Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on - PowerPoint PPT Presentation

Tax Cuts for Whom? Heterogeneous Effects of Income Tax Changes on Growth & Employment Owen Zidar University of California, Berkeley All UC Group - Huntington Library Conference April 6, 2013 1

Variation in Tax Policy & Structure of Income Tax Changes 1982 1991 Average Change in Tax Liability as Share of AGI 2 0 −2 1993 2003 2 0 −2 0 50 100 0 50 100 AGI Percentile Graphs by Year 2

Research Questions How does the composition of income tax changes affect subsequent output & employment? Do tax cuts for high income taxpayers generate more employment & output growth than equivalently sized tax cuts for low and moderate income taxpayers? If so, why? 3

Overview 1 Theoretical Framework: Redistribution from savers to constrained/less patient borrowers 2 Empirical Approach: National: Romer & Romer AER 2010 disaggregated by income group Regional: Bartik approach 3 Data: Historical returns & counterfactuals from NBER TAXSIM 4 Results: Tax cuts for those with high incomes lead to substantially less employment growth and economic activity than similarly sized tax cuts for those with low and moderate incomes Aggregate consumption, particularly durable consumption, and investment tend to increase more strongly after bottom 90% gets tax cuts Weak to nonexistent relationship between tax cuts for the top 10% and employment growth 4

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Empirical importance of heterogeneity in effects of fiscal policy [e.g. Mertens & Ravn AER forthcoming] 1 Or any other modestly sized redistributive policies at a business cycle frequency 5

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Empirical importance of heterogeneity in effects of fiscal policy [e.g. Mertens & Ravn AER forthcoming] Optimal stimulus design 1 Or any other modestly sized redistributive policies at a business cycle frequency 5

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Empirical importance of heterogeneity in effects of fiscal policy [e.g. Mertens & Ravn AER forthcoming] Optimal stimulus design Effects of ending the Bush tax cuts for certain income groups 1 Or any other modestly sized redistributive policies at a business cycle frequency 5

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Empirical importance of heterogeneity in effects of fiscal policy [e.g. Mertens & Ravn AER forthcoming] Optimal stimulus design Effects of ending the Bush tax cuts for certain income groups Effects of mass refinancing 1 1 Or any other modestly sized redistributive policies at a business cycle frequency 5

Motivation Why study the impacts of these tax changes and how they vary over the income distribution? Empirical importance of heterogeneity in effects of fiscal policy [e.g. Mertens & Ravn AER forthcoming] Optimal stimulus design Effects of ending the Bush tax cuts for certain income groups Effects of mass refinancing 1 But Little direct evidence. Likely due to empirical issues: endogeneity, simultaneity, and observability 1 Or any other modestly sized redistributive policies at a business cycle frequency 5

II. Empirical Framework: Background Romer & Romer (AER 2010) ∆ Y t = α + β ∆ Tax t + ǫ t (1) Types of Tax Changes 6

II. Empirical Framework: Background Romer & Romer (AER 2010) ∆ Y t = α + β ∆ Tax t + ǫ t (1) Types of Tax Changes 1 Counteract economic forces 2 Spending offsets 6

II. Empirical Framework: Background Romer & Romer (AER 2010) ∆ Y t = α + β ∆ Tax t + ǫ t (1) Types of Tax Changes 1 Counteract economic forces 2 Spending offsets 3 Address inherited deficit 4 Promote long run growth 6

Empirical Framework: (1) Narrative Approach Output growth & exogenous tax changes for different income groups Growth Y , t = β 0 + β B 90 , 0 (∆ Tax B 90 , t ) + β T 10 , 0 (∆ Tax T 10 , t ) + β NON , 0 (∆ Tax NON , t ) + ... � �� � = b 0 ∆ Tax t + β B 90 , m (∆ Tax B 90 , m ) + β T 10 , m (∆ Tax T 10 , m ) + β NON , m (∆ Tax NON , m ) � �� � = b m ∆ Tax t − m + X t λ + ǫ t 7

Empirical Framework: (1) Narrative Approach Output growth & exogenous tax changes for different income groups Growth Y , t = β 0 + β B 90 , 0 (∆ Tax B 90 , t ) + β T 10 , 0 (∆ Tax T 10 , t ) + β NON , 0 (∆ Tax NON , t ) + ... � �� � = b 0 ∆ Tax t + β B 90 , m (∆ Tax B 90 , m ) + β T 10 , m (∆ Tax T 10 , m ) + β NON , m (∆ Tax NON , m ) � �� � = b m ∆ Tax t − m + X t λ + ǫ t ∆ Tax B 90 and ∆ Tax T 10 are changes in income and payroll taxes as a share of GDP for the bottom 90% and top 10% respectively X t is a vector of controls such as lagged GDP growth, government transfers, etc. Assume Cov(∆ Tax g , t , ǫ t ) = 0 ∀ g ∈ ( BOT 90 , TOP 10 , NONINCOME ) following Romer & Romer AER 2010 Frisch Waugh 7

Empirical Framework: (2) Bartik Approach Overview of Bartik approach Idea: Auto shock on employment in Detroit vs. Denver Labor literature: Bartik (1991), Card (1992), Katz & Murphy (1992), Moretti (2004) Implementation: When national tax policy affects high income taxpayers, states with large shares of high income taxpayers will face larger shocks Test: If high income tax cuts have substantial effects, CT and NJ should grow faster following national high income tax cuts Value: Provides additional identifying variation 2 2 Within & across state variation. Avoids national concerns: fed & trends 8

Data: Constructing tax changes Tax Change Measure is a function of three things: 1 Income and deductions from year prior to an exogenous tax change 3 2 Old tax schedule 3 New tax schedule 3 Preliminary tests suggest that results are robust to using two year lags and various inflation adjustments 9

Data: Constructing tax changes Example: 1993 Omnibus Budget Reconciliation Act 10

Data: Constructing tax changes I do this calculation for entire sample of NBER returns 2000 Change in Tax Liability 1000 0 −1000 0 50000 100000 150000 200000 250000 Adjusted Gross Income 11

Historical Income & Payoll Tax Changes by AGI Quintile .4 .2 Percent of GDP 0 −.2 −.4 −.6 1960 1970 1980 1990 2000 2010 Year Tax Change: Bottom 20% Tax Change: 21−40% Tax Change: 41−60% Tax Change: 61−80% Tax Change: Top 20% 12

Results Overview National Data: 1 Output and Employment growth 2 Mechanisms: Consumption and Investment State Data: 1 Similar specification at state-level 2 Effects across the income distribution 13

National Data: Employment & Top 10% 10 1978 1979 Employment Growth over 2 Years 1973 1977 1985 1956 1974 1984 1966 5 1965 1988 1987 1969 1967 1972 1986 1989 1960 1968 2000 1951 1964 1994 1995 2006 1998 1997 1970 1980 1990 2007 1957 1999 1963 1996 2005 2001 1952 1976 1993 2004 1953 1971 1961 1955 1981 1962 1950 1975 1959 2008 2003 1983 1991 1982 0 2011 1954 2002 1992 1958 2009 2010 −5 −.6 −.4 −.2 0 .2 .4 Sum of Tax Changes for Top 10% as % of GDP (from T−2 to T) 14

National Data: Employment & Bottom 90% 10 1978 1979 Employment Growth over 2 Years 1973 1977 1985 1956 1974 1984 1966 5 1987 1988 1965 1969 1967 1972 1986 1989 1960 2000 1968 1951 1994 1995 1964 2006 1998 1997 1970 1980 1990 2007 1999 1957 1963 1996 2005 2001 1976 1952 1993 2004 1953 1971 1961 1962 1955 1981 1950 1959 1975 2008 2003 1983 1991 1982 0 2011 1954 1992 2002 1958 2009 2010 −5 −1 −.5 0 .5 Sum of Tax Changes for Bottom 90% as % of GDP (from T−2 to T) 15

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State Data: Employment & Top 10% 10 5 State Employment Growth 0 −5 −10 −1 −.5 0 .5 1 Sum of Tax Changes for Residents in Top 10% as % of GDP (from T−2 to T) 17

State Data: Employment & Bottom 90% 10 5 State Employment Growth 0 −5 −10 −1.5 −1 −.5 0 .5 Sum of Tax Changes for Residents in Bot. 90% as % of GDP (from T−2 to T) 18