PUBLISHED PAPERS
Mortenson, Jacob A., and Andrew Whitten (2020). Bunching to Maximize Tax Credits: Evidence from Kinks in the U.S. Tax Schedule. American Economic Journal: Economic Policy, 12:3, pp. 402-32.
*replication files and online appendix: here
*code: .ado file to estimate bunching
*media: wall street journal
Mortenson, Jacob A., Heidi R. Schramm, and Andrew Whitten (2019). The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs. National Tax Journal, 72:3, pp. 507-542.
*winner of the 2019 Richard A. Musgrave Prize for best article in the National Tax Journal.
*replication files and online appendix: here
*code: .ado file to estimate bunching
*media: wall street journal
Mortenson, Jacob A., Heidi R. Schramm, and Andrew Whitten (2019). The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs. National Tax Journal, 72:3, pp. 507-542.
*winner of the 2019 Richard A. Musgrave Prize for best article in the National Tax Journal.
WORKING PAPERS
(2021) How Do Business Owners Respond to a Tax Cut? Examining the 199A Deduction for Pass-through Firms
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
We consider the short-run responses of businesses and their owners to the introduction of Section 199A, a deduction implemented in 2018 that reduced the effective tax rate on pass-through business income. We study the deduction using several datasets derived from de-identified tax records of individuals and businesses. Overall, we do not find an increase in 2018 in business income likely to be eligible for the deduction, either in the time series or among firms with greater exposure to the deduction due to plausibly exogenous characteristics. We additionally examine specific hypothesized margins of adjustment. We find that partnerships (one type of pass-through business) reduce compensation paid to owners, in line with the incentives created by 199A, but that S corporations (another type of pass-through business) mostly do not. Additionally, we do not find that workers – whether new hires or current employees – switch from employee to contractor status to claim the new deduction. Finally, we find no evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment of nonowners, though this analysis is underpowered in the short-run.
(2021) IPOs and Corporate Tax Planning
coauthors: Christine Dobridge and Becky Lester
under review
How does going public affect firms' tax obligations and tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we compare tax payments for firms that completed an IPO with those that filed for an IPO but later withdrew and remained private. We find that in the years immediately following IPO completion, firms have a higher probability of paying taxes and pay more U.S. tax. The effects occur regardless of tax status in the pre-IPO period and are not explained by statutory limitations imposed on the use of pre-IPO losses. Higher income reported for financial reporting purposes, as well as lower interest deductions attributable to debt repayment, contribute to the increased tax payments. These increases are partially offset by higher tax deductions for post-IPO investment and employment spending. Furthermore, the IPO is associated with increased tax planning through foreign tax haven use. The evidence adds to the nascent literature examining corporate tax implications of the IPO decision.
(2016) Estimating the Elasticity of Broad Income for High-Income Taxpayers
coauthors: Laura Kawano and Caroline Weber
This paper precisely estimates the elasticity of broad income (EBI) with respect to the marginal net-of-tax rate for high-income taxpayers. We study the introduction of a new top income tax bracket in 2013 using a large panel of high-income taxpayers drawn from administrative tax records. Our estimation strategy – inverse probability weighting – takes into account the tremendous income volatility experienced by high-income taxpayers. We obtain an intent-to-treat (ITT) EBI of 0.013. After rescaling to account for taxpayers crossing the top income tax bracket threshold, we obtain a treatment-effect-on-the-treated elasticity that is bounded below by the ITT estimate and above by 0.034.
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
We consider the short-run responses of businesses and their owners to the introduction of Section 199A, a deduction implemented in 2018 that reduced the effective tax rate on pass-through business income. We study the deduction using several datasets derived from de-identified tax records of individuals and businesses. Overall, we do not find an increase in 2018 in business income likely to be eligible for the deduction, either in the time series or among firms with greater exposure to the deduction due to plausibly exogenous characteristics. We additionally examine specific hypothesized margins of adjustment. We find that partnerships (one type of pass-through business) reduce compensation paid to owners, in line with the incentives created by 199A, but that S corporations (another type of pass-through business) mostly do not. Additionally, we do not find that workers – whether new hires or current employees – switch from employee to contractor status to claim the new deduction. Finally, we find no evidence of changes in real economic activity as measured by physical investment, wages to non-owners, or employment of nonowners, though this analysis is underpowered in the short-run.
(2021) IPOs and Corporate Tax Planning
coauthors: Christine Dobridge and Becky Lester
under review
How does going public affect firms' tax obligations and tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we compare tax payments for firms that completed an IPO with those that filed for an IPO but later withdrew and remained private. We find that in the years immediately following IPO completion, firms have a higher probability of paying taxes and pay more U.S. tax. The effects occur regardless of tax status in the pre-IPO period and are not explained by statutory limitations imposed on the use of pre-IPO losses. Higher income reported for financial reporting purposes, as well as lower interest deductions attributable to debt repayment, contribute to the increased tax payments. These increases are partially offset by higher tax deductions for post-IPO investment and employment spending. Furthermore, the IPO is associated with increased tax planning through foreign tax haven use. The evidence adds to the nascent literature examining corporate tax implications of the IPO decision.
(2016) Estimating the Elasticity of Broad Income for High-Income Taxpayers
coauthors: Laura Kawano and Caroline Weber
This paper precisely estimates the elasticity of broad income (EBI) with respect to the marginal net-of-tax rate for high-income taxpayers. We study the introduction of a new top income tax bracket in 2013 using a large panel of high-income taxpayers drawn from administrative tax records. Our estimation strategy – inverse probability weighting – takes into account the tremendous income volatility experienced by high-income taxpayers. We obtain an intent-to-treat (ITT) EBI of 0.013. After rescaling to account for taxpayers crossing the top income tax bracket threshold, we obtain a treatment-effect-on-the-treated elasticity that is bounded below by the ITT estimate and above by 0.034.
DORMANT PAPERS
(2019) Simulating the 199A Deduction for Pass-through Owners
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
We analyze the new Section 199A deduction for pass-through income using a representative sample of administrative data from tax year 2016. We identify the taxpayers who would have benefited from the pass-through deduction had it applied in 2016. The analysis uses taxpayers' reported income, abstracting from behavioral responses, and applies key aspects of 2018 tax code. We do not attempt to model any potential economic growth spurred by 199A, nor do we model the economic incidence of the deduction. The estimated tax savings from the deduction, measured in 2018 dollars, is $34.5 billion. The majority of the beneficiaries of the deduction are in the bottom 80 percent of the income distribution. However, 60 percent of pass-through income, and 72 percent of the statutory benefit of the passthrough deduction, accrues to taxpayers in the top five percent of adjusted gross income (above roughly $208,000). Without the 199A guardrails, we estimate that this group would receive 83 percent of the statutory benefit.
(2018) The Absence of Income Effects at the Onset of Child Tax Benefits
coauthors: Jake Mortenson, Heidi Schramm, and Lin Xu
We study the effects of quasi-random variation in unearned income on labor force participation, earnings, business income, capital gains realizations, retirement savings, and unemployment compensation. To identify these income effects, we exploit an age discontinuity in the federal tax system: parents whose children are born in December of year t-1 can claim child-related tax benefits for that year, whereas otherwise-similar parents whose children are born in January of year t cannot. We use a panel of administrative tax data comprised of the universe of married households with a child born in December or January in years 2001 through 2013. Over this period, the average child tax benefit was about $1,800. Using a regression discontinuity research design, we find approximately zero treatment effects on the intensive and extensive margin for all outcome variables studied. Our results are consistent with precise zero income effects and suggest that households do not learn about (and respond to) child tax benefits in the first year they are claimed.
(2016) Optimal Taxation of Internalities: The Role of Market Incentives
This paper analyzes the optimal taxation of goods when consumers fail to maximize their own utility, imposing internalities on themselves. This can happen due to imperfect information, cognitive bias, or lack of willpower, among other causes. I relax two ubiquitous assumptions found in other work on this topic by studying imperfect competition and the incentive firms have to de-bias consumers. Contrary to standard results, I find that (i) internality correction, even if costless, is not always desirable; (ii) optimal tax rates are generally not equal to marginal internalities; and (iii) firm de-biasing incentives attenuate the optimal internality tax or subsidy.
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
We analyze the new Section 199A deduction for pass-through income using a representative sample of administrative data from tax year 2016. We identify the taxpayers who would have benefited from the pass-through deduction had it applied in 2016. The analysis uses taxpayers' reported income, abstracting from behavioral responses, and applies key aspects of 2018 tax code. We do not attempt to model any potential economic growth spurred by 199A, nor do we model the economic incidence of the deduction. The estimated tax savings from the deduction, measured in 2018 dollars, is $34.5 billion. The majority of the beneficiaries of the deduction are in the bottom 80 percent of the income distribution. However, 60 percent of pass-through income, and 72 percent of the statutory benefit of the passthrough deduction, accrues to taxpayers in the top five percent of adjusted gross income (above roughly $208,000). Without the 199A guardrails, we estimate that this group would receive 83 percent of the statutory benefit.
(2018) The Absence of Income Effects at the Onset of Child Tax Benefits
coauthors: Jake Mortenson, Heidi Schramm, and Lin Xu
We study the effects of quasi-random variation in unearned income on labor force participation, earnings, business income, capital gains realizations, retirement savings, and unemployment compensation. To identify these income effects, we exploit an age discontinuity in the federal tax system: parents whose children are born in December of year t-1 can claim child-related tax benefits for that year, whereas otherwise-similar parents whose children are born in January of year t cannot. We use a panel of administrative tax data comprised of the universe of married households with a child born in December or January in years 2001 through 2013. Over this period, the average child tax benefit was about $1,800. Using a regression discontinuity research design, we find approximately zero treatment effects on the intensive and extensive margin for all outcome variables studied. Our results are consistent with precise zero income effects and suggest that households do not learn about (and respond to) child tax benefits in the first year they are claimed.
(2016) Optimal Taxation of Internalities: The Role of Market Incentives
This paper analyzes the optimal taxation of goods when consumers fail to maximize their own utility, imposing internalities on themselves. This can happen due to imperfect information, cognitive bias, or lack of willpower, among other causes. I relax two ubiquitous assumptions found in other work on this topic by studying imperfect competition and the incentive firms have to de-bias consumers. Contrary to standard results, I find that (i) internality correction, even if costless, is not always desirable; (ii) optimal tax rates are generally not equal to marginal internalities; and (iii) firm de-biasing incentives attenuate the optimal internality tax or subsidy.