Behavioral Responses to Taxation: Evidence from Field Experiments and Tax Policy Variation

University Of California-Berkeley, Berkeley CA

Investigators

Abstract

The objective of this proposal is to estimate behavioral responses to taxation and transfer programs using four novel designs: (1) Use a randomized field experiment with a large tax preparer in the United States in order to estimate the effect of information about a large transfer program--the Earned Income Tax Credit--on the subsequent earnings behavior of recipients. (2) Use a randomized field experiment carried out by the tax administration in Denmark in order to analyze the effects of tax audits and announcements about future tax audits on tax compliance. (3) Use a cohort based payroll tax reform in Greece where the ceiling on payroll taxes was significantly increased in 1992 (but only for those starting to work in 1992 and after) to estimate the long-run incidence of payroll taxes on earnings and labor supply behavior (4) Use the very large variation in estate tax rates by degree of relationship in continental European countries (such as France) vis-à-vis English speaking countries (such as the United States) to estimate the effect of estate taxation on wealth accumulation. The potential intellectual merit of the proposed activity is to significantly advance our knowledge of empirical behavioral responses to taxes and government transfers. Such an understanding is crucial to evaluate the costs and benefits of government tax and transfer policies and hence to help policy makers design better tax and transfer systems. The proposal offers four innovative research designs in order to make progress on this question. The first two of the designs involve analyzing large randomized field experiments, while the remaining two exploit variation created by actual tax laws. The effect of information on behavioral responses to taxation has hardly been explored before and could be a significant determinant to the size of the responses. If such effects are large, the government could increase information of programs designed to promote certain behaviors at a modest cost. The Earned Income Tax Credit information experiment offers a pioneering attempt in that direction. Tax enforcement is critical for successful tax implementation. Tax enforcement efforts are most often kept secret by tax authorities making them particularly difficult to analyze. The Danish tax administration carried out a large randomized tax audit field experiment and will give us full data access for the analysis. This partnership offers a unique opportunity to evaluate rigorously the effects of tax enforcement as well as test specific enforcement strategies. Evaluating the incidence effects of payroll taxes as well as the labor supply responses to earnings taxation in the long-run is notoriously difficult because studies comparing outcomes before and after a tax reform measures only the short-term response to taxation. The cohort based payroll tax reform in Greece is an unusual policy experiment because it creates two groups of workers in the same labor market which face permanently very different payroll tax schedules based solely on their date of entry in the labor force. The Greek Social Security Administration has been willing to supply exhaustive administrative data to study this reform. Finally, the response of wealth accumulation to estate taxation is central in the policy debate on the estate tax. Using variation in tax rates based on the relationship degree (in some countries but not others) offers a novel way to make progress on this difficult empirical question. The broader impact resulting from the proposed activity is to develop a model for partnerships between either a government tax agency (as in the case of the Danish tax enforcement project or the Greek payroll tax reform) or a private company (as in the case of the large tax preparer for the Earned Income Tax Credit information project) that could be fruitful both for advancing scientific knowledge but also for improving the design and the practical implementation of tax and transfer policies. In the case of the Earned Income Tax Credit project, we are also planning on trying to develop a partnership with the US Internal Revenue Service for additional data access. Access to company or government large administrative databases as well as the possibility to run field experiments is likely to become more and more prevalent. A broader goal behind this NSF grant application is to promote the experiences for data access for research purposes from the most advanced countries such as Scandinavian countries in order to improve data access in countries such as the United States where access for research is currently more restricted.