Unwilling, unable or unaware? The role of different behavioral factors in responding to tax incentives

Transcription

1 Unwilling, unable or unaware? The role of different behavioral factors in responding to tax incentives Tuomas Kosonen Tuomas Matikka VATT Tax Systems Conference (Oxford) Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 1 / 30

2 Motivation Background Responsiveness to tax incentives is an essential issue in public finance Existing studies find different responses to similar tax incentives (Saez et al. 2012, and Meghir and Phillips 2010) Recent literature highlights the importance of frictions (Chetty et al. 2011, Chetty 2012, Kleven and Waseem 2013) Frictions prevent agents from responding to tax incentives according to their structural preferences Various types of frictions: tax salience and inattention, knowledge about tax rules, search costs, inflexible working hours etc. Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 2 / 30

3 Motivation Background However, the literature has not systematically addressed the role and significance of different frictions in explaining heterogeneous responses Different reasons for responding and not responding might have different implications (Chetty et al. 2009, Reck 2014) Unawareness of tax rules and inattention Inability to respond due to labor market frictions Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 3 / 30

4 Introduction Background We study to what extent and in which manner taxpayers respond to different tax incentives We outline how different frictions affect the size and nature of the response We compare similar or even the same individuals facing different incentives We use the bunching method to produce clear and comparable evidence (Saez 2010) Kink points in the marginal income tax rate (MTR) schedule (Chetty et al. 2011) Notch points related to study subsidy program for university students (Kleven and Waseem 2013) Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 4 / 30

5 Institutions Marginal income tax rate schedule Marginal income tax rate schedule Year 2007 Marginal tax rate Taxable income Note: Marginal tax rates include the average flat municipal tax rate and average social security contributions Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 5 / 30

6 Study subsidy Institutions Study subsidy approx. 500e per month for university students Eligibility depends on annual gross income (default limit 11,800e) credit points (5pts/month) Exceeding the income limit results in losing the subsidy of one month Income limits increased by 30% in 2008 (default: 9,200e 11,800e) Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 6 / 30

7 Kinks and notches Institutions Disposable income, euros Disposable income around the study subsidy notch Gross income relative to notch point Disposable income, euros Disposable income around the 1st MTR kink Gross earned income relative to kink point Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 7 / 30

8 Methods Bunching at a kink point (1- )z Indiff. curve for type L Indiff. curves for type H Slope 1-τ 2 Slope 1-τ 1 k k+dz z Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 8 / 30

9 Methods Bunching at a notch point (1- )z Indiff. curve for type L Indiff. curves for type H τ Slope 1-τ j j+ z D j+ z z Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 9 / 30

10 Data Methods Register-based data on the universe of taxpayers in Finland in Based on linked employer-employee database (FLEED) provided by Statistics Finland Data include detailed income tax and income transfer variables from official registers (Tax Administration, Social Insurance Institution etc.) Allows for accurate analysis of bunching around different kinks and notches Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 10 / 30

11 Baseline results Bunching at MTR kink points First MTR kink, all taxpayers Excess mass: (.076), Elasticity: -.003(.005) Distance from the kink Second MTR kink, all taxpayers Excess mass:.095 (.035), Elasticity:.004(.001) Distance from the kink Third MTR kink, all taxpayers Excess mass:.01 (.023), Elasticity: 0(.001) Distance from the kink Last MTR kink, all taxpayers Excess mass:.005 (.065), Elasticity: 0(.001) Distance from the kink Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 11 / 30

12 Baseline results Study subsidy notch Study subsidy notch, all students Excess mass: (.19), Share in the dominated region:.92 (.027) Upper limit: 26 (3.954) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 12 / 30

13 Frictions Frictions Optimization frictions and structural preferences might both affect observed responses Different reasons for no bunching at MTR kink points Tax incentives are too small Taxpayers are unable to respond (fixed working hours, search costs etc.) Taxpayers are unaware of incentives (location of kink points, what a marginal tax rate is, etc.) We characterize the role of different frictions by studying different subgroups Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 13 / 30

14 Awareness of tax rules Frictions Inability to respond is less important for the self-employed Ability to affect both reported income (no third-party reporting) and labor supply (no fixed contracts) Previous studies show large responses to MTR kinks among entrepreneurs in other Nordic countries (Chetty et al. 2011, Bastani and Selin 2014) Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 14 / 30

15 Frictions MTR bunching for the self-employed First MTR kink, self-employed Excess mass:.083 (.081), Elasticity:.006(.005) Distance from the kink Last MTR kink, self-employed Excess mass: -.2 (.219), Elasticity: -.002(.002) Distance from the kink Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 15 / 30

16 Frictions Round-number bunching for the self-employed Round-number bunching at 10k, self-employed Excess mass:.429 (.023) Distance from 10k Round-number bunching at 20k, self-employed Excess mass:.458 (.023) Distance from 20k Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 16 / 30

17 Inability to respond Frictions Students are typically wage earners who are unable to flexibly respond to tax incentives Cannot choose reported income (extensive third-party reporting of labor income in Finland) Cannot freely choose working hours (limited number of wage and hours contracts available) Costly to alter labor supply (job search costs, costly to stop working once the income limit is reached) In addition, it might be difficult to predict and monitor yearly income Nevertheless a significant response to the notch Despite inability frictions taxpayers respond to large enough incentives Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 17 / 30

18 Study subsidy notch Frictions Study subsidy notch, students with the default subsidy (9 months) Excess mass: (.294), Share in the dominated region:.895 (.042) Upper limit: 22 (2.158) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 18 / 30

19 Frictions MTR bunching for current and former students First MTR kink, all students Excess mass: -.09 (.107), Elasticity: -.006(.007) Distance from the kink Last MTR kink, university/polytechnic graduates Excess mass: (.084), Elasticity: -.001(.001) Distance from the kink First MTR kink, students who previously bunch at the notch Excess mass: (.183), Elasticity: -.044(.012) Distance from the kink Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 19 / 30

20 Frictions Students: The size of the notch Study subsidy notch, students with 2-5 subsidy months Excess mass:.651 (.34), Share in the dominated region:.953 (.051) Upper limit: 21 (7.167) Study subsidy notch, students with 6-8 subsidy months Excess mass: (.811), Share in the dominated region:.904 (.097) Upper limit: 33 (7.617) Distance from the notch Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 20 / 30

21 Frictions Students: Number of years studied Study subsidy notch, students with less than 3 study years Excess mass: (.849), Share in the dominated region:.934 (.102) Upper limit: 26 (7.66) Distance from the notch Study subsidy notch, students with more than 3 study years Excess mass: (.232), Share in the dominated region:.912 (.033) Upper limit: 26 (3.504) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 21 / 30

22 Awareness Frictions Students are in general aware of the notch Study subsidy needs to be applied Income limits are stated in the notification letter Social Security Institution remits back the subsidy if the income limit is exceeded We study awareness by following subgroups of students over time Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 22 / 30

23 Frictions Students who were in the dominated region before Study subsidy notch, students who were in the dominated region before Excess mass: (.939), Share in the dominated region:.978 (.426) Upper limit: 32 (11.3) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 23 / 30

24 Frictions Study subsidy notch: Before and after the reform of Study subsidy notch, all students Excess mass: (.245), Share in the dominated region:.964 (.032) Upper limit: 32 (1.115) Distance from the notch Study subsidy notch, all students Excess mass: (.238), Share in the dominated region:.923 (.029) Upper limit: 22 (.848) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 24 / 30

25 Frictions Students who bunched at the notch before the reform Study subsidy notch, students who bunched before the reform Excess mass: (.487), Share in the dominated region:.896 (.056) Upper limit: 28 (2.202) Distance from the notch Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 25 / 30

26 Conclusions Summary Frictions play an important role in explaining behavioral responses Responses to the MTR schedule may feature both unawareness and inability frictions Larger incentives create significant but inexact responses Inability to respond matters even when taxpayers are aware of the rules Welfare costs of large incentives might be larger than implied by observed bunching In future work we aim at a more careful distinction between different frictions Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 26 / 30

27 Extras Study subsidy: Income limits and size of the incentive Study subsidy months Income limit Relative income loss at the margin if income limit is exceeded 1 17, % 2 16, % 3 15, % 4 14, % 5 13, % 6 12, % 7 11, % 8 10, % 9 9, % Note: The relative loss from marginally exceeding the income limit is calculated using the full study subsidy (461 euros) plus 15% interest collected by the Social Insurance Institution. Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 27 / 30

28 Extras Students around the old notch, Income distribution around the old notch before 2008, all students Excess mass:.34 (.117) Distance from the old income limit Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 28 / 30

29 Extras Round-number bunching: Self-employed Round-number bunching at 10k, self-employed with no net assets Excess mass:.273 (.024) Distance from 20k Round-number bunching at 20k, self-employed with no net assets Excess mass:.26 (.027) Distance from 20k Round-number bunching at 10k, self-employed with positive net assets Excess mass:.001 (.017) Distance from 10k Round-number bunching at 20k, self-employed with positive net assets Excess mass:.052 (.017) Distance from 20k Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 29 / 30

30 Extras Bunching at MTR kink points: Self-employed First MTR kink, self-employed with no net assets Excess mass:.394 (.14), Elasticity:.027(.009) Distance from the kink Last MTR kink, self-employed with no net assets Excess mass:.246 (.549), Elasticity:.003(.006) Distance from the kink First MTR kink, self-employed with positive net assets Excess mass:.379 (.101), Elasticity:.025(.007) Distance from the kink Last MTR kink, self-employed with positive net assets Excess mass: (.292), Elasticity: 0(.003) Distance from the kink Tuomas Matikka (VATT) Unwilling, unable or unaware? Tax Systems Conference 30 / 30