Taxing top earners: a human capital perspective
We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a human capital model. The top of the model Laffer curve occurs at a 53 percent top tax rate. Tax revenues and the tax rate at the top of the Laffer curve are smaller compared to an otherwise similar model that ignores the possibility of skill change in response to a tax reform. We also show that if one applies the methods used by Diamond and Saez (2011) to provide quantitative guidance for setting the tax rate on top earners to model data then the resulting tax rate exceeds the tax rate at ...
Housing affordability: recommendations for new research to guide policy
This article highlights areas where economic research is needed to guide federal policymakers addressing the challenge of improving housing affordability. The author places these research recommendations in the framework of five key issues, reflecting policymakers? need to identify a rationale for government action; to employ a single, clear measure to gauge affordability; to understand the unintended consequences of current housing policies; to ensure that the political environment is considered when developing policy; and to decide whether to use housing finance reform as a means of ...
Estimating the Intergenerational Elasticity and Rank Association in the U.S.: Overcoming the Current Limitations of Tax Data
Ideal estimates of the intergenerational elasticity (IGE) in income require a large panel of income data covering the entire working lifetimes for two generations. Previous studies have demonstrated that using short panels and covering only certain portions of the life cycle can lead to considerable bias. A recent influential study by Chetty et al. (2014) using tax data estimates the IGE in family income for the entire U.S. to be 0.344, considerably lower than most previous estimates. Despite the seeming advantages of extremely large samples of administrative tax data, I demonstrate that the ...
The Sufficient Statistic Approach: Predicting the Top of the Laffer Curve
We provide a formula for the tax rate at the top of the Laffer curve as a function of three elasticities. Our formula applies to static models and to steady states of dynamic models. One of the elasticities that enters our formula has been estimated in the elasticity of taxable income literature. We apply standard empirical methods from this literature to data produced by reforming the tax system in a model economy. We find that these standard methods underestimate the relevant elasticity in models with endogenous human capital accumulation.
Smoothing state tax revenues over the business cycle: gauging fiscal needs and opportunities
During the two most recent U.S. recessions in 2001 and in 2007?2009, state governments experienced an unusually high degree of fiscal stress due to increased revenue cyclicality. Expanding upon the aggregate evidence, this paper explores the degree to which individual states have experienced fluctuating tax receipts over the business cycle. The findings provide state policymakers with information to better understand the extent and causes of this tax revenue cyclicality and, in the context of balanced budget requirements, the efficacy of alternative measures that might be employed to smooth ...
Tax Reform and U.S. Effective Profit Taxes: From Low to Lower
The Tax Cuts and Jobs Act (TCJA) reduced the federal corporate profit tax rate from 35 percent to 21 percent. Adding in state profit taxes, the overall U.S. tax rate went from 39 percent, one of the highest rates in the world, to 26 percent, about the average rate abroad. The implications of the new law for U.S. competitiveness depend on how these statutory tax rates compare with the actual rates faced by U.S. and foreign companies. To address this question, this post presents new evidence on tax payments as a share of profits, as well as analytical measures of tax impacts on profitability. ...
The Near Term Growth Impact of the Tax Cuts and Jobs Act
This note uses existing empirical estimates of the macroeconomic effects of tax changes to project the near term impact of the Tax Cuts and Jobs Act on US GDP growth. Applying recent reduced form estimates of tax multipliers with the projected revenue impact of the Act yields a level of GDP that is predicted to be 1.3% higher by 2020, with most of the growth front-loaded in 2018. Accounting for the composition of the Act in terms of its individual and corporate provisions leads to a similar GDP increase by 2020, but with stronger growth in 2018 and a partial reversal in the following years. ...
Should Platforms be Allowed to Charge Ad Valorem Fees?
Many platforms that facilitate transactions between buyers and sellers charge ad valorem fees in which fees depend on the transaction price set by sellers. Given these platforms do not incur significant costs that vary with transaction prices, their use of ad valorem fees has raised controversies about the efficiency of this practice. In this paper, using a model that connects platforms' use of ad valorem fees to third-degree price discrimination, we evaluate the welfare consequences of banning such fees. We find the use of ad valorem fees generally increases welfare, including for calibrated ...
Disinvesting in the future?: a comprehensive examination of the effects of state appropriations for public higher education
In aggregate, state appropriations are the largest revenue source for public higher education in the United States. However, these appropriations have significantly declined over past decades, drawing serious concerns about the potential negative impact on schools and students. This paper provides a more comprehensive study of the effects of state appropriations than previous research, while explicitly exploring and testing the heterogeneity of the effects by institutional type. It finds strong evidence of the negative effects of state appropriation cuts in the areas of tuition and fees, ...
Quantitative Macro Versus Sufficient Statistic Approach: A Laffer Curve Dilemma?
This article highlights two approaches to tax policy for the top 1 percent of earners. On the one hand are dynamic general equilibrium models requiring complicated calibration and simulation algorithms and strong structural assumptions. On the other hand is the sufficient statistic approach, which attempts to parsimoniously reach the trinity of empirical, theoretical, and policy relevance. The author illustrates ongoing work highlighting explicit connections between these two approaches.