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Working Paper
Tax Heterogeneity and Misallocation
Companies face different effective marginal tax rates on their income. This can be detrimental to allocative efficiency unless taxes offset other distortions in the economy. This paper estimates the effect of tax rate heterogeneity on aggregate productivity in distorted economies with multiple frictions. Using firm-level balance-sheet data and estimates of marginal tax rates, we find that tax heterogeneity reduces total factor productivity by about 3 percent. Our findings highlight the positive correlation between marginal tax rates and other distortions to capital and especially labor. This ...
Working Paper
Estimating the Tax and Credit-Event Risk Components of Credit Spreads
This paper argues that tax liabilities explain a large fraction of observed short-maturity investment-grade (IG) spreads, but credit-event premia do not. First, we extend Duffie and Lando (2001) by permitting management to issue both debt and equity. Rather than defaulting, managers of IG firms who receive bad private signals conceal this information and service existing debt via new debt issuance. Consistent with empirical observation, this strategy implies that IG firms have virtually zero credit-event risk (at least until they become ?fallen angels"). Second, we provide empirical evidence ...
Working Paper
Targeted business incentives and the debt behavior of households
The empirical effects of place-based tax incentive schemes designed to aid low-income communities are unclear. While a growing number of studies find beneficial effects on employment, there is little investigation into other behaviors of households affected by such programs. We analyze the impact of the Texas Enterprise Zone Program on household debt and delinquency. Specifically, we utilize detailed information on all household liabilities, delinquencies, and credit scores from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax, a quarterly longitudinal 5% random sample of ...
Working Paper
What Do Survey Data Tell Us about US Businesses?
This paper examines the reliability of survey data on business incomes, valuations, and rates of return, which are key inputs for studies of wealth inequality and entrepreneurial choice. We compare survey responses of business owners with available data from administrative tax records, brokered private business sales, and publicly traded company filings and document problems due to nonrepresentative samples and measurement errors across several surveys, subsamples, and years. We find that the discrepancies are economically relevant for the statistics of interest. We investigate reasons for ...
Working Paper
Capital Gains Taxation and Investment Dynamics
This paper quanti?es the long-run effects of reducing capital gains taxes on aggregate investment. We develop a dynamic general equilibrium model with heterogeneous ?rms, which face discrete capital gains tax rates based on their ?rm size. We calibrate our model by targeting relevant micro moments as well as the difference-in-differences estimate of the capital elasticity based on the institutional setting and a policy reform in Korea. We ?nd that the ?rm-size reform that reduced the capital gains tax rates from 24 percent to 10 percent for the affected ?rms increased aggregate investment by ...
Working Paper
Employer Wage Subsidy Caps and Part-Time Work
Hiring credits and employer wage subsidies are tools that policymakers have available to attempt to improve labor market conditions for workers. This study explores how capped-wage subsidies affect firms’ labor market decisions, in particular, their reliance on part-time and low-skill workers. We focus on the federal Empowerment Zone program, which offers firms in targeted areas a 20 percent wage subsidy (capped at $3,000 per year) for each employee who also resides in the Empowerment Zone. Results using different methods of identification suggest that firms respond to capped-wage subsidies ...
Working Paper
Entrepreneurship and State Taxation
Entrepreneurship plays a vital role in the economy, yet there exists little well-identified research into the effects of taxes on startup activity. Using recently developed county-level data on startups, we examine the effect of states' corporate, personal and sales tax rates on new firm activity and test for cross-border spillovers in response to these policies. We find that new firm employment is negatively?and disproportionately?affected by corporate tax rates. We find little evidence of an effect of personal and sales taxes on entrepreneurial outcomes. Our results are robust to changes in ...
Discussion Paper
How Will the New Tax Law Affectt Homeowners in High Tax States? It Depends
The Tax Cuts and Jobs Act of 2017 (TCJA) introduces significant changes to the federal income tax code for individuals and businesses. Several provisions of the new tax law are particularly significant for the owner?occupied housing market. In this blog post, we compare the federal tax liability and the marginal after-tax cost of mortgage interest and property taxes under the old and new tax codes for a wide range of hypothetical recent home buyers in a high tax state. We find that impacts vary substantially along the income/home price distribution.
Working Paper
Proxy SVARs: Asymptotic Theory, Bootstrap Inference, and the Effects of Income Tax Changes in the United States
Proxy structural vector autoregressions (SVARs) identify structural shocks in vector autoregressions (VARs) with external proxy variables that are correlated with the structural shocks of interest but uncorrelated with other structural shocks. We provide asymptotic theory for proxy SVARs when the VAR innovations and proxy variables are jointly ?-mixing. We also prove the asymptotic validity of a residual-based moving block bootstrap (MBB) for inference on statistics that depend jointly on estimators for the VAR coefficients and for covariances of the VAR innovations and proxy variables. These ...
Working Paper
Corporate Taxes and the Earnings Distribution: Effects of the Domestic Production Activities Deduction
This paper investigates how corporate tax changes affect workers’ earnings. We use a dataset of U.S. worker-level W-2 filings matched with corporate tax returns and study the implementation of the Domestic Production Activities Deduction (DPAD). We find the DPAD tax rate reduction has a substantial effect on the distribution of annual wage earnings within a firm. Earnings of workers at the top of their firm’s earnings distribution rise relative to those at the bottom of the distribution. We estimate a semi-elasticity of average earnings of 1.1 with respect to the DPAD marginal tax rate ...