Inequality and Taxation: Evidence from Data, Experiments, and Tax Policy Variation

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

Inequality and Taxation: Evidence from Data, Experiments, and Tax Policy Variation Income inequality has increased sharply in the United States, as well as in many OECD countries in recent decades. Therefore, it is valuable to develop better and more timely measures of inequality to enlighten the policy debate. Tax and transfer policy can potentially play a key role in curbing inequality. Therefore, it is valuable to understand the rise in inequality affects the public preferences for more redistribution through taxes and transfers, and estimate the economic costs of increasing redistribution through taxes and transfers. The objective of this proposal is to use administrative data as well as experimental data to make progress on those questions in four related contexts. (1) Use population tax return data posted in real time on Internal Revenue Service (IRS) databases to create early but accurate distributional statistics that could be produced almost one year earlier than current final statistics published by the Statistics of Income division of IRS, (2) Use a randomized survey experiment to analyze the effects of providing interactive information about the US income distribution on preferences for redistribution through progressive taxation and political involvement, (3) Use population US tax return data and geographical variation in knowledge about gaming the Earned Income Tax Credit (EITC) to evaluate the real labor supply responses to the EITC and the efficiency costs of the program, (4) Use Danish population tax and migration administrative data to evaluate the effects of a special tax scheme offering a time limited low income tax rate to highly compensated foreigners migrating to Denmark. The potential intellectual merit of the proposed activity is to significantly advance our knowledge in the analysis of inequality and taxation. 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. There is relatively little work that credibly identifies the effects of inequality on preferences for redistribution. Our proposed randomized survey experiment is an innovative way to use new online survey technology that can provide randomized treatments and collect information about preferences for redistribution at relatively low cost. The effect of information on behavioral responses to taxation has hardly been explored before and could be a significant determinant to the size of such behavioral 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 project offers a great opportunity to make progress in that direction. The issue of tax induced migration is looming large in public policy debates both within the European Union but also across US states. There is remarkably little evidence in the literature about this issue. The Danish special tax scheme offers a promising avenue to break new ground in this important but under-explored issue. The broader impact resulting from the proposed activity is to develop a model for partnerships between government statistical agencies (the Danish statistical agency and the Statistics of Income division of the IRS) and researchers 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 EITC project, lessons from our research could be used to further improve the design of the EITC program. In the case of the early statistics, the goal is to propose new methods and products that could later on be adopted by the Statistics of Income division of IRS or other government agencies to provide higher quality and timely income statistics to the public. 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.