Individual Tax Returns Research Articles

Personal Income Tax and Income Inequality. New Evidence from a South American Country: Ecuador 2007-2011

This paper assesses the redistributive impact of Ecuador’s personal income tax (PIT) over the 2007-2011 period. First, using individual income tax return data we compute different indicators of tax progressivity and redistributive impact (i.e. Kakwani, Suits and Reynolds-Smolensky indices) to estimate the extent to which income inequality is modified by the PIT. Second, we mobilize microsimulation techniques to assess the redistributive effect of the PIT while testing different definitions of taxable income. Third, based on the top incomes literature, we compute the effective income tax rates paid by top income groups. Finally, based on the elasticity of taxable income literature, we derive optimal income tax rates for top income groups. We find two main empirical results. First, although Ecuador’s PIT is highly progressive its redistributive capacity is very low because high-income individuals are more likely to reduce their taxable income through legal tax deductions than low-income individuals. Second, the effective tax rates paid by high-income individuals are relative low (e.g. 7% for the top 1% group) while optimal tax rates for top earners could be as high as 63%.

Hidden Yet Visible: A Theory of the Relation between Tax Audits and Underreporting

Do audits affect individual tax compliance? This question is not new and multiple answers have been attempted over the past four decades. Those who have made such attempts have suffered from the impediment of an inability to test their theories against known, or even approximated, rates of underreporting on individual income tax returns. The first part of this paper develops a method for approximating the underreporting rate for individual income tax returns, since no such method currently exists. The second part uses this method to take a stab at answering the question whether audits affect tax underreporting rates.

Income Tax, Income Contingent Education Loans and the Taxpayer Parallax

In designing tertiary education income contingent loans (ICL), primary attention has been focussed on designing arrangements which improve access to and affordability of education. In contrast, much less attention has been given to how best to design the repayment of those loans in a way which minimizes any adverse behavioural response by ICL debtors. With more governments moving to increase the student contribution to the cost of their education, the likely magnitude of an individual’s ICL debt can not only impact their education take-up, but once incurred can result in adverse behavioural responses during the ICL debt decumulation phase. This paper argues that two main factors drive the behaviour of those with an ICL debt during the decumulation phase. The first is the basis for determining ICL repayment (including base, rates and thresholds) and the second is the size of an individual’s ICL debt. Just as the interaction between tax rates and transfer means tests combine to adversely impact the transition from welfare to work, the interactions between ICL debt level, repayments and personal income tax can adversely impact the transition from study to work, with implications for ICL repayment and income tax compliance. To provide insight into these issues, the 2011-12 Australian Taxation Office 2% sample unit record file of individual tax returns is examined for differences firstly between Australian taxpayers with and without a Higher Education Loans Program (HELP) debt, and secondly, between those taxpayers with varying levels of HELP debt but comparable income levels. While some strong evidence was found for differences between HELP and non-HELP debtors from the Australian data, the paper highlights the need for more research into this issue before conclusive findings can be made that ICL debt does influence taxpayer behaviour. Such research should be a high priority because in the Australian case, between 2011-12 and 2017-18, HELP debtors are expected to increase 95% and average debt levels 41%.

THE EFFECTS OF THE TAXATION OF SOCIAL SECURITY BENEFITS ON OLDER WORKERS' INCOME AND CLAIMING DECISIONS

Social Security benefits are taxed under a complex regime that raises marginal effective tax rates by up to 85 percent, which could discourage the labor supply of older workers and affect the decision to claim benefits. Using a nonparametric graphical methodology, this paper investigates whether older taxpayers reduce income to avoid the tax. While previous research found that the labor supply of older workers is significantly affected by the Social Security earnings test, we find little evidence of a response to benefit taxation in a large panel of data compiled from individual income tax and information returns. Similarly, while taxation of benefits provides an incentive for many to delay claiming, we find no evidence of such an effect. Overall, the findings suggest that older taxpayers have little understanding of the rules governing Social Security benefit taxation.

Effective taxation of top incomes in Germany

We exploit an exhaustive administrative dataset that includes the individual tax returns of all households in the top percentile of the income distribution in Germany to pin down the effective income taxation of households with very high incomes. Taking tax base erosion into account, we find that the top percentile of the income distribution pays an effective average tax rate of 30.5 per- cent and contributes more than a quarter of total income tax revenue. Within the top percentile, the effective average tax rate is first increasing and then decreasing with income. Since the 1990s, ef- fective average tax rates for the German super rich have fallen by about a third, with major reduc- tions occurring in the wake of the personal income tax reform of 2001-2005. As a result, the con- centration of net incomes at the very top of the distribution has strongly increased in Germany.

Effective Taxation of Top Incomes in Germany

Abstract We exploit a dataset that includes the individual tax returns of all taxpayers in the top percentile of the income distribution in Germany to pin down the effective income taxation of households with very high incomes. Taking tax base erosion into account, we find that the top percentile of the income distribution pays an effective average tax rate of 30.5% and contributes more than a quarter of total income tax revenue. Within the top percentile, the effective average tax rate is first increasing, then decreasing, with income. Since the 1990s, effective average tax rates for the German super-rich have fallen by about a third, with major reductions occurring in the wake of the personal income tax reform of 2001-05. As a result, the concentration of net incomes at the very top of the distribution has strongly increased in Germany.

Who Participates in Income Shifting?

This paper analyzes the sources of heterogeneity in legal tax avoidance strategies across individuals. Three conditions are required for a taxpayer to participate in tax avoidance: incentive, access, and awareness. Using rich Swedish administrative panel data with a unique link between corporate and individual tax returns, we analyze individual participation in legal tax planning around the 2006 Swedish tax reform. Our results suggest that closely held corporations are utilized to facilitate income shifting across tax bases to reduce the individual’s overall tax burden. We find that both tax incentives and awareness of tax incentives impact the decision to access income-shifting opportunities. Our results show that factors explaining participation in legal tax avoidance substantially differ from those explaining participation in illegal tax evasion.

Tax Incentives and Charitable Contributions: the Evidence from Censored Quantile Regression

AbstractThis paper investigates the relationship between tax price and charitable contributions using the censored quantile regression (QR) technique, which can provide a complete description of the whole distribution of giving, and data from US Internal Revenue Service individual tax returns. The findings of the present study are as follows. First, the price elasticities of charitable contributions are all negative and consistently decrease in absolute value along the quantiles. Second, donors at lower giving quantiles are price elastic but donors at higher quantiles are price inelastic. Third, the income elasticities are positive and increase along the quantiles. Lastly, the effects of wealth, age, marital status, and the number of dependents vary across quantiles. All the empirical results show that the censored QR offers better explanations on the relationship between tax incentives and charitable contributions.

Wills for Everyone: Helping Individuals Opt Out of Intestacy

Most Americans die without executing a will, thereby allowing testamentary freedom to lapse and property owned at death to pass by default rules of intestacy rather than the decedent’s expressed intent. This is problematic because most individuals without a will neither intend to die intestate and nor understand the significant undesirable consequences of intestacy. Prior intestacy scholarship evaluated the fairness, efficiency and social consequences of the current rules of heirship, but implicitly accepted the high rate of intestacy as a fait accompli. This Article rejects the assumption that the high rate of intestacy is insusceptible to legal reform. Scholars have traditionally explained the high long-term rate of intestacy as the product of psychological fears regarding mortality and the unwillingness to contemplate matters relating to death. But this explanation seems implausible. Even though humans commonly harbor fears about death, they are psychologically capable of contemplating the succession of property as demonstrated by the widespread use of non-testamentary transfers such as life insurance and jointly titled property with survivorship rights. This Article proposes an alternative explanation for testamentary procrastination, ascribing blame on the relative inaccessibility of the will-making process because of its obscurity, complexity, and cost. To simplify and promote lay access to the will-making process, this Article proposes a theory of lay testation and advocates for renewed consideration of statutory form wills with several important innovations. The most notable proposal is the creation of a “testamentary schedule,” an optional form will attached to the state individual income tax return that could be prepared and filed electronically. By integrating the income tax and estate planning processes, the testamentary schedule would discourage testamentary procrastination by interacting with the testator annually at the optimal moment, when she is required to prepare legally significant tax documents that in many cases take into account considerations relevant to estate planning (e.g., potential beneficiaries and the nature and extent of property). The Appendix includes a sample testamentary schedule and revocation form.

Why Don't Taxpayers Maximize their Tax-Based Student Aid? Salience and Inertia in Program Selection

Abstract Tax-based federal student aid is designed to increase postsecondary attendance and ease the financial burden of higher education enrollment by offering students and their families a menu of tax incentives. However, many taxpayers who are eligible for more than one tax-based aid program, and who are limited to one program per student each year, fail to select the single program that offers the largest reduction in taxes. Analyzing a panel dataset of individual income tax returns, I find that in roughly one out of four returns taxpayers and paid preparers fail to select the tax-minimizing tax-based aid program. I find evidence that greater salience of federal tax effects, and inertia in program selection, leads some taxpayers and paid preparers to make non-tax-minimizing selections. Streamlining the set of tax-based aid programs into a single tax incentive is likely to be a more effective way of lowering the costs of postsecondary attendance for students and their families.

Time to Retire? The Effect of State Fiscal Policies on Retirement Decisions

Our research addresses the importance of state fiscal policies on the probability of retirement using a panel of individual tax return data. Results indicate that a one percentage point increase in the income or sales tax rate reduces the probability of retirement by about 8.7 percent. The evidence suggests that state spending might also affect retirement decisions but magnitudes are inconclusive. In general, the results suggest that the income effect dominates; that is, higher tax rates at the state-level reduce disposable income and decrease the probability of retiring. Results are similar in models examining single and married filers separately.

Impact of quality antecedents on taxpayer satisfaction with online tax-filing systems—An empirical study

This paper discusses taxpayer satisfaction with an online system for filing individual income tax returns. Online tax-filing system quality encompasses information, system, and service qualities, which are the antecedents of user satisfaction with any system. To measure online tax-filing system quality, a second-order measurement model was tested using higher-order confirmatory factor analysis. Hierarchical factor analysis supported the measurement model of IS quality in the research setting. Path analysis using structural equation modeling confirmed that the quality antecedents strongly influenced taxpayer satisfaction with the online tax-filing system. Furthermore, the factors of information and system quality were more important than service quality in measuring taxpayer satisfaction, demonstrating the importance to taxpayers of system outputs and processing ability. Based on the findings, implications for online tax-filing systems are discussed. Finally, limitations are presented.

THE ESTIMATION OF HUMAN CAPITAL BY ADMINISTRATIVE ARCHIVES IN A STATIC AND LONGITUDINAL PERSPECTIVE: THE CASE OF MILAN

Abstract This paper focuses on the estimation of the latent variable human capital (HC) at disaggregated level (worker) by available routinely institutional data flows. In particular we utilize the Lombardy region administrative archive ‘Employment Centers of the Province of Milan’, collecting information about careers of workers in the private sector of the Milan area, and administrative flows collecting mandatory workers' individual income tax returns, filed with the National Internal Revenue Service. First, we propose and empirically estimate HC scores in a static (referred to 2004) framework, by means of a realistic measurement model within causal relationships among endogenous and exogenous (investment) HC indicators. Furthermore, the model also specifies a set of (concomitant) indicators that, not belonging to HC investment indicators, have causal impact on endogenous variables and on HC scores, too. Second, we propose a longitudinal analysis (period 2000–2004) aimed to investigate how workers' earned income growth rates vary over workers' educational levels and other personal characteristics. The empirical results of both analyses confirm the characteristics of the Italian job market, denoted by marked inequalities, and knowledge regarding the process of school to work transition, characterized by a weak incidence of education on longitudinal trajectories of earned income.

A Theoretical Analysis of Income Tax Evasion, Optimal Auditing, and Credibility in Developing Countries

We first construct a theoretical model of tax evasion in a stylized developing country in which all taxpayers have either high or low income. The key problem is that the high-income taxpayers may underreport their income. An individual income tax return can only be verified with an audit that costs c. There is a constant tax rate τ on income and a fine F on underpaid tax. In this setting, we analyze two cases. In the first case, the tax authority pre-commits to its audit policy. We determine the optimal audit policy for the tax authority and then we discuss why this policy is not credible. In the second case, there is a fixed proportion of high-income taxpayers who report their income truthfully. In this context, we first study the properties of a credible audit policy. Then, we examine the impact of an increase in the three parameters (c, τ, F) on the equilibrium audit policy.

Present-Biased Preferences and Credit Card Borrowing

Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and to have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints. (JEL D12, D14, D91)

Green, Black and Brown: Uncovering Latvia's Environmental Politics

Click to increase image sizeClick to decrease image sizeKeywords: Latvia, environmentalismLatvian Green Partyparty politics Notes Notes 1 1 lat = 0.7 euro. 2 Law on the Financing of Political Organizations, amended August 2008, ‘Politisko Partiju Finansēšanas likums’ (available at: http://www.likumi.lv/doc.php?id=36189&from=off, accessed 1 June 2009). 3 For example, the Latvian Anti-Corruption Bureau (KNAB) found that 93% of donations to the Green/Farmers Union were made by people who claimed that the money came from money earned more than three years previously – and the Latvian taxation authorities can only investigate individual tax-returns with a three-year backlog. Thus, the truth of these claims cannot be investigated (Korupcijas Novēršanas un Apkarošanas Birojs 2004). 4 Daunis Auers's interview with D. Rasnačs (TB/LNNK Parliamentary Deputy 1995–present, Minister of Justice 1995–1998), 11 March 2002. 5 Aivars Lembergs, the long-standing Mayor of Ventspils and best-known advocate of the Ventspils group of companies, has been charged by Latvian prosecutors as the de facto owner of the offshore businesses that own the major transit-related businesses in Ventspils, and thus the de facto leader of the Ventspils group (Lapsa & Jančevska 2006 Lapsa, L and Jančevska, K. 2006. Kas ir Lembergs? [What is Lembergs?], Rīga: Pilsētai un Pasaulei. [Google Scholar]). 6 Parliamentary deputies from all three parties have been interviewed as suspects in the investigation of the ‘Lembergs's stipendiates’ list discussed later in this section. 7 The total declared income of ZZS in 2002 was 503,292.32 lats (Latvian Anti-Corruption Bureau 2002).

A Theoretical Analysis of Income Tax Evasion, Optimal Auditing, and Credibility in Developing Countries

We first construct a theoretical model of tax evasion in a stylized developing country in which all taxpayers have either high or low income. The key problem is that the high income taxpayers may under report their income. An individual income tax return can only be verified with an audit that costs c. There is a constant tax rate τ on income and a fine F on underpaid tax. In this setting, we analyze two cases. In the first case, the tax authority pre-commits to its audit policy. We determine the optimal audit policy for the tax authority and then we discuss why this policy is not credible. In the second case, there is a fixed proportion of high income taxpayers who report their income truthfully. In this context, we first study the properties of a credible audit policy. Then, we examine the impact of an increase in the three parameters (c, τ , F) on the equilibrium audit policy.

Income Mobility in the United States: New Evidence from Income Tax Data

While many studies have documented the long-term trend of increasing income inequality in the U.S. economy, there has been less focus on income mobility and the potential opportunity for upward mobility. Data from panels of individual income tax returns suggest that there was considerable income mobility in the U.S. economy over the 1987-1996 and 1996-2005 periods. Consistent with prior mobility studies, the data show that over half of taxpayers moved to a different income quintile and that roughly half of taxpayers who began in the bottom income quintile moved up to a higher income group by the end of each period. By contrast, those with the very highest incomes in the base year were more likely to drop to a lower income group and the median real income of these taxpayers declined in each period. Economic growth resulted in rising incomes for most taxpayers over both time periods. Initial position in the income distribution and changes in marital status were found to be associated with the largest upward or downward movements through the income distribution.

Present-Biased Preferences and Credit Card Borrowing

Some individuals borrow extensively on their credit cards. This paper tests whether present-biased time preferences correlate with credit card borrowing. In a field study, we elicit individual time preferences with incentivized choice experiments, and match resulting time preference measures to individual credit reports and annual tax returns. The results indicate that present-biased individuals are more likely to have credit card debt, and have significantly higher amounts of credit card debt, controlling for disposable income, other socio-demographics, and credit constraints.

The Benefits and Costs of I-File

In 2007, nearly 60 percent of all Federal individual tax returns were filed electronically, about three times the proportion 10 years earlier. Because electronic filing is both more efficient and more accurate than filing by mail, it generates substantial savings for taxpayers: The Internal Revenue Service (IRS) estimates it saves $2.36 for each electronically-filed return. The clear benefits of electronic filing have led policymakers to ask what steps can be taken to accelerate its adoption. One such proposal, commonly referred to as I-File, calls for the IRS to develop and operate an online tax filing system that would allow individuals to prepare their returns online and submit their returns directly to the IRS. In this paper, we analyze the likely benefits and costs of I-File. We conclude that I-File proposals do not represent a viable approach to increasing electronic filing, improving the efficiency of the IRS, or reducing the costs to taxpayers of filing tax returns.