“Expert and Public Attitudes Towards Tax Policy: 2013, 1994, 1934” (w. Joel Slemrod and Diane Lim) National Tax Journal, December 2013, 66 (4), 775–806.
What do tax policy “experts” think about tax policy issues, and why do these views differ so strikingly from those held by the general public? To explore these questions, we examine the results of a recent survey of tax policy experts who are members of the National Tax Association (NTA). We compare those responses to two previous surveys — one conducted in 1994 of NTA members and the other in 1934 of U.S. public finance professors. We also survey the general public on a subset of the questions asked of the NTA members, and discover a large divergence between the answers of the NTA respondents and those of the public. We suspect, but cannot prove, that part of the divergence arises because experts are trained to think of policy changes in a balanced-budget framework, so that supporting a tax cut must also mean raising some other tax or cutting some government expenditures. Absent that connection, lower taxes and narrow bases can indeed look attractive.
How does assignment of the remittance obligation affect consumption tax incidence? In classical tax theory, the responsibility of transferring tax revenue has no effect on which party bears the economic burden of a consumption tax. I explore this prediction in the context of agreements between city governments and a large digital platform firm that shifted the obligation to remit hotel taxes from independent renters to the platform firm itself. Using variation in the location and timing of such agreements, I identify a substantial increase in advertised tax-inclusive rental prices—a violation of remittance invariance—but comparatively modest declines in completed reservations. A contemporaneous increase in hotel tax revenue collections suggests that the policy was an effective tax increase assessed on previously non-compliant renters. I explore heterogeneity in pass-through using several proxies for host price-setting sophistication. Pass-through of the effective tax increase was lowest among full-space, frequent renters who likely faced smaller optimization frictions relative to more amateur renters. My results indicate that shifting the remittance obligation to the platform increases after-tax prices and raises revenue, suggesting that consumers bear a greater share of the tax burden when the remittance obligation is shifted to a party with fewer evasion opportunities.
"Independent Contractors in the U.S.: New Trends from 15 years of Administrative Tax Data" (w. Katherine Lim, Alicia Miller, and Max Risch)
There is growing interest among policy makers and researchers in measuring the prevalence of independent contractors (ICs), partially due to concern that these workers do not enjoy the benefits provided to employees. However, identifying IC income is difficult because most existing datasets do not track it. We make two contributions to understanding changing patterns of IC income receipt. First, we translate the legal concept of an IC relationship into one that can be used to identify these relationships in tax data. Second, we use those data to establish several new empirical facts about individuals who receive IC income and the firms that contract with them. We find that the share of workers with IC income has grown by 1.5 percentage points, or 22 percent, since 2001, pre-dating the rise of the gig economy and in line with previous estimates of IC growth. Independent contractor income receipt and its growth are not evenly distributed across workers. The largest share of workers with IC income are those in the top quartile of earnings who primarily receive wage income. But the fastest growing group are those in the bottom quartile of earnings who primarily receive IC income. Women saw more growth in IC income receipt than men, and smaller firms saw more growth in IC labor usage than larger firms. Together, these trends suggest that the long-run growth in IC labor in the U.S. cannot solely be attributed to individuals seeking supplemental income, or to the rise of a few online platform firms, but may represent a structural shift in the labor market, particularly for women.
"Independent Contractors in Law and in Fact: Evidence from U.S. Tax Returns"
In this paper, I refine a definition of contractors developed in my previous work, apply it to a novel and comprehensive data source—the universe of U.S. individual income tax filings—and yield two empirical results. First, I show that the characteristics of workers primarily providing contractor labor and those primarily providing employee labor have converged over time using several metrics that proxy for financial and behavioral control, two elements of the criteria used to classify workers. This suggests a growing misalignment between the legal classification of contractors and the economic substance of firm-worker relationships, a trend that is more pronounced for lower-earning workers. Second, I show that how a worker is classified is responsive to firms’ financial incentives, using a difference-in-differences design involving a discontinuity in Medicare reimbursement rules between small and large firms. This result suggests that some firms may substitute away from employment relationships to avoid regulatory costs. I discuss several potential policy implications of these findings for the income tax system, including whether there is a continued basis for treating employees and contractors differently in light of a growing convergence in their economic reality.
"Does the Elasticity of the Sales Tax Base Depend on Enforcement? Evidence from U.S. States’ Voluntary Collection Agreements" (w. Yeliz Kacamak and Tejaswi Velayudhan)
Sales taxes are an important source of revenue for U.S. states. A key parameter that determines the marginal excess burden associated with this tax is the elasticity of the consumption tax base with respect to the tax rate. We study empirically how an important development in U.S. sales tax policy—the requirement of online retailers to remit the sales tax instead of the consumer—impacts this elasticity using quasi-experimental variation from the staggered state-wise introduction of Voluntary Collection Agreements (VCAs). Using detailed purchase data from the Nielsen Consumer Panel and monthly, zip-code level information on local sales tax rates, we find that consumers reduce their online expenditure after the introduction of VCAs, consistent with an increase in compliance with sales taxes on online sales and suggesting that consumers took note of the tax change. We test whether consumers are less responsive to sales tax rate changes and more responsive to sales tax holidays as a result. On average, we do not find evidence of an impact of the remittance rule change on the elasticity of the tax base with respect to the tax rate.
"Taxpayer Responses to Third-Party Income Reporting: Preliminary Evidence from a Natural Experiment in the Taxicab Industry" (w. Bibek Adhikari, James Alm, Brett Collins, and Michael Sebastiani)
This paper uses confidential tax returns data from sole-proprietor businesses to estimate behavioral responses to the introduction of Form 1099-K, a third-party income reporting mandate that requires credit card companies to report to the Internal Revenue Service the gross amount of all payment transactions that businesses receive through their electronic payment systems. We estimate the causal impact of Form 1099-K on business reporting by exploiting a natural experiment in which many cities in the U.S. passed their own ordinances mandating that taxicab drivers install credit card readers in their vehicles, while other cities did not pass such ordinances. We find that taxpayers respond to third-party information reporting in offsetting ways. In particular, we find that firms from cities with mandatory credit card ordinances reported more receipts after the introduction of Form 1099-K compared to similar firms from cities without mandatory credit card ordinances, but they also reported an essentially offsetting increase in expenses. Overall, the net impact of third-party information reporting led to small and statistically insignificant changes in taxable income. These results are robust to a variety of alternative specifications and placebo tests.
Short pieces (*Draft available on request)
“Dead, But Not Gone? An Empirical Study of the 2000 OECD Model Ar. 14 ‘Discontinuation’” *
In 2000, the OECD eliminated Ar. 14 “Independent Professional Services” from the Model Tax Convention on Income and Capital, consolidating taxation of non-employee high skilled labor income with other business income under Ar. 7 “Business Profits.” Reception to this consolidation was decidedly mixed, perhaps reflecting suspicion that the change was perceived to afford differential benefits to certain countries based on their labor market characteristics. Using data on treaty agreement provisions, I examine the empirical translation of Ar. 14 elimination from the OECD model into agreements signed by states in agreements signed after 2000. I then explore whether non-adoption can be explained by differences in states’ economic fundamentals that could render consolidation asymmetrically beneficial. Finally, I explore whether there is any evidence that adopting states invested more in professional education in response to expanded scope of resident income taxation. This last question can be situated in an extensive literature, which seeks to disentangle real economic responses to tax law changes from comparatively superficial evasion response. The empirical analysis may also illuminate whether and the extent to which model tax provision changes are incorporated into binding bilateral treaty agreements by states with fundamentally different economic interests.
“Cary Brown Doesn’t Work in America’s New (Labor) Economy: Where Non-Equivalence Will Matter for a U.S. Consumption Tax” *
For more than a decade, US tax revenue has failed to keep pace with the growing costs of popular entitlements. Corporate inversions to avoid the US corporate tax inspire public censure and demands for reform. Since a dramatic political reversal by Australia in 2000, the US has existed in a class by itself among OECD countries in not having a national consumption tax. Renewed interest in the mechanics of implementing a US consumption tax provides an opportunity to review the existing literature on the equivalence between a post-paid Value Added Tax (VAT) and a pre-paid Payroll Tax (PRT). I argue that, in the US context, the equivalence between these two taxes breaks down most significantly due to the PRT’s full exemption of economic rents and the pressure a PRT would exert on traditional employment relationships.