Laura Kawano

Taxpayer Confusion: Evidence from the Child Tax Credit

We develop an empirical test for whether households understand or misperceive their marginal tax rate. Our identifying variation comes from the loss of the Child Tax Credit when a child turns 17. Using this age discontinuity, we find that despite this tax liability increase being lump-sum and predictable, households reduce their reported wage income upon discovering they have lost the credit. This finding suggests that households misinterpret at least part of this tax liability change as an increase in their marginal tax rate. This evidence supports the hypothesis that tax complexity can cause confusion and leads to unintended behavioral responses. (JEL D12, D14, H24, H31)We develop a model of how taxpayers update beliefs over their tax rates when they encounter a non-salient tax liability change. We test the models hypotheses using the loss of the Child Tax Credit when a child turns 17. Because this tax liability change is lump-sum and predictable, there should be no reaction in labor income if taxpayers are fully informed. Using this age discontinuity, we find, however, that losing the credit reduces household labor income. This finding suggests that taxpayers misperceive the source of tax liability changes, leading to under- or over-reactions to changes in marginal tax rates.

The Dividend Clientele Hypothesis: Evidence from the 2003 Tax Act

This paper provides evidence that dividend and capital gains tax rates importantly influence household portfolio choices. Using data from the Surveys of Consumer Finances around the 2003 dividend tax reductions, I estimate the relationship between taxes and household portfolio dividend yields. I find that a one percentage point decrease in the dividend tax rate relative to the long-term capital gains tax rate causes household portfolio dividend yields to increase by 0.04 percentage points. The results suggest that high income households significantly increased their portfolio dividend yields in response to the 2003 dividend tax rate reductions.

How do corporate tax bases change when corporate tax rates change? With implications for the tax rate elasticity of corporate tax revenues

We construct a new database of extensive margin changes to multiple aspects of corporate tax bases for OECD countries between 1980 and 2004. We use our data to systematically document the tendency of countries to implement policies that both lower the corporate tax rate and broaden the corporate tax base. This correlation informs our interpretation of previous estimates of the relationship between corporate tax rates and corporate tax revenues, which typically do not include comprehensive measures of the corporate tax base definition. We then re-examine the relationship between corporate tax rates and corporate tax revenues. We find that accounting for unobserved heterogeneity attenuates the relationship between corporate tax rates and corporate tax revenues, and increases the implied revenue-maximizing tax rate. Controlling for our new tax base measures does not substantively impact the magnitude of this relationship.

The economic impact of hurricane Katrina on its victims: Evidence from individual tax returns

Hurricane Katrina destroyed more than 200,000 homes and led to massive economic and physical dislocation. Using a panel of tax return data, we provide one of the first comprehensive analyses of the hurricane’s long-term economic impact on its victims. Katrina had large and persistent impacts on where people live; small and mostly transitory impacts on wage income, employment, total income, and marriage; and no impact on divorce or fertility. Within just a few years, Katrina victims’ incomes fully recover and even surpass that of controls from similar cities that were unaffected by the storm. The strong economic performance of Katrina victims is particularly remarkable given that the hurricane struck with essentially no warning. Our results suggest that, at least in this particular disaster, aid to cover destroyed assets and short-run income declines was sufficient to make victims financially whole. Our results provide some optimism regarding the costs of climate-change driven dislocation, especially when adverse events can be anticipated well in advance.

How Income Changes During Unemployment: Evidence from Tax Return Data

We use a panel of tax returns spanning 1999 to 2011 to provide evidence on household experiences during unemployment. A period of unemployment is associated with a 20 percent reduction in annual household wage earnings. Unemployment insurance (U.I.) compensates for half of lost wages. Households also partially compensate using a variety of income sources. Distributions from retirement accounts increase in the short run. Self-employment income and disability insurance payments increase over longer periods. More generous U.I. benefits crowd out wage income and are associated with increased retirement account distributions. This combination of responses is consistent with U.I. benefits lengthening unemployment spells.

Estimating the Elasticity of Broad Income for High-Income Taxpayers

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.

How the Rich Respond to Anticipated Tax Increases: Evidence from the 1993 Tax Act

We examine the responses of high-income taxpayers to the increases in the top income tax rates under the Omnibus Budget Reconciliation Act of 1993. We use a large panel of tax returns spanning 1987 to 1996 to estimate the elasticity of taxable income using a difference-in-differences approach. We estimate that the ETI is roughly 0.3 for high-income taxpayers, but that there was significant intertemporal income-shifting ahead of tax rate increases that were easily anticipated. Failing to account for this shifting response produces a much higher ETI estimate of 0.7. We find changes in the types of income reported by high-income households: decreases in wage income, coupled with increases in capital gains and S corporation income which both received preferential tax treatment. While all high-income households re-timed their taxable income ahead of the tax increases, this effect is even stronger for executives. There is also suggestive evidence that executives of S corporations responded, reducing their wage and partnership income and increasing S corporation income, to avoid the uncapping of the employment tax base.

Taxes and Financial Portfolio Choices: Evidence from the Tax Rate Reductions of the 2001 and 2003 Tax Acts

This paper exploits the tax rate variation generated by the Economic Growth and Tax Reconciliation Act of 2001 (which reduced ordinary income tax rates) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (which reduced capital gains and dividend tax rates) to estimate the effect of taxes on financial portfolio allocations. Using data from the 1998 and 2007 Survey of Consumer Finances samples, I examine changes to household financial portfolio allocations across six asset classes. I find limited evidence of households responses to the tax reductions. There is weak evidence that increase in the tax advantage of equities relative to interest income caused households to shift portfolios towards taxable equities. There is also evidence that households shelter their more heavily taxed assets in retirement accounts.