Increase In Income Tax Research Articles

Do More Efficient Taxes Lead to Bigger Government?: Evidence from the Introduction of Withholding for the State Personal Income Tax

This paper examines the claim that adopting more efficient taxes leads to bigger government by studying the introduction of withholding of the state personal income tax. We exploit the staggered adoption of withholding by individual states in the U.S. between 1948 and 1971 to construct a difference-in-differences style estimate and find that withholding immediately and permanently increased income tax collections by about 30 percent at given tax rates. Governments responded to this efficiency shock, the major response being a shift in the composition of revenues towards a heavier reliance on the personal income tax. States also increased revenues from other taxes as they implemented withholding, which suggests that a need to raise more revenue was an important motive for adopting withholding. The evidence we obtain suggests that withholding resulted in a one-time increase in personal income tax revenues but did not change the growth rate of revenues by itself.

The Expensive Truth: The Possible Tax Implications Related to Scholarship and Cost of Attendance Payments for Athletes

The result from O’Bannon v. NCAA should provide NCAA student-athletes with unprecedented financial benefits such as cost of attendance (COA) scholarships. While these benefits will support student-athletes, there are potential unintended consequences surrounding the increase in financial support, including federal and state income taxes. Athletic scholarships have traditionally been classified as qualified scholarships under Revenue Ruling 77–263. However, by providing a COA payment, the scholarship transforms from an educational benefit to a quid pro quo contractual agreement. As such, student-athletes may be forced to pay income taxes on their disqualified scholarship. The purpose of this study is to determine the potential taxability of the COA qualified scholarships. This study analyzes the Internal Revenue Code and Treasury Regulations to determine if the COA scholarship meets the requirements for a qualified scholarship. In addition, the present work provides potential tax implications for student-a...

Income Taxes and Team Performance: Do They Matter?

State- and local-income tax rates differ across locations, giving low-tax teams a competitive advantage when bidding for players. I investigate the effect of income tax rates on professional team performance between 1977 and 2014 using data from professional baseball, basketball, football, and hockey in the United States. Regressing income tax rates on winning percentage, I find little evidence of income tax effects prior to 1994, but since then a ten percent increase in income taxes is associated with a three percent decline in winning percentage. A robustness check using within state variation in income taxes affirms this result. The income tax rate effect varies by league, with the largest effect in professional basketball, where teams in states without income tax win 4.5 more games each year relative to high-tax states. The income tax effect is smallest in major league baseball, which could be explained by greater team payroll disparity. Placebo tests using college team performance find no evidence of an income tax effect.

Are Efficient Taxes Responsible for Big Government? Evidence from Tax Withholding

The paper examines the claim that more efficient taxes lead to bigger government by studying the effects of income tax withholding, a particular technological shock to tax efficiency. We exploit the variation in the timing of the adoption of withholding by state governments in the United States during the 1940’s through 1970’s. Due to improved compliance and other factors, withholding immediately and permanently increased income tax collections by 24 percent at given tax rates. We find that this efficiency shock caused a large increase in income tax revenues, although much of the increase occurred through a shift in the composition of revenues towards a heavier reliance on the income tax. We also find that the revenue from other taxes increased when withholding was adopted, which we intepret as evidence that the adoption of withholding was motivated by higher demand for government spending. We use the theory to disentangle the causal effect from withholding to higher taxes and the reverse causality from higher demand to withholding. The causal effect accounts for at most one half of the 8 percent increase in total revenue. Contrary to claims that withholding was the thing that enabled the post-war explosion of income taxation, we conclude that it accounts for approximately 9 percent of the growth of state income taxes during the period in question.

Informing Investment to Reduce Inequalities: A Modelling Approach.

BackgroundReducing health inequalities is an important policy objective but there is limited quantitative information about the impact of specific interventions.ObjectivesTo provide estimates of the impact of a range of interventions on health and health inequalities.Materials and MethodsLiterature reviews were conducted to identify the best evidence linking interventions to mortality and hospital admissions. We examined interventions across the determinants of health: a ‘living wage’; changes to benefits, taxation and employment; active travel; tobacco taxation; smoking cessation, alcohol brief interventions, and weight management services. A model was developed to estimate mortality and years of life lost (YLL) in intervention and comparison populations over a 20-year time period following interventions delivered only in the first year. We estimated changes in inequalities using the relative index of inequality (RII).ResultsIntroduction of a ‘living wage’ generated the largest beneficial health impact, with modest reductions in health inequalities. Benefits increases had modest positive impacts on health and health inequalities. Income tax increases had negative impacts on population health but reduced inequalities, while council tax increases worsened both health and health inequalities. Active travel increases had minimally positive effects on population health but widened health inequalities. Increases in employment reduced inequalities only when targeted to the most deprived groups. Tobacco taxation had modestly positive impacts on health but little impact on health inequalities. Alcohol brief interventions had modestly positive impacts on health and health inequalities only when strongly socially targeted, while smoking cessation and weight-reduction programmes had minimal impacts on health and health inequalities even when socially targeted.ConclusionsInterventions have markedly different effects on mortality, hospitalisations and inequalities. The most effective (and likely cost-effective) interventions for reducing inequalities were regulatory and tax options. Interventions focused on individual agency were much less likely to impact on inequalities, even when targeted at the most deprived communities.

The Dynamics of Wealth Inequality and the Effect of Income Distribution.

The rapid increase of wealth inequality in the past few decades is one of the most disturbing social and economic issues of our time. Studying its origin and underlying mechanisms is essential for policy aiming to control and even reverse this trend. In that context, controlling the distribution of income, using income tax or other macroeconomic policy instruments, is generally perceived as effective for regulating the wealth distribution. We provide a theoretical tool, based on the realistic modeling of wealth inequality dynamics, to describe the effects of personal savings and income distribution on wealth inequality. Our theoretical approach incorporates coupled equations, solved using iterated maps to model the dynamics of wealth and income inequality. Notably, using the appropriate historical parameter values we were able to capture the historical dynamics of wealth inequality in the United States during the course of the 20th century. It is found that the effect of personal savings on wealth inequality is substantial, and its major decrease in the past 30 years can be associated with the current wealth inequality surge. In addition, the effect of increasing income tax, though naturally contributing to lowering income inequality, might contribute to a mild increase in wealth inequality and vice versa. Plausible changes in income tax are found to have an insignificant effect on wealth inequality, in practice. In addition, controlling the income inequality, by progressive taxation, for example, is found to have a very small effect on wealth inequality in the short run. The results imply, therefore, that controlling income inequality is an impractical tool for regulating wealth inequality.

Implications of Fiscal Policy for Housing Tenure Decisions

Many of the world's wealthy countries provide fiscal incentives to homeowners. Yet, the impact of such tax breaks on housing tenure decision is unclear. Using difference-in-differences approach, this study estimates the effect of mortgage interest deduction on home ownership in the United States. The identification relies on the large changes in income tax rates and standard deduction. The largest of these changes increased income tax rate by as much as 23,9% and decreased standard deduction by 7,2% between 2002 and 2004. The baseline estimates suggest that increase in income tax rate in a state that allows mortgage interest deduction is associated to 3 percentage points increase in home ownership relative to states that didn't change their fiscal policy and to 5 percentage points - relative to states that do not allow mortgage interest deduction but had a comparable increase in tax rates. The results are robust to a range of alternative specifications.

Oregon's 2013-15 Budget: Pulling Out of the Recession, Winners and Losers

Author(s): Henkels, Mark; Steel, Brent S | Abstract: The 2014 Oregon Legislative short session was a highly partisan affair where majority Democrats in the House and Senate pursued contentious issues to Republicans including marijuana legalization, gun control, the Columbia River Bridge Crossing, and the huge implementation problems of Oregon’s dysfunctional health plan exchange (“Cover Oregon”). The economic picture in the state featured a modest recovery and urban job growth providing an increase in state income taxes, while other revenue sources such as cigarette taxes, estate taxes, and Oregon Lottery revenues were less than expected. Nonetheless, the legislature managed to adjust the 2013-15 biennial budget, although two issues indicate there are deeper unresolved problems remaining: ongoing public employee dissatisfaction and the impact of general fund redistribution on specific programs.

A CGE Analysis of the Economic Impact of Trade Liberalisation on the Algerian Economy

The principal focus of the study is to show the nature and extent of the incentives trade policy liberalisation could provide on the way to further boost the economy of Algeria. It also tries to find out what the economic position would be, should the trade regime be more or fully liberalisation by reducing or elimination the existing tariff. In this study, different types of external price shocks are also considered in order to test the response of the economy. Model results indicate that by reducing tariffs, domestic output increase in almost all the sectors but government revenue and saving decline significantly. Government revenue fall due to the reduction/elimination of tariff could be compensated by reducing net subsides to the corporate sector and also by increasing income tax in a progressive way. Exports also increase showing the justification of the liberalisation and also supporting the argument that tariffs bias exports. But the increase in total import is bigger than the increase in exports which causes a deterioration of the real balance of trade, but the elimination of tariff increase private consumption and total absorption. Export price shocks in petroleum sectors chow a fall in domestic output and consequently a fall in value added and total employment. Domestic terms of trade of exports deteriorate and exports fall. This also causes a fall in GDP, private consumption and total absorption. The government revenue declines and budget deficits worsen. A 10 percent devaluation in the real exchange rate shows a fall in domestic output in aggregate agriculture and service whereas an increase in output in industry. GDP at factor cost also falls simultaneously with a fall in total absorption and private consumption. Devaluation pushes up exports in the majority of the sectors and brings down import in some sectors only. Keywords: External Shocks, trade policies, Algerian Economy, Computable General Equilibrium Model.

Homeowners, renters and the political economy of property taxation

Studies find that renters are more supportive of public spending that is financed by the property tax than homeowners, a finding commonly referred to as the “renter effect.” The renter effect suggests that, all else equal, renters should prefer property taxation over other forms of taxation. We test that hypothesis using detailed micro-level survey data that contains voter responses to two key questions: their willingness to pay higher property taxes to fund public services and their willingness to pay higher sales taxes to fund those services. Using a difference-in-differences estimation strategy, we find first that renters are approximately 10 to 18 percentage points more likely than homeowners to favor a property tax increase over a sales tax increase, a finding consistent with the presence of a renter effect. However, these results are not driven by the survey responses of renters. Analysis based on separate regressions for renters and homeowners reveals that renters are indifferent between a property tax increase and either a sales tax or state income tax increase, while homeowners strongly oppose a property tax increase relative to either a sales tax or state income tax increase. Further, the strong opposition among homeowners to the property tax is not eroded by including controls for income and other demographics as might be expected if these differences were driven by economic incentives. Finally, an examination of the variation in tax burden created by Proposition 13 in California shows no evidence that homeowner aversion to the property tax increases with the homeowner's relative tax burden. These findings of homeowner aversion to property taxes are consistent with recent work suggesting that salience matters when voters evaluate taxes, but also suggest that increased salience does not necessarily lead to more careful consideration of individual tax burdens.

An Income Tax Increase to Fund Higher Education: A CGE Analysis for Chile

An increase in income taxes to fund education was one of the demands made by the social movements that emerged in Chile in 2011. Currently, the Chilean Congress is enacting a tax reform to raise money for higher education. This study aims to show the dynamic effects on the general equilibrium of the Chilean economy under two alternative approaches: a subsidy to lower the price of higher education (public and private), and greater spending on public higher education to reduce household payments for education. The social accounting matrix (SAM) used to calibrate the computable general equilibrium (CGE) model has 38 economic sectors, including the production structure of private education and public education. The study mainly concludes that a subsidy policy has significant advantages over increasing higher public education spending, regarding its effects on variables such as GDP, investment, and household incomes, while both policies have a similar effect on poverty and income distribution.

Corporate Income Taxes, Financial Constraints and Innovation

We hypothesize that corporate income taxes reduce firms' pledgeable income and distort their incentives to innovate. Using a differences-in-differences methodology, we empirically document that large state income tax increases (decreases) stifle (stimulate) corporate innovation over the 1988-2006 period. Exploring the channels, we show that tax changes have a stronger impact on innovation for more financially-constrained firms, for firms with weaker governance and for firms that avoid taxes more. We further alleviate endogeneity concerns by conducting numerous additional tests, such as showing that most of the impact of tax changes on innovation occurs two or more years after the change, and that tax changes have the opposite effect on firms operating in neighboring states.

Homeowners, Renters and the Political Economy of Property Taxation

Studies that examine the demand for local public services that are financed by a property tax consistently find that renters are more supportive of public spending than homeowners, a finding commonly referred to as the “renter effect.” In this paper we use detailed micro-level survey data to provide new evidence on the renter effect. The renter effect suggests that, all else equal, renters should prefer property taxation over other forms of taxation. We test that hypothesis using voter responses to two key questions: their willingness to pay higher property taxes to fund public services and their willingness to pay higher sales taxes to fund those services. Using a difference-in-differences estimation strategy, we find first that renters are approximately 10 to 18 percentage points more likely than homeowners to favor a property tax increase over a sales tax increase, a finding consistent with the presence of a renter effect. However, these results are not driven by the voting behavior of renters. Analysis based on separate regressions for renters and homeowners reveals that renters are indifferent between a property tax increase and either a sales tax or state income tax increase, while homeowners strongly oppose a property tax increase relative to either a sales tax or state income tax increase. Further analysis reveals that the strong opposition among homeowners to the property tax is not associated with the relative tax burden faced by homeowners. Examining the variation in tax burden created by Proposition 13 in California, we find that homeowner aversion to the property tax does not increase with the homeowner’s relative tax burden. These findings of homeowner aversion to property taxes are consistent with recent work suggesting that salience matters when voters evaluate taxes, but also suggest that increased salience does not necessarily lead to more careful consideration of individual tax burdens.

Tax Structures, Economic Growth And Development

This paper investigates the relationship between tax structures and economic growth in a panel of developed and developing countries. In order to raise revenue, low-income countries have historically relied more heavily on international trade taxes, whilst richer nations employ comparatively more consumption and income taxes. Using the new Government Revenue Dataset (GRD) from the International Centre for Tax and Development (ICTD), we consider the effects of revenue-neutral changes in tax structure on economic growth for a panel of over 100 countries with data covering the period 1980-2010. Results from the Common Correlated Effects Mean Group (CMG) estimator (Pesaran 2006) find that increases in income taxes (specifically personal income taxes) offset by reductions in trade or consumption taxes have had a negative impact on GDP growth rates. We also highlight the fact that trade liberalisation has not had any discernible positive effects on economic growth. Revenue-neutral increases in personal income taxes are found to be particularly harmful in middle- and low-income countries. Taken alongside the results of, for example, Baunsgaard and Keen (2010), this is a reminder of the difficulties of tax reform for developing countries.

A Replication of “Millionaire Migration and State Taxation of Top Incomes

We reevaluate Young and Varner’s (YV) study of the effect of New Jersey’s 2004 income tax increase on migration. The 2004 “millionaires’ tax” raised New Jersey’s marginal income tax rate from 6.37 percent to 8.97 percent on incomes over US$500,000. YV reported that the tax change apparently had no effect on net out-migration of affected taxpayers (relative to other affluent taxpayers); however, this result appears to be due to their modeling New Jersey out-migration and in-migration simultaneously to determine net migration effects. Correcting for this, we find a statistically significant increase in the out-migration of taxpayers making over US$500,000 of roughly eighty per year in the years following the tax change. Given that the increase likely spurred out-migration in groups not directly taxed and discouraged in-migration, our estimates may understate the actual impact of the tax on New Jersey net out-migration.

Adding Employer Contributions to Health Insurance to Social Security's Earnings and Tax Base

The inclusion of employer-sponsored health insurance (ESI) in taxable income would increase income and payroll tax receipts, but would also increase Old Age, Survivors, and Disability Insurance (OASDI) benefits by adding ESI to the OASDI earnings base. This study uses the Urban Institute’s DYNASIM model to estimate the effects of including ESI premiums in taxable earnings on the level and distribution by age and income groups of income tax burdens, payroll tax burdens, and OASDI benefits. We find that the increased present value of OASDI benefits from including ESI in the wage base in 2014 offsets about 22 percent of increased income and payroll taxes, 57 percent of increased payroll taxes, and 72 percent of increased OASDI taxes. The overall distributions of taxes and benefits by income group follow the same pattern, with both taxes and benefits increasing as a share of income between the bottom and middle quintiles and then declining as a share of income for higher income taxpayers. But households in the bottom income quintiles receive a net benefit from including ESI in the tax base because their increase in OASDI benefits exceeds their increase in income and payroll taxes. Over a lifetime perspective, all earnings groups experience net tax increases, but workers in the middle of the earnings distribution experience the largest net tax increases as a share of lifetime earnings. Higher benefits offset a larger share of tax increases for lower than for higher income groups.

State Fiscal Policy during the Great Recession

Plunging tax revenues and soaring social program demand during the Great Recession created state budget shortfalls of historic magnitude. After reviewing states’ aggregate reaction to the economic downturn, we conduct an original analysis of the recession’s budgetary impact on the states and their policy responses. Economic factors such as falling personal income and home values explain much of the variation in the recession’s impact. State budgeting rules and practices conditioned states’ experiences, but not always as intended: budget gaps were smaller in states with stricter balanced budget requirements, but larger in states with statutory spending limitations. Personal income tax increases were more likely in states with a Democratic legislature or greater public unionization rates, while midyear spending cuts were smaller in states with larger public sector unions. In sum, we find that while states’ objective economic situations determined the bulk of their responses to the Great Recession, political factors determined these responses’ shape and form.

The impact of the Indonesian income tax reform: A CGE analysis

This study evaluates the impacts of Indonesia's recent income tax reforms on key macroeconomic variables, as well as the impacts on poverty and income distribution. It was found that the reductions in personal income tax and corporate income tax increase economic growth under a balanced budget assumption. The policy reforms also lead to a small reduction in the incidence of poverty. However, the policies also lead to an increase in income inequality because the tax cut is more beneficial to households in the highest income categories. It is recommended that future tax cuts should target the urban and rural poor.

Reevaluating the Effect of Tax and Expenditure Limitations

This article evaluates the effect of tax and expenditure limitations (TELs) on municipal general own-source revenue in the United States. Using an instrumental variable approach, this study addresses the endogeneity problem of TELs that has been largely overlooked in previous research. Data are collected on 724 US cities with populations of at least 25,000 from 1970 to 2006. Results indicate that when the endogeneity of TELs is taken into account, TELs lead to considerable reductions in property taxes but substantial increases in sales taxes, income taxes, and user charges per capita. The increases in the latter forms of revenue not only offset the loss in property taxes but also generate a supplemental revenue effect, resulting in a net gain of total municipal general own-source revenue per capita. The study provides important policy implications and suggests that TELs may have unintended consequences and lead to bigger government.

The effects of tax rate changes on tax bases and the marginal cost of public funds for Canadian provincial governments

The efficiency losses from taxation vary directly with the responsiveness of a government’s tax bases to tax-rate increases. We estimate the dynamic responses of tax bases to changes in tax rates using aggregate panel data from Canadian provinces over the period 1972 to 2006. Our preferred empirical results indicate that a one percentage point increase in corporate income, personal income, and sales tax rates is associated with a 3.67, 0.76, and 1.17 percent reduction in their respective tax bases in the short run. The corresponding long-run tax base semi-elasticity estimates are higher: −13.60, −3.63, and −3.18, respectively. We use the tax base elasticity estimates to calculate the marginal cost of public funds (MCF) for the provinces’ three major taxes. Our computations indicate that the corporate income had the highest MCF and that the sales tax had the lowest MCF in all provinces in 2006. The MCF for the personal income tax ranged from 1.44 in Alberta to 3.81 in Quebec. Our results imply that there would have been significant welfare gains in 2006 from reductions in provincial corporate income tax rates. Our computations also indicate that the equalization grant formula may reduce the perceived MCF of the provinces that receive these grants, and that increases in provincial corporate and personal income taxes can cause significant reductions in federal tax revenues.