Income Tax Schedule Research Articles

Household Health Care Payments Under Rate Setting, Spending Growth Target, and Single-Payer Policies

Households have high burden of health care payments. Alternative financing approaches could reduce this burden for some households. To estimate the distribution of household health care payments across income under health care reform policies. Cross-sectional study with microsimulation used nationally representative data of the US population in 2030. Civilian, noninstitutionalized population from the 2022 Current Population Survey linked to expenditures from the 2018 and 2019 Medical Expenditure Panel Survey and 2022 National Health Expenditure Accounts were included. Rate regulation of hospital, physician, and other health care professional payments equal to the all-payer mean in the status quo, spending growth target at 4% annual per capita growth, and single-payer health care financed through taxes. Household health care payments (out-of-pocket expenses, premiums, and taxes) as a share of compensation. The synthetic population contained 154 456 records representing 339.5 million individuals, with 51% female, 7% Asian, 14% Black, 18% Hispanic White, 56% non-Hispanic White, and 5% other races and ethnicities (American Indian or Alaskan Native only; Native Hawaiian or other Pacific Islander only; and 2 or more races). In the status quo, mean household health care payments as a share of compensation was 24% to 27% (standard error [SE], 0.2%-1.2%) across income groups (median [IQR] 22% [4%-52%] below 139% of the federal poverty level [FPL]; 21% [4%-34%] for households above 1000% FPL [11% of the population]). Under rate setting, mean (SE) payments by households above 1000% FPL increased to 29% (0.6%) (median [IQR], 22% [6%-35%]) and decreased to 23% to 25% for other income groups. Under the spending growth target, mean (SE) payments decreased from 23% to 26% (SE, 0.2%-1.2%) across income groups. Under the single-payer system, mean (SE) payments declined to 15% (0.7%) (median [IQR], 4% [0%-30%]) for those below 139% FPL and increased to 31% (0.6%) (median [IQR], 23% [3%-39%]) for those above 1000% FPL. Uninsurance fell from 9% to 6% under rate setting due to improved Medicaid access, and to zero under the single-payer system. Single-payer financing based on the current federal income tax schedule and a payroll tax could substantially increase progressivity of household payments by income. Rate setting led to slight increases in payments by higher-income households, who financed higher payment rates in Medicare and Medicaid. Spending growth targets reduced payments slightly for all households.

Optimal Income Taxation

This article explores subjects in optimal income taxation characterized by recent research interest, practical importance in light of concerns about inequality, potential for misunderstanding, and prospects for advancement. Throughout the analysis, paths for further investigation are highlighted. Areas of focus include multidimensional abilities and endogenous wages; asymmetric information and the income of founders; production and consumption externalities from labor effort; market power and rents; behavioral phenomena relating to perceptions of the income tax schedule, myopic labor supply, and the interactions of savings, savings policies, and labor supply; optimal income transfers; the relationship between optimal income taxation and the use of other instruments; and issues relating to the social welfare function and utility functions, including non-welfarist objectives, welfare weights, heterogeneous preferences, and taxation of the family. (JEL D63, D82, D91, H21, H24, H53, J22)

Social versus individual work preferences: implications for optimal linear income taxation

We extend the standard optimal linear income taxation model to allow for differences in social and individual work preferences while still maintaining the assumption that individuals are rational. The theoretical and simulation analyses show that when the government places a higher social weight on work than do individuals, the optimal marginal income tax rate (MIT) becomes lower. This implies lower revenue, income guarantee, and overall progressivity. The case for lower MIT is reinforced when the government places a relatively higher weight on work for low earners. Combining our analysis with that of An and Coady (2022), we, on the one hand, agree with previous studies that the optimal nonlinear income tax schedule would be close to the optimal linear one but, on the other, show that the degree of closeness would depend on preference differences. Our work contributes to the burgeoning field of non-welfarist economics.

Estimating the effect of Progressive Personal Income Tax Schedule for Russia in a global CGE-OLG model

Estimating the effect of Progressive Personal Income Tax Schedule for Russia in a global CGE-OLG model

Better bunching, nicer notching

This paper studies the bunching identification strategy for an elasticity parameter that summarizes agents’ responses to changes in slope (kink) or intercept (notch) of a schedule of incentives. We show that current bunching methods may be very sensitive to implicit assumptions in the literature about unobserved individual heterogeneity. We overcome this sensitivity concern with new non- and semi-parametric estimators. Our estimators allow researchers to show how bunching elasticities depend on different identifying assumptions and when elasticities are robust to them. We follow the literature and derive our methods in the context of the iso-elastic utility model and an income tax schedule that creates a piece-wise linear budget constraint. We demonstrate bunching behavior provides robust estimates for self-employed and not-married taxpayers in the context of the U.S. Earned Income Tax Credit. In contrast, estimates for self-employed and married taxpayers depend on specific identifying assumptions, which highlight the value of our approach. We provide the Stata package bunching to implement our procedures.

Optimal income taxation with tax avoidance and endogenous labour supply

AbstractI determine the optimal income tax schedule when individuals both choose endogenously their labour supply and have the possibility of avoiding paying taxes. Considering a convex concealment cost function, I propose a formula for the optimal marginal tax rate, that generalizes the formula of the standard Mirrlees model to the case of tax avoidance. I also show that the results obtained by Casamatta (2021) in the fixed income case hold true when labour supply is endogenous: with a low enough marginal cost of avoidance, it is optimal to let some taxpayers, located in the interior of the skill distribution, avoid taxes.

Individualism and tax progressivity

This article proposes a novel theoretical model that factors in individualism culture for explaining tax progressivity. It shows that an increase in the level of individualism reduces optimal tax progressivity, regardless of whether a social planner or voters choose income tax schedule. Moreover, an increase in the pre-tax income inequality raises tax progressivity optimal for the social planner or voters, for any given level of individualism. These findings from introducing individualism culture for tax progressivity are quite original. This article makes an important contribution of providing an explanation for the puzzling fact that taxes of some countries with low inequality of pre-tax income are more progressive than those of other with high inequality. This article implies that a country with low pre-tax income inequality can have highly progressive tax if the country’s culture features fairly low level of individualism. Empirical analysis with panel data of 87 countries finds evidence supportive of these theoretical findings.

Who should bear the burden of COVID-19 related fiscal pressure? An optimal income taxation perspective

The COVID-19 pandemic has led to an increase in public debt in most countries, and the Ukraine war is likely to have similar effects. This will increase fiscal pressure in the future. We study how the shape of the optimal nonlinear income tax schedule is affected by this increase. We calibrate the workhorse optimal income tax model to five European countries: France, Germany, Italy, Spain and the UK. Applying an inverse-optimum approach to the pre COVID-19 economies we obtain the Pareto weights implicitly applied by the different countries. We then ask how the schedule of marginal and average tax rates should be optimally adjusted to the increase in fiscal pressure. For all countries, we find that the increase in fiscal pressure leads to a less progressive optimal tax schedule both in terms of marginal and average tax rates.

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.

Bunching in rank-dependent optimal income tax schedules

Considering optimal non-linear income tax problems when the social welfare function only depends on ranks as in Yaari (Econometrica 55(1):95–115, 1987) and weights agreeing with the Lorenz quasi-ordering, we extend the analysis of Simula and Trannoy (Am Econ J Econ Policy, 2021) in two directions. First, we establish conditions under which bunching does not occur in the social optimum. We find a sufficient condition on individual preferences, which appears as a reinforcement of the Spence-Mirrlees condition. In particular, the marginal dis-utility of gross income should be convex, but less convex the higher the productivity. We also show that, for all productivity distributions with a log-concave survival function, bunching is precluded under the maximin, Gini, and “illfare-ranked single-series Ginis”. Second, we turn to a discrete population setting, and provide an “ABC” formula for optimal marginal tax rates, which is related to those for a continuum of types found in Simula and Trannoy (2021), but remain essentially distinct.

Gathering support for green tax reform: Evidence from German household surveys

Green tax reform is unpopular because, typically, the poor are hurt most by the higher prices of carbon-intensive commodities. If revenues from a carbon tax are recycled, it may be feasible to gain popular support for green tax reform. To investigate this, we estimate an EASI demand system from German household data and a labour supply schedule, using wage data, and the German income tax schedule and let emission intensities decline in the carbon tax. If the revenue from a carbon tax is recycled via a lump-sum transfer to all households, this gives more equitable albeit less efficient outcomes, yet 70% of households are worse off. If the revenue is recycled via lower income taxes, there is more efficiency at the expense of more inequality, and about half of households benefit. With a recycling mix of lump-sum transfers and lower income taxes, popular support can be mustered without hurting equity too much. We also investigate the effects of Germany meeting its legal target for curbing emissions by 55% in 2030 relative to 1990 levels. We find that most of emission reductions are due to producers responding by lowering emission intensities rather than by consumers to less carbon-intensive consumption categories.

Voting over selfishly optimal income tax schedules with tax-driven migrations

Voting over selfishly optimal income tax schedules with tax-driven migrations

How to Tax Different Incomes?

We study the optimal tax system when taxpayers earn different kinds of income by supplying different inputs. Imperfect substitution between inputs allows for general equilibrium effects. We consider any type of cross-base responses to tax changes such as income-shifting. Formalizing the tax schedule as the sum of many one-dimensional schedules, we express optimal marginal tax rate on any kind of income in terms of sufficient statistics, including new ones for cross-base responses and general equilibrium effects. We also identify the conditions under which making the personal income tax marginally more schedular is socially desirable. The comprehensive and schedular (dual, in particular) income taxes being recurring proposals in the public debate, we derive sufficient conditions under which each form of tax is optimal. We stress how empirically restrictive these conditions are. Using a new algorithm on French tax return data, we characterize the optimal combination of a nonlinear tax schedule on personal income and a linear tax rate on capital income. We find that one should include, without any deduction, all income sources in the personal income base and subsidize the source of income which is more elastic. We find that crossbase responses have little effects on the personal nonlinear income tax schedule but increases by 5.9 to 6.9 percentage points the capital tax rate. General equilibrium effects also increases this tax rate by around 4.5 percentage points.

Optimal tax problems with multidimensional heterogeneity: a mechanism design approach

We propose a new method, that we call an allocation perturbation, to derive the optimal nonlinear income tax schedules with multidimensional individual characteristics on which taxes cannot be conditioned. It is well established that, when individuals differ in terms of preferences on top of their skills, optimal marginal tax rates can be negative. In contrast, we show that with heterogeneous behavioral responses and skills, one has optimal positive marginal tax rates, under utilitarian preferences and maximin.

Optimal taxation with multiple dimensions of heterogeneity

This paper develops a general theory of optimal income taxation with multiple dimensions of agent heterogeneity. The main technical hurdle in developing this theory is the possibility that individuals have multiple optimal incomes. Using a perturbation approach, we derive optimal tax formulas that account for the possibility that individuals have multiple optima and, hence, account for the possibility that individuals jump between their optimal income levels when we perturb the tax schedule. We quantify the magnitude of these effects, thereby augmenting the optimal tax formulas from Saez (2001) with additional “jumping effect” terms. We provide a partial characterization of when individuals with multiple optimal incomes may exist under the optimal tax schedule. Finally, we derive a new methodology to simulate optimal income tax schedules with multidimensional heterogeneity. We implement this method numerically, showing that individuals with multiple optimal income levels can exist under the optimal tax schedule.

Understanding the elasticity of taxable income: A tale of two approaches

This paper conducts the first formal comparison of two main approaches (tax reform versus bunching approach) to estimate the elasticity of taxable income (ETI), a central parameter in the public finance literature since Feldstein (1999). Using a novel panel of administrative tax data from China and exploiting China’s progressive monthly wage income tax schedule and a tax reform in 2011, we document two key differences in the ETI estimates obtained from these two approaches. First, the tax reform ETI estimates increase concavely over time, while the bunching ETI estimates are much more stable. Second, the tax reform ETI estimates (around 4 in the long-run) are much larger than the bunching ETI (around 0.5), and the difference is statistically significant. To account for these facts, we develop a simple model where individuals in each period have some probability to permanently change hours of work without paying other costs but can temporarily adjust hours by paying additional costs. With stable wage rates, the two estimators should converge to the same underlying value. But with normal wage growth, the tax reform estimates converge to the true underlying parameter, whereas the bunching estimates can be far below the true figure.

Optimal Taxation with Private Insurance

Abstract We derive a fully non-linear optimal income tax schedule in the presence of private insurance. We fill the gap in the literature by studying the optimal tax formula with a comprehensive structure of the private markets—including incomplete markets models—both theoretically and quantitatively. As in the standard taxation literature without private insurance, the optimal tax formula can still be expressed in terms of standard sufficient statistics. With private insurance, however, the formula involves additional terms that reflect how the private market interacts with public insurance. For example, the optimal tax formula should also consider asset distribution and pecuniary externalities as well as the welfare effects of borrowing constraints.

Optimal Taxation of Families: Mirrlees Meets Becker

AbstractThis paper studies optimal taxation of families—a combination of an income tax schedule and child tax credits. Child-rearing requires both goods and parental time, which distinctly impact the design of optimal child tax credits. In the quantitative analysis, I calibrate my model to the US economy and show that the optimal child tax credits are U-shaped in income and decrease with family size. In particular, the optimal credits decrease in the first nine deciles of the income distribution and then increase thereafter. Implementing the optimum yields large welfare gains.

When redistribution makes personalized pricing of externalities useless

AbstractWe consider a standard optimal taxation framework in which consumers' preferences are separable in consumption and labor and identical over consumption, but are affected by consumption externalities. For every nonlinear, income‐dependent pricing of goods there is a linear pricing scheme, combined with an adjusted income tax schedule, that leaves all consumers equally well‐off and weakly increases the government's budget. The result depends on whether a linear pricing scheme exists that keeps the aggregate amount of consumption at its initial level observed under nonlinear pricing. We provide sufficient conditions for the assumption to hold. If adjusting the income tax rate is not available, personalized prices for an externality can enhance social welfare if they are redistributive, that is, favor consumers with a larger marginal social value of income.

Optimal income taxation with tax avoidance

AbstractWe determine the optimal income tax schedule when individuals have the possibility of avoiding paying taxes. Considering a convex concealment cost function, we find that a subset of individuals, located in the interior of the income distribution, should be allowed to avoid taxes, provided that the marginal cost of avoiding the first euro is sufficiently small. This contrasts with the results of Grochulski who shows that, using a subadditive cost function, all individuals should report their true income. We also provide a characterization of the optimal income tax curve.