Tax Policy and the Economy

September 18, 2014
Jeffrey Brown, University of Illinois, Urbana-Champaign and NBER, Organizer

Casey Mulligan, University of Chicago and NBER

The New Full-time Employment Taxes

Hours, employment, and income taxes are economically distinct, and all three are either introduced or expanded by the Affordable Care Act (ACA), beginning in 2014. Mulligan characterizes the new hours and employment taxes from the perspective of a household budget constraint, measures their magnitude, and assesses their likely consequences for employee work schedules. When the ACA is fully implemented, full-time employment taxes will be prevalent and often as large as what workers can earn in five hours of work per week, 52 weeks per year. The economic significance of the ACA’s full-time employment taxes varies by demographic group: they are non-monotonic in age, decreasing in years of schooling, and increasing with family size.

Bradley Heim, Indiana University; Ithai Lurie, Department of the Treasury; and Kosali Simon, Indiana University and NBER

The Impact of the Affordable Care Act Young Adult Provision on Labor Market Outcomes: Evidence from Tax Data

Heim, Lurie and Simon use a panel data set of all U.S. tax records spanning 2008-2012 to study the impact of the Affordable Care Act (ACA) requirement to allow young adult dependents to be covered by their parents’ insurance policies on labor market-related socioeconomic outcomes. How health insurance expansions affect young adults through employment, education and family formation have important implications for public finance. Since tax data record access to employer provided fringe benefits in W-2 forms, the authors are able to examine the impact of this coverage expansion by comparing young adults whose parents have access to benefits to other similar aged young adults, before and after the law, and to young adults who are slightly older than the age threshold of the law. The use of tax data to identify families who have fringe benefits through their employer is an important advantage because the law was implemented during a labor market recovery in which outcomes could differ by age, even absent the law. Despite sizable increases documented elsewhere in insurance coverage resulting from this law, the authors find no meaningful changes in labor market related outcomes. They examine a comprehensive set of outcomes (whether the individual worked at all in the formal sector, self-employment, holding of employer provided retirement and health benefits, educational enrollment, total wages, whether taxes were filed, whether married and whether had children), and are the first to use a triple difference strategy to examine labor market effects of this law; they are also the first they know of to use tax data to examine any impact of the ACA. Although it is possible that labor market outcomes have changed in ways not captured by tax data (e.g. a change in hours of work while holding total wages constant, or a change in non-reported self-employment), the authors’ evidence suggests that the extension of health insurance to young adults did not substantially alter their labor market outcomes thus far.

Martin Feldstein, Harvard University and NBER

Raising Revenue by Limiting Tax Expenditures

Louis Kaplow, Harvard University and NBER

Government Policy and Labor Supply with Myopic or Targeted Savings Decisions

A central justification for social insurance and for other policies aimed at retirement savings is that individuals may fail to make adequate provision during their working years. Much research has focused on myopia and other behavioral limitations. Yet little attention has been devoted to how these infirmities, and government policies to rectify them, influence labor supply. This linkage could be extremely important in light of the large pre-existing distortion due to income and consumption taxation and income-based transfer programs. For example, might myopic individuals, as a first approximation, view payroll taxes and other withholding to fund retirement savings as akin to an income tax, while largely ignoring the distant future retirement benefits that they fund? If so, the distortion of labor supply may be many times higher than otherwise, making savings-promotion policies much more costly than appreciated. Or consider what may be the labor supply implications for an individual who is defaulted into higher savings and, as a consequence, sees concomitantly lower take-home pay. Kaplow offers a preliminary, conceptual exploration of these questions. In most of the cases considered, savings policies do not act purely like a tax despite individuals' non-optimizing savings behavior, and in some cases labor supply actually is raised, not lowered, in which event policies that boost savings may be significantly more welfare-enhancing than recognized. Accordingly, there is a compelling need for empirical exploration of the interaction between non-optimal savings behavior and labor supply.

George Bulman, University of California, Santa Cruz, and Caroline Hoxby, Stanford University and NBER

The Returns to the Federal Tax Credits for Higher Education

Three tax credits benefit households who pay tuition and fees for higher education. The credits have been justified as an investment: generating more educated people and thus more earnings and externalities associated with education. The credits have also been justified purely as tax cuts to benefit the middle class. In 2009, the generosity of and eligibility for the tax credits expanded enormously so that their 2011 cost was $25 billion. Using selected, de-identified data from the population of potential return filers, Bulman and Hoxby show how the credits are distributed across households with different incomes. The authors estimate the causal effects of the federal tax credits using two empirical strategies (regression kink and simulated instruments) which they show to be strong and very credibly valid for this application. The latter strategy exploits the massive expansion of the credits in 2009. The authors present causal estimates of the credits' effects on postsecondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. They discuss the implications of our findings for society's return on investment and for the tax credits' budget neutrality over the long term (whether higher lifetime earnings generate sufficient taxes to recoup the tax expenditures). They assess several explanations why the credits appear to have negligible causal effects.