Via the TaxProf Blog, a new Congressional Research Service report tackles the question of the effects of corporate tax reform on government revenues (specifically if there is a “laffer curve”). This bit excerpted on Paul Caron’s blog caught my eye:
The analysis in this report suggests that many of the concerns expressed about the corporate tax are not supported by empirical data. Claims that behavioral responses could cause revenues to rise if rates were cut do not hold up on either a theoretical basis or an empirical basis. Studies that purport to show a revenue maximizing corporate tax rate of 30% (a rate lower than the current statutory tax rate) contain econometric errors that lead to biased and inconsistent results; when those problems are corrected the results disappear. Cross-country studies to provide direct evidence showing that the burden of the corporate tax actually falls on labor yield unreasonable results and prove to suffer from econometric flaws that also lead to a disappearance of the results when corrected, in those cases where data were obtained and the results replicated. Similarly, claims that high U.S. tax rates will create problems for the United States in a global economy suffer from a misrepresentation of the U.S. tax rate compared to other countries and are less important when capital is imperfectly mobile, as it appears to be.
Could it be that the CRS is familiar with bias and inconsistency? And lo and behold, from inside the PDF:
In their study, Brill and Hassett use panel data for the OECD countries from 1981 to 2003.30 They use regression analysis (OLS) to estimate the effects. Brill and Hassett find that the corporate tax rate has at first a positive effect on corporate tax revenues as a percentage of GDP and then a decreasing effect—the effect looks like an inverted U, the shape of the classic Laffer curve. All of their coefficient estimates are statistically significant. However, they do not account for problems often encountered with the use of panel data, and their coefficient estimates would appear to be biased and inconsistent.
New Jersey was a good subject for the study, Young said, because it has so many neighboring states with large cities near the state lines, making it possible to move without having to change jobs.
The millionaire tax produces about $1 billion in annual revenue for the state, Young said, while the amount of revenue lost to out-migration of millionaires is $16 million.
The new study comes just days after an economist working in the administration of Gov. Chris Christie (R) reported that the tax was responsible for the loss of 20,000 taxpayers and $2.5 billion in income. The report did not address whether the new revenue from the tax offset those losses.
Hm, silly question perhaps? Turns out that the New York Times thinks it is interesting enough to feature it on its “Room for Debate” feature, including a contribution from political scientist Larry Bartels.
Not surprisingly, the Times and its contributors don’t really answer the question. The way they ask it is curious, though: “Do Taxes Narrow the Wealth Gap?” It’s curious because taxes–really, “tax policy”, which can mean imposing or taking away a tax that is either regressive or progressive or “flat”–in theory could redistribute in either direction.
For example, this working paper (via TaxProf Blog) argues that different tax reforms in the US over the past fifty years have had heterogeneous effects on income inequality in the US. One thing to keep in mind is that these authors are using simulations to imagine what the counterfactual income distribution would look like under different tax regimes. These simulations come with what might be hard to swallow assumptions–but there surely better than the Times’ back and forth.
But it turns out there is loads of variation in tax policy in the real world, so observational data combined with quasi-experimental designs could yield some real insights on this question. For example, I recently read that nearly 5,000 local jurisdictions in the US impose a local income tax (also on the TaxProf Blog).
My impression is that there are vast quantities of theoretical work on taxation and redistribution in both economics and political science, but very little data and very few people who study the real effects of tax policy. This is something of a troubling disconnect.
(With apologies to the Monkey Cage.)
Via tax.com’s facebook wall, this reuters story is misleadingly titled “Analysis: Americans try to outrun state, local tax hikes.” The first piece of deception is that there is no analysis in the story. The second is that there is no data. Please catch me if I’m just reading too fast, but the only data point seems to be the quote from the accountant that opens the story. The accountant says he’s getting more clients asking about changing their residency for tax purposes.
In contrast, Ezra Klein / The Wall Street Journal did a nice job summarizing a recent empirical study, which concludes the opposite. Look here.
More evidence that the news media has problems accumulating knowledge. Only a couple weeks ago there was coverage of a major empirical study on this question, and now it’s as if it never happened.
Boston taxpayers benefit when nonprofit salaries get spent at local businesses, and sales taxes are collected when visitors to the city’s museums eat, sleep, and shop in the city. The US Conference of Mayors found that governments see a return on investment of more than $7 in taxes for every $1 invested in educational institutions.
From a letter to the editor by Ford W. Bell and Tim Delaney in today’s Boston Globe. Bell and Delaney write in response to an unsigned editorial endorsing Boston Mayor Thomas Menino’s plan to send mock tax bills to city nonprofits, urging them to contribute to city revenues voluntarily.
That sounds like an interesting experiment, the sending of the letters. But what caught my eye here is the claim that investments in educational institutions (presumably, higher ed institutions) lead to a “more than” 7 to 1 return on investment. Normally, I don’t actually look up studies myself to evaluate them–the point of this blog is mainly to critique how these issues get talked about in the media. But here I’m intrigued. So I’ll look up this study.
…OK, I spent my three minutes searching and can’t find it. So the methodology is going to have to remain a mystery. What we can speculate about is what these letter-writers get out of the publication of their letter. I would guess maybe <50% of those who read this letter, a tiny audience, would find it at all convincing. Factor in the hard economic times, and that number is less. Factor in how many people would retain this information, and it’s less. Factor in how many would use this information in making a decision in the real world, and the number is even less. The conclusion is that letters like this have a very low ROI.
Via Ezra Klein, this graph:
Klein’s post focuses on the regional variation: in the South, states rely more on regressive taxes (like sales taxes) instead of progressive taxes (like income tax).
However, what jumps out at me from this graph, especially in light of my earlier post about state tax incentives, is the huge gap between personal and corporate income taxes across all regions. Bear in mind the graphs are for the percentage of total revenue raised, and there are lots more individuals paying income taxes than corporations paying income taxes.
Massachusetts certainly thinks so, as this map of state tax incentives from the Boston Globe indicates. So do Michael Widmer and Jim Klocke, president of the Massachusetts Taxpayers Foundation and executive vice president of the Greater Boston Chamber of Commerce, respectively. In an op/ed in today’s Globe, they defend what critics are calling a “Fidelity tax break,” referring to the financial services company that recently announced its intention to move some jobs out of state. In particular, they say that this tax policy is not specific to Fidelity: “single sales factor apportionment.”
The single sales factor bases firms’ state income tax on their sales in Massachusetts, instead of on a combination of sales, property, and payroll. It has been unfairly labeled a “Fidelity tax break’’ — unfair because it affects an entire industry, not just one company, and because it is not a tax break.
When Massachusetts passed a single sales factor law in the mid-1990s, it lowered the cost of employing people here. It spurred the creation of thousands of new jobs, preserved thousands more, and was fully complied with by the companies it affected.
More than half of all states have adopted some form of single sales factor apportionment. The adoption of single sales by neighboring and competitor states should lead us not to question its effectiveness or validity, but to strengthen our resolve to preserve it.
It may be the case that this tax incentive, and tax incentives generally, attract jobs, but if so these authors have provided no evidence. That some neighboring states have adopted it is interesting, and suggests we could identify the causal effect of such breaks; but that the authors only say that states have adopted these taxes, offering this as evidence they must be a good thing, and don’t actually claim any positive results in those states, is suggestive.
I don’t know if tax incentives create jobs. The Globe’s map indicates that that is the idea: for each break, they give a number of jobs that were supposed to be created as a result. What I do know is that this opinion piece contains essentially no information on the true causal relationship.
And be sure to look out for my next post, “Do op/eds influence public policy?”
Boston Globe columnist Derrick Jackson writes,
[T]here is little conclusive data on the direct relationship between taxation and entrepreneurship, and plenty of examples where nations with high taxes have robust small businesses. Last month, Inc. magazine detailed how Norwegians pay nearly half their income to the government, yet measures of entrepreneurial activity are about the same or even a bit better than the United States.
Jackson motivates his discussion by talking about increasing rhetoric from Republicans on how the health care bill is supposedly crushing innovation by levying new taxes on small businesses.
So there are two causal claims here. First is the relationship between taxes and entrepreneurship in general. The second, which Jackson doesn’t seem to dispute, is that the new health care law is raising taxes on small businesses.
I can’t really comment on the second claim, but it seems simple to verify whether it is true or not. As for the first, one thing we have to worry about is trying to say something general by comparing the United States to a group of Scandinavian countries. We want to know the effect of taxation on entrepreneurship, but any relationship we see could just be due to some other difference, of which there are many, between the US and this group of countries.
The one that jumps out right away is the ethnic homogeneity in Scandinavia. I actually heard an interview with the author of the magazine article where Jackson is getting most of his data, and the interviewer raised this point. The author replied by throwing out the example of Israel, an ethnically diverse country with lots of innovation. I think there are problems with using Israel as a counter-example, but the bigger problem is that the writer seems to think that finding a single counter-example is sufficient to counter the ethnicity story. It isn’t. The way to test for the relationship of interest here involves gathering more data.