Tax Task Force Meeting, New York City 2005

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Oscar Cetrangolo

Argentina is facing the greatest crisis of its history and taxation has played a crucial role in the genesis, development and, as present fiscal figures show, in its way out. In very general terms, the main problems of the Argentine tax system are related to five issues: solvency, instability, equity, informal sector and federalism.

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Elsa Romo-Leroux de Mena

301kb pdf
Nada Eissa

The Tax Reform Act of 1986 was arguably the most significant reform of the federal income tax in the United States since the inception of the modern tax system in 1948. TRA86 expanded the tax base, and in addition reduced marginal tax rates- most significantly at the top and the bottom of the income distribution. At the very top of the statutory tax schedule, the marginal tax rate was reduced from 50 percent to 28 percent (or 44 percent).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 nature of the reforms suggest focusing on the very top of the income distribution. To isolate the behavioral response to taxes from the effects of general labor market trends, I use comparison groups of women whose tax rates were less affected by the reforms. The effects of TRA86 are identified by comparing the labor supply of women at the 99th percentile of the income distribution to that of women from the 75th percentile of the same distribution.I find evidence that the labor supply of high-income, married women increased quite substantially after the Tax Reform Act of 1986. Total hours worked by married women at the top of the income distribution increased by as much as 90 hours per year after their taxes declined. This response cannot be explained by the choice of the comparison group nor by changing returns to education over this period. The observed responses imply an hours worked elasticity with respect to the after-tax wage that is somewhat high, in the range of 0.6 to 0.8. By examining the participation response separately, this paper also contributes to our understanding of the composition of the labor supply response; i.e. the extensive (participation) versus intensive (hours worked) margin. The evidence for high income women over this period suggest that at least half of the total elasticity is due to labor force participation.

1.83mb pdf
Martin Feldstein

This paper reports new estimates of the sensitivity of taxable income to changes in tax rates based on a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. This comparison is done by using a panel of more than 4000 individual tax returns created by the Treasury that matches tax returns for the same taxpayers in different years.The analysis emphasizes that the response of taxable income is much more general than the response of traditional measures of labor supply and is likely to be much more sensitive to tax rates.The evidence shows a substantial response of taxable income to changes in marginal tax rates. The differences-of-differences calculations imply an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and could be substantially higher.There is a brief discussion and simulation analysis of the implications of these estimates for the likely impact of the 1993 tax rate increases on tax revenues. Even the lowest estimated elasticity implies that the tax rates changes enacted in 1993 will lead to little additional personal income tax revenue.

187kb pdf
Roger Gordon

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Roger Gordon

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Jonathan Gruber,
Emmanuel Saez

A central tax policy parameter that has recently received much attention, but about which there is substantial uncertainty, is the overall elasticity of taxable income. We provide new estimates of this elasticity which address identification problems with previous work, by exploiting a long panel of tax returns to study a series of tax reforms throughout the 1980s. This identification strategy also allows us to provide new evidence on both the income effects of tax changes on taxable income, and on variation in the elasticity of taxable income by income group. We find that the overall elasticity of taxable income is approximately 0.4; the elasticity of real income, not including tax preferences, is much lower. We also estimate small income effects on tax changes on reported income, implying that the compensated and uncompensated elasticities of taxable income are very similar. We estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above $100,000 per year, who have an elasticity of 0.57, while for those with incomes below $100,000 per year the elasticity is less than one-third as large. Moreover, high income taxpayers who itemize are particularly responsive to taxation. We then derive optimal income tax structures using these elasticities. Our estimates suggest that the optimal system for most redistributional preferences consists of a large demogrant that is rapidly taxed away for low income taxpayers, with lower marginal rates at higher income levels.

855kb pdf
Dalia Marin,
Chenggang Xu,
Haizhou Huang

This paper provides a unified analysis for the onset of the 1998 financial crisis and the strong economic recovery afterward in Russia and other former Soviet Union countries. Before the crisis a banking failure arose owing to the coexistence of a lemons credit market and high government borrowing. In a lemons credit market low credit risk firms switched from bank to nonbank finance, including trade credits and barter trade, generating an externality on banks' interest rates. The collapse of the treasury bills market in the financial crisis triggered a change in banks’ lending behavior, providing initial conditions for banking development.

39kb pdf
Haizhou Huang

195kb pdf
Joosung Jun

The tax structure in Korea does not much resemble those found in developed countries: the personal income tax is of relatively minor importance (14.1 percent of total tax revenue in 2003; the share for corporate taxes was 17.3); the corporate taxes are paid primarily by large manufacturing companies; and the use of revenue earmarking is extensive (the revenue from earmarked taxes amounted to 3.5 percent of GDP or 17.2 percent of total taxes; taking into account earmarked grants to localities, almost 35 percent of total tax revenue was earmarked in 2003).These phenomena are possibly related to tax enforcement problems faced in Korea: due to the lack of reliable tax information on the self-employed and small firms, the bases of income and value added taxes are narrow. Earmarked taxes, the revenue from which normally flows into a special account or fund, have appeared to be an attractive source of financing various public services without much resistance from the taxpayers (the special accounts and public funds together accounted for about 45 percent of the consolidated central government expenditure, leaving barely over half of central government activities for the general account).This note presents an analysis of the link between major earmarked taxes (the transportation, the rural development, the education, and the liquor tax, etc.) and their corresponding accounts (transportation facilities, rural development, environment, education, transfers-to-localities, etc.): The major findings are: (1) the link between any specific source and expenditure does not appear to be tight (“weak” earmarking), suggesting that the marginal expenditure decision remain in the hands of the budgetary authorities, not taxpayers; (2) the tax-expenditure linkage does not reflect a benefit-tax principle in most cases (especially when taxes are imposed in surcharges; when a fixed ratio of general revenue is earmarked); most likely, earmarking in Korea was motivated by revenue collecting purposes.

37kb pdf
Joosung Jun

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Beatriz Merino

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José Teófilo Oliveira

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Indira Rajaraman

38kb pdf
Govinda M. Rao

221kb pdf
Shahe Emran,
Joseph Stiglitz

The current consensus on indirect tax reform in developing countries favors a reduction in trade taxes with an increase in VAT to raise revenue. The theoretical results on selective reform that underlie this consensus are, however, derived from partial models that ignore the existence of an informal economy. Once the incomplete coverage of VAT due to an informal economy is acknowledged, we show that, contrary to the current consensus, the standard revenue-neutral selective reform of trade taxes and VAT reduces welfare under plausible conditions. Moreover, a VAT base broadening with a revenue-neutral reduction in trade taxes may also reduce welfare. The results raise serious doubts about the wisdom of the indirect tax reform policies pursued by a large number of developing countries.

214kb pdf
Shahe Emran,
Joseph Stiglitz

A strand of recent literature shows that a reform of import tariff (export tax) and consumption tax (production tax) that keeps consumer (producer) price unchanged enhances welfare and increases revenue under plausible conditions. It has been argued that the results provide an ex post justification for the widely implemented reform policies in developing countries that reduce trade taxes and increase consumption tax like VAT for revenue. We demonstrate that the results derived so far critically depend on the unrealistic assumption that there is no informal sector in the economy, implying that each and every commodity in the economy can be taxed through VAT and production tax. Our results show that, when the feasibility restrictions on the tax instruments imposed by the presence of a large informal and shadow economy is taken into account, such consumer or producer price-neutral reform reduces both welfare and revenue under plausible conditions.

117kb pdf
Joseph Stiglitz