Estimation and Interpretation of Tax Distortions
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Nathan Seegert, University of Utah
Bunching versus Diff-in-Diff
AbstractHow can we reconcile the wide differences between difference-in-difference estimates and bunching estimates of taxable income elasticities? We provide a simple framework showing how the dynamics of bunching estimates and difference-in-difference estimates around the time of tax reforms can shed light on the role of optimization frictions in determining taxable income responses. We implement our method on U.K. data and a reform to the top income tax brackets.
AbstractThis paper shows that the sufficient statistic approach to the welfare properties of income (and other) taxes does not extend to tax systems with notches, because with notches, changes in bunching induced by changes in tax rates have a first-order effect on tax revenues. In an income tax setting, we show that the marginal excess burden (MEB) and the welfare-maximizing top rate of tax are given by the relevant formulae for a proportional tax as in Feldstein (1999) plus a correction factor. The Feldstein formulae always underestimate the MEB and overestimate the revenue and welfare-maximizing rate of tax. Quantitatively, these mis-estimates can be very large; the MEB can be underestimated by an order of magnitude. An application to VAT is discussed; with a calibration to UK data, the MEB of the VAT is roughly three times what is would be if VAT was simply a proportional tax.
Tax Advantages and Imperfect Competition in Auctions for Municipal Bonds
AbstractWe show that the effect of tax advantages of municipal bonds on the market structure of municipal
bond auctions is a crucial determinant of state and local governments’ borrowing costs. Reduced-form estimates show that increasing the tax advantage by 3-pp. lowers mean borrowing costs by 9-10%, consistent with a greater-than-unity passthrough elasticity. Non-parametric evidence shows that strategic participation and bidding in imperfectly-competitive auctions generates this greater-than-unity passthrough. Using a structural auction model to evaluate the efficiency of Obama and Trump administration proposals, we find that the reduction in municipal borrowing costs is 2.8-times the revenue cost of the tax advantage
Federal Reserve Bank of San Francisco
University of Oregon
University of Michigan
John N. Friedman,
- H20 - General
- H21 - Efficiency; Optimal Taxation