Bradley Heim, U.S. Treasury Department; and Ithai Lurie, Department of the Treasury
The Effect of Health Insurance Premium Subsidies on Entry into and Exit from Self-Employment
Heim and Lurie estimate the effect of an increase in the deductibility of health insurance premiums for self-employed individuals on the probability of being self-employed. Using a panel of tax returns from 1999 to 2004, they estimate fixed-effects instrumental variable regressions for the probability of being self-employed, entering into self-employment, and exiting from self-employment. The results suggest that this policy change increased the probability of being self-employed by 13 percent and increased the probability that a taxpayer would be primarily or exclusively self-employed by 16 percent and 12 percent respectively. The authors also find that the probability of entering self-employment increased by 24 percent and the probability of exit decreased by 16 percent.
Adam Cole, Department of the Treasury
Christmas in August: Prices and Quantities During Sales Tax Holidays
Cole estimates the incidence of state sales taxes on computers by exploiting exogenous changes in tax rates attributable to sales tax holidays. Using scanner data that span nine tax holidays in 2007, he finds that the sales tax is fully or slightly over-shifted to consumers. Demand is extremely responsive to small price changes during tax holidays. The quantity responses range from 5.76 to 16.53 more computers purchased per 10,000 people than would be predicted in the absence of the holidays. The timing response accounts for between 37 and 90 percent of the increase in purchases in the tax holiday states over the 30-week horizon.
Gregory Lewis, Harvard University and NBER; and Patrick Bajari, University of Minnesota and NBER
Procurement Contracting with Time Incentives: Theory and Evidence
In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods that give contractors explicit time incentives. Bajari and Lewis characterize equilibrium bidding and efficient design of these contracts. They then gather a unique dataset of highway repair projects awarded by the Minnesota Department of Transportation that includes both innovative and standard contracts. Descriptive analysis shows that for both contract types, contractors respond to the incentives as the theory predicts, both at the bidding stage and after the contract is awarded. Next, they build a structural econometric model that endogenizes project completion times and perform counterfactual policy analysis. Their estimates suggest that switching from standard contracts to designs with socially efficient time incentives would increase welfare by over 19 percent of the contract value; or in terms of the 2009 Mn/DOT budget, $290 million. They conclude that large improvements in social welfare are possible through the use of improved contract design.
James R. Hines, Jr., UC, Berkeley and NBER; and Alison Felix, Federal Reserve Bank of Kansas City
Corporate Taxes and Union Wages in the United States
Hines and Felix evaluate the effect of U.S. state corporate income taxes on union wages. American workers who belong to unions are paid more than their non-union counterparts, and this difference is greater in low-tax locations, reflecting the fact that unions and employers share tax savings associated with low tax rates. In 2000, the difference between average union and non-union hourly wages was $1.88 greater in states with corporate tax rates below 4 percent than in states with tax rates of 9 percent and higher. Controlling for observable worker characteristics, a single percent lower state tax rate is associated with a 0.36 percent higher union wage premium, suggesting that workers in a fully unionized firm capture roughly 54 percent of the benefits of low tax rates.
Mikhail Golosov, Yale University and NBER; Aleh Tsyvinski, Yale University and NBER; and Matthew Weinzierl, Harvard University
Preference Heterogeneity and Optimal Commodity Taxation
Golosov, Tsyvinski, and Weinzierl analytically and quantitatively examine a prominent justification for capital taxation: goods preferred by the high-skilled ought to be taxed. They study an environment where commodity taxes are allowed to be nonlinear functions of income and consumption and find that optimal commodity taxes on these goods may be regressive. They first derive an expression for optimal commodity taxation, allowing them to study the forces for and against regressivity in that more general setting. They then parameterize the model to evidence on the relationship between skills and preferences and examine the quantitative case for regressive taxes on two specific, important categories of expenditure: future consumption (saving) and housing. The relationship between skill and time preference delivers quantitatively small, regressive capital taxes and does not justify substantial capital taxation, whether regressive or linear. In contrast to the case of capital taxation, there is a stronger case for regressive treatment of spending on owner-occupied housing. Their quantitative simulations yield an optimal policy that resembles the current mortgage interest deduction in the United States.
Henrik Kleven, London School of Economics; Claus Kreiner, University of Copenhagen; and Emmanuel Saez, UC, Berkeley and NBER
Unwilling or Unable to Cheat? Evidence from a Randomized Tax Audit Experiment in Denmark
Kleven and his co-authors analyze a randomized tax enforcement experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 Danish individual tax filers was selected for the experiment. Half of those tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, "threat-of-audit" letters were randomly assigned and sent to those tax filers. This experiment allows the researchers to study income tax compliance in Denmark in great detail, as well as the causal effects of both prior audits and audit threats on subsequent reporting behavior. The researchers find that tax compliance in Denmark is high overall, but that there is substantial tax evasion on purely self-reported income, that is, income which is not subject to double reporting by third parties. These results show that the informational framework is more important than socioeconomic variables in explaining tax compliance. The authors find that prior audits significantly increase the likelihood of self-reporting higher incomes the following year, implying that individuals update their beliefs about audit probability based on experiencing an audit. Threat-of-audit letters also have significant effects on self-reported income adjustments. All those empirical results can be explained using a simple rational model of tax evasion and introducing the key distinction between self-reported and third-party reported incomes.
Alexander M. Gelber, University of Pennsylvania and NBER; and Joshua Mitchell, Harvard University
Taxes and Time Allocation
Hundreds of papers have investigated how incentives and policies affect hours worked in the market. Gelber and Mitchell examine how income taxes affect time allocation in the other two-thirds of the day. Using the Panel Study of Income Dynamics from 1975 to 2004, they analyze the response of single women's housework, labor supply, and other time to variation in tax and transfer schedules across income levels, number of children, states, and time. They find that when the economic reward to participating in the labor force increases, hours worked will increase and housework will decrease, with the decrease in housework accounting for roughly three-quarters of the increase in market work. Analysis of repeated cross-sections of time-diary data from 1975 to 2004 shows similar results, with various measures of "home production" accounting for at least half of the increase in market hours of work in response to policy changes. Data on expenditures from the Consumer Expenditure Survey from 1980-2003 show some evidence that expenditures on market goods likely to substitute for housework will increase in response to an increased incentive to join the labor force. These results are consistent with the classic time allocation model of Becker (1965).
Fabian Duarte, Yale University, and Justine Hastings, Yale University and NBER
Fettered Consumers and Sophisticated Firms: Evidence from Mexico's Privatized Social Security Market