Implications of Phase-Outs on Individual Marginal Tax Rates

1999 ◽  
Vol 21 (1) ◽  
pp. 45-72 ◽  
Author(s):  
Charles R. Enis ◽  
Leroy F. Christ
Keyword(s):  
Effective Rate ◽  
Algebraic Model ◽  
Tax Planning ◽  
Policy Implications ◽  
Tax Rates ◽  
Rate Structure ◽  
Multiple Phase ◽  
Marginal Tax Rates ◽  
Federal Income Tax ◽  
Phase Out

The goal of this paper is to show the behavior of effective marginal tax rates relative to statutory marginal tax rates within the rate structure of the present federal income tax regime. Understanding the behavior of effective marginal rates is important as these rates are a significant component of tax planning and decision making. Statutory marginal tax rates are explicitly stated in published rate schedules. Various deductions, exemptions and credits involved in determining the tax liability are phased out as gross income increases. These restrictions result in effective marginal tax rates that can exceed respective statutory rates. Substantial divergence between effective and statutory rates can occur when multiple phase-out provisions overlap and interact. This study develops an algebraic model using tax return information that converts statutory to effective marginal rates. Policy implications concerning simplifying the effective rate structure are also discussed.

Taxes as a Determinant of Managerial Compensation in Privately Held Insurance Companies

2001 ◽  
Vol 76 (4) ◽  
pp. 655-674 ◽  
Author(s):  
Bin Ke
Keyword(s):  
Control Sample ◽  
Tax Planning ◽  
Managerial Compensation ◽  
Insurance Companies ◽  
Tax Rates ◽  
Investment Income ◽  
Federal Income Tax ◽  
Planning Decision ◽  
Privately Held Firms ◽  
Privately Held

This study empirically investigates how taxes affect managerial compensation for a sample of privately held insurers whose managers own a large percentage of the firm's stock (I refer to these as management-owned insurers) during 1989–1996. Shareholder/managers receive two types of income from the firm they own: compensation income as employees, and investment income as shareholders. Although compensation income is taxable to employees and deductible by employers, investment income is subject to double taxation. Thus, the mix of the two is an important tax-planning decision for management-owned insurers. I predict and find that as individual tax rates increased relative to corporate tax rates from 1989–1992 to 1993–1996, shareholder/managers paid themselves less tax-deductible compensation relative to a control sample of nonmanagement-owned insurers (i.e., privately held insurers with no managerial ownership). The study's results expand our understanding of management-owned, privately held firms' tax-planning strategies, and have implications for the efficiency of the federal income tax system.

Measuring “Schmeduling”

2019 ◽  
Vol 87 (5) ◽  
pp. 2399-2438 ◽  
Author(s):  
Alex Rees-Jones ◽  
Dmitry Taubinsky
Keyword(s):  
Income Tax ◽  
Mental Representations ◽  
Tax Rates ◽  
Marginal Tax Rate ◽  
Tax Rate ◽  
Policy Relevance ◽  
Marginal Tax Rates ◽  
Federal Income Tax ◽  
The U.S ◽  
Empirical Framework

Abstract What mental models do individuals use to approximate their tax schedule? Using incentivized forecasts of the U.S. Federal income tax schedule, we estimate the prevalence of the “schmeduling” heuristics for constructing mental representations of nonlinear incentive schemes. We find evidence of widespread reliance on the “ironing” heuristic, which linearizes the tax schedule using one’s average tax rate. In our preferred specification, 43% of the population irons. We find no evidence of reliance on the “spotlighting” heuristic, which linearizes the tax schedule using one’s marginal tax rate. We show that the presence of ironing rationalizes a number of empirical patterns in individuals’ perceptions of tax liability across the income distribution. Furthermore, while our empirical framework accommodates a rich class of other misperceptions, we find that a simple model including only ironers and correct forecasters accurately predicts average underestimation of marginal tax rates. We replicate our finding of prevalent ironing, and a lack of other systematic misperceptions, in a controlled experiment that studies real-stakes decisions across exogenously varied tax schedules. To illustrate the policy relevance of the ironing heuristic, we show that it augments the benefits of progressive taxation in a standard model of earnings choice. We quantify these benefits in a calibrated model of the U.S. tax system.

The Impact of Floors and Phase-Outs on Taxpayers' Decisions and Understanding of Marginal Tax Rates

2003 ◽  
Vol 25 (1) ◽  
pp. 72-86 ◽  
Author(s):  
Timothy J. Rupert ◽  
Louise E. Single ◽  
Arnold M. Wright
Keyword(s):  
Low Complexity ◽  
Tax Rates ◽  
High Complexity ◽  
Marginal Tax Rate ◽  
Tax Rate ◽  
Rate Dependent ◽  
Decision Performance ◽  
Marginal Tax Rates ◽  
Phase Out ◽  
The Impact

Tax provisions that reduce deductions and credits by imposing floors and phase-outs have become an increasingly popular tool used by Congress. However, these provisions also obscure the marginal tax rate, thereby potentially impairing the ability of taxpayers to make optimal decisions. We investigate the effects of floors and phase-outs on taxpayers' ability to determine their correct marginal tax rates and how this may affect tax-rate-dependent investment decisions. To investigate these potential effects we created an experimental setting in which taxpayers (89 M.B.A. students) were asked to maximize their after-tax income by choosing between a taxable and nontaxable bond. Each participant was assigned to one of three experimental tax systems: low complexity with no floors or phase-outs, medium complexity with one floor, and high complexity with both a floor and phase-out. The effective marginal tax rate was the same in each condition. The results indicate that decision performance was significantly better for participants facing the low complexity system than those in the medium or high complexity systems.

Marginal Income Tax Rates, Economic Growth, and Primary Fiscal Deficits

2020 ◽  
Vol 48 (5) ◽  
pp. 676-705
Author(s):  
Andrew Keinsley ◽  
Shu Wu
Keyword(s):  
Income Tax ◽  
Negative Impact ◽  
Positive Impact ◽  
General Level ◽  
Tax Rates ◽  
Marginal Tax Rates ◽  
Federal Income Tax ◽  
Private Spending ◽  
Primary Deficit ◽  
Spending Growth

Economic theory suggests that variations in marginal tax rates are more important for consumption and investment decisions than the average rates commonly studied. This article analyzes the aggregate implications of the statutory tax code, using a new times series on annual marginal tax rates, which decomposes the federal income tax code into its “level” and “progressive” (or spread) components. Robust results from a vector autoregression model show that increasing the spread of the marginal income tax rates has a positive impact on private spending growth, leading to an indirect, negative impact on the primary deficit ratio. Contrary to the political narrative, our findings suggest that the general level of these tax rates does not significantly impact growth rates or the primary deficit ratio.

A Model of Multinational Income Shifting and an Application to Tax Planning with E-Commerce

2014 ◽  
Vol 36 (2) ◽  
pp. 27-53 ◽  
Author(s):  
Kenneth J. Klassen ◽  
Stacie K. Laplante ◽  
Carla Carnaghan
Keyword(s):  
Tax Planning ◽  
Investment Model ◽  
Income Shifting ◽  
Tax Rates ◽  
Foreign Investments ◽  
Effective Tax Rates ◽  
Tax Rate ◽  
Foreign Earnings ◽  
Joint Consideration ◽  
The U.S

ABSTRACT: This manuscript develops an investment model that incorporates the joint consideration of income shifting by multinational parents to or from a foreign subsidiary and the decision to repatriate or reinvest foreign earnings. The model demonstrates that, while there is always an incentive to shift income into the U.S. from high-foreign-tax-rate subsidiaries, income shifting out of the U.S. to low-tax-rate countries occurs only under certain conditions. The model explicitly shows how the firms' required rate of return for foreign investments affects both repatriation and income shifting decisions. We show how the model can be used to refine extant research. We then apply it to a novel setting—using e-commerce for tax planning. We find firms in manufacturing industries with high levels of e-commerce have economically significant lower cash effective tax rates. This effect is magnified for firms that are less likely to have taxable repatriations. JEL Classifications: G38, H25, H32, M41.

Estimates of Effective Marginal Tax Rates on Factor Incomes

1981 ◽  
Vol 54 (2) ◽  
pp. 191 ◽  
Author(s):  
Douglas H. Joines
Keyword(s):  
Tax Rates ◽  
Marginal Tax Rates
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