US Income Research Articles

Convergence, Trade and Institutions

Does openness contribute to convergence of countries to the US income level? Our statistical and econometric analysis concludes for an affirmative answer. Using data for 150 countries for 1970-2012 we conclude almost all cases fell in three groups of countries that experienced a significant convergence: (i) followed the Asian export model, (ii) accessed the European Union, or (iii) are rich in natural resources and had an appropriate policy. All three cases are based on openness. Institutions also play a major role. There is beta-convergence. But over the all period only 20% of the countries jumped from low to middle and from middle to high income, which shows the persistence of each group.The paper "Development Theory and Globalization, the Second Wave: A Reinterpretation" to which this Appendix II applies is available at the following URL: http://ssrn.com/abstract=2444601Appendix I for this paper are available at the following URL: http://ssrn.com/abstract=2444622

Tracing Tails – Large Idiosyncratic Income Shocks in a Heterogeneous Agent Asset Pricing Model

I present evidence that large individual income changes can help explaining the size and value premium in a cross-section of portfolio returns. I develop a tail risk measure, the Idiosyncratic Income Risk Factor and estimate it on US income data. The results show that the extreme income shocks vary with the state of the economy. In an augmented Consumption-Based Asset Pricing Model, the Idiosyncratic Income Risk Factor emerges as a priced factor when explaining a cross-section of returns of 25 portfolios sorted by size and book-to-market ratio. The findings support Krebs’ (2004) critique of the Constantinides and Duffie (1996) idiosyncratic risk asset pricing model: central moments of the cross-sectional distribution of income cannot be used to test the implications of the Constantinides and Duffie (1996) model. I present evidence that supports the notion of a fat-tail-generating personal disaster process affecting asset prices.

The myth of America's “culture of consumerism”: Policy may help drive American household's fraying finances

This article examines why American consumption has boomed over the past three decades, even as wages have stagnated and debt has risen. Although many analysts characterize rising spending as a product of a “culture of consumerism,” these analyses suggest that much of this spending growth is on well-being-essential products, whose prices have been rising quickly. Nonessential consumption growth is primarily occurring at the top of the US income pyramid, while the strains of paying for basic essentials may push lower income households into greater debt. America's purported inability to restrain consumption spending may be attributable to policy-induced structural factors that make basic necessities expensive, and less a product of modern marketing, media, or some other cultural phenomenon.

Empirical Asset Pricing with Reference-Dependent Heterogeneous Agents

I propose a strategy for the empirical evaluation of prospect theory that links concepts from the literature on asset pricing with heterogeneous agents to behavioral finance. I develop an asset pricing model in which two representative agents maximize their utility by investing in risky assets. One agent represents the behavior of investors above their reference level, one below. Using US income panel data, investors are sorted into groups depending on recent income development. In line with prospect theory, estimation results show that investors below their reference level act risk-seeking. The cross-sectional variation in returns of portfolios sorted by size and book-to-market value can be explained with a plausible risk aversion coefficient of ten while the unexplained equity premium is drastically reduced.

How Taxing is Tax Filing? Leaving Money on the Table Because of Compliance Costs

I use a quasi-experimental design and a novel identification strategy to estimate the burden of filing taxes. Employing a sample of US income tax returns, I observe the preferences of taxpayers when choosing between itemizing deductions and claiming the standard deduction. Taxpayers forego tax savings to avoid the hassle cost of itemizing, resulting in an average burden of itemizing of $644, with substantial heterogeneity. A revealed preference argument implies that itemizing deductions is as painful as working 19 hours. The burden of tax filing is larger for richer households, consistent with the fact that the value of time increases with income. I explore two explanations for the result. First, it could be due to an extreme aversion to filing taxes. Such aversion implies that itemizing deductions imposes aggregate hassles costs of 0.2% of GDP and back-of-the-envelope extrapolations to filing federal taxes yields an overall burden of 1.25% of GDP. Second, if taxpayers are time inconsistent they may forego large benefits even when hassle costs are relatively small due to procrastination. I provide evidence most consistent with taxpayers being present-biased. Both explanations – whether driven by preferences or mistakes – suggest that the tax filing burden is significantly larger than previously estimated. I discuss policy implications of the result.

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.

Optimal Level of Government Debt - Matching Wealth Inequality and the Fiscal Sector

We calibrate an incomplete markets large scale OLG model to the US income and wealth distribution and examine the effects of alternative government debt levels and adjustment policies on macroeconomic aggregates and welfare. We find that the government should hold negative debt. Due to the high degree of wealth and income dispersion ex ante lifetime utility increases with increasing wages (falling interest rates) by around 6% of lifetime consumption at optimal debt levels. The optimal level depends on the adjustment policy can vary by up to 70% of GDP (between -180% and -110%). With lower government debt, high income/wealth agents are always worse off. Adjusting transfers benefits the lowest income/wealth group. The largest gains are, however, experienced by agents in the middle of the income/wealth distribution: they benefit from higher wages and transfers but do not lose too much capital income.

The Austerity of Low Pay: US Exceptionalism in the Age of Inequality

This essay begins by establishing that US income inequality was high relative to other high-income countries in 1980 and became an extreme outlier by the mid-2000s. It then provides a brief account of the main forces underlying America’s path to extreme inequality and low wages. Finally, it shows how low-paid workers in the United States have fared relative to their counterparts in the rest of the rich world. It does so by reference to two sets of findings from my recent research. The first finding is that extreme inequality has not only not bought the United States exceptional productivity growth, but also that the United States shares less of its productivity growth with wage earners than is typical of other rich countries. The second set of statistics shows that the US low-wage share of employment is the highest in the rich world, and reports that the share of young, less-educated workers paid low wages is far higher in the United States than France, mainly due to the diametrically opposed minimum wage policies. At the same time, the evidence does not support the orthodox prediction that French employment performance worsened for these workers, either in absolute terms or relative to their US counterparts. The widespread advocacy for austerity in the current political debate is a reflection of the power of the same free market fundamentalism that generated and promoted the post-1980 laissez-faire experiment. To reduce inequality and promote economic growth and middle-class incomes, the article concludes with a call for replacing this disastrous experiment—including its prescriptions for austerity for the less well-off—with a return to the relative egalitarianism of the pre-1980 era.

A note on the ‘food paradox’: some contradictory evidence

A sample of 200 households in one New York City neighborhood in 1904 shows constant per capita food consumption as households grow in size, holding constant per capita expenditure. Logan (Econ Inq 49(4):1008–1028, 2011) presents US historical evidence that per capita food consumption declines as households grow, replicating contemporary cross-national evidence reported by Deaton and Paxson (J Political Econ 106(5):897–930, 1998), which they describe as a ‘paradox’. Possible reasons for the contradictory evidence include minimal price variation within a city, greater homogeneity of household units, more being spend on rent leading to greater benefits of sharing living space, and application of the unitary household model to a more appropriate setting. Time series estimates of US price and income elasticity of food demand show constant or increasing per capita consumption, which also contradicts the received literature.

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.

How Much Would US Style Fiscal Integration Buffer European Unemployment and Income Shocks? (A Comparative Empirical Analysis)

We examine the degree to which federal fiscal integration smoothes income and unemployment shocks across US States. We find that roughly 25 cents of every dollar of income shock at the state level is offset by federal fiscal policy. This stabilization comes entirely through the Federal tax system, not through spending stabilizers, automatic or otherwise. If we apply a comparable amount of cross country stabilization to European Union countries (as exists across US States), Greece and Spain would be receiving additional transfers of 2.5 percent of GDP.

How Elastic Are Preferences for Redistribution? Evidence from Randomized Survey Experiments

We analyze randomized online survey experiments providing interactive, customized information on US income inequality, the link between top income tax rates and economic growth, and the estate tax. The treatment has large effects on views about inequality but only slightly moves tax and transfer policy preferences. An exception is the estate tax—informing respondents of the small share of decedents who pay it doubles support for it. The small effects for all other policies can be partially explained by respondents' low trust in government and a disconnect between concerns about social issues and the public policies meant to address them. (JEL D31, D72, H23, H24)

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.

Financialization and US Income Inequality, 1970-2008

Focusing on U.S. non-finance industries, we examine the connection between the financialization of the US economy and rising income inequality. We argue that the increasing reliance by firms on earnings realized through financial channels decoupled the generation of surplus from production, strengthening owners' and elite workers' negotiating power relative to other workers. Moreover, the financial conception of the firm reduced capital and management commitment to production, further marginalizing labor’s role in U.S. corporations. The result was an incremental exclusion of the general workforce from revenue generating and compensation setting processes. Using time-series cross-section data at the industry level, our analysis shows that increased dependence on financial income, in the long run, decreased labor's share of income, increased top executives' share of compensation, and increased earnings dispersion among workers. Net of conventional explanations, including declining unionization, globalization, technological change, and capital investment, the effects of financialization are substantial on all three dimensions of increased inequality. The counterfactual analysis suggests that financialization accounts for more than half of the decline in labor's share of income, 10 percent of the growth in officers' share of compensation, and 15 percent of the growth in earnings dispersion between 1970 and 2008.