C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E

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1 19.1 Tax Incidence C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Sources of federal government revenue, 1960 and 2008: Category: Income taxes 44.5% 43.7% Corporate taxes Payroll tax Excise taxes Other Tax incidence: Assessing which party (consumers or producers) bears the true burden of a tax. Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 3 of 35

2 19.1 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E The Statutory Burden of a Tax Does Not Describe Who Really Bears the Tax, and Is Irrelevant to the Tax Burden Consumer burden = $0.30 Producer burden = $0.20 Price per gallon (P) P 2 = $2.00 P 3 = $1.80 P 1 = $1.50 $1.30 (a) Tax on producers S 2 C D E B A Tax = $0.50 S 1 D Consumer burden = $0.30 Producer burden = $0.20 Price per gallon (P) $1.80 P 1 = $1.50 P 3 = $1.30 P 2 = $1.00 (b) Tax on consumers C D E B A Tax = $0.50 S D 1 D 2 0 Q 2 = 80 Q 3 = 90 Q 1 = 100 Quantity in billions of gallons (Q) 0 Q 1 = 100 Quantity in billions of gallons (Q) Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 7 of 35

3 19.1 Perfectly Inelastic Demand C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 10 of 35

4 19.1 Perfectly Elastic Demand C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 11 of 35

5 19.1 Supply Elasticities C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 13 of 35

6 19.2 Tax Incidence in Factor Markets C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 16 of 35

7 19.2 Impediments to Wage Adjustment C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E (a) Tax on workers (b) Tax on firms Firm burden = $0.50 Worker burden = $0.50 Wage (W) W 2 = $7.75 W M = $7.25 W 3 = $6.75 C B A Tax = $1.00 S 2 S 1 D 1 Firm burden = $1.00 Wage (W) W 2 = $8.25 W M = $7.25 $6.75 B C C A Tax = $1.00 D 2 S 1 D 1 0 H 2 H 1 Hours of labor (H) 0 H 3 H 2 H 1 Hours of labor (H) Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 18 of 35

8 20.1 C H A P T E R 2 0 T A X I N E F F I C I E N C I E S A N D T H E I R I M P L I C A T I O N S F O R O P T I M A L T A X A T I O N Taxation and Economic Efficiency: Graphical Approach Price per gallon (P) S 2 S 1 Tax = $0.50 P 2 = $1.80 P 1 = $1.50 P 3 = $1.30 E F G D B C A Deadweight loss, DWL D 1 0 Q 2 = 90 Q 1 = 100 Quantity in billions of gallons (Q) Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 4 of 40

9 20.1 C H A P T E R 2 0 T A X I N E F F I C I E N C I E S A N D T H E I R I M P L I C A T I O N S F O R O P T I M A L T A X A T I O N Elasticities Determine Tax Inefficiency (a) Inelastic demand (b) Elastic demand Price per gallon (P) S 2 S 1 Price per gallon (P) S 2 S 1 P 2 P 1 C B A Tax DWL P 2 P 1 B C A Tax DWL D 1 D 1 0 Q 2 Q 1 Quantity in billions of gallons (Q) 0 Q 2 Q 1 Quantity in billions of gallons (Q) Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 6 of 40

10 20.1 C H A P T E R 2 0 T A X I N E F F I C I E N C I E S A N D T H E I R I M P L I C A T I O N S F O R O P T I M A L T A X A T I O N Marginal DWL Rises with Tax Rate Price of gas P 3 P 2 P 1 D Tax = $0.10 B A S 3 S 2 Tax = $0.10 DWL S 1 C E D 1 0 Q 3 Q 2 Q 1 Quantity of gas Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 10 of 40

11 C H A P T E R 2 0 T A X I N E F F I C I E N C I E S A N D T H E I R I M P L I C A T I O N S F O R O P T I M A L T A X A T I O N 20.1 A Tax System s Efficiency Is Affected by a Market s Preexisting Distortions Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 12 of 40

12 Figure 2A: Summer 2000 Difference in Log Gas Prices IL/IN vs. Neighboring States: MI, OH, MO, IA, WI 0 Log Points /1/2000 6/8/2000 6/15/2000 6/22/2000 6/29/2000 7/6/2000 7/13/2000 7/20/2000 7/27/2000 Date Source: Doyle and Samphantharak 2008.

13 Figure 2B: Fall 2000 Difference in Log Gas Prices IN vs. Neighboring States: MI, OH, IL Log Points /1/ /8/ /15/ /22/ /29/ /5/ /12/ /19/ /26/2000 Dates Source: Doyle and Samphantharak 2008.

14 Figure 2C: Winter 2000/2001 Difference in Log Gas Prices IL vs. Neighboring States: MO, IA, WI, IN 0.08 Log Points Dec Dec Dec Dec Jan Jan Jan-01 Date Source: Doyle and Samphantharak 2008.

15 19.4 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E EVIDENCE: The Incidence of Excise Taxation Excises tax on cigarettes varies widely across the United States. o Low of $0.025/pack per pack in VA. o High of $1.51/pack in CT and MA. o Since 1990, NJ increased its tax rate nearly sixfold. o Arizona has increased its tax nearly eightfold. Many studies examine how taxes affect prices. These studies uniformly conclude that the price of cigarettes rises by the full amount of the excise tax. Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 29 of 35

16 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E 19.3 Effects of a Restaurant Tax: A General Equilibrium Example Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 24 of 35

17 19.3 General Equilibrium Tax Incidence C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E Public Finance and Public Policy Jonathan Gruber Fourth Edition Copyright 2012 Worth Publishers 25 of 35

19.4 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E The Incidence of Taxation in the United States Results of CBO Incidence Analysis The top

18 19.4 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E The Incidence of Taxation in the United States Results of CBO Incidence Analysis The top panel of this table shows the total effective federal tax rate on all households and on the top and bottom quintiles of the income distribution. The other panels show the effective tax rates of various other types of federal taxes. Public Finance and Public Policy Jonathan Gruber Third Edition Copyright 2010 Worth Publishers 33 of 36

19 19.4 C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X I N C I D E N C E The Incidence of Taxation in the United States Results of CBO Incidence Analysis Public Finance and Public Policy Jonathan Gruber Third Edition Copyright 2010 Worth Publishers 34 of 36

20 Source: Linden and Rockoff Illustration of Identification Strategy

21 Figure 3a: Price Trends Before and After Offenders' Arrivals Parcels Within Tenth Mile of Offender Location Days Relative to Sex Offender Arrival, Arrival on Day 0 Note: Results from local polynomial regressions (bandwidth=90 days) of sale price on days before/after offender arrival. Source: Linden and Rockoff 2008.

22 Figure 3b: Price Trends Before and After Offenders' Arrivals Parcels Within 1/3 Mile of Offender Location Days Relative to Sex Offender Arrival, Arrival on Day 0 <.1 Miles.1 to.3 Miles Note: Results from local polynomial regressions (bandwidth=90 days) of sale price on days before/after offender arrival. Source: Linden and Rockoff 2008.

23 Figure 1: Mandated Benefit Wage Rate S w 1 A D 1 L 1 Labor Supply Source: Raj Chetty's Undergraduate Lecture Note

24 Figure 1: Mandated Benefit Wage Rate S w 1 A $1 D 2 D 1 L 1 Labor Supply Source: Raj Chetty's Undergraduate Lecture Note

25 Figure 1: Mandated Benefit Wage Rate S $a w 1 A w 2 B $1 D 2 D 1 L 1 Labor Supply Source: Raj Chetty's Undergraduate Lecture Note

26 Orig. Tag Exp. Tag Source: Chetty, Looney, Kroft (2009)

27 Period Effect of Posting Tax-Inclusive Prices: Mean Quantity Sold TREATMENT STORE Control Categories Treated Categories Difference Baseline (0.22) (0.37) (0.43) Experiment (0.87) (1.02) (0.64) Difference DD TS = over time (0.75) (0.92) (0.64) Period CONTROL STORES Control Categories Treated Categories Difference Baseline (0.24) (0.30) (0.32) Experiment (0.72) (1.06) (1.09) Difference DD CS = 0.06 over time (0.64) (0.92) (0.90) Source: Chetty, Looney, Kroft (2009) DDD Estimate (0.58)

28 Change in Log Per Capita Beer Consumption Figure 2a Per Capita Beer Consumption and State Beer Excise Taxes Change in Log(1+Beer Excise Rate) Source: Chetty, Looney, Kroft (2009)

29 Change in Log Per Capita Beer Consumption Figure 2b Per Capita Beer Consumption and State Sales Taxes Change in Log(1+Sales Tax Rate) Source: Chetty, Looney, Kroft (2009)

30 Effect of Excise and Sales Taxes on Beer Consumption Dependent Variable: Change in Log(per capita beer consumption) Baseline Bus Cyc, 3-Year Diffs Food Exempt Alc Regs. (1) (2) (3) (4) ΔLog(1+Excise Tax Rate) (0.17)*** (0.17)*** (0.46)** (0.22)*** ΔLog(1+Sales Tax Rate) (0.30) (0.30) (0.32) (0.30) Business Cycle Controls x x x Alcohol Regulation Controls x x x Year Fixed Effects x x x x F-Test for Equality of Coeffs Sample Size 1,607 1,487 1, Source: Chetty, Looney, Kroft (2009) Note: Estimates imply q t 0.06

31 Figure 4. Average Federal Tax Rates, by Before-Tax Income Group, 2013 Highest Quintile Top 1 Percent 96th to 99th Percentiles 91st to 95th Percentiles 81st to 90th Percentiles Fourth Quintile Average for Entire Quintile Middle Quintile Second Quintile Lowest Quintile Percent Source: Congressional Budget Office. Average federal tax rates are calculated by dividing federal taxes by before-tax income.

32 Figure 5. Average Federal Tax Rates, by Before-Tax Income Group and Tax Source, Fourth Quintile Middle Quintile Highest Quintile Second Quintile Lowest Quintile Individual Income Taxes Payroll Taxes Corporate Income Taxes Excise Taxes Source: Congressional Budget Office. Average federal tax rates are calculated by dividing federal taxes by before-tax income. Before-tax income is market income plus government transfers. Market income consists of labor income, business income, capital gains (profits realized from the sale of assets), capital income excluding capital gains, income received in retirement for past services, and other sources of income. Government transfers are cash payments and in-kind benefits from social insurance and other government assistance programs. Those transfers include payments and benefits from federal, state, and local governments. Negative average tax rates for individual income taxes result when refundable tax credits, such as the earned income tax credit and the child tax credit, exceed the other income tax liabilities of the households in an income group.

1933 1938 1943 1948 1953 1958 1963 1968 1973 1978 1983 1988 1993 1998 % of top 1%

33 45% Figure S.22: Taxes paid by the top 1% 40% 35% 30% 25% 20% 15% 10% 5% 0% % of top 1% pre-tax income Individual income taxes Corporate taxes Estate taxes Sales + residential property + payroll taxes Source: Appendix Table II-G2

30% Taxes paid by the bottom 50% % of bottom

1958 1963 1968 1973 1978 1983 1988 1993 1998

34 30% Taxes paid by the bottom 50% % of bottom 50% pre-tax income 25% 20% 15% 10% 5% Capital taxes Payroll taxes Individual income taxes 0% Sales taxes Source: Appendix Table II-G2

35 Average tax rates by pre-tax income group 45% 40% % of pre-tax income 35% 30% 25% 20% 15% Top 1% All 10% 5% 0% Bottom 50% Source: Appendix Table II-G1.

Lecture 3: Tax Incidence and Efficiency Costs of Taxation

1 50 Lecture 3: Tax Incidence and Efficiency Costs of Taxation Stefanie Stantcheva Fall 2017 19.1 Tax Incidence C H A P T E R 1 9 T H E E Q U I T Y I M P L I C A T I O N S O F T A X A T I O N : T A X