Tax Policy and the Economy

An NBER conference on Tax Policy and the Economy took place in Washington DC September 26. Research Associate Robert A. Moffitt, Johns Hopkins University and NBER organized the meeting, which was sponsored by the Harry and Lynde Bradley Foundation. These researchers' papers were presented and discussed:

Jonathan Meer, Texas A&M University and NBER, and Benjamin Priday, Texas A&M University

The Impact of Income, Wealth, and Tax Policy on Charitable Giving

Meer and Priday estimate the tax price elasticity of charitable giving using newly-available data from the Panel Study of Income Dynamics. They find that households that always itemize are less sensitive to tax preferences than households that switch itemizing status. The researchers apply these results to the provisions of the Tax Cut and Jobs Act of 2017, taking into account the marginal propensity to donate from the increase in disposable income expected for most households, and predict significant reductions in charitable giving.

Katherine Baicker, University of Chicago and NBER; Mark Shepard, Harvard University and NBER; and Jonathan S. Skinner, Dartmouth College and NBER

One Medicare for All? The Economics of a Uniform Health Insurance Program (NBER Working Paper No. 24037)

There is increasing interest in expanding Medicare coverage to younger populations, but less well understood is whether the current Medicare program is the right foundation on which to build. Traditional Medicare provides a uniform level of coverage to all recipients, and combined with supplemental plans, it is more generous in terms of coverage of new technologies and choice of doctors than nearly all public plans in other developed countries. Baicker, Shepard, and Skinner develop an economic framework to study the tradeoffs between uniformity versus choice among levels of health benefit generosity in public insurance programs. They argue that a uniform system made more sense when Medicare began in 1965, but it may not provide the best foundation going forward for at least three reasons. First, the income distribution was far more equal in 1966; since then as income inequality has risen, it is more difficult to design a uniform program that serves the needs of the top 1% and middle-income people simultaneously. Second, both the scale and cost of medical technology have expanded dramatically. In 1965, most treatment options were limited to surgery, inexpensive drugs, or hospitalization, so the rich could not “buy” more health care even if they wanted. Since that time, medical technology has evolved to create ever more expensive procedures or treatments with uncertain or small health benefits, creating a dilemma when Medicare must decide whether to cover these new innovations for everyone. Finally, the potential inefficiency inherent in tax financing of public health insurance benefits to high-income households implies that they would have been willing to pay for more out-of-pocket, particularly as health costs continue to outpace GDP growth. Baicker, Shepard, and Skinner further contrast on efficiency and equity grounds the structure of Medicare with the benchmark approach in many developed countries: a basic public benefit but one that allows higher-income households to either opt-out or top-up for additional care.

Casey B. Mulligan, University of Chicago and NBER

The Employer Penalty, Voluntary Compliance, and the Size Distribution of Firms: Evidence from a Survey of Small Businesses

A new survey of 745 small businesses shows little change in the size distribution of businesses between 2012 and 2016, except among businesses with 40-74 employees, in a way that is closely related to whether they offer health insurance coverage. Using measures of both size and voluntary regulatory compliance, Mulligan applies these changes to the Affordable Care Act's employer mandate. Between 28,000 and 50,000 businesses nationwide appear to be reducing their number of full-time-equivalent employees to below 50 because of that mandate. This translates to roughly 250,000 positions eliminated from those businesses.

Robert J. Barro, Harvard University and NBER, and Brian Wheaton, Harvard University

Taxes, Incorporation, and Productivity (NBER Working Paper No. 25508)

U.S. businesses can be C-corporations or pass-through entities in the forms of S-corporations, partnerships, and sole proprietorships. C-corporate status conveys benefits from perpetual legal identity, limited liability, potential for public trading of shares, and ability to retain earnings. However, legal changes have enhanced pass-through alternatives, notably through the invention of the S-corporation in 1958, the advent of publicly-traded partnerships in the early 1980s, and the improved legal status of limited liability companies (LLCs) at the end of the 1980s. C-corporate form is typically subject to a tax wedge, which offsets the productivity benefits. Barro and Wheaton use a theoretical framework in which firms' productivities under C-corporate and pass-through form are distributed as bivariate log-normal. The tax wedge determines the fraction of firms that opt for C-corporate status and also determines overall business output (productivity), the share of output generated by C-corporations, and the sensitivity of this share to the tax wedge. This framework underlies the researcher's empirical analysis of C-corporate shares of business economic activity. Long-difference regressions for 1968-2013 show that a higher tax wedge reduces the C-corporate share of net capital stocks, equity (book value), gross assets, and positive net income, as well as the corporate share of gross investment. The C-corporate shares also exhibit downward trends, likely reflecting underlying legal changes. Barro and Wheaton infer from the quantitative findings that the reduction in the tax wedge since 1968 has expanded overall business productivity by about 4%.

John Beshears and David Laibson, Harvard University and NBER; James J. Choi, Yale University and NBER; Mark Iwry, The Brookings Institution; David C. John, AARP Public Policy Institute; and Brigitte C. Madrian, Brigham Young University and NBER

Building Emergency Savings Through Employer-Sponsored Rainy Day Savings Accounts

Many Americans live paycheck to paycheck, carry revolving credit balances, and have little liquidity to absorb financial shocks (Angeletos et al. 2001; Kaplan and Violante 2014). One consequence of this financial vulnerability is that many individuals use a portion of their retirement savings during their working years. For every $1 that flows into 401(k)s and similar accounts, between 30¢ and 40¢ leaks out before retirement (Argento, Bryant, and Sabelhaus 2015). Beshears, Choi, Iwry, John, Laibson, and Madrian explore the practical considerations and challenges of helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. They believe that this can be achieved cost effectively by automatically enrolling workers into an employer-sponsored payroll deduction “rainy day” or “emergency” savings account, and present three specific implementation options.

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