SPRING, 2014


FACULTY FOCUS // SPRING 2014

What Are You Thinking About?

Interviewed by Terry Kosdrosky

Death and taxes are said to be the only certain things in life. You might add to that list arguments about taxes. U-M Ross Professor Joel Slemrod works to get past those arguments and find out what really works. Slemrod, the Paul W. McCracken Collegiate Professor of Business Economics and Public Policy, is one of the country’s leading researchers on the subject and has written several books. His work can help lawmakers craft better tax policy and provide insight into effective ways to curb tax cheating.

A: We’re focusing on the capital gains tax and looking at Google searches, Wikipedia searches, traffic on the IRS web site, and calls to the IRS. We’d like to know if people are researching the tax implications of buying and selling stock before or after they make the transaction. Ideally, you’d like to see a spike in searches about the capital gains tax before a spike in stock transactions. Unfortunately, we see the opposite most of the time — the stock volume precedes the capital gains tax searches. We do see some other interesting patterns. The search volume spikes during certain times of the year — the filing deadline and the end of the year, where people make decisions on capital gains and losses. The other project is a look into the impact of an IRS enforcement policy that started in 2011. Credit card companies now send a report to the IRS on every merchant’s credit card transactions, the idea being that the IRS can compare it to what the merchant reported. The IRS suspected a high rate of non-compliance with small businesses. It’s still early, so we don’t have conclusions yet, but the new policy might have some unintended consequences. Suppose you are a restaurant. You can offer a discount to customers who pay cash and lower the volume of trackable credit card transactions. So we’re trying to gauge the true impact of that enforcement rule.

Why is this interesting to you?

A: I’ve always been interested in taxation and behavior because it affects just about every economic decision you make. If you are going to buy a house, make a charitable contribution, buy or sell stock, or quit smoking, taxes touch all of that. It also touches on honesty. I’m fascinated by tax evasion – who is tempted to cheat and what keeps them from cheating.

What are the practical implications for industry?

A: The main one is that the people who make tax policy should think about the likely consequences of what they’re doing before they do it. That’s some of the insight we’re trying to provide. When a policy is being considered, you hear a lot of arguments both for and against. But once it’s been decided, there’s not enough of looking back and finding out if it actually worked.


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