NBER's 26th Tax Policy and the Economy Conference

October 6, 2011
Jeffrey R. Brown of the University of Illinois at Urbana-Champaign, Organizer

Jeffrey B. Liebman, Harvard University and NBER, and Erzo F.P. Luttmer, Dartmouth College and NBER
The Perception of Social Security Incentives for Labor Supply and Retirement: The Median Voter Knows More Than You'd Think

The degree to which the Social Security tax distorts labor supply depends on the extent to which individuals perceive the link between current earnings and future Social Security benefits. To measure that perceived linkage between labor supply and Social Security benefits, Liebman and Luttmer administered a survey to a representative sample of Americans aged 50-70. They found that the majority of respondents believe that their Social Security benefits increase with labor supply: the respondents generally report a link between labor supply and future benefits that is somewhat greater than the actual figure. These researchers also surveyed people about their understanding of various other provisions in the Social Security benefit rules. They found that some of these provisions (for example, the effects of delayed benefit claiming and rules regarding widows' benefits) are relatively well understood, while others (including rules on spousal benefits and provisions on which years of earnings are taken into account) are less well understood. This survey also incorporated a framing experiment, which showed that how the incentives for delayed claiming are presented has an impact on hypothetical claiming decisions. In particular, the traditional "break-even" framing used by the Social Security Administration leads to earlier claiming than other presentations.

Michael P. Devereux and Simon Loretz, Oxford University
How would EU Corporate Tax Reform Affect U.S. Investment in Europe?

Devereux and Loretz examine the likely impact on the investment of U.S. multinational companies of potentially introducing a system of formula apportionment in the EU (European Union). The researchers pay particular attention to tax planning strategies that might be used by the multinationals. They ask first whether the effective tax rates of U.S. companies differ from those of European companies, and then estimate the extent to which both U.S. and European companies would be likely to choose to be taxed by the optional new system. The researchers consider the various effects on investment incentives and conclude that the relative position of U.S. and EU companies under the new system would depend crucially on the details of the taxation of foreign passive income.

Joseph Bankman and John Cogan, Stanford University; R. Glenn Hubbard, Columbia University and NBER; and Daniel Kessler, Stanford University and NBER
Reforming the Tax Preference for Employer Health Insurance

The current tax preference for employer-sponsored health insurance contributes to the very high level of health spending in the United States. Bankman, Cogan, Hubbard, and Kessler consider what the consequences for health spending would be if people with health insurance were given an additional deduction for their expected out-of-pocket spending -- that is, an additional tax deduction that would decline as the actuarial value of their insurance rises. The researchers show that this approach would reduce health spending more, and would have a smaller budget cost, than the deduction for actual out-of-pocket spending that they analyzed in an earlier paper which considered encouraging a shift to higher-copayment health insurance. They estimate that a deduction for expected out-of-pocket expenses would reduce private health spending by $86 billion in 2010 at a budget cost of approximately $5 billion. They conclude that, under reasonable assumptions about consumers' valuation of this incremental spending and the cost of public funds, such a deduction would be welfare-improving.

Francisco J. Gomes, London Business School; Laurence J. Kotlikoff, Boston University and NBER; and Luis M. Viciera, Harvard University and NBER

The Excess Burden of Government Indecision (NBER Working Paper No. 12859)

Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever their political motives for waiting to decide, the procrastination distorts economic decisions relative to what would have occurred with early policy resolution. Gomes, Kotlikoff, and Viceira posit, calibrate, and simulate a life-cycle model with earnings, lifespan, investment return, and future policy uncertainty and then measure the excess burden from delayed resolution of policy uncertainty. The first uncertain policy that they consider concerns the level of future Social Security benefits. Specifically, they examine how an agent would respond to learning in advance that she will experience a major Social Security benefit cut starting at age 65. They show that having to wait to learn this materially affects consumption, saving, labor supply, and portfolio decisions. It also reduces welfare. Indeed, the excess burden of government indecision, in this instance, can range as high as 0.6 percent of the agent's economic resources. This is a significant distortion in and of itself. It is also significant when compared to other distortions measured in the literature. The second uncertain policy considered in this paper concerns marginal tax rates. The authors obtain similar results once they adjust for the impact of tax rates on income.

Leonard E. Burman, Syracuse University and NBER, and Marvin Phaup, George Washington University

Tax Expenditures, the Size and Efficiency of Government, and Implications for Budget Reform (NBER Working Paper No. 17268)

One possible explanation for the difficulty in controlling the budget is that a major component of spending-tax expenditures-receives privileged status. Tax expenditures are treated as tax cuts rather than spending. Burman and Phaup explore the implications of that mis-classification and illustrate how it can lead to higher taxes, larger government, and an inefficient mix of spending (too many tax expenditures). They then suggests options for reform to the budget process that would explicitly incorporate and properly measure tax expenditures. They conclude by considering ways to control tax expenditures (and other spending) and the special challenges presented by tax expenditures.

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