxpayers will not benefit from a SALT deduction irrespective of the SALT cap, particularly taxpayers that either take the standard deduction or are subject to the alternative minimum tax (AMT). We examine the developing law around the SALT cap and provide descriptive empirical evidence of its disparate impact on closely held business taxpayers. Consistent with prior economics literature, we find that the impact is indeed most pronounced among high-income taxpayers in blue states. However, we note that the impact is substantially less than the furor over the limitation would suggest because many high-income taxpayers are subject to the AMT and so are not significantly affected by the limitation. These findings suggest two underemphasized points. First, the imposition of the SALT cap was not the drastic financial hit to blue state taxpayers that policy makers and commentators have suggested. Second, with a new administration that favors eliminating the SALT cap, Congress could consider whether the repeal of the cap alone is enough because further changes would be needed to return the SALT deduction to its earlier prominence.

The Widening Gap Under the Internal Revenue Code: The Need for Renewed Progressivity

“I have never viewed taxation as a means of rewarding one class of taxpayers or punishing another. If such a point of view ever controls our public policy, the traditions of freedom, justice and equality of opportunity, which are the distinguishing characteristics of our American civilization, will have disappeared and in their place we shall have class legislation with all its attendant evils.” Andrew Mellon (1924)The words written by Andrew Mellon more than 75 years ago represent an idealistic view of the tax system. Despite the ideas expressed by Mr. Mellon, it is difficult to devise a tax scheme that conforms to his standards. Our present scheme of taxation is intended to promote vertical equity, which means that the higher income taxpayer should pay a higher level of taxes based on an abilityto-pay concept. In theory, this objective is met by the progressive tax structure imposed under the Code. Arguably, a progressive tax system is inconsistent with the principles expressed by Mellon because of the purported penalty levied against high-income taxpayers in the form of inflated tax rates and the reward bestowed on low-income taxpayers in the form of lower tax rates. In reality, a progressive tax system does not reward or punish one class of taxpayers over another, but it is necessary to ensure that taxpayers do not pay more tax dollars to finance the government than they can afford. A progressive tax scheme is also necessary to enable every taxpayer to retain sufficient income to live above the poverty threshold. To the extent that a taxpayer lives below the poverty threshold, that taxpayer should not be required to pay income taxes. The current tax scheme is only partially successful in preventing taxpayers’ after-tax income from falling below the poverty threshold.

Mobility responses to the establishment of a residential tax haven: Evidence from Switzerland

I analyze mobility responses to a tax reform that established the Swiss canton of Obwalden as a tax haven in 2006. The reform, which included a regressive income tax schedule, was explicitly aimed at attracting the top 1%. Difference-in-Differences (DiD) estimations comparing Obwalden to all other cantons confirm that the reform successfully attracted high-income taxpayers: by 2016, the share of top earners in the canton had doubled, and average income per taxpayer was 16% higher relative to 2005. Based on individual tax return data, I estimate the mobility elasticity with a two-stage least square (2SLS) approach, which isolates the identifying variation in the tax rate stemming from the 2006 reform only. I find a large elasticity of the stock of high-income taxpayers of 1.5–2 with respect to the net-of-average-tax rate. The corresponding flow elasticity is 7.2. Despite these large behavioral responses, the reform did not increase revenue per capita in the canton. Finally, I find small positive effects on local employment. However, in-movers with high incomes were not more likely to also work in the canton, and I cannot rule out that employment effects were driven by the simultaneous reduction in corporate income taxes.

SECRETS OF THE PANAMA PAPERS: HOW TAX HAVENS EXACERBATE INCOME INEQUALITY


 
 
 Data leaks like the Panama Papers show how tax havens provide a secret offshore financial system that privileges three main actors: malefactors, millionaires, and multinational corporations. Such leaks have provided millions of documents detailing how certain taxpayers benefit from tax haven services. Wealthy criminals use the offshore world to anonymize their financial misdeeds and, in low-income countries, drain governments of valuable resources while citizens remain in dire circumstances. High-income taxpayers exploit the offshore world to legally reduce their tax bills, deploying techniques that are not available to ordinary-income taxpayers. The leaks also show how the wealthiest members of society—the top 0.01%—are more likely to engage in the criminal offense of offshore tax evasion by hiding their fortunes in tax havens. Finally, multinational corporations set up related corporations in tax havens to reduce global tax liabilities legally, providing higher returns for wealthier shareholders. By privileging the interests of criminals, millionaires, and corporations, the offshore world is exacerbating the growing income inequality found in much of the world. This Article considers legal and policy reforms to address this challenge.
 
 

Tax evasion, technology, and inequality

Ensuring compliance with the tax laws is an enduring challenge for all governments. However, the methods by which governments enforce the tax laws, and by which individuals and firms evade their taxes, change over time, due at least in part to changing technology. In this paper I examine how changing technology, especially changes driven by the transformation of information into digital formats for use by computers, seems likely to affect tax evasion in the years ahead. I argue that many of these changes in technology will improve the ability of governments to decrease tax evasion, mainly by increasing the flow of information to governments. However, I also argue that these changes in technology will open up new avenues by which some individuals and some firms can evade (and avoid) taxes. At this point it is unclear which trend will dominate, so that the effects of technology on the overall level of tax evasion are uncertain. Even so, I believe that the distributional effects of these technological changes are more predictable, given the differential effects of technology on the abilities of individuals of different levels and types of income to evade their taxes. Indeed, I argue that changing technology will make evasion increasingly difficult for most taxpayers, especially those subject to employer withholding and third party information reporting, but that evasion will be increasingly viable for a small number of taxpayers, especially very high income taxpayers. Regardless of the overall impact of technology on the level of tax evasion, I conclude that the effects of technology will likely increase economic inequality.

Policy Forum: The Real Concentration of Capital Gains in Canada—A Longitudinal Analysis

It is generally believed that the preferential treatment of capital gains for personal income tax purposes benefits primarily high-income taxpayers. However, since traditional tax statistics include capital gains in the total income of individuals, some individuals see their annual income artificially inflated by the one-time realization of a capital gain. The authors use Statistics Canada's Longitudinal Administrative Databank to better identify who <i>really</i> benefits from the preferential treatment of capital gains in Canada and to determine their frequency of realization. Specifically, the authors measure the shift of taxpayers between five income groups depending on whether or not their capital gains are considered in their total income. While wealthier taxpayers do benefit disproportionately from the preferential treatment of capital gains, the exclusion of capital gains from total income significantly reduces this disproportion. Taxpayers with more modest incomes benefit more than one would expect from the preferential treatment of capital gains, especially when they are over 55 years old. Taxpayers with higher incomes also realize capital gains more frequently than those with lower incomes. That said, among taxable capital gain filers only, this gap is much smaller, indicating that once taxpayers report capital gains, they tend to do so frequently. Taxpayers who report capital gains with regularity remain a minority, although they realize a large share of the total value of capital gains.

Mega-IRAs, Mega-401(k)s, and Other Mega-Retirement Accounts: Statement for the Record

The Senate Finance Committee’s hearing on July 28, 2021 -- Building on Bipartisan Retirement Legislation: How Can Congress Help? -- spotlighted “mega-IRAs”: individual retirement accounts with balances of $5 million or more. An analysis by the Joint Committee on Taxation in advance of the July 28 hearing found that the number of taxpayers with mega-IRAs now exceeds 28,000. The hearing followed a June 2021 report by the nonprofit investigative journalism organization ProPublica, which revealed—based on leaked IRS files—that a handful of high-net-worth individuals had accumulated massive IRA balances. The Senate Finance Committee hearing and the ProPublica report emphasized one way that taxpayers amass mega-IRAs: by “stuffing” an account with undervalued assets such as pre-IPO stock and investment-fund carried interests. “Stuffing” no doubt occurs in some instances, and Congress could take steps to stop it (e.g., by prohibiting IRAs from holding non-publicly traded assets). However, it is unlikely that most mega-IRAs result from abusive stuffing tactics. Individuals engaged in stuffing would generally want to convert their IRAs from traditional to Roth accounts quickly. Yet JCT’s analysis found that 85 percent of mega-IRA owners hold only traditional accounts. How, then, have tens of thousands of high-income individuals created mega-IRAs? As our submission shows, existing rules allow high-income taxpayers to amass mega-IRAs straightforwardly—and legally—by “maxing out” 401(k) defined contribution plans, potentially combining defined contribution plans with defined benefit plans, and investing in S&P 500 index funds or other publicly traded assets. Mega-IRAs are indeed a problem, but they are a problem primarily caused by laws that lavish excessive tax benefits on high-income individuals. This statement for the record begins by illustrating how high-income individuals can create mega-IRAs through entirely legal means. Next, we review the choices that Congress has made over the last quarter-century that opened a wide door to mega-IRAs. We then explain why the JCT data and other sources strongly suggest that most mega-IRAs do not reflect stuffing. We conclude with concrete policy recommendations to stem the tide of mega-IRAs and other mega-retirement arrangements, which undermine the progressivity and revenue-raising potential of the federal income tax system.

Consumption Response to Permanent Tax Increase: A Ricardian Equivalence Response to Re-distribution

Using a large, representative sample of consumer financial transaction data, this paper studies the consumption and savings response to a permanent increase in income tax. In 2015, Singapore marginally raised the income taxes on high-income taxpayers. Using difference-in-differences regressions, controlling for individual fixed effects and year-month fixed effects, we show robust results that the affected consumers experienced little change in their spending but instead adjusted their savings downward. The pattern is prevalent across consumer demographics, and is unexplained by consumer inattentiveness, hyperbolic discounting, or unobserved labor market responses. Furthermore, the tax increase financed fiscal redistribution leads to a rather long-lasting increase in the consumption of the lower-income population.

КЛАССИФИКАЦИЯ ДОХОДОВ ФИЗИЧЕСКИХ ЛИЦ НА ПРЯМЫЕ И КОСВЕННЫЕ КАК МЕТОД УВЕЛИЧЕНИЯ ИНВЕСТИРОВАНИЯ В ЭКОНОМИКУ РОССИИ

Currently, much attention is paid to the taxation of individuals and their income on the territory of the Russian Federation and abroad. The study examines the scale of tax rates of personal income: flat and progressive, which in turn contribute to the formation of low-income and high-income taxpayers. The article presents the classification of income of individuals from sources in Russia: direct and indirect. Direct income is the income specified in clause 1 of Article 208 of the Tax Code of the Russian Federation. Indirect income is considered to be income from sources in Russia, but received through foreign companies. The use of flat and progressive taxation scales is periodically the subject of controversy when considering draft laws in the State Duma due to the presence of a category of citizens with high incomes, thus implementing the principle of fair taxation, reducing the stratification of society. Opponents of the proposed methods of calculating taxes on a progressive scale criticized them, suggesting that the number of citizens with high incomes is small. The article reveals the benefits of payers when paying personal income tax on the territory of Russia from Russian income received through foreign companies using a progressive scale, and not from all direct income from Russian sources on a flat scale, as at present. When dividing the income of individuals into direct and indirect, there is a benefit for persons who carry out operations on the territory of foreign states with funds whose sources are the Russian Federation. The current situation allows us to formulate the following recommendations: To introduce progressive tax rates that would reflect the principle of fair taxation. Consider the income received by Russian organizations in foreign countries from operations in foreign countries on the basis of income received on the territory of Russia as indirect income. Create an automatic system for accounting for indirect income of Russian taxpayers, which would simultaneously calculate personal income tax.

Taxation with Mobile High-Income Agents: Experimental Evidence on Tax Compliance and Equity Perceptions

In a laboratory experiment on tax compliance, we model a situation in which high-income taxpayers can leave a tax system that finances a public good. We compare low-income taxpayers’ compliance decisions and equity perceptions across treatments in which they are informed or not informed about the mobility option of high-income taxpayers. This allows us to test if low-income taxpayers regard the mobility option as a rationale for implementing a regressive tax schedule. To investigate if a potential `justification effect’ of the mobility option depends on the causes of income heterogeneity, we also varied whether income was allocated based on relative performance in a prior ability task or at random. Interestingly, although the performance-based allocation itself was judged to be fairer, we observed higher compliance under the random allocation mechanism. However, compliance and equity perceptions did not significantly differ by the information treatment variation, regardless of the source of income inequality. The results indicate that the threat of losing high-income taxpayers’ contributions does not lead low-income taxpayers to view the regressive tax schedule more favorably. This suggests that taking the differential mobility options as given and altering tax schedules accordingly may not be perceived as an adequate policy response.

Beyond Head of Household: Rethinking the Taxation of Single Parents

Under current law, unmarried taxpayers with children can take advantage of the head of household filing status (HHFS) to reduce their federal income taxes. We argue that the design of the filing status is largely obsolete, geared toward alleviating a “marriage penalty” in the tax code that is much less important than when the filing status was first established. At the same time, the growth in the fraction of Americans raising children outside of traditional two-parent households has dramatically raised the cost of the filing status to the fisc. In this article, we highlight two features of the design of HHFS that undermine its goal of providing support to single parent households. First, because it is designed as a filing status, HHFS provides a larger tax break to high-income taxpayers than to low-income ones: in 2013 HHFS saved qualifying taxpayers in the 25th percentile of the income distribution under $100 a year compared to almost $2,000 a year for qualifying taxpayer in the 75th income percentile. Second, the tax savings provided by HHFS bear no relation to the number of children a taxpayer supports, even though taxpayers supporting more children are likely to have less ability to pay. We propose reforming HHFS by replacing it with an expanded child tax credit for single parents and estimate that a revenue neutral reform along these lines would support a refundable tax credit of approximately $384 per child for households headed by single parents.

Using small businesses for individual tax planning: evidence from special tax regimes in Chile

Many countries have special tax regimes (STRs) for small businesses. Even though these regimes may reduce compliance costs, they increase the complexity of the tax system and can be used by high-income individuals to avoid taxes. This paper uses administrative data from Chile to analyze whether the use of STRs is associated with strategic tax planning at the individual level. A descriptive analysis of the data finds three stylized facts that, taken together, are consistent with strategic behavior: STRs are used frequently, they are used mainly by high-income taxpayers, and high-income taxpayers are more likely to hold a portfolio of businesses filing taxes under STRs. We rationalize these facts with a simple model of small business creation and tax planning and test the model’s predictions. We find that following a reform that made a particular STR more restrictive, reported individual incomes from businesses filing under that STR decreased between 10 and 15%, while income reported from alternative sources increased. Overall Taxable Income increased between 4 and 7%. This increase is explained by the more restrictive scenario for avoiding taxes through STRs, consistent with individuals using these regimes for tax planning.

From Soviets to oligarchs: inequality and property in Russia 1905-2016

This paper combines national accounts, survey, wealth and fiscal data (including recently released tax data on high-income taxpayers) in order to provide consistent series on the accumulation and distribution of income and wealth in Russia from the Soviet period until the present day. We find that official survey-based measures vastly under-estimate the rise of inequality since 1990. According to our benchmark estimates, top income shares are now similar to (or higher than) the levels observed in the United States. We also find that inequality has increased substantially more in Russia than in China and other ex-communist countries in Eastern Europe. We relate this finding to the specific transition strategy followed in Russia. According to our benchmark estimates, the wealth held offshore by rich Russians is about three times larger than official net foreign reserves, and is comparable in magnitude to total household financial assets held in Russia.

From Communism to Capitalism: Private versus Public Property and Inequality in China and Russia

This paper combines national accounts, survey, wealth, and fiscal data (including recently released tax data on high-income taxpayers) in order to provide consistent series on the accumulation and distribution of income and wealth in China and Russia over the 1978-2015 period. We contrast the different privatization strategies implemented in the two countries and observe their impacts on the evolution of inequality.

Kształtowanie i zobrazowanie progresywnej skali podatkowej

In most countries, a progressive tax is levied on the income of individuals. This article addresses the different design of a progressive tax scale taking into account the issue of the so-called tax bubbles that constitute an increased MTR. This feature of the tax function is a result of the exclusion of the high income taxpayers from the basic allowance or reduced tax rates. As shown in the article, this may lead to a higher tax burden under the joint taxation compared to the separate taxation. The analysis refers to the tax scales in Germany, Poland, the UK and the USA.

Does the Income Tax Cause Parents to Spend Too Much Time with Their Children?: Rethinking Mirrlees

In 1971, James Mirrlees published “An Exploration in the Theory of Optimum Income Taxation,” one of the most influential tax papers ever written. Unpacked, Mirrlees’ claim can be restated as follows: Assume that our undistorted decisions about how to allocate our time between paid and unpaid activities are welfare-maximizing. If so, any distortion of those decisions by the tax system is welfare-reducing. Unless the supply of labor is inelastic or income effects predominate, taxing income from labor will cause taxpayers to spend less time engaged in paid activities and more time in unpaid activities than would be welfare-maximizing. Because of the declining marginal utility of money, redistribution from high-income to low-income individuals is generally welfare-enhancing. Nevertheless, at some point the welfare losses from taxing labor income to effect redistribution outweigh the welfare gains produced by redistribution. This, in turn, (1) limits the overall amount of welfare-enhancing redistribution we can effect by taxing income from labor and (2) requires flat or declining marginal tax rates on such income. Stated in the abstract, the claim is plausible enough to have persuaded important segments of the tax and tax economic academy. In the intervening 40 years, however, empirical evidence has come to suggest that the claim is strongest when applied to parents, especially mothers, with young children – the one economically significant group that consistently demonstrates elastic responses to labor taxation. Survey data establishes that a very large portion of the unpaid time spent by American parents of children age 12 or younger – both fathers and mothers – is spent on the care of their own children. If taxes cause parents to spend more time on unpaid activities, therefore, they almost certainly cause parents to spend more time with their children. Any such behavioral distortion is, by hypothesis, welfare-reducing. As to parents, therefore, optimal tax theory’s claim is that progressive taxation causes parents to spend too much time with their children. At the very least, optimal tax theorists must be comfortable with the possibility that this is effectively their claim. But is the claim true? This paper approaches the question from within the standard preference-satisfaction utilitarian paradigm, using standard tax economic arguments – the perspective most sympathetic to the claim. Specifically, it focuses on two of the many assumptions Mirrlees used to make his mathematics tractable. First, he assumed that utility is absolute, not relative – that our utility curves do not depend on how much anyone else has. Second, he assumed that supply curves for consumption goods are similarly fixed and exogenous. In the case of parents, especially mothers, with young children, both assumptions are probably false. But if this is so, insufficiently progressive taxes may cause parents to spend too little time with their children. And if so, Mirrlees’ computations cannot be taken to be even provisionally correct, even within the welfarist paradigm. The paper then turns to the problem of GDP maximization – a goal regularly confused with that of welfare maximization. GDP maximizers rely heavily on the empirical literature Mirrlees’ paper triggered to argue that high top marginal rates trigger labor-leisure substitution. They then assume, generally without further evidence, that the substitution of leisure for labor by high-income taxpayers reduces GDP growth. Happily, the Reagan tax cuts tested this assumption nicely – advocates promised that those cuts would boost GDP growth. Contrary to predictions, however, average U.S. GDP growth declined in the decades after the Reagan cuts. The reasons are unclear. What this does mean, however, is that the Mirrlees literature cannot by itself be read to support the proposition that high marginal rates reduce GDP growth. And this, in turn, means that the constraints it imposes on real-world policymaking are much less significant than is commonly assumed.

The Bunching of Capital Gains Realizations

We describe a simple model of taxpayer decisions to realize or delay their capital gains and losses. Investors will delay their realizations if the after tax rate of return is sufficiently high. As the holding period for the asset approaches a year and a day (after which capital gains are taxed at a lower rate), taxpayers will tend to harvest their losses and delay their gains. Next, we use a unique data set of capital gains transactions to investigate the behavior of taxpayers with respect to the preferential tax rate for long term capital gains. Our data allows us to examine the shifting of gains across time periods, but eliminates the effect of the large pool of accrued gains that enlarge previous estimates. We find strong evidence that taxpayers respond to the preferential rate by reducing the realizations of gains in the weeks leading up to the point when that rate applies. However the magnitude of the elasticities are small: We estimate a short-term gains elasticity of 0.52 and a long-term gains elasticity of 1.0. We find that high income taxpayers are more responsive with elasticities of -0.75 for short term gains and 1.5 for long term gains. We also find evidence that taxpayers minimize their tax liability by timing their gains and losses in the same week.