Behavioral Responses to Taxation and Inequality: Evidence from Policy Variation Using Administrative Data

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

This project aims at understanding whether taxes and transfers can be effective tools to address income inequality, and how they affect the economy both at the US level and the state level. The investigators use administrative data from IRS returns to analyze the effects of taxes and transfers on both inequality and economic activity. The proposed activity will significantly advance our knowledge in the analysis of inequality, taxes, and transfers. Such an understanding is crucial to evaluate the costs and benefits of government tax and transfer policies and hence help policy makers design better tax and transfer systems. This research will also develop a model for partnerships between government statistical agencies (the office of Tax Analysis of the US Treasury 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 California Earned Income Tax Credit (EITC) project, lessons from the research could be used to further improve the design of the EITC program. Lastly, the investigators integrate the measurement of economic growth with the measurement of inequality by developing a new tool "Distributional National Accounts". This new tool has the potential to inform the current debate on inequality. Specifically, this research uses administrative data to analyze behavioral responses to taxation and inequality in four related contexts: (1) evaluate the effects of the 2013 tax increases at the top of the distribution on income reporting, tax avoidance, and economic activity; (2) evaluate the 2015 California EITC on both tax evasion and labor supply of single parents; (3) evaluate the effects of state income and inheritances taxes on the mobility of individuals across US states; (4) combine US tax return data with National account data to create Distributional National Accounts in order to integrate national accounting analysis with inequality analysis and be able to provide statistics on the distribution of overall economic growth by socio-economic groups in the United States. The first three projects offer innovative research designs analyzing large administrative data using tax policy variations, while the last project aims at offering better distributional statistics to the public that can help bridge the gap between the analysis of economic growth and inequality analysis.