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.
*online appendix: here
*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.
*online appendix: here
*winner of the 2019 Richard A. Musgrave Prize for best article in the National Tax Journal.
WORKING PAPERS
(2023) Financial Inclusion Across the United States
coauthors: Moto Yogo and Natalie Cox
We study retirement and bank account participation for the universe of U.S. households aged 50 to 59 in the administrative tax data. In the lowest income quintile in 2019, 21 and 70 percent of households had retirement and bank accounts, respectively. For the same group, 38 percent of households had access to an employer retirement plan. Geographic variation in financial participation primarily relates to income rather than racial composition. By instrumental variables, we estimate the causal effect of access to an employer retirement plan. Universal access with automatic enrollment could increase retirement account participation by 17 percentage points in the lowest income quintile over ten years.
(2023) Automatic Tax Filing: Simulating a Pre-Populated Form 1040
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
revise and resubmit: NTJ
*media: vox, wall street journal
Each year Americans spend over 1.7 billion hours and $33 billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for tax year 2019. Our baseline results indicate that between 66 and 75 million returns (42 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $8.3 billion in refunds due to 11 million (20 percent) of them.
(2022) IPOs and Corporate Tax Planning
coauthors: Christine Dobridge and Becky Lester
Does going public affect the amount and type of corporate tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we show that IPO completion is associated with the implementation of multinational income shifting strategies central to the current international tax policy debate. Specifically, firms (i) expand their foreign tax haven presence, (ii) enter into cross-border agreements that accompany intangible asset transfers to foreign subsidiaries, and (iii) increase their level of foreign related-party payments around the time that they go public. The effects are strongest among firms that switch to more sophisticated tax advisors in the years preceding the IPO. In contrast, we observe little domestic tax planning because large stock option deductions, which increase as a consequence of the IPO, provide large domestic tax shields. The paper contributes to the nascent tax literature studying IPOs by documenting the specific tax strategies enabling public firms to remain lightly taxed in the post-IPO period. Furthermore, the findings imply that U.S. tax policies targeted at early-stage innovative firms are critical for retaining domestically-developed IP – and the income earned on such assets – for the U.S. tax base.
(2022) The Secular Decline in Private Firm Leverage
coauthors: Christine Dobridge and Erik Gilje
Using firm-level administrative tax data on the 43% of business liabilities in the United States tied to privately held firms, we document dramatic reductions in leverage since the Great Recession. Leverage for the average private firm fell fifteen percent between 2004 and 2018. In contrast, leverage among public firms rose during this period. The decline in leverage among private firms is inconsistent with theories that suggest firm leverage tracks pro-cyclical credit market conditions. Younger and smaller private firms see especially large declines in leverage, and we find that reduced leverage among private firms is correlated with lower investment. Our findings have important implications for theories on how firm leverage and investment relate to economic fluctuations.
(2022) 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
*media: tax notes
We measure the short-run responses of businesses and their owners to Section 199A, a deduction that reduced the effective tax rate on most U.S. pass-through business income beginning in 2018. We study taxpayer behavior using de-identified tax records of individuals and businesses. With some notable exceptions, we find neither strong evidence of tax avoidance behavior nor evidence of positive real economic effects. We do not find an increase in 2018 or 2019 business income eligible for the deduction, either in the time series or from comparisons of taxpayers with exogenously differing levels of exposure to the deduction. We examine specific hypothesized margins of adjustment. Partnerships reduce compensation paid to owners, in line with the incentives created by 199A, but S corporations do not. In contrast to fears expressed about the legislation, 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 non-owners, though this analysis is underpowered in the short-run.
(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: Moto Yogo and Natalie Cox
We study retirement and bank account participation for the universe of U.S. households aged 50 to 59 in the administrative tax data. In the lowest income quintile in 2019, 21 and 70 percent of households had retirement and bank accounts, respectively. For the same group, 38 percent of households had access to an employer retirement plan. Geographic variation in financial participation primarily relates to income rather than racial composition. By instrumental variables, we estimate the causal effect of access to an employer retirement plan. Universal access with automatic enrollment could increase retirement account participation by 17 percentage points in the lowest income quintile over ten years.
(2023) Automatic Tax Filing: Simulating a Pre-Populated Form 1040
coauthors: Lucas Goodman, Katie Lim, and Bruce Sacerdote
revise and resubmit: NTJ
*media: vox, wall street journal
Each year Americans spend over 1.7 billion hours and $33 billion preparing individual tax returns, and these filing costs are regressive. To lower and redistribute the filing burden, some commentators have proposed having the IRS pre-populate tax returns for individuals. We evaluate this hypothetical policy using a large, nationally representative sample of returns filed for tax year 2019. Our baseline results indicate that between 66 and 75 million returns (42 to 48 percent of all returns) could be accurately pre-populated using only current-year information returns and the prior-year return. Accuracy rates decline with income and are higher for taxpayers who have fewer dependents or are unmarried. We also examine 2019 non-filers, finding that pre-populated returns tentatively indicate $8.3 billion in refunds due to 11 million (20 percent) of them.
(2022) IPOs and Corporate Tax Planning
coauthors: Christine Dobridge and Becky Lester
Does going public affect the amount and type of corporate tax planning? Using a panel of U.S. corporate tax return data from 1994 to 2018, we show that IPO completion is associated with the implementation of multinational income shifting strategies central to the current international tax policy debate. Specifically, firms (i) expand their foreign tax haven presence, (ii) enter into cross-border agreements that accompany intangible asset transfers to foreign subsidiaries, and (iii) increase their level of foreign related-party payments around the time that they go public. The effects are strongest among firms that switch to more sophisticated tax advisors in the years preceding the IPO. In contrast, we observe little domestic tax planning because large stock option deductions, which increase as a consequence of the IPO, provide large domestic tax shields. The paper contributes to the nascent tax literature studying IPOs by documenting the specific tax strategies enabling public firms to remain lightly taxed in the post-IPO period. Furthermore, the findings imply that U.S. tax policies targeted at early-stage innovative firms are critical for retaining domestically-developed IP – and the income earned on such assets – for the U.S. tax base.
(2022) The Secular Decline in Private Firm Leverage
coauthors: Christine Dobridge and Erik Gilje
Using firm-level administrative tax data on the 43% of business liabilities in the United States tied to privately held firms, we document dramatic reductions in leverage since the Great Recession. Leverage for the average private firm fell fifteen percent between 2004 and 2018. In contrast, leverage among public firms rose during this period. The decline in leverage among private firms is inconsistent with theories that suggest firm leverage tracks pro-cyclical credit market conditions. Younger and smaller private firms see especially large declines in leverage, and we find that reduced leverage among private firms is correlated with lower investment. Our findings have important implications for theories on how firm leverage and investment relate to economic fluctuations.
(2022) 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
*media: tax notes
We measure the short-run responses of businesses and their owners to Section 199A, a deduction that reduced the effective tax rate on most U.S. pass-through business income beginning in 2018. We study taxpayer behavior using de-identified tax records of individuals and businesses. With some notable exceptions, we find neither strong evidence of tax avoidance behavior nor evidence of positive real economic effects. We do not find an increase in 2018 or 2019 business income eligible for the deduction, either in the time series or from comparisons of taxpayers with exogenously differing levels of exposure to the deduction. We examine specific hypothesized margins of adjustment. Partnerships reduce compensation paid to owners, in line with the incentives created by 199A, but S corporations do not. In contrast to fears expressed about the legislation, 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 non-owners, though this analysis is underpowered in the short-run.
(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.