April 9 and 10, 2015
Behavioral Responses to Taxation: Research Using Administrative Tax Data
Caroline M. Hoxby, Stanford University and NBER, and George Bulman, University of California, Santa Cruz
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 filers, Hoxby and Bulman show how the credits are distributed across households with different incomes. The researchers 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 post-secondary attendance, the type of college attended, the resources experienced in college, tuition paid, and financial aid received. They discuss the implications of their 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). The researchers assess several explanations why the credits appear to have negligible causal effects.
Patricia Tong, Department of the Treasury, and Li Zhou, University of Alberta
The Impact of Place-Based Employment Tax Credits on Local Labor: Evidence from Tax Data
This paper examines the impact of the Empowerment Zone and Renewal Community (EZRC) employment tax credits on local labor market outcomes using administrative data with information on which firms claim these credits and where individuals work and live. Tong and Zhou find strong evidence that the place-based employment tax credit improves outcomes of both EZRC and non-EZRC residents employed at firms utilizing this tax incentive. In the authors' sample, treated firms represent a small share of EZRC resident labor demand, which limits the impact of this place-based policy on overall local labor.
Michael P. Devereux and Li Liu, University of Oxford
Incorporation for Investment
Devereux and Liu estimate the effect of corporation tax on small business incorporation and investment by exploring cross-sectional variation in the impact of a 2006/07 tax reform in a difference-in-differences design. Analyzing the population of U.K. corporation tax records from 2002/03 to 2008/09, the researchers present three findings. First, a one percentage point increase in the tax gains to incorporation increases the number of newly incorporated companies by around 2 to 4.5%. Second, there is a strong cash flow effect of taxes on corporate investment. On average, a one percentage point increase in the average tax rate reduces investment rate by about 2.2 percentage points. Third, the cash flow effect of corporation taxes on investment is most pronounced for newly incorporated firms, and diminishes over time. This evidence is consistent with the hypothesis that incorporation lowers the cost of external finance for small businesses, and that the cost is further reduced the longer a business has been incorporated.
David Joulfaian, Department of the Treasury; James Poterba, MIT and NBER; and Robert Gordon, Twenty-First Securities Corporation
In 2010, the U.S. estate tax expired for one year, and was replaced by a basis carryover regime for capital gains on assets transferred to heirs. When the estate tax was reinstated in 2011, it was retroactively extended to 2010 on an optional basis. Executors of estates of 2010 decedents could choose between being taxed under the 2011 estate tax regime with its associated basis-step up on bequeathed assets, and under the basis carry-over regime of 2010. This presented estate tax filers with a choice between a current estate tax liability and a potential future capital gains tax liability. Some estates were taxed under each of the two tax regimes. In this paper, Joulfaian, Poterba, and Gordon present evidence on the choices reflected in the estate tax filings of 2010 decedents. It begins by summarizing the considerations that could affect an executors choice between filing under each of the tax regimes. It then compares the estates filed under each of the tax regimes in 2010 to investigate whether the factors that might affect relative tax liability appear to affect taxpayers decisions, and it compares estate tax returns filed in 2010 with returns filed in 2009, 2011, and 2012 to describe differences that may have been associated with the optional basis carryover regime in 2010. While the findings do not provide an explicit test of tax-efficient behavior by estate tax filers, they do provide evidence that filing choices were consistent with such behavior.
Jason M. DeBacker, Middle Tennessee State University; Bradley Heim and Anh Tran, Indiana University; and Alex J. Yuskavage, Department of the Treasury
This paper studies the impact of tax enforcement activity on subsequent individual taxpaying behavior. DeBacker, Heim, Tran, and Yuskavage exploit four waves of randomized Internal Revenue Service (IRS) audits of individual income tax filers during the 2006-09 period to study both the short and long run effects of audits on taxpaying behavior. Rich and confidential IRS data allow the researchers to show the differential impact of audits across sources of income and deductions. The results highlight how the effects of audits on subsequent compliance behavior are impacted by other aspects of tax policy. The results also show how the lasting impact of audits results in a long-run revenue gain that is about two times as large at the static gain in revenue from an audit.
Julie Berry Cullen, University of California, San Diego and NBER; Nicholas Turner, Department of the Treasury; and Ebonya L. Washington, Yale University and NBER
Political Alignment and Tax Evasion
Tatyana Deryugina, University of Illinois, Urbana-Champaign; Laura Kawano, Department of the Treasury; and Steven D. Levitt, University of Chicago and NBER
Hurricane Katrina destroyed more than 200,000 homes and led to massive economic and physical dislocation. Using a panel of tax return data, Deryugina, Kawano, and Levitt provide one of the first comprehensive analyses of the hurricane's long-term economic impact on its victims. Katrina had large and persistent impacts on where people live; small and mostly transitory impacts on wage income, employment, total income, and marriage; and no impact on divorce or fertility. Within just a few years, Katrina victims' incomes fully recover and even surpass that of controls from similar cities that were unaffected by the storm. The strong economic performance of Katrina victims is particularly remarkable given that the hurricane struck with essentially no warning.
Kirk B. Doran, University of Notre Dame; Alexander M. Gelber, University of California, Berkeley and NBER; and Adam Isen, Department of the Treasury
Doran, Gelber, and Isen study the effect of a firm winning an additional H-1B visa on the firm's outcomes, by comparing winning and losing firms in the Fiscal Year 2006 and 2007 H-1B visa lotteries. The researchers match administrative data on the participants in these lotteries to the universe of approved U.S. patents, and to IRS data on the universe of U.S. firms. Winning additional H-1B visas has an insignificant effect on patenting within eight years, with confidence intervals that rule out moderate-sized or larger effects. H-1Bs substantially crowd out employment of other workers. The authors find some evidence that additional H-1Bs lead to lower average employee wages while raising firm profits.
Public Economics Spring Program Meeting
Michael Geruso, University of Texas, Austin and NBER, and Timothy J. Layton, Harvard Medical School
Risk adjustment is commonly used in health insurance markets to deal with problems of adverse selection and cream skimming by compensating health plans for insuring consumers whose diagnoses imply high expected costs. However, in all real world risk adjustment systems, insurers themselves report the diagnoses that determine enrollee risk scores and ultimately insurer payments. If risk scores are manipulable, insurers that "upcode" enrollees will extract higher payments. Geruso and Layton model upcoding in the presence of adverse selection and develop a novel strategy for separately identifying upcoding from selection in data. They apply this strategy to analyze diagnosis coding by Medicare Advantage insurers. The authors find that enrollees in Medicare Advantage plans generate 7% higher risk scores than what the same enrollees would generate under Traditional Medicare, where coding incentives are weaker. Absent a coding inflation correction, this implies excess payments to Medicare Advantage of around $11 billion annually and a distortion in seniors' choice between Medicare Advantage and Traditional Medicare. This choice distortion worsens with increasing insurer competition. The researchers also find evidence that coding intensity is higher in plans with higher levels of insurer-provider integration, further distorting seniors' choices to more integrated plans.
Jonas Kolsrud and Peter Nilsson, Uppsala University, and Camille Landais and Johannes Spinnewijn, London School of Economics
John Beshears, David Laibson, and Brigitte C. Madrian, Harvard University and NBER, and James J. Choi, Yale University and NBER
Can governments increase private savings by taxing savings up front instead of in retirement? Roth 401(k) contributions are not tax-deductible in the contribution year, but withdrawals in retirement are untaxed. The more common before-tax 401(k) contribution is tax-deductible in the contribution year, but both principal and investment earnings are taxed upon withdrawal. Using administrative data from eleven companies that added a Roth contribution option to their existing 401(k) plan between 2006 and 2010, Beshears, Choi, Laibson, and Madrian find no evidence that total 401(k) contribution rates differ between employees hired before versus after the Roth introduction, which means that the amount of retirement consumption being purchased by 401(k) contributions increases after the Roth introduction. A survey experiment suggests two behavioral factors play a role in the unresponsiveness of contribution rates to their tax treatment: (1) employee confusion about or neglect of the tax properties of Roth balances and (2) partition dependence.
Francois Gerard, Columbia University, and Francisco JM. Costa, Getulio Vargas Foundation (FGV/EPGE)
This paper studies how one may overestimate the social cost of a long-run corrective policy by neglecting the possibility of hysteresis, i.e. that the policy in earlier periods may have lasting impacts in later periods. In a price-theoretic framework, Costa and Gerard show that one statistic is key to evaluate such a bias: the long-term impact of a similar but temporary policy that was known to be temporary. The researchers then provide evidence of the importance of hysteresis, and estimate such a statistic, for a policy-relevant behavior: residential electricity use in a developing country context. The authors study the 10-year impact of a 9-month long policy in Brazil, which aimed at large temporary reductions in residential electricity use. They exploit the fact that customers of some distribution utilities were not subject to the policy through a difference-in-difference strategy. Using utility-level administrative data, the authors find that the temporary policy led to a long-run and stable reduction in average electricity use of 11%, or about half of the short-run impact. Using individual monthly billing data for one distribution utility, they find that 69% of customers were still consuming less electricity four years after the policy ended. Household-level microdata suggest that the main mechanism of hysteresis is a persistent change in consumption habits. Incorporating the researchers' estimates into their framework illustrates that, neglecting the possibility of hysteresis, one could dramatically overestimate the social cost of long-run corrective policies.
Patrick M. Kline and Christopher R. Walters, University of California, Berkeley and NBER
In this paper, Kline and Walters empirically evaluate the cost-effectiveness of Head Start, the largest early-childhood education program in the United States. Using data from the randomized Head Start Impact Study (HSIS), we show that Head Start draws a substantial share of its participants from competing preschool programs that receive public funds. This both attenuates measured experimental impacts on test scores and reduces the program's net social costs. A cost-benefit analysis demonstrates that accounting for the public savings associated with reduced enrollment in other subsidized preschools can reverse negative assessments of the program's social rate of return. Estimates from a semi-parametric selection model indicate that Head Start is about as effective at raising test scores as competing preschools and that its impacts are greater on children from families unlikely to participate in the program. Efforts to expand Head Start to new populations are therefore likely to boost the program's social rate of return, provided that the proposed technology for increasing enrollment is not too costly.
Justine S. Hastings, Brown University and NBER; Christopher A. Neilson, New York University; and Seth D. Zimmerman, University of Chicago
Hastings, Neilson, and Zimmerman test the impact of information about degree-specific labor market outcomes on college enrollment decisions using a Randomized Controlled Trial (RCT) administered within the online Chilean federal student loan application process. Using linked secondary and post-secondary education records and tax returns for fourteen cohorts of Chilean high school graduates, the researchers created measures of past-cohort earnings and tuition costs for nearly all institution and major combinations in the Chilean higher education system. Loan applicants were asked a series of survey questions about their enrollment plans and their beliefs about earnings and cost outcomes. Following the survey questions, randomly selected applicants were given information on the returns and costs of their planned enrollment choices as well as access to a searchable database to compare returns and costs across enrollment options. Students have unbiased but highly variable beliefs about tuition costs, and upward-biased beliefs about earnings outcomes. Poorer students have less accurate information and choose lower-earning degrees from the options available to them conditional on baseline ability. While information treatment has no effect on whether students enroll in any tertiary degree program, it does cause low-SES students to enroll in degrees where earnings net of costs were higher for past graduates and enrollees. While effect sizes are small, they substantially exceed the cost of implementing the disclosure policy, suggesting a high return on investments in information provision.