The Value of Honesty: Empirical Estimates from the Case of the Missing Children

How much are people willing to forego to be honest, to follow the rules? When people do break the rules, what can standard data sources tell us about their behavior? Standard economic models of crime typically assume that individuals are indifferent to dishonesty, so that they will cheat or lie as long as the expected pecuniary benefits exceed the expected costs of being caught and punished. We investigate this presumption by studying the response to a change in tax reporting rules that made it much more difficult for taxpayers to evade taxes by inappropriately claiming additional dependents. The policy reform induced a substantial reduction in the number of dependents claimed, which indicates that many filers had been cheating before the reform. Yet, the number of filers who availed themselves of this evasion opportunity is dwarfed by the number of filers who passed up substantial tax savings by not claiming extra dependents. By declining the opportunity to cheat, these taxpayers reveal information about their willingness to pay to be honest. We present a novel method for inferring the characteristics of taxpayers in the absence of audit data. Our analysis suggests both that this willingness to pay to be honest is large on average and that it varies significantly across the population of taxpayers.

The Effect of the Earned Income Tax Credit in the District of Columbia on Poverty and Income Dynamics

Using unique longitudinal administrative tax panel data for the District of Columbia (DC), we assess the combined effect of the DC supplemental earned income tax credit (EITC) and the federal EITC on poverty and income dynamics within Washington, DC, from 2001 to 2011. The EITC in DC merits investigation, as the DC supplement to the federal credit is the largest in the nation. The supplemental DC EITC was enacted in 2000, and has been expanded from 10 percent of the federal credit in 2001 to 40 percent as of 2009. To implement the study, we estimate least squares models with 0/1 dependent variables to estimate the likelihood of net-EITC income above poverty and near-poverty thresholds. We also estimate the likelihood of earnings growth and income stabilization from the EITC. To identify the effect of the EITC, we exploit variation in the EITC subsidy rate from 2008 to 2009, when an additional EITC bracket of 45 percent was added for workers with three or more dependent children, up from 40 percent in the previous year for workers with two or more children. We also estimate a model examining the impact of city-level changes to the EITC. The structure and richness of our data enable us to control for tax filer fixed effects, an important innovation from many previous EITC studies. Overall, we find that the combined EITC raises the likelihood of net-EITC income above poverty and near poverty by as much as 9 percent, with the largest consistent effects accruing to single-parent families

Household responses to tax and spending policies.

Government policies affect labor supply and financial decisions in numerous ways. The tax code alters incentives for earning and reporting income, and government spending programs influence household consumption decisions. This dissertation consists of three empirical investigations quantifying the impact of particular government policies on household decisions. The U.S. tax treatment of married couples changed in 1948, from a system in which each spouse paid taxes on his or her own income to a system in which a married couple is taxed as a unit. Chapter 1 investigates how this conversion affects labor supply and the division of income between spouses. It utilizes a natural experiment created by cross-state variation in property laws: Those in states with community property laws were unaffected by the 1948 legal change. Comparing the behavior of taxpayers in affected and unaffected states indicates that the tax change is associated with a decline in the labor force participation rate of married women, consistent with theory. Married women were also less likely to have on-wage income after 1948, reflecting pre-1948 allocation of family assets to wives for tax purposes. The effects of joint taxation on married men's labor force participation and non-wage income are generally not statistically significant. Chapter 2 explores how the Earned Income Tax Credit affects reported self-employment income. A model in which an individual allocates labor supply between the wage sector and the self-employment sector generates predictions about how changes in the parameters of the EITC affect participation in self-employment. Consistent with the model, evidence from tax return data shows that an increase in the EITC phase-in rate increases the share of returns reporting self-employment income. Chapter 3 investigates how the presence of a state merit scholarship program affects household-level consumption decisions. There has been concern that merit scholarships flow disproportionately to high income students and are largely used to fund non-educational expenses. Using data from the Consumer Expenditure Survey, I find no evidence that spending on non-educational goods increases more in states with merit scholarships than in other states. If anything, households respond by reducing their borrowing.Ph.D.EconomicsLabor economicsSocial SciencesUniversity of Michigan, Horace H. Rackham School of Graduate Studieshttp://deepblue.lib.umich.edu/bitstream/2027.42/126205/2/3238006.pd

and the NBER

This paper uses data from the universe of tax returns filed between 2001 and 2010 to provide new evidence on the extent to which taxpayers are willing to shift births from the beginning of January to the end of December in order to claim child-related tax benefits in an earlier tax year. Filers have an incentive to shift births, through induction or cesarean delivery, into December because child-related tax benefits are not prorated. We find evidence of a positive, but very small, effect of tax incentives on birth timing. We argue that the response to tax incentives is likely small in part because of limited information, delays in the processing of Social Security Numbers for newborns and a lack of control over medical procedures on the part of low-income filers. We also document a precise shifting of reported self-employment income in response to variation in incentives from the Earned Income Tax Credit due to childbirth, which is indicative of tax evasion

Joint Taxation and the Labour Supply of Married Women: Evidence from the Canadian Tax Reform of 1988*

The Canadian federal tax reform of 1988 replaced a spousal tax exemption with a non-refundable tax credit. This reduced the'jointness'of the tax system: after the reform, secondary earners'effective'first dollar'marginal tax rates no longer depended on the marginal tax rates of their spouses. In practice, the effective'first dollar'marginal tax rates faced by women with high-income husbands were particularly reduced. Using difference-indifference estimators, we find a significant increase in labour force participation among women married to higher-income husbands. Copyright 2007 Institute for Fiscal Studies.