Taxpayer Bunching Evidence: Responsiveness at Kink Points of the Honduran Personal Income Tax

This paper studies the response of taxpayers to changes in the marginal tax rate or kinks, estimated through compensated elasticities by applying the bunching methodology to Honduran administrative data on Personal Income Tax (PIT) from the period 2011 – 2018. Due to missing data issues at the first kink, estimates are only generated for the other two kinks. The results show a low response, reflected by a compensated elasticity around 0.09. Higher response on wage earners was found at the second kink. Further analysis is done by type of taxpayer, income source, third-party reporting, gender, and age.

Labor supply responses to income tax free and bracket expansions

PurposeAn important concern of economic policy analysis is how income taxes affect labor supply since this is crucial in assessing the efficiency costs of taxation and designing labor income taxation. The focus in the literature has been mostly to study the responses of high earners and women. The authors contribute to this literature by focusing more on how middle earners respond to financial incentives and whether the responses are different between men and women.Design/methodology/approachThe authors exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. The authors adopt an empirical framework that is similar to Bosch and van der Klaauw (2012) and condition on the effects of other factors, such as inflows of foreign workers that may have affected the wages, participation and working hours of native males and females. The authors also conduct various sensitivity analyses to examine the robustness of the estimates.FindingsThe authors find robust evidence that the tax reforms increased the wages of medium and high educated married males and females significantly. They also had a positive impact on work participation that was more substantial for married women, especially the medium educated. The authors estimate significant positive own wage labor supply elasticities that are small and about the same for men and women when the authors condition on the labor outcome effects of inflows of EU and non-EU foreign workers, which changed the skill distribution of the economy and had a more significant impact on female labor outcomes. Smaller wage labor supply elasticities indicate lower disincentive effects and deadweight losses from the imposition of taxes and have implications on the design of optimal taxation of men and women.Originality/valuePrevious investigations of the labor supply responses of both men and women to a given policy change have been identified mostly by exploiting changes in joint income taxation and marginal tax rates. The authors exploit substantial expansions in the level of individual income exempt from taxation and taxed at a lower marginal tax rate while the schedule of marginal tax rates remained the same. The income effects of these reforms could be limited since the reduced marginal tax rates apply to only part of the income.

Implications of a Mortgage Interest Credit for the United States

The US mortgage interest deduction (MID) allows homeowners to deduct the interest paid on their mortgages from their federal tax returns, provided that they itemize deductions. Since the benefit depends on a taxpayer’s marginal tax rate, which increases with income, the MID is an “upside-down subsidy” that becomes more valuable for higher-income homeowners. I analyze the implications of converting the US MID to a mortgage interest credit (MIC) and evaluate the effects on federal revenue and the distribution of income. I argue that a MIC could be better targeted at low- and middle-income taxpayers on the margin of homeownership while also being more progressive and less expensive than the current MID.

Higher Taxes at the Top: The Role of Entrepreneurs

This paper computes optimal top marginal tax rates in Bewley-Huggett-Aiyagari–type economies that include entrepreneurs. Consistent with the data, entrepreneurs are overrepresented at the top of the income distribution and are thus disproportionately affected by an increase in the top marginal income tax rate. The top marginal tax rate that maximizes welfare is 60 percent. While average welfare gains are positive and similar across occupations along the transition, they are larger for entrepreneurs than for workers in the long run, and this occupational gap in welfare gains after the tax increase widens with increasing income. (JEL D11, D21, D31, H21, H24, L26)

What is the optimal age for withdrawing Social Security Benefits? Full Retirement Age, Late Withdrawal Age of 70, or Early Withdrawal Age of 62

When to retire is an individual decision based on many criteria like health of the individual, family responsibilities, expected life of the individual, single family income or dual family income, and other such considerations. A financial consideration can also be made. Retiring early will imply a reduction in social security benefits for the rest of your life. Retiring later than your full retirement age can mean a significant bump in benefits for the rest of your life. This paper simulates different conditions to estimate how long a life one needs to live to recover from the reduction in benefits resulting from earlier retirements. Specifically, we model four permutations of the time value of money and the marginal tax rate on early benefits. Our results show there are significant advantages of withdrawing early benefits in most cases where life expectancy is shorter. But when expected life terms are much higher above 83, delaying retirement can significantly enhance the payout of benefits.

Solving the Muni Puzzle: Who Benefits from Tax Exemption of Government Debt?

I provide a new approach to measuring interest savings associated with issuing tax-exempt municipal bonds (munis) and present empirical evidence offering a solution to the long-standing “muni puzzle.” I show that the tax policy is effective and consistent with theory once I account for idiosyncratic issuer risk and investor preferences. I match tax-exempt munis to near-identical taxable munis issued by the same government at the same time with the same security characteristics to identify the slope of and the trend in implied marginal tax rates. Results of the random coefficients model, which mitigates issuer- and issuance-level unobserved effects, predict the slope of the marginal tax rate to be consistent with asset pricing theory and the tax profile of the typical muni investor. Findings also imply cyclicality over time and heterogeneity in implied marginal tax rates across issuers due to variations in idiosyncratic risk.

Reforming the individual income tax in Spain

Can the Spanish government generate more tax revenue by making personal income taxes more progressive? To answer this question, we build a life-cycle economy with uninsurable labor productivity risk and endogenous labor supply. Individuals face progressive taxes on labor and capital incomes and proportional taxes that capture social security, corporate income, and consumption taxes. Our answer is yes, but not much. A reform that increases labor income taxes for individuals who earn more than the mean labor income and reduces taxes for those who earn less than the mean labor income generates a small additional revenue. The revenue from labor income taxes is maximized at an effective marginal tax rate of 51.6% (38.9%) for the richest 1% (5%) of individuals, versus 46.3% (34.7%) in the benchmark economy. The increase in revenue from labor income taxes is only 0.82%, while the total tax revenue declines by 1.55%. The higher progressivity is associated with lower aggregate labor supply and capital. As a result, the government collects higher taxes from a smaller economy. The total tax revenue is higher if marginal taxes are raised only for the top earners. The increase, however, must be substantial and cover a large segment of top earners. The rise in tax collection from a 3 percentage points increase on the top 1% is just 0.09%. A 10 percentage points increase on the top 10% of earners (those who earn more than €41,699) raises total tax revenue by 2.81%.

The Mystery of Zero-Leverage Firms: Evidence from Nigerian Quoted Firms

Objective – Empirical finance literature has added a new twist to the debt conservatism puzzle within the broader capital structure puzzle, namely the phenomenon of zero leverage. Motivated by Strebulaev and Yang (2013), this study investigates the attributes of zero leverage firms in Nigeria in an attempt to add a developing country perspective to the zero-leverage phenomenon observed in firms. Methodology/Technique – The non-financial corporations quoted on the Nigerian Stock Exchange (NSE) for the period 1999-2014 constitute the population of the study. Firms with market leverage ratios ranging from 0% to 5% met the criteria for inclusion. Panel data regression techniques such as the generalized method of moments (GMM) and two stage least squares (2SLS) were used in the study. Findings – Zero leverage is persistent across 13 industries and is a declining function of the marginal tax rate, firm size, profitability, and liquidity. Firms that follow a zero-leverage (and almost zero-leverage) policy have higher growth opportunities, more tangible assets, pay higher dividends, are older, and have access to debt markets. Non-debt tax shields do not explain zero-leverage behaviour. Originality/Value – This study addresses the gaps related to the questions of why and how firm-specific attributes affect zero leverage behaviour among Nigerian quoted firms. It sheds light on the economic mechanisms driving zero leverage phenomenon within firms with high debt capacity. Type of Paper: Empirical. JEL Classification: G30, G32. Keywords: Capital Structure; Zero Leverage Puzzle; Tax Benefits; Debt Capacity; Financing Decisions. Reference to this paper should be made as follows: Paseda, O; Adedeji, B.S. 2020. The Mystery of Zero-Leverage Firms: Evidence from Nigerian Quoted Firms, Acc. Fin. Review 5 (2): 44 – 71. https://doi.org/10.35609/afr.2020.5.2(2)

The Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks

We study how the changing demographic composition of the US labor force has affected the response of the unemployment rate to marginal tax rate shocks. Using narratively identified tax changes as proxies for structural shocks, we establish that the responsiveness of the unemployment rates to tax changes varies significantly across age groups: the unemployment rate response of the young is nearly twice as large as that of the old. This heterogeneity is the channel through which shifts in the age composition of the labor force impact the response of the unemployment rate to tax cuts. We find that the aging of the baby boomers considerably reduces the effects of tax cuts on aggregate unemployment. (JEL E24, E62, H24, H31, J21)