|
...provides evidence on behavioral responses at different points (or quantiles) in the distribution of income and so is relevant to the question of whether the responses of, say, the rich differ from those at other points in the income distribution. Our results clearly indicate that marginal tax rates affect the reporting decisions of individuals. However, there are significant differences in the marginal tax rate reporting responses for the various types of reported income, there are major differences across income classes, and there are notable differences in the estimated responses across estimation methods.
Keywords Tax price elasticity * Quantile regression
JEL Classification H20 * H30
Introduction
Economists have long agreed that individual behavior should respond in some way to a change in marginal tax rates. However, estimates of the sizes of these behavioral responses in such dimensions as labor supply, savings, capital gains realizations, tax compliance, charitable contributions, and compensation choice are enormously varied and controversial. (1)
The responses of individuals to marginal tax rates in their reporting of income on tax returns are equally uncertain, and the magnitudes of these responses are a central issue in debates about the effects of income taxation, especially in the debate of the impact of changes in marginal tax rates on the level of tax revenues. Major tax changes in the last several decades have given economists the opportunity to examine these reporting changes. Feldstein (1995) finds that the elasticity of reported income with respect to the tax price of reported income (defined as one less the marginal tax rate) is quite large, generally in excess of one in his preferred estimates; Auten and Carroll (1999) also estimate large, if somewhat smaller, elasticities. In contrast, Gruber and Saez (2002) estimate reporting responses to the entire set of federal and state tax changes in the 1980s, including the Tax Reform Act of 1986, and they find that the elasticity is significantly smaller, roughly 0.4. Other studies also find that individual reporting responses are typically present (Slemrod 1998).
While these are important and significant results, there are several issues that remain unresolved about the actual magnitude of the tax price elasticities of the individual reporting decisions. First, it seems likely that the responses of individuals to marginal tax rates differ across the various forms of income that individuals report on their tax returns (e.g., wages and salaries, adjusted gross income, and total income), since the ability of individuals to alter the timing of their receipt and declaration of income must certainly vary across income type. However, the possibility of such differential responses across income type has seldom been examined. Second, it also seems likely that these reporting responses differ at different points in the distribution of income; that is, even for the same form of income, higher income individuals are apt to have more flexibility in their reporting decisions due to, say, their larger financial resources and their greater access to sophisticated tax advice. Again, the magnitudes of such differential responses across income levels have not been thoroughly investigated. Third, the responses are apt to vary across alternative methods of estimation. For example, estimation results are likely to be sensitive to methods that deal with extreme observations in different ways; with taxpayer reporting behavior, outliers occur frequently and they can be large. Of more importance, studies of tax reporting behavior have in most recent cases utilized what has been termed an atheoretical, or "natural experiment," approach to estimation, in which responses are measured by comparing taxpayer reporting behavior before and after some tax change. Heckman (1996) emphasizes that the assumptions required in the natural experiment approach are quite restrictive, and he suggests that the more traditional structural approach--in which behavioral responses of a single cross section of taxpayers are estimated as a function of marginal tax rates and other demographic and economic variables--has much to recommend it. (2) These are all issues that are still unsettled.
In this paper we present estimates of the responsiveness of individual reporting decisions to marginal tax rates (and other factors) that address these issues. We use individual income tax returns for the year 1995 from the Internal Revenue Service (IRS) Statistics of Income Division (SOI), and combine this information with data on the individual income tax systems of the states (where relevant). We then estimate the impact of marginal tax rates and various other taxpayer characteristics like age, marital status, and family size on the decisions to report total income, adjusted gross income, and wages and salaries on individual income tax returns. We also apply a common empirical specification to alternative estimation methods, both of which utilize the traditional structural approach to taxpayer responses. One method is ordinary least squares (OLS) regression. A second method uses quantile regression. Quantile regression provides evidence on behavioral responses at different percentile points, or "quantiles" (e.g., the 20, 40, 50, 60, and 80 percentiles), in the distribution of income, and so is relevant to the question of whether the responses of, say, the very rich differ from those at other points in the income distribution. Quantile regression also allows something to be said about the (differential) responses in a way that limits the influence of extreme observations while utilizing the entire sample of observations.
Unlike much previous work, we therefore estimate the responsiveness of a wide range of tax reporting behavior to marginal tax rates, we estimate the responses of individuals at different points in the income...
NOTE: All illustrations and photos
have been removed from this article.
Looking for additional articles?
Search our database of over 3 million articles.
Looking for more in-depth information on this industry?
Search our complete database of Industry & Market reports by text, subject, publication
name or publication date.
About Goliath
Whether you're looking for sales prospects, competitive information, company
analysis or best practices in managing your organization,
Goliath can help you meet your business needs.
Our extensive business information databases empower business
professionals with both the breadth and depth of credible,
authoritative information they need to support their business
goals. Whether it be strategic planning, sales prospecting,
company research or defining management best practices -
Goliath is your leading source for accurate information.
|
%20%20&position=1)