The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada

Federal tax reform in 1988 flattened the Canadian personal income tax schedule, changing the marginal tax rates for many individuals. Using methods similar to those applied by Auten and Carroll [Rev. Econ. 81(4) (1999) 681] in the study of the effects of the 1986 U.S. Tax Reform Act, we estimate the responsiveness of income to changes in taxes to be substantially smaller in Canada. However we find evidence of a much higher response in self-employment income, in the labor income of seniors and from those with high incomes.     

The effect of the tax reform act of 1986 on the location of assets in financial services firms

This paper examines the effects of the Tax Reform Act of 1986 on the international location decisions of U.S. financial services firms. The Act included rule changes that made it substantially more difficult for U.S. firms to defer U.S. taxes on overseas financial services income held in low-tax jurisdictions. We use information from the tax returns of U.S. corporations to examine how local taxes affect the allocation of financial assets held abroad by financial services firms. We find that, before the Act, the location of reported assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions. However, after the Act, differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad. Our results suggest that the tightening of the anti-deferral provisions applicable to financial services companies has been successful in diminishing the effect of host country income taxes on asset location decisions.     

税收、收入不平等和内生经济增长

企业家(通过金融中介)从家庭借贷来支撑创新。二者在企业家的努力不为外人所见的情形下双方签订信用合同分享创新带来的垄断利润(即蛋糕)。两个有代表性经济人(企业家和家庭)的存在允许人们在内生经济增长模型里研究收入不平等。本文研究发现,企业家分配份额的增加一开始会提升增长速度,但是过了一定值后会拉低增长速度;而该份额的增加一直拉大企业家和工人间的收入差距。所以降低企业家获得的蛋糕的份额的分配改革可缩小收入差距。提高企业家来自创新的收入的税率将降低他们的努力程度,从而降低增长速度,但是该税率的提高有助于降低收入不平等程度。存款收入的税率提高尽管不会改变企业家的努力程度,但是也会降低经济增长速度,而且不会降低收入不平等(如果工人有一定比例的存款)。对于劳动收入(工人工资)的税率增加会加剧工人和企业家间的收入不平等,但对经济增长速度没有影响。     

Tax bases,tax rates and the elasticity of reported income

Tax reforms usually change both tax rates and tax bases. Using a panel of income tax returns spanning the two major U.S. tax reforms of the 1980s and a number of smaller tax law changes, I find that the elasticity of income reported on personal income tax returns depends on the available deductions. This highlights that this key behavioral elasticity is not an immutable parameter but rather that it can be to some extent controlled by policy makers. One implication is that base broadening reduces the marginal efficiency cost of taxation. The results are very similar for all income categories indicating that the rich are more responsive to tax rates because tax rules that apply to them are different (their tax base is narrower). The point estimates indicate that the Tax Reform Act of 1986 reduced the marginal cost of collecting a dollar of tax revenue, with roughly half of this reduction due to the base broadening and the other half due to the tax rate reduction. As a by-product, the analysis in this paper offers a reconciliation of disparate estimates obtained by previous studies of the tax responsiveness of income.     

Reexamination of Economic Growth, Tax Policy, and Distributive Politics

The paper examines the relationship between economic growth, tax policy, and distribution of capital and labor ownership in a one‐sector political‐economy model of endogenous growth with productive government spending financed by a proportional tax on capital income. The analysis shows that inequality in wealth and income can be positively or negatively related to the optimal tax rate. In either environment, higher inequality leads to a lower after‐tax return to capital, thereby reducing the economy's growth rate.     

INCOME AND WEALTH INEQUALITY: EVIDENCE AND POLICY IMPLICATIONS

Drawing on the author's work, this lecture presents evidence on U.S. income and wealth inequality. It presents series for top income and wealth shares, and the distribution of economic growth by income groups. It discusses the mechanisms behind the evolution of U.S. income and wealth inequality from historical and comparative perspectives. It analyzes the role of public policy and in particular taxation in the evolution of inequality. (JEL D31, F66, J24)     

The Role of Banks in Shaping Income Inequality: A Within-Country Study

This paper investigates the role of banks in shaping income inequality. We extend the current literature on the banking–inequality nexus by examining a sample of 103 Italian provinces for the period 2000–2018. We find that a higher banking development decreases income inequality. From a methodological viewpoint, we aim to contribute to the current literature by both adjusting the index of income inequality for the presence of tax evasion in income data and applying different estimation approaches to control for endogeneity. Some policy implications emerge from the findings of this study.     

Taxes and female labor supply

The Economic Recovery Tax Act of 1981 and the Tax Reform Act of 1986 changed the U.S. income tax structure in a dramatic fashion. In particular, these two reforms reduced the marginal tax rates for married households. In this paper I investigate what part of the rise in labor force participation of married women between 1980 to 1990 (a rise of 13 percentage points) can be accounted by the changes in taxes. I build an heterogeneous agent model populated by married households. Households differ by age and educational attainment levels of their members and decide whether the second earner, the wife, should participate in the labor market. I select parameter values so that the model economy is consistent with the 1980 U.S. economy in terms of income tax structure, wages (skill premium and gender gap), marital sorting (who is married with whom), and female labor force participation. Using counterfactual experiments I find that 20–24 percent of the rise in married female labor force participation is accounted for by the changes in the income tax structure. Changes in wages account for 62–64 percent, and changes in marital sorting account for 14–16 percent of the rise in the participation rate of married women.     

Income inequality and economic growth

Despite the extensive existing literature on income inequality and economic growth, there remains considerable disagreement on the effect of inequality on economic growth. Existing literatures find either a positive or a negative relationship. In this paper, we attempt to theoretically examine that relationship with a stochastic optimal growth model. We make the disagreement clear within a single model. We conclude (i) that both are possible – that is, higher inequality can retard growth in the early stage of economic development, and can encourage growth in a near steady state, (ii) that income redistribution by high income tax does not always reduce income inequality. Income inequality can be reduced by higher income tax in a near steady state, but it cannot be reduced in the early stage of economic development, and (iii) that two government polices – rapid economic growth and low income inequality – can be achieved by low income tax in the early stage of economic development, but both cannot be achieved simultaneously in a near steady state.     

Negative income taxes,inequality and poverty

We use a neoclassical growth model with heterogeneous agents to analyze the redistributive effects of a negative income tax system, which combines a flat rate tax with a fully refundable credit (“demogrant”). We show that changing the demogrant‐to‐output ratio causes significant changes in the distribution of income. Specifically, we find that increasing the demogrant‐to‐output ratio sharply reduces the level of inequality as well as both relative and absolute poverty (all measured in terms of post‐tax total income). However, these reductions in inequality and poverty come at the expense of a significant reduction in output.     

INCOME DISTRIBUTION IN THE U.S.S.R. IN THE 1980s

In 1989 Soviet authorities released unprecedented new data on the size distribution of income in the U.S.S.R. in the 1980s, including the distributions by republics. With the goal of providing a benchmark for evaluating the effect of current and future economic reforms on income distribution in the former Soviet Union, this paper estimates inequality measures for the new data. The estimation uses a simple nonparametric technique based on the Kolmogorov-Smirnov test to fit the Soviet data to a lognormal distribution. The results suggest that, for income from official sources, (1) inequality in the Soviet Union as a whole declined throughout the 1980s-both before and after Gorbachev's accession in 1985, and (2) income inequality was greater in the poorer, southern republics of the U.S.S.R. than in the north. While the inclusion of unofficial (unreported) private income would probably reinforce the second of these two trends, its effect on the first cannot be determined on the basis of available information.     

United States income inequality: The concept of countervailing power revisited

This article uses some of the conceptual infrastructure associated with J.K. Galbraith’s “countervailing power” argument to explore the deep history of U.S. income inequality. Two explanatory variables—institutional power and distributive conflict—have played an integral role in the shifting patterns of U.S. income inequality since the late nineteenth century. The “commodified” power of large firms, manifested in aggregate concentration and the markup, exacerbates inequality while the “countervailing” power of organized labor, manifested in union density and strike activity, mitigates inequality. One implication of this research is that U.S. income inequality is unlikely to diminish unless the labor movement (or a comparable social movement) is strengthened.     

Factor Components of Inequality: A Cross‐Country Study

This paper uses data from the Luxembourg Income Study to examine some of the forces that have driven changes in household income inequality over the last three decades of the twentieth century. We decompose inequality for six countries (Canada, Germany, Norway, Sweden, the U.K., and the U.S.) into the three sources of market income (earnings, property income, and income from self‐employment) and taxes and transfers. Our findings indicate that although changes in the distribution of earnings are an important force behind recent trends, they are not the only one. Greater earnings dispersion has in some cases been accompanied by a reduction in the share of earnings which dampened its impact on overall household income inequality. In some countries the contribution of self‐employment income to inequality has been on the rise, while in others, increases in inequality in capital income account for a substantial fraction of the observed distributional changes.     

Employment Patterns of Husbands and Wives and Family Income Distribution in Italy (1977–98)

The pattern of employment among men and women has changed remarkably over the past decades. The growth in the participation in the labor market of women with high-income husbands has heightened concerns that wives' earnings may increase income inequality among married couples, especially in countries like Italy, the U.K., and the U.S., where more noticeable growth of income inequality during the past decade has accompanied changes in employment levels. In this paper we attempt to measure the impact of the changes of women and men's employment patterns on the distribution of income among Italian households, by considering regional differences, using micro data from the Historical Archive of the Bank of Italy Survey of Household Income and Wealth (SHIW) for the period 1977–98. Our results indicate that total income distribution would have been more unequal without women's labor income.     

Redistribution and entrepreneurship with Schumpeterian growth

We examine the effects of redistributive taxation on growth and inequality in a Schumpeterian model with risk-averse agents. There are skilled and unskilled workers, and the growth rate is determined by the occupational choice of skilled agents between entrepreneurship and employment. We show that redistribution provides insurance to entrepreneurs and increases the growth rate. The effects on inequality are such that low tax rates increase inequality relative to laissez-faire due to changes in wages, but higher tax rates can simultaneously raise growth and reduce inequality. We contrast the optimal linear income tax with alternative policies for promoting R&D and find that it is preferable on both equity and efficiency grounds.      

中国农村收入流动分析

本文利用农业部1986—2001年间六省农村固定观察点数据,对农村家庭收入流动进行了经验分析,发现:第一,分析期内农户呈现出收入流动程度随时间先增大后逐渐稳定的趋势,这使得持久收入不均等程度显著小于年度不均等,1995年以后虽然有较大的年度收入不均等,但持久收入不均等较小;第二,分析期内农村收入流动始终大于同期城市收入流动;第三,在1986—1990年间,农民平均收入较高省份的收入流动程度较大,而在1995—2001年间,各省收入流动差异并不明显;第四,农民收入水平有条件收敛的趋势,同时,教育水平提高、外出打工,都对农民收入增长有显著的推进作用。     

The impact of the Indonesian income tax reform: A CGE analysis

This study evaluates the impacts of Indonesia's recent income tax reforms on key macroeconomic variables, as well as the impacts on poverty and income distribution. It was found that the reductions in personal income tax and corporate income tax increase economic growth under a balanced budget assumption. The policy reforms also lead to a small reduction in the incidence of poverty. However, the policies also lead to an increase in income inequality because the tax cut is more beneficial to households in the highest income categories. It is recommended that future tax cuts should target the urban and rural poor.     

Automation and inequality with taxes and transfers

Declines in low-skill labour shares are reviewed, and a stylised model is constructed to examine their determinants and future implications. A retrospective analysis of US shocks suggests that technological change has contributed more to raising income inequality and the wealth to GDP ratio than other changes. An anticipated future twist away from low-skill labour toward the capital, combined with population growth, risks high unemployment rates. Productivity growth at twice the pace since 1990 limits this, though inequality persists. Analysis shows that a generalisation of the US ‘earned income tax credit’ system with consumption tax outperforms alternatives of the ‘universal basic income’.     

MEASURING THE IMPACT OF VALUING HEALTH INSURANCE ON LEVELS AND TRENDS IN INEQUALITY AND HOW THE AFFORDABLE CARE ACT OF 2010 COULD AFFECT THEM

A substantial part of the U.S. inequality literature focuses on yearly levels and trends in pre‐tax, post‐transfer cash income and its distribution over time and finds that median income appears to be stagnating, with income growth primarily coming at higher income levels. When we use data from the Current Population Survey for 1995–2008 and add the value of employer‐ and government‐provided health insurance coverage, not only does it increase the upward trend in the level of resources controlled by Americans, but also reduces the level of inequality in these resources and its upward trend. We then provide a highly stylized example of this broader income measure's value in capturing the impact of two key provisions of the Affordable Care Act of 2010—an expansion in Medicaid and the provision of subsidies to lower‐income families for purchasing private coverage on state‐run exchanges. Even though these incremental expansions build on existing systems of government‐provided health insurance, we find that the vast majority of the benefits would still accrue to the bottom three deciles of the income distribution when we include the value of employer‐ and government‐provided health insurance in our expanded yearly income measure. (JEL D31, H51, I14)     

Income Taxation with Labor Responses

When incomes are exogenously given, U. Jakobsson ( Journal of Public Economics s 5 (1976), 161–168) proved that a progressive tax structure always reduces inequality. We investigate the implications for effective progression of relaxing the assumption of exogenous incomes when individuals have the same preferences but different talents. We extend the standard result and conclude that it is generally impossible to disentangle the respective contributions to inequality reduction of the tax schedule and agents' preferences. For a linear tax schedule to result in less unequally distributed incomes it is sufficient that the elasticity of labor supply be nonincreasing in exogenous income and nondecreasing in productivities. The latter condition proves to be necessary and sufficient when the tax schedule is proportional.