Taxes, High-Income Executives, and the Perils of Revenue Estimation in the New Economy

This paper attempts to help explain the unforecasted, excess' personal income tax revenues of the last several years. Using panel data on executive compensation in the 1990s, it argues that because the gains on most stock options are treated as ordinary income for tax purposes, rising stock market valuations are directly tied to non-capital gains income. This blurred line between capital and wage income for has affected tax revenue in three ways, at least for these high-income people. First, stock performance has directly affected the amount of ordinary income that people report by influencing their stock option exercise decisions. Second, the presence of options gives executives more flexibility in changing the timing of their reported income and appears to make them much more sensitive to the short-run timing of tax changes, even accounting for the stock market changes of the period. Third, because of the tax rules on options, changing the capital gains tax rate, as the U.S. did in the late 1990s, can lead individuals to exercise their options early to convert the expected future gains into lower-taxed forms. The data show significant evidence of each of these effects and in all three cases, executives working in the new' economy and high-technology sectors

The Impact and Inefficiency of the Corporate Income Tax: Evidence from State Organizational Form Data

By double taxing the income of corporate firms but not unincorporated firms, taxes can play an important role in a firm's choice of organizational form. The sensitivity of the organizational form decision to tax rates can also be used to approximate the efficiency cost of the corporate income tax. This paper uses new cross-sectional data on organizational form across states compiled in the Census of Retail Trade to estimate this sensitivity. The results document a significant impact of the relative taxation of corporate to personal income on the share of economic activity that is done by corporations including sales, employment, and the number of firms. The impacts are substantially larger than those found in the previous empirical literature based on time-series data.

Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform

macroeconomics, laffer curve

The Importance of Measurement Error in the Cost of Capital

Conventional estimates of the impact of taxes on investment may be seriously biased by measurement error in the cost of capital. The existence and size of such error, however, has not been documented. Using panel data on different types of capital equipment, this paper provides direct evidence of measurement error in the tax component of the cost of capital, accounting for about 20 percent of the tax term's variance. Correcting for the error with IV estimation shows that taxes significantly affect both prices and investment and that conventional results may be off by as much as a factor of four.

In a World Without Borders: The Impact of Taxes on Internet Commerce

The rapid rise in sales over the Internet has generated debate over the taxation of such transactions since the buyers usually pay no sales tax. This paper uses new data on the purchase decisions of approximately 25,000 online users to examine the effects that local sales taxes have on Internet commerce. The results show that, controlling for many observable characteristics, people who live in locations with high sales taxes are significantly more likely to buy things over the Internet. The estimated tax responsiveness of both participation and spending are large and resemble the tax effects found in previous research on retail sales in geographic border areas. The results are quite robust; the tax sensitivity is clear nationally, within regions, within states, and even within metropolitan areas. Further results suggest that the tax effect cannot be explained by unobserved heterogeneity across cities. The magnitudes in the paper suggest that to apply existing sales taxes to Internet commerce would reduce the number of online buyers by 25% and spending by more than 30% with some specifications suggesting even larger effects.

The Value of Broadband and the Deadweight Loss of Taxing New Technology

With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.

How do Incumbents Respond to the Threat of Entry? Evidence from the Major Airlines

We examine how incumbents respond to the threat of entry by competitors (as distinct from how they respond to actual entry). We look specifically at passenger airlines, using the evolution of Southwest Airlines’ route network to identify particular routes where the probability of future entry rises abruptly. We find incumbents cut fares significantly when threatened by Southwest’s entry. Over half of Southwest’s total impact on incumbent fares occurs before Southwest starts flying. These cuts are only on threatened routes, not those out of non-Southwest competing airports. The evidence on whether incumbents are seeking to deter or accommodate entry is mixed.

Measuring Prices and Price Competition Online: Amazon and Barnes and Noble

Despite the interest in measuring price sensitivity of online consumers, most academic work on Internet commerce is hindered by a lack of data on quantity. In this paper we use publicly available data on the sales ranks of about 20,000 books to derive quantity proxies at the two leading online booksellers. Matching this information to prices, we can directly estimate the elasticities of demand facing both merchants as well as create a consumer price index for online books. The results show significant price sensitivity at both merchants but demand at Barnes and Noble is much more price-elastic than is demand at Amazon. The data also allow us to estimate the magnitude of retail outlet substitution bias in the CPI due to the rise of Internet sales. The estimates suggest that prices online are much more variable than the CPI, which understates inflation by more than double in one period and gets the sign wrong in another.

Playing with Fire: Cigarettes, Taxes and Competition from the Internet

This paper documents the rise of the Internet as a source of cigarette tax competition for states in the United States. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, the paper documents a substantial increase in the sensitivity of taxable cigarette sales correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of recent cigarette tax increases substantially. Given the continuing growth of the Internet and of Internet cigarette merchants, the results imply serious problems for state revenue authorities.cigarette tax, cigarette sales, cigarette smuggling