Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on - PowerPoint PPT Presentation

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth & Employment Owen Zidar University of California, Berkeley NBER Summer Institute 2013: Public Economics July 23, 2013 Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 1 / 48

Variation in Tax Policy & Structure of Income Tax Changes 1982 1991 Average Change in Tax Liability as Share of Income 2 0 −2 1993 2003 2 0 −2 0 50 100 0 50 100 Income Percentile Graphs by Year Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 2 / 48

Research Questions How does the composition of income tax changes affect subsequent output & employment? Do tax cuts for high income taxpayers generate more employment & output growth than equivalently sized tax cuts for low and moderate income taxpayers? If so, why? Traditional PF: Labor supply effects via marginal tax rates 1 Macro: Effects on Aggregate Demand 2 This Paper: Aggregate Demand but with focus on distributional 3 effects Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 3 / 48

Overview 1 Conceptual Framework: Aggregate demand effects due to redistribution from savers to constrained/less patient borrowers 2 Empirical Approach: National: Romer & Romer AER 2010 disaggregated by income group Regional: variation in income distribution across states 3 Data: Historical returns & counterfactuals from NBER TAXSIM 4 Results: Tax cuts for those with high incomes lead to substantially less employment growth and economic activity than similarly sized tax cuts for those with low and moderate incomes Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 4 / 48

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Model: New Keynesian vs RBC Policy Design: Optimal stimulus design Effects of ending the Bush tax cuts for specific income groups Effects of mass refinancing Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 5 / 48

Some Relevant Literature Little direct evidence likely due to empirical issues: endogeneity, simultaneity, and observability Macro Empirical: Romer & Romer (AER 2010). Mertens & Ravn (AER 2013) Theoretical: Monacelli and Perotti (2011), Heathcote (2005), Gali, Lopez-Salifo, and Valles (2007) Consumption responses to Taxes and Transfers Minimum Wage Aaronson, Agarwal, and French (AER 2012) MPC Jappelli and Pistaferri (2012 & 2010), Dynan Skinner and Zeldes (2001), McCarthy (1995), Parker (1999). Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 6 / 48

I. Conceptual Framework Overview Agents with different MPCs because some constrained or myopic Consider lump sum redistribution − ∆ τ b = ∆ τ s Increases aggregate consumption because c b , t ⇑ and c s , t ↓ In standard new Keynesian framework, higher consumption ⇒ increased output, L D , and employment Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 7 / 48

II. Empirical Framework: Background (1/2) Romer & Romer (AER 2010) ∆ Y t = α + β ∆ Tax t + ǫ t (1) Types of Tax Changes 1 Counteract economic forces 2 Spending offsets 3 Address inherited deficit 4 Promote long run growth Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 8 / 48

II. Empirical Framework: Background (2/2) ∆ Y t = α + � M i =0 b i ∆ Tax t − i + e t Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 9 / 48

II. Empirical Framework: (1) National Approach Romer & Romer Specification M � ∆ Y t = α + ∆ b i Tax t − i + e t i =0 Decompose Romer Tax Shocks  ∆Tax B 90 , t for Bottom 90%  ∆Tax t is ∆Tax T 10 , t for Top 10%  ∆Tax NON , t for Non Income Changes Allow for different effects: b m vs β B 90 , m , β T 10 , m , β NON , m Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 10 / 48

II. Empirical Framework: (1) National Approach Output growth & exogenous tax changes for different income groups ∆ Y t = β 0 + β B 90 , 0 (∆ Tax B 90 , t ) + β T 10 , 0 (∆ Tax T 10 , t ) + β NON , 0 (∆ Tax NON , t ) + ... � �� � = b 0 ∆ Tax t + β B 90 , m (∆ Tax B 90 , t − m ) + β T 10 , m (∆ Tax T 10 , t − m ) + β NON , m (∆ Tax NON , t − m ) � �� � = b m ∆ Tax t − m + ǫ t ∆ Tax B 90 and ∆ Tax T 10 are changes in income and payroll taxes as a share of GDP for the bottom 90% and top 10% respectively Assume Cov(∆ Tax g , t , ǫ t ) = 0 ∀ g ∈ ( BOT 90 , TOP 10 , NONINCOME ) following Romer & Romer AER 2010 Frisch Waugh Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 11 / 48

II. Empirical Framework: (1) National Approach Add government transfer “shocks” for compositional concerns ∆ Y t = β 0 + β B 90 , 0 (∆ Tax B 90 , t ) + β T 10 , 0 (∆ Tax T 10 , t ) + β NON , 0 (∆ Tax NON , t ) + ... � �� � = b 0 ∆ Tax t + β B 90 , m (∆ Tax B 90 , t − m ) + β T 10 , m (∆ Tax T 10 , t − m ) + β NON , m (∆ Tax NON , t − m ) � �� � = b m ∆ Tax t − m M M � � + λ m (∆ Transfers t − m ) + η m (∆ Y t − m ) + ˜ ǫ t m =0 m =1 Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 12 / 48

II. Empirical Framework: (2) Regional Approach Exploit variation in income distribution across states Heterogeneity: NJ & CT have 4X share of top 10% vs SD Idea: When national tax policy affects high income taxpayers, states with large shares of high income taxpayers will face larger shocks Labor literature: Bartik (1991), Card (1992), Katz & Murphy (1992), Moretti (2004) Test: If high income tax cuts have substantial effects, CT and NJ should grow faster following national high income tax cuts Value: Provides additional identifying variation Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 13 / 48

II. Empirical Framework: (2) Regional Approach Income Tax Shocks by State  ∆Tax T 10 , s , t for s = CT    ∆Tax T 10 , s , t for s = NJ ∆Tax T 10 , t is ...    ∆Tax T 10 , s , t for s = SD Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 14 / 48

II. Empirical Framework: (2) Regional Approach State emp growth & state tax shocks for different income groups M � ∆ Y s , t = α + ( β B 90 , m ∆ T B 90 , s , t − m + β T 10 , m ∆ T T 10 , s , t − m + X s , t − m λ s , m ) m =0 + η s + φ t + ǫ s , t ∆ T B 90 , s , t is the exogenous change in taxes as a share of state GDP for taxpayers who are in the bottom 90 percent of AGI nationally Assume Cov (∆ Tax g , s , t − m , ǫ s , t ) = 0 ∀ g , s , m < 3 Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 15 / 48

III. Data Overview National Data: 1945-2011 1 Dependent Variables: Employment (BLS) & macro aggregates(BEA) 2 Independent Variables: SOI, NBER TAXSIM for 1960+, standard controls State Data: 1980-2007 1 Dependent Variables: Employment data from BLS 2 Independent Variables: NBER TAXSIM and controls (government transfers, state taxes, population data from BEA) Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 16 / 48

Data: Constructing tax changes Tax Change Measure is a function of three things: 1 Income and deductions from year prior to an exogenous tax change 1 2 Old tax schedule 3 New tax schedule 1 Preliminary tests suggest that results are robust to using two year lags and various inflation adjustments Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 17 / 48

Data: Constructing tax changes Example: 1993 Omnibus Budget Reconciliation Act Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 18 / 48

Data: Constructing tax changes Example: 1993 Omnibus Budget Reconciliation Act Suppose a taxpayer made $180K in 1992 Based on the 1992 schedule & her income and deductions in 1992 , she would have paid $50,500 Based on the 1993 schedule & her income and deductions in 1992 , she would have paid $54,000 My measure assigns her a $3,500 tax increase in 1993 Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 19 / 48

Data: Constructing tax changes I do this calculation for entire sample of NBER returns 2000 Change in Tax Liability 1000 0 −1000 0 50000 100000 150000 200000 250000 Adjusted Gross Income Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 20 / 48

Comparison of Aggregate Changes w/ Romer Changes 1 Tax Change as a Share of GDP .5 0 −.5 −1 −1.5 1940 1960 1980 2000 2020 Year Romer Tax Measure Income & Payroll Tax Changes Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 21 / 48

Disaggregated Income & Payoll Tax Changes Income Only .4 .2 Percent of GDP 0 −.2 −.4 −.6 1960 1970 1980 1990 2000 2010 Year Tax Change: Bottom 20% Tax Change: 21−40% Tax Change: 41−60% Tax Change: 61−80% Tax Change: Top 20% Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 22 / 48

State Bartik Statistics TAXSIM has states for those with income < $200K, so I (1) use obs below cutoff and (2) extrapolate shares based on state shares of $150 to $200K. Top States Bottom States Rank State Top 10 Share Rank State Top 10 Share 1 NJ 15.4 42 TN 6.9 2 CT 15.1 43 AL 6.8 3 MD 13.7 44 SC 6.5 4 AK 13.3 45 WV 5.8 5 VA 13.0 46 AR 5.6 6 MA 12.8 47 ME 5.4 7 CA 12.7 48 MT 5.2 8 NY 11.6 49 MS 5.2 9 CO 11.5 50 ID 4.9 10 DC 11.1 51 SD 3.8 Owen Zidar (UC Berkeley) Tax Cuts for Whom? July 23, 2013 23 / 48