MARGINAL TAX RATES AND INCOME Mertens, Karel; Olea, José Luis Montiel
The Quarterly journal of economics,
11/2018, Volume:
133, Issue:
4
Journal Article
Peer reviewed
Open access
Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the United States, this study estimates short-run tax elasticities of reported income ...of around 1.2 based on time series from 1946 to 2012. Estimated elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this article arise because of additional efforts to account for dynamics, expectations, and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. There is also evidence that the responses are to marginal tax rates rather than average tax rates. Counterfactual tax cuts targeting the top 1% alone are estimated to have short-run positive effects on economic activity and incomes outside of the top 1%, but to increase inequality in pretax incomes. Cuts for taxpayers outside of the top 1% also lead to increases in incomes and economic activity, but with a longer delay.
In 2001, Norwegian tax records became easily accessible online, allowing everyone in the country to observe the incomes of everyone else. According to the income comparisons model, this change in ...transparency can widen the gap in well-being between richer and poorer individuals. Using survey data from 1985–2013 and multiple identification strategies, we show that the higher transparency increased the gap in happiness between richer and poorer individuals by 29 percent, and it increased the life satisfaction gap by 21 percent. We provide back-of-the-envelope estimates of the importance of income comparisons, and discuss implications for the ongoing debate on transparency policies.
The paper estimates the extent of evasion of personal income tax (PIT) in Italy by integrating two methods that the literature has previously applied separately. The consumption‐based method ...introduced by Pissarides and Weber (1989) is used to estimate misreporting of income in micro data collected in the household IT‐SILC survey. We adopt an econometric specification close in spirit to that of Feldman and Slemrod (2007), which allows us to estimate income misreporting at different rates for different income sources. The misreporting estimates are then used in the discrepancy method to correct the incomes compared with administrative registered data. The comparison provides new estimates of evasion of personal income tax by type of income, region and income class. The estimates are used to improve microsimulation analyses of the distributional impact of tax evasion.
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.
Rising inequality reduced income growth for the bottom 95% of the US personal income distribution beginning about 1980. To maintain stable debt to income, this group's consumption-income ratio needed ...to decline, which did not happen through 2006, and its debt-income ratio rose dramatically, unlike the ratio for the top 5%. In the Great Recession, the consumption-income ratio for the bottom 95% did finally decline, consistent with tighter borrowing constraints, whilst the top 5% ratio rose, consistent with consumption smoothing. We argue that higher inequality and the associated demand drag helps explain the slow recovery.
Using 41 million observations on savings for the population of Denmark, we show that the effects of retirement savings policies on wealth accumulation depend on whether they change savings rates by ...active or passive choice. Subsidies for retirement accounts, which rely on individuals to take an action to raise savings, primarily induce individuals to shift assets from taxable accounts to retirement accounts. We estimate that each $1 of government expenditure on subsidies increases total saving by only 1 cent. In contrast, policies that raise retirement contributions if individuals take no action—such as automatic employer contributions to retirement accounts—increase wealth accumulation substantially. We estimate that approximately 15% of individuals are ‘‘active savers’’ who respond to tax subsidies primarily by shifting assets across accounts; 85% of individuals are ‘‘passive savers’’ who are unresponsive to subsidies but are instead heavily influenced by automatic contributions made on their behalf. Active savers tend to be wealthier and more financially sophisticated. We conclude that automatic contributions are more effective at increasing savings rates than subsidies for three reasons: (i) subsidies induce relatively few individuals to respond, (ii) they generate substantial crowd-out conditional on response, and (iii) they do not increase the savings of passive individuals, who are least prepared for retirement.
We investigate the effect of labor productivity growth, workers’ bargaining power, and legal minimum wage revision rules on income distribution in a novel agent-based macroeconomic model mostly ...inspired by the post-Keynesian literature. Its main novelties are a wage bargaining process and a mark-up adjustment rule featuring a broader set of dimensions and coupled channels of interaction. The former allows nominal wages to be endogenously determined by interactions involving firms and workers, which are mediated by workers’ bargaining power. The latter assumes that firms also consider their position relative to workers (through their unit costs) to set their mark-up rates, thus linking the evolution of nominal wages in the bargaining process and labor productivity growth to the functional income distribution. This has implications for the personal income distribution through a three-class structure for households. The model reproduces numerous stylized facts, including those concerning the income distribution dynamics. By capturing the inherent social conflict over the distribution of income, our results show the importance of the coevolutionary interaction between workers’ bargaining power and productivity growth to the dynamics of income inequality and to its relationship with output. This leads to a policy dilemma between promoting productivity growth and improving income equality which can, nonetheless, be attenuated by combining policies and institutions that protect workers with policies that stimulate technological innovation and productivity growth.
We quantify how sensitive is migration by star scientists to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal ...and corporate taxes on star scientists' migration patterns. The long-run elasticity of mobility relative to taxes is 1.8 for personal income taxes, 1.9 for state corporate income tax, and — 1.7 for the investment tax credit. While there are many other factors that drive when innovative individuals and innovative companies decide to locate, there are enough firms and workers on the margin that state taxes matter.
Though perceived financial well-being is viewed as an important topic of consumer research, the literature contains no accepted definition of this construct. Further, there has been little systematic ...examination of how perceived financial well-being may affect overall well-being. Using consumer financial narratives, several largescale surveys, and two experiments, we conceptualize perceived financial wellbeing as two related but separate constructs: 1) stress related to the management of money today (current money management stress), and 2) a sense of security in one’s financial future (expected future financial security). We develop and validate measures of these constructs (web appendix A) and then demonstrate their relationship to overall well-being, controlling for other life domains and objective measures of the financial domain. Our findings demonstrate that perceived financial well-being is a key predictor of overall well-being and comparable in magnitude to the combined effect of other life domains (job satisfaction, physical health assessment, and relationship support satisfaction). Further, the relative importance of current money management stress to overall well-being varies by income groups and due to the differing antecedents of current money management stress and expected future financial security. Implications for financial well-being and education efforts are offered.
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