Trends in High Incomes and Behavioral Responses to Taxation: Evidence from Executive Compensation and Statistics of Income Data

This paper examines income trends from 1992 to 2004 and the responsiveness of different income measures to tax changes for corporate executives and for the very highest income U.S. taxpayers. We detail the growth in executive compensation and break down the components of that growth by sources, such as the value of options and stock grants, as well as bonus income. We then examine income trends at various points in the income distribution for executives and for all taxpayers. An empirical strategy similar to that employed by Goolsbee (2000) is then used to examine the responsiveness to tax rates of broad measures as well as individual sources of executive compensation. Additionally, we investigate the impact of marginal tax rates applying to corporate income, personal income, and capital gains on the composition of executive compensation. Consistent with other studies, we find that most of the growth and volatility in incomes has been concentrated within the top one percent of taxpayers, for whom income grew sharply between 1992 and 2000, and then declined sharply from 2000 to 2002. Below the top one percent, income patterns are much more stable. Income patterns for executives are similar to, but more volatile than, those for the very highest income taxpayers. Salary income of executives has been relatively stable, while the value of their stock options, stock grants, and bonuses has grown tremendously. We use data from two sources: a panel of executives and IRS tax returns from the Statistics of Income. Our elasticity estimates based on the panel of executives may be more reliable than those based on the tax panel because the regressions include firm-specific information that helps to explain changes in income. For executives, our permanent earned income elasticity estimate for the early 1990s is 0.19 (with substantial transitory shifting of income into the year prior to the 1993 tax increase). There is also evidence of substantial transitory income shifting around the time of the 2001 Economic Growth Tax Relief and Reconciliation Act (EGTRRA), but the overall estimated elasticity is negative. The results are not definitive, however. Our results are sensitive to many factors, such as the time-period examined, the data set used, and the econometric specification. That inconsistency reflects the complexities inherent in estimating high-income behavioral responses to taxation. The fact that the elasticity estimates differ greatly across time-periods and across the two datasets suggests that non-tax factors are extremely important. That observation is consistent with several other papers (Slemrod 1996, Saez 2004, Kopczuk 2005, Giertz 2006) that all show a great deal of sensitivity surrounding taxable income elasticity estimates.Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation; Executive Compensation; Income Distribution;

Redistribution and Tax Expenditures: The Earned Income Tax Credit

This paper examines the distributional and behavioral effects of the Earned Income Tax Credit (EITC). We chart the growth of the program over time, and argue several expansions show that real responses to taxes are important. We use tax data to show the distribution of benefits by income and family size, and examine the impacts of hypothetical reforms (expansions and contractions) to the credit. Finally, we calculate the efficiency effects of marginal changes to EITC parameters. Targeting the EITC to lower-income families by raising the phase-out rate generates a welfare loss for single mothers, primarily because of the disincentive to enter the labor market and not the traditional hours-of-work distortion.

Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment

This paper uses the Tax Reform Act of 1986 as a natural experiment to identify the labor supply responsiveness of married women to changes in the tax rate. The Tax Reform Act of 1986 reduced the top marginal tax rate by 44 percent (from 50 percent to 28 percent), but changed less the marginal tax rate for those further down the income distribution. I analyze the response of married women at or above the 99th percentile of the income distribution, using as a control group women from the 75th percentile of the income distribution. I therefore identify the tax effect as the difference between the change in labor supply of women with large tax rate reductions and the change in labor supply of women with small tax rate reductions. I find evidence that the labor supply of high-income, married women increased due to the Tax Reform Act of 1986. The increase in total labor supply of married women at the top of the income distribution (relative to married women at the 75th percentile of the income distribution) implies an elasticity with respect to the after- tax wage of approximately 0.8. At least half of this elasticity is due to labor force participation. Use of a second control group supports the participation response but is inconclusive on the hours of work response.

Who Chooses, Who Uses? Initial Evidence from the D.C. Opportunity Scholarship Program

The federal government recently enacted its first school voucher program as a pilot project in the District of Columbia. To be eligible, students need to be entering grades K-12 and have a family income at or below 185 percent of the poverty level. Although a rigorous analysis of the Opportunity Scholarship Program’s impact on student achievement and other outcomes remains a prospect for the future, at this early point initial data exists regarding the families that are applying for the program and the students that are using and not using the voucher when offered. Here we present a preliminary analysis of those data. We find that program applicants are somewhat disadvantaged relative to non-applicants regarding educational characteristics and family income, and are more likely to be African American, than non-applicants. The fact that the program is means-tested appears to be central to the finding that it is reaching a more disadvantaged population of students. When we examine all students that received a voucher award, and compare the group of voucher users with the group of voucher decliners, we find two significant differences. First, scholarship users are educationally advantaged in important ways relative to scholarship decliners. They are much less likely to have learning or physical disabilities, and younger scholarship users evidence somewhat higher test scores than non-users in similar grades. Second, we find that scholarship non-users are more likely to report that their existing school has various specialized educational programs and more extensive facilities. Although these results suggest some measure of selectivity in the group of actual program participants, the data do not indicate conclusively if that selectivity is a function of the decisions and behavior of participating private schools or the result of the rational decisions of consumers in a newly-expanded education market

Tax Reform in Kenya: Policy and Administrative Issues

Kenya's tax system has undergone more or less continual reform over the last twenty years. On the policy side, rate schedules have been rationalized and simplified, a new value-added tax introduced, and external tariffs brought in line with those of neighboring countries in East Africa. At the same time, administrative and institutional reforms have taken place. Kenya has the trappings of a modern tax system, including, for example, a credit-invoice VAT, a PAYE individual income tax with graduated but arguably moderate rates, and a set of excise taxes focused on the usual suspects (alcohol, cigarettes, gasoline, etc.). However, with up to 70 percent of GDP produced and possibly as much as 75 percent of labor employed in the informal sector, the ability of the tax system to raise sufficient revenue with minimal distortions is severely circumscribed. In such an environment, raising around one-fifth of GDP in tax revenue is likely to impose very large distortionary costs on the economy. Continued reform of both the policy instruments and the administrative and enforcement capacity of the tax system is therefore imperative. The aim of this paper is to provide a broad overview of the Kenyan tax system, the reforms that have occurred over the past two decades, and the administrative structures in place. To properly assess the distortionary costs of the current tax system, we intend to undertake micro-econometric analysis of the effects of the tax reforms pursued by the government, using individual-level tax return data when available. We discuss the proposed methodology for this subsequent research in the conclusion to this paper

The Earned Income Tax Credit and the Labor Supply of Married Couples

Over 18 million taxpayers are projected to receive the Earned Income Tax Credit (EITC) in tax year 1997, at a total cost to the federal government of about 25 billion dollars. The EITC is refundable, so that any amount of the credit exceeding the family's tax liability is returned in the form of a cash refund. Advocates of the credit argue that this redistribution occurs with much less distortion to labor supply than that caused by other elements of the welfare system. This popular view that the credit is unlikely to hold among married couples. Theory suggests that primary earners (typically men) would increase labor force participation, but secondary earners would reduce their labor supply in response to an EITC. We study the labor supply response of married couples to several EITC expansions between 1984 and 1996. While our primary interest is the response to changes in the budget set induced by the EITC, our estimation strategy takes account of budget set changes caused by federal tax policy, and by cross-sectional variation in wages, income, and family size. We use both quasi-experimental and reduced form labor supply models to estimate the impact of EITC induced tax changes. The results suggest that EITC expansions between 1984 and 1996 increased married men's labor force participation only slightly but reduced married women's labor force participation by over a full percentage point. Overall, the evidence suggests that family labor supply and pre-tax family earnings fell among married couples. Our results imply that the EITC is effectively subsidizing married mothers to stay at home, and therefore have implications for the design of the program.