US Income Tax Research Articles

Measuring Revenue-Maximising Elasticities of Taxable Income: Evidence for the US Income Tax

A recent review of empirical estimates of the elasticity of taxable income (ETI) concluded that ‘the US marginal top rate is far from the top of the Laffer curve’ (Saez et al, 2012, p.42). This paper provides a detailed examination of the analysis underlying this conclusion, and considers whether other tax rates in the US income tax system are on the ‘right’ side of the Laffer curve. Conceptual expressions for ‘Laffer-maximum’ or revenue-maximizing ETIs, based on readily observable parameters, are presented for individuals and groups of taxpayers in a multi-rate income tax system. Applying these to the US income tax in 2005, with its complex effective marginal rate structure, demonstrates that a wide range of revenue-maximizing ETI values can be expected for individual taxpayers within and across tax brackets, and in aggregate. For many taxpayers these revenue-maximizing ETIs are well within the range of empirically estimated elasticities.

The Tax Benefit of Income Smoothing

A worker can contribute pre-tax dollars to a private pension plan. Under a progressive tax, this feature reduces income taxes. Ippolito (1986) argues that an individual in 1979 can reduce lifetime taxes by 20%. We re-examine his analysis using the complete time-series of US income tax history and find that the tax benefit of income smoothing is much smaller.

The Properties of Income Risk in Privately Held Businesses

Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less persistent, but is also characterized by higher probabilities of extreme upward transition, compared to labor income. Furthermore, the distribution of percent changes for business income is more dispersed than that for labor income, and it also indicates that business income faces substantially higher tail risks. Our results suggest that the high-income households are more likely to bear both the big positive and the big negative business income percent changes.

From Obsolescence to Sustainability, Back Again, and Beyond

ABSTRACTThis article traces the idea of architectural obsolescence in twentieth-century architecture and urbanism: where the idea comes from that buildings and cities can suddenly lose their value and utility, and how architects and others around the world responded to the perception that obsolescence characterized modernity. Evolving out of early twentieth-century US income tax policy and capitalist real estate development, the paradigm of obsolescence spread globally in the mid-century urban and social realms before impacting architecture directly. Some designers embraced obsolescence's liberating promise of expendability and short-life buildings. Others were horrified by its implications of ephemerality and waste, leading to preservationism, postmodernism, and ecologism. Obsolescence, as a paradigm for comprehending and managing change in the built environment, thus set the stage for its successor worldview of sustainability, it is argued. Yet obsolescence and sustainability are also intimately linked through similar views of performance and quantification, technology and the past. Understanding the complex relationships between obsolescence and sustainability historicizes both paradigms, critiques their inevitability, and thus looks beyond the horizon of sustainability to a possibly different future.

Optimal factor tax incidence in two-sector human capital-based models

This paper studies the optimal factor tax incidence in a standard two-sector, human capital-based endogenous growth model elucidated by Lucas (1988). Capital income taxes generate dynamic inefficiency for capital accumulation and labor income taxes create dynamic inefficiency for human capital accumulation. A factor tax incidence is a tradeoff between these two inefficiencies. A switch from capital income taxes to labor income taxes reduces the long-run welfare coming from lower leisure and increases the long-run welfare originated from higher economic growth and higher consumption. Because the representative agent's learning time and human capital are inseparable and thus affect learning activities at the same degree, we find that based on the current US income tax code, it is optimal to first tax capital income, and to resort to taxing labor income only when tax revenue is insufficient to cover government expenditure.

Road Crash Fatalities on US Income Tax Days

Road Crash Fatalities on US Income Tax Days

The new US exit tax scheme: breaking off a long-term relationship with Uncle Sam

The new US exit tax scheme: breaking off a long-term relationship with Uncle Sam

The Properties of Income Risk in Privately Held Businesses

Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less persistent, but is also characterized by higher probabilities of extreme upward transition, compared to labor income. Furthermore, the distribution of percent changes for business income is more dispersed than that for labor income, and it also indicates that business income faces substantially higher tail risks. Our results suggest that the high-income households are more likely to bear both the big positive and the big negative business income percent changes.

The Properties of Income Risk in Privately Held Businesses

Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less persistent, but is also characterized by higher probabilities of extreme upward transition, compared to labor income. Furthermore, the distribution of percent changes for business income is more dispersed than that for labor income, and it also indicates that business income faces substantially higher tail risks. Our results suggest that the high-income households are more likely to bear both the big positive and the big negative business income percent changes.

Decomposition of progressivity and inequality indices: Inferences from the US federal income tax system

Vertical equity is an important criterion in evaluating a tax system. Vertical equity has two elements: progressivity and income equality. In this paper, we analyze the vertical equity effects of the US income tax system during 1995–2006 and show that income inequality increased substantially during the period combined with a significant reduction in real progressivity.Using a Lorenz-curve-based graphical method, we decompose progressivity and income inequality indices and identify and quantify how much each source of income contributes to overall progressivity and income inequality. Results for the 1995–2006 period indicate that US income tax treatment of Salaries and Wages income were distributed and taxed progressively and contributed to a decrease in income inequality. However, the treatment of Net Capital Gains not only decreased progressivity, it negated the income inequality reduction achieved by salaries and wages.These results show that to evaluate the vertical equity of a tax system, both income inequality and progressivity indexes must be considered. Additionally, the decomposition method allows policy makers to estimate the progressivity and income inequality effects of marginal changes in income source and how each source is taxed.

The Foreign Source Income Repatriation Patterns of US Parents in Worldwide Loss

On average, 40 percent of US corporations with foreign source income are not taxable because they are in loss, and annually these loss firms are responsible for about 13 percent of foreign source dividend repatriations. Yet the repatriation behavior of these US parents in loss has largely been overlooked, both in policy analysis and in the economic literature. This study uses a balanced panel of US income tax returns from 1998 to 2002 in order to examine the repatriation behavior of US parents in loss. The panel data allows us to relate the repatriation behavior of individual US parents to their income status. The paper demonstrates that the unique incentives facing firms in loss years can cause the repatriation behavior in loss years to differ systematically from repatriation behavior in income years. As a result of this finding, it may be prudent for those who analyze dividend repatriation to incorporate the unique incentives facing US parents in loss in order to improve the accuracy of empirical estimates of the effects of taxes on repatriation.

Host-country governance, tax treaties and US direct investment abroad

We investigate how the quality of the host-country governance and a bilateral US income tax treaty affect the rates of return that US companies require on their foreign direct investment (FDI). Using indexes of corruption and political instability, we find that poor governance causes the companies to require significantly higher rates of return. This lends support to earlier authors who have concluded that poor governance discourages both local investment and inward FDI. After accounting for the quality of host-country governance, however, no evidence could be found that an income tax treaty has any effect on the required rates of return.

On the optimal progressivity of the income tax code

This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions. Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2 % and a fixed deduction of about $ 9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7 % higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62 % ) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.

The effect of marginal tax rates on income: a panel study of ‘bracket creep’

This paper uses a panel of individual tax returns and the ‘bracket creep’ as source of tax rate variation to construct instrumental variables estimates of the sensitivity of income to changes in tax rates. From 1979 to 1981, the US income tax schedule was fixed in nominal terms while inflation was high (around 10%). This produced a real change in tax rate schedules. Taxpayers near the top-end of a tax bracket were more likely to creep to a higher bracket and thus experience a rise in marginal rates the following year than the other taxpayers. Compensated elasticities can be estimated by comparing the differences in changes in income between taxpayers close to the top-end of a tax bracket to the other taxpayers. These estimates, based on comparisons between very similar groups, are robust to underlying changes in the income distribution, such as a rise in inequality. The elasticities of taxable income and adjusted gross income are around 0.4 and significant but the elasticities of wage income are in general insignificant and close to zero.

Ending the Taxation of Foreign Business Income

This article examines the current system of taxation of income earned by US residents (both corporations and individuals) in foreign countries. It finds that adopting a system whereby this income was exempt from US income tax would increase economic efficiency.

Do Taxpayers Bunch at Kink Points?

This paper uses tax return data to analyze bunching at the kink points of the US income tax schedule. We estimate the compensated elasticity of reported income with respect to (one minus) the marginal tax rate using bunching evidence. We find clear evidence of bunching around the first kink point of the Earned Income Tax Credit but concentrated solely among the self-employed. A simple tax evasion model can account for those results. We find evidence of bunching at the threshold of the first income tax bracket where tax liability starts but no evidence of bunching at any other kink point. (JEL H23, H24, H26)

The Japan–US Income Tax Treaty

The Japan–US Income Tax Treaty