Does the Investment Interest Limitation Explain the Existence of Dividends?

Miller and Scholes show that under certain conditions the Federal Income tax taxes dividend income at a rate no higher than the rate on capital gains. Tabulations of actual 1977 tax returns show that the special circumstances under which this can occur apply to less than 3% of dividend income and no significant role can be ascribed to their result in the determination of corporate dividend policy.

Identification in Tax-Price Regression Models: The Case of Charitable Giving

In this paper we use an instrumental variable estimator to exploit sources of independent variation, which allows unbiased estimation of the tax-price elasticity under more general conditions. The estimator is applied to the demand for charitable giving. A charitable giving equation is an appropriate test for this procedure because it represents the purest case of a tax-price coefficient. That is, taxes are the sole source of variance in the price. The deduction is also an important policy issue. In 1982, 1.8 percent of gross income was deducted for this reason, about as much as the capital gains deduction.

Alternative Tax Rules and Personal Savings Incentives: Microeconomic Data and Behavioral Simulations

This study examines the potential effects on personal savings of alternative types of tax rules. The analysis makes use of two extensive samples of information on individual savings and financial income: the 1972 Consumer Expenditure Survey and a stratified random sample of 26,000 individual tax returns for that year. The first type of tax rule that we consider would permit all tax-payers to make tax deductible contributions to individual savings accounts. The interest and dividends earned in these accounts would also accumulate untaxed. A potential problem with any such plan is that Individuals could in principle obtain tax deductions without doing any additional saving merely by transferring pre-existing assets into the special accounts. The evidence that we have examined indicates that this Is not likely to be important in practice since most taxpayers currently have little or no financial assets with which to make such transfers. For example, a plan permitting contributions of 10 percent of wages up to $2000 a year would exhaust all the pre-existing assets of 75 per-cent of households in just 2 years. Our evidence also shows that a ceiling on annual contributions of 10 percent of wages still leaves an increased saving incentive for more than 80 percent of households since fewer than 20 percent of households currently save as much as 10 percent a year. Specific simulations of a variety of such proposals show that even when income and substitution effects balance for a representative taxpayer (implying no change in his consumption) aggregate saving would rise considerably. The second type of tax rule that we examine would increase the current$200 interest and dividend exclusion. In 1972, among families with incomes of $20,000 to$30,000, 55 percent had more than $200 of interest and dividends; for those with incomes of at least$30,000, 82 percent had more than $200 of interest and dividends. For such families, the$200exclusion provides no incentive for additional saving. Our analysis considers four ways of strengthening the saving incentive while limiting the reduction in tax revenue:(1) a limit of $1000 on the interest and dividend exclusion; (2) a 51) percent exclusion of interest and dividends up to a$1000 limit; (3) exclusion of interest and dividends in excess of 5 percent of income over$10,000with an exclusion limit of$1000;and (4)exclusion of 20 percent of interest and dividend income without any limit. The revenue effects of all of these options were found to be quite small. But even with quite modest elasticities of current consumer spending with respect to the relative prices of present and future consumption, these plans could increase saving by significantly more than the reduction in tax revenue.

Sources of IRA Saving

To address the question of whether IRA5 contribute to capital formation, we use the IRS/University of Michigan taxpayer sample for income tax returns during 1980-84. By matching families across a five-year period, we can estimate the dynamic interactions of IRA purchases and other types of saving, correct for individual differences, and test whether IRA purchases are in part offset by other (net) asset sales. The "reshuffling" hypothesis implies that taxpayers who enroll in IRAs should, over time, experience a drop in net taxable interest and dividend income as their taxable assets (or new loans) are used to purchase IRAs. Conversely, the "new saving" view of IRAs implies that taxable interest and dividend income should be unaffected by IRA purchases. We find little or no evidence which favors the view that IRAs are funded by cashing out existing taxable assets. In fact, individuals who purchased IRAs in each year between 1982-84 increased their asset holdings by more than those who did not purchase IRAs. In one sense, our results strongly confirm the studies by Venti and Wise and Hubbard that IRA saving represents new saving. But shuffling could still occur, albeit on a secondary level: families who are accumulating both taxable assets and IRAs might have accumulated even more taxable assets had IRA5 not been available

The Significance of Federal Taxes as Automatic Stabilizers

Using the TAXSIM model for the period 1962-95, we consider the federal tax system's impact as an automatic stabilizer. Despite the many changes in the tax system, there has been relatively little change in its role as an automatic stabilizer. We estimate that individual federal taxes offset perhaps as much as 8 percent of initial shocks to GDP. We also suggest that the progressive income tax may help to stabilize output via its effect on the supply of labor, an additional effect that may even be of similar magnitude to the more traditional path of stabilization through aggregate demand.

Recent Developments in the Marriage Tax

The new tax law increases tax rates of high income individuals, and expands the earned income tax credit for low income individuals. We use a sample of actual tax returns to compute estimates of the 'marriage tax' - the change in couples joint tax upon marriage - under this new law. We predict that in 1994 52 percent of American couples will pay a marriage tax, with an average of about $1,244; 38 percent will receive a subsidy averaging about$1,399. These aggregate figures mask a considerable amount of dispersion in the population. Under the new law, the marriage tax for certain low-income families can exceed $3,000 annually; for certain very high income families it can exceed$10,000 annually.