OTPR has an ongoing Working Paper Series that features research papers by faculty associates of OTPR as well as the papers from our policy and research conferences. They are distributed throughout the academic, government, and business tax communities.

The abstracts are listed below.

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2008-1	Kyle D. Logue and Joel Slemrod, “Genes as Tags: The Tax Implications of Widely Available Genetic Information
Advances in genetic research promise to loosen the tradeoff between progressivity and efficiency by allowing tax liability (or transfer eligibility) to be based in part on immutable characteristics of individuals (“tags”) that are correlated with their expected lot in life. Use of genetic tags would reduce reliance on tax bases (such as income) that are subject to individual choices and therefore subject to inefficient distortion to those choices. Taking advantage of this information will allow policy outcomes that dominate the outcome menu available without using genes as tags: the same distributional outcome can be attained with less cost to the economy. As genetic information spreads to private employers and insurers (and assuming the law did not effectively prevent them from using such information), the case for adopting a genetic endowment tax becomes more compelling, as genetic inequalities would be exacerbated by market forces. If society desires to reduce or eliminate such inequalities, to maximize overall utility by shifting resources from the genetic rich to the genetic poor, at least two potential policy instruments are available: a direct genetic endowment tax-and-transfer regime, or a regulatory regime that forbids genetic discrimination and forces genetic cross-subsidization.
2007-5	Austan Goolsbee, Michael Lovenheim, and Joel Slemrod, “Playing with Fire: Cigarettes, Taxes, and Competition from the Internet”.
This paper documents the rise of the Internet as a source of cigarette tax competition for states in the United States. Using data on cigarette tax rates, taxable cigarette sales and individual smoking rates by state from 1980 to 2005 merged with data on Internet penetration, the paper documents that there has been a substantial increase in the sensitivity of taxable cigarette sales that is correlated with the rise of Internet usage within states. The estimates imply that the increased sensitivity from cigarette smuggling over the Internet has lessened the revenue generating potential of recent cigarette tax increases substantially. Given the continuing growth of the Internet and of Internet cigarette merchants, the results imply serious problems for state revenue authorities.
2007-4	James R. Hines Jr., “Taxation of Foreign Income”
Taxation of foreign income entails the taxation by one country of income that its residents earn in another country. While most countries exempt active foreign business income from taxation, several large capital exporters subject foreign income to taxation but permit taxpayers to claim credits for taxes paid to foreign governments. There is extensive empirical evidence that the taxation of foreign income influences the magnitude of foreign investment, and the tax avoidance activities of investors. Neutral taxation of foreign income entails considerations not only of the volume and location of investment, but also the effects of taxation on capital ownership.
2007-3	James R. Hines Jr., “Tax Havens”
Tax havens are low-tax jurisdictions that offer businesses and individuals opportunities for tax avoidance. The 45 major tax haven countries in the world today are small, affluent, and generally well governed. They attract disproportionate shares of world foreign direct investment, and, largely as a consequence, their economies have grown much more rapidly than the world as a whole over the past 25 years. The effect of tax havens on economic welfare in high tax countries is unclear, though the availability of tax havens appears to stimulate economic activity in nearby high-tax countries
2007-2	James R. Hines Jr., “Excise Taxes”
Excise taxes are selective taxes on the sale or use of specific goods and services, such as alcohol and gasoline. Over time, governments have relied less on excise taxes, though excise taxes still contribute 12 percent of total government revenues in OECD countries. In addition to generating needed revenue, excise taxes can be designed to control externalities and to impose tax burdens on those who benefit from government spending. Rather more controversially, excise taxes also can be used to discourage consumption of potentially harmful substances (such as tobacco and alcohol) that individuals might overconsume in the absence of taxation
2007-1	James R. Hines Jr., “Excess Burden of Taxation”
The excess burden of taxation is the efficiency cost, or deadweight loss, associated with taxation. Excess burden is commonly measured by the area of the associated Harberger triangle, though accurate measurement requires the use of compensated demand and supply schedules. The generation of empirical excess burden studies that followed Arnold Harberger’s pioneering work in the 1960s measured the costs of tax distortions to labor supply, saving, capital allocation, and other economic decisions. More recent work estimates excess burdens based on the effects of taxation on more comprehensive measures of taxable income, reporting sizable excess burdens of existing taxes.
2006-5	Keith J. Crocker and Joel Slemrod, “The Economics of Earnings Manipulation and Managerial Compensation
This paper examines managerial compensation in an environment where managers may take a hidden action that affects the actual earnings of the firm. When realized, these earnings constitute hidden information that is privately observed by the manager, who may expend resources to generate an inflated earnings report. We characterize the optimal managerial compensation contract in this setting, and demonstrate that contracts contingent on reported earnings cannot provide managers with the incentive both to maximize profits, and to report those profits honestly. As a result, some degree of earnings management must be tolerated as a necessary part of an efficient agreement.
2006-4	Dhammika Dharmapala and James R. Hines Jr. “Which Countries Become Tax Havens?” December 2006
This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal. The effect of governance on tax haven status persists when the origin of a country’s legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens – and suggests that the range of sensible tax policy options is constrained by the quality of governance.
2006-3	James R. Hines Jr., “Taxing Consumption and Other Sins,” November 2006
Throughout American history, the U.S. federal and state governments have imposed excise taxes on commodities such as alcohol and tobacco (and more recently, gasoline and firearms). Rates of such “sin” taxation, and consumption taxation broadly (including sales taxes and value-added taxes), are currently much lower in the United States than they are in Europe, Japan, and other affluent parts of the world. In part, this reflects relative government sizes, but that is not the whole story, since even controlling for total tax collections, levels of national income, government decentralization, and openness to international trade, the United States imposes unusually low excise and consumption taxes. As a result, the United States relies to a much greater degree than other countries on personal and corporate income taxes, thereby affording fewer opportunities to use the tax system to protect individuals and the environment by discouraging the consumption of “sinful” commodities, and instead simply discouraging saving and investment
2006-2	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Capital Structure with Risky Foreign Investment,” May 2006.
American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do other foreign affiliates of the same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.
2006-1	Joel Slemrod, “Taxation and Big Brother: Information, Personalization, and Privacy in 21^st Century Tax Policy, October 2005.
The transmission and processing of information is at the core of taxation, and one of the great ongoing technological resolutions has been in information technology. Looking forward ten, twenty, or thirty years, what are the implications of technological advancements for tax policy? How will, and how should, tax policy be different twenty years from now than it is today? This paper argues that, although the new technology greatly facilitates the use of taxpayer information to create a personalized tax system, there are forces pushing the tax system in the opposite direction, toward a radically depersonalized tax system, partly out of concern over the infringement on privacy of the information.
2005-13	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Foreign Direct Investment and Domestic Economic Activity,” October 2005.
How does rising foreign investment influence domestic economic activity? Firms whose foreign operations grow rapidly exhibit coincident rapid growth of domestic operations, but this pattern alone is inconclusive, as foreign and domestic business activities are jointly determined. This study uses foreign GDP growth rates, interacted with lagged firm-specific geographic distributions of foreign investment, to predict changes in foreign investment by a large panel of American firms. Estimates produced using this instrument for changes in foreign activity indicate that 10 percent greater foreign capital investment is associated with 2.2 percent greater domestic investment, and that 10 percent greater foreign employee compensation is associated with 4.0 percent greater domestic employee compensation. Changes in foreign and domestic sales, assets, and numbers of employees are likewise positively associated; the evidence also indicates that greater foreign investment is associated with additional domestic exports and R&D spending. The data do not support the popular notion that greater foreign activity crowds out domestic activity by the same firms, instead suggesting the reverse.
2005-12	Joel Slemrod, “My Beautiful Tax Reform,” March 2005.
Many experts equate the best tax system with the simplest, and the best tax reform with the one that most simplifies the system. However, the simplest, most elegant policy need not be the best because tax policy involves a tradeoff among objectives, including equity and efficiency objectives, and often, achieving equity and efficiency requires some complexity. Because one’s favored tax system depends both on economic assumptions and value judgments, which not everyone shares, this paper discusses both what tax system I favor and what has led me to my viewpoint, so the reader can get a sense of how his own economics or values would lead to a different policy prescription. Under my beautiful tax reform, most Americans would not have to file tax returns. The tax system would no longer be the primary source of goodies passed out by the government and a major determinant of how resources are allocated—what goodies and subsidies that remain would be consolidated. Progressivity would be retained with a system under which most, but not all, American taxpayers would be subject to a low, basic rate, the same rate at which all tax credits can be redeemed. Taxation of business income would be rationalized with the objective of taxing all business income at the appropriate tax rate of the income earner, sharply reducing tax sheltering, and making corporation tax payments more transparent.
2005-11	Mihir A. Desai, Dhammika Dharmapala, and Winnie Fung, "Taxation and the Evolution of Aggregate Corporate Ownership Concentration," June 2005
The concentration of corporate ownership is a critical element of a corporate governance environment and reflects the degree to which different income groups participate in the stock market. Legal rules, politics and behavioral factors have all been emphasized as explanatory factors in analyses of corporate ownership concentration and the degree to which different income groups hold equities. An extension of standard tax cliente arguments demonstrates that changes in the progressivity of taxes can also significantly influence corporate ownership concentration. A novel index of the concentration of corporate ownership over the twentieth century in the United States provides the opportunity to quantitatively test for the role of taxes in shaping ownership concentration. The index of ownership concentration is characterized by considerable time series variation, with significant diffusion of ownership in the post-WWII era and reconcentration in the late 1990s. Analysis of this index indicates that the progressivity of taxation significantly influences corporate ownership concentration and equity market participation as predicted by the model. This evidence supports the intuition of Berle and Means (1932) that taxation can significantly influence patterns of equity ownership.
2005-10	Edward L. Maydew and Douglas A. Shackelford, “The Changing Role of Auditors in Corporate Tax Planning,” June 2005.
This paper examines changes in the role that auditors play in corporate tax planning following recent events, including the well-known accounting scandals, passage of the Sarbanes-Oxley Act, and regulatory actions by the SEC and PCAOB. On the whole, these events have increased the scrutiny of auditor independence. We examine the effects of these events on the market for tax planning, in particular the longstanding link between audit and tax services. While the effects are recent, they are already being seen in the data. Specifically, there has already been a dramatic shift in the market for tax planning away from obtaining tax planning services from the same firm that does one’s audit. We estimate that the average ratio of tax fees to audit fees paid by firms in the S&P 500 to the firms doing their audits declined from approximately one in 2001 to one-fourth in 2004. At the same time, we find no evidence of a general decline in spending for tax services. The total revenue of the tax practices of the largest accounting firms has held steady over this period. In sum, the evidence indicates a decoupling of the longstanding link between audit and tax services, such that firms are shifting their purchase of tax services away from their auditor and towards other providers. We close with conjectures about the implications of these changes for corporate tax collections, financial accounting for income taxes, and the structure of the accounting industry.
2005-9	James R. Hines Jr., “Corporate Taxation and International Competition,” July 2005.
Countries around the world continue to tax corporate income at significant rates despite downward pressures from international competition. Average statutory corporate income tax rates fell from 46 percent in 1982 to 33 percent in 1999, though tax bases simultaneously broadened, as a result of which average corporate tax collections actually rose from 2.1 percent of GDP in 1982 to 2.4 percent of GDP in 1999. Two pieces of evidence point to the possibility that mobile capital has received favorable tax treatment in recent years as a result of tax competition. The first is the experience of American multinational firms, whose average effective foreign tax rates fell from 43 percent in 1982 to 26 percent in 1999. The second is the cross-sectional pattern of tax rate-setting: small countries, facing elastic supplies of world capital, taxed corporate income at significantly lower rates than did larger countries in 1982. Corporate tax rates in 1999 did not substantially differ between small and large countries, implying that large countries set their tax rates in response to the same competitive pressures that small countries have always faced.
2005-8	Donald Bruce, John Deskins, and William F. Fox, “On the Extent,Growth, and Efficiency Consequences of State Business Tax Planning,” June 2005
Our focus in this essay is on the extent to which tax planning in response to variations in state tax policy has affected state corporate income tax bases and revenues. Tax planning is defined as a broad set of actions undertaken by firms to reduce their tax liability. Financial or accounting tax planning is contrasted with what we refer to as locational distortions, in which firms move physical operations to avoid higher tax liabilities. Results from a fixed effects instrumental variables regression model using a 1985-2001 panel of state-level data provide highly suggestive evidence that tax planning activity significantly diminishes taxable corporate profits in high tax states. Specifically, we find that state corporate income tax bases decline by nearly 7 percent following a one-percentage-point increase in the top marginal corporate income tax rate, controlling for locational distortions. We also find that throwback rules are usually ineffective in restoring corporate income tax bases while combined reporting requirements are often effective. Further analysis indicates that tax planning has not diminished the locational distortions of tax policy.
2005-7	Michelle Hanlon, Lillian Mills, and Joel Slemrod, “An Empirical Examination of Corporate Tax Noncompliance,” June 2005.
This paper offers some exploratory analysis of an extraordinarily rich data set of audit and appeals records, matched with tax returns and financial statements, of several thousand corporations. We find that corporate tax noncompliance, at least as measured by deficiencies proposed upon examination, amounts to approximately 13 percent of “true” tax liability. Second, noncompliance is a progressive phenomenon, meaning that noncompliance as a fraction of a scale measure increases with the size of the company. Other things equal, noncompliance is related to two measures of the presence of intangibles and with being a private company. We find some evidence that incentivized executive compensation schemes are associated with more tax noncompliance, but only with respect to bonuses and not for stock options and other equity-related incentive pay. We uncover no relation between a commonly-studied measure of the quality of corporate governance and the extent of proposed (scaled) tax deficiency. Finally, we find that there is no consistent simple or partial negative association between our measure of tax noncompliance and measures of the effective tax rate calculated from financial statements. These conclusions are preliminary because our central measure of tax noncompliance is the result of an imperfect and perhaps systematically detailed audit of a tax return declaration that may itself be the opening bid in what is expected, often correctly, to be an intense negotiation and formal appeals process. Second, the causal links among tax aggressiveness, executive compensation, and corporate governance are potentially complex, and the analysis presented here at best establishes statistical associations, but certainly does not establish causal relations.
2005-6	Jonathan Gruber and Joshua Rauh, “How Elastic Is the Corporate Income Tax Base?” June 2005.
We estimate the impact of the corporate tax rate on the level of corporate taxable income for publicly traded firms from 1960-2003. In the spirit of Gruber and Saez (2002) who consider the elasticity of household taxable income, we overcome the endogeneity of corporate tax rates to taxable income by modeling the effective tax rates faced by firms in one period, and the effective tax rate that would be faced by firms with the same characteristics in the next period. Using industry level aggregates, we find strong evidence that the corporate tax base is elastic with respect to the marginal effective tax rate, though the magnitude is smaller than typical estimates of household taxable income elasticities. .
2005-5	Alan J. Auerbach and Kevin A. Hassett, “The 2003 Dividend Tax Cuts and the Value of the Firm: An Event Study,” June 2005.
The “Jobs and Growth Tax Relief Act of 2003” (JGTRA03) contained a number of significant tax provisions, but the most noteworthy may have been the reduction in dividend tax rates. The political debate over the dividend tax reductions of 2003 took a number of surprising twists and turns. Accordingly, it is likely that the views of market participants concerning the probability of significant dividend tax reduction fluctuated significantly during 2003. In this paper, we use this fact to estimate the effects of dividend tax policy on firm value. We find that firms with higher dividend yields benefited more than other dividend paying firms, a result that, in itself, is consistent with both new and traditional views of dividend taxation. But further evidence points toward the new view and away from the traditional view. We also find that non-dividend-paying firms experienced larger abnormal returns than other firms as the result of the dividend tax cut, and that a similar bonus accrued to firms likely to issue new shares, two results that may appear surprising at first but are consistent with the theory developed in the paper.
2005-4	Stephen R. Bond, Michael P. Devereux, and Alexander Klemm, “Dissecting Dividend Decisions: Some Clues About the Effects of Dividend Taxation from Recent UK Reforms,” June 2005.
We present empirical evidence which suggests that a big increase in dividend taxation for UK pension funds in July 1997 affected the form in which some UK companies chose to make dividend payments, but otherwise had limited effects on both the level of dividend payments and the level of investment. These findings are consistent with a version of the 'new view' of dividend taxation. We also identify a group of firms whose dividend choices are difficult to reconcile with (stock market) value maximization.
2005-3	Raj Chetty, Joseph Rosenberg, and Emmanuel Saez, “The Effects of Taxes on Market Responses to Dividend Announcements and Payments: What Can We Learn from the 2003 Dividend Tax Cut?” June 2005.
This paper investigates the effects of capital gains and dividend taxes on excess returns around announcements of dividend increases and ex-dividend days for U.S. corporations. Consistent with standard no-arbitrage conditions, we find that the ex-dividend day premium increased from 2002 to 2004 when the dividend tax rate was cut. Consistent with the signaling theory of dividends, we also find that the excess return for dividend increase announcements went down from 2002 to 2004. However, these findings are very sensitive to the years chosen for the pre-reform control period. Semi-parametric graphical analysis using data since 1962 shows that the relationship between tax rates and ex-day and announcement day premia is very fragile and sensitive to sample period choices. Strong year-to-year fluctuations in the ex-day and announcement day premia greatly reduce statistical power, making it impossible to credibly detect responses even around large tax reforms. The important non-tax factors affecting these premia must therefore be understood before progress can be made in evaluating the role of taxation in market responses.
2005-2	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Do Tax Havens Divert Economic Activity,” April 2005
When multinational firms expand their operations in tax havens, do they divert activity from non-havens? Much of the debate on tax competition presumes that the answer to this question is yes. This paper offers a model for examining the relationship between activity in havens and non-havens, and discusses the implications of recent evidence in light of that model. Properly interpreted, the evidence suggests that tax haven activity enhances activity in nearby non-havens.
2005-1	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Foreign Direct Investment and the Domestic Capital Stock,” January 2005.
This paper evaluates evidence of the impact of outbound foreign direct investment (FDI) on domestic investment rates. OECD countries with high rates of outbound FDI in the 1980s and 1990s exhibited lower domestic investment than other countries, which suggests that FDI and domestic investment are substitutes. U.S. time series data tell a very different story, however: years in which American multinational firms have greater foreign capital expenditures coincide with greater domestic capital spending by the same firms. One dollar of additional foreign capital spending is associated with 3.5 dollars of additional domestic capital spending in the time series, implying that foreign and domestic capital are complements in production by multinational firms. This effect is consistent with cross sectional evidence that firms whose foreign operations expand simultaneously expand their domestic operations, and suggests that interpretation of the OECD cross sectional evidence may be confounded by omitted variables.
2004-11	James R. Hines Jr., “Do Tax Havens Flourish?” October 2004.
Tax haven countries offer foreign investors low tax rates and other tax features designed to attract investment and thereby stimulate economic activity. Major tax havens have less than one percent of the world’s population (outside the United States), and 2.3 percent of world GDP, but host 5.7 percent of the foreign employment and 8.4 percent of foreign property, plant and equipment of American firms. Per capita real GDP in tax haven countries grew at an average annual rate of 3.3 percent between 1982 and 1999, which compares favorably to the world average of 1.4 percent. Tax haven governments appear to be adequately funded, with an average 25 percent ratio of government to GDP that exceeds the 20 percent ratio for the world as a whole, though the small populations and relative affluence of these countries would normally be associated with even larger governments. Whether the economic prosperity of tax haven countries comes at the expense of higher tax countries is unclear, though recent research suggests that tax haven activity stimulates investment in nearby high-tax countries.
2004-10	Mihir A. Desai and James R. Hines Jr., “Old Rules and New Realities: Corporate Tax Policy in a Global Setting,” October 2004.
This paper reassesses the burden of the current U.S. international tax regime and reconsiders well-known welfare benchmarks used to guide international tax reform. Reinventing corporate tax policy requires that international considerations be placed front and center in the debate on how to tax corporate income. A simple framework for assessing current rules suggests a U.S. tax burden on foreign income in the neighborhood of $50 billion a year. This sizeable U.S. taxation of foreign investment income is inconsistent with promoting efficient ownership of capital assets, either from a national or a global perspective. Consequently, there are large potential welfare gains available from reducing the U.S. taxation of foreign income, a direction of reform that requires abandoning the comfortable, if misleading, logic of using similar systems to tax foreign and domestic income.
2004-9	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Economic Effects of Regional Tax Havens,” October 2004.
How does the opportunity to use tax havens influence economic activity in nearby non-haven countries? Analysis of affiliate-level data indicates that American multinational firms use tax haven affiliates to reallocate taxable income away from high-tax jurisdictions and to defer home country taxes on foreign income. Ownership of tax haven affiliates is associated with reduced tax payments by nearby non-haven affiliates, the size of the effect being equivalent to a 20.8 percent tax rate reduction. The evidence also indicates that use of tax havens indirectly stimulates the growth of operations in non-haven countries in the same region. A one percent greater likelihood of establishing a tax haven affiliate is associated with 0.5 to 0.7 percent greater sales and investment growth by non-haven affiliates, implying a complementary relationship between haven and non-haven activity. The ability to avoid taxes by using tax haven affiliates therefore appears to facilitate economic activity in non-haven countries within regions.
2004-8	Joel Slemrod, “The Economics of Corporate Tax Selfishness,” September 2004.
The corporation income tax occupies a tenuous place in the economics of taxation. The purpose of this paper is to offer an economics perspective on the issue of corporate tax reporting behavior, and to focus on what economics can contribute to the policy debate about corporate tax noncompliance. The policy and practice of corporate tax avoidance and evasion are ahead of economic theory and empirical analysis. Our empirical understanding of corporate behavior depends mostly on two sources of data, (publicly-available) financial statements and (confidential, but characterized in aggregated form) tax returns. There is a set of empirical questions on which we can make progress, such as the interaction between sheltering and real decisions, the cross-sectional determinants of corporate evasion and the use of abusive tax shelters, and how accounting rules and enforcement affect tax reporting and real decisions. There are subtle policy questions, such as the impact of public disclosure of corporate tax return information, linking tax liability to financial statement income, and the impact of penalties on corporate directors and abusive tax shelter promoters, to which clear thinking about the demand and supply of tax evasion and abusive avoidance can contribute.
2004-7	Keith J. Crocker and Joel Slemrod, “Corporate Tax Evasion with Agency Costs,” July 2004.
This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.
2004-6	Jon Bakija and Joel Slemrod, “Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns
This paper examines how changes in state tax policy affect the number of federal estate tax returns filed in each state, utilizing data on federal estate tax return filings by state and wealth class for 18 years between 1965 and 1998. Controlling for state- and wealth-class specific fixed effects, we find that high state inheritance and estate taxes and sales taxes have statistically significant, but modest, negative impacts on the number of federal estate tax returns filed in a state. High personal income and property tax burdens are also found to have negative effects, but these results are somewhat sensitive to alternative specifications. This evidence is consistent with the notion that wealthy elderly people change their real (or reported) state of residence to avoid high state taxes, although it could partly reflect other modes of tax avoidance as well. We discuss the implications for the debate over whether individual states should “decouple” their estate taxes from federal law, which would retain the state tax even as the federal credit for such taxes is eliminated. Our results suggest that migration and other observationally equivalent avoidance activities in response to such a tax would cause revenue losses and deadweight losses, but that these would not be large relative to the revenue raised by the tax.
2004-5	Roger Gordon, Laura Kalambokidis, Jeffrey Rohaly, and Joel Slemrod, “Toward a Consumption Tax, and Beyond,” June 2004.
In this paper we investigate the extent to which the U.S. income tax system of 2004 collects tax on capital income, and the implications of extending tax-preferred savings accounts. We do so by applying a methodology that estimates how much tax is collected on capital income by calculating how much tax revenue would change if the tax system were modified to exempt income from capital in present value—specifically by adopting what the Meade Committee (1978) called an “R-base tax”—while leaving the tax rate structure and tax incentives otherwise unchanged. The difference between actual revenue and revenue under this alternative tax system is a measure of how much tax on capital income is collected under current law. We find that, as of 2004, the U.S. tax system has returned to the situation of the mid-1980s wherein our income tax system raises little revenue from taxing capital income. If extensive tax-free savings accounts were to be introduced, the system would raise almost no revenue from capital income and possibly subsidize, rather than tax, capital income. The main culprit in this state of affairs is the retention of interest deductibility. Although the revenue from taxing capital income is small, the gains that would result from a clean consumption tax have not been attained, as there remain distortions to both saving and investment decisions, and distortions across capital assets, portfolios, corporate financing, and choice of organizational form under the patchwork of provisions that have been adopted.
2004-4	Joel Slemrod and Varsha Venkatesh, “The Income Tax Compliance Cost of Large and Mid-Size Businesses,” April 2004.
This reports presents evidence on the compliance costs of medium-sized businesses based on a survey conducted by the Office of Tax Policy Research. The survey attempts to measure the size and composition of compliance costs and to identify firm characteristics that affect these costs. Our analysis of the responses of taxpayers and tax professionals confirms the regressivity of business compliance costs and suggests that, as a proportion of taxes paid, they are significantly higher than for the largest U.S. businesses and for individual taxpayers. Comparisons to revenue must be done carefully, however, because the majority of medium-sized businesses are in fact not taxpaying entities, but are rather pass-through entities.
2004-3	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “Capital Controls, Liberalizations, and Foreign Direct Investment,” February 2004
Affiliate-level evidence indicates that American multinational firms circumvent capital controls by adjusting their reported intrafirm trade, affiliate profitability, and dividend repatriations. As a result, the reported profit impact of local capital controls is comparable to the effect of 24 percent higher corporate tax rates, and affiliates located in countries imposing capital controls are 9.8 percent more likely than other affiliates to remit dividends to parent companies. Multinational affiliates located in countries with capital controls face 5.4 percent higher interest rates on local borrowing than do affiliates of the same parent borrowing locally in countries without capital controls. Together, the costliness of avoidance and higher interest rates raise the cost of capital, significantly reducing the level of foreign direct investment. American affiliates are 13-16 percent smaller in countries with capital controls than they are in comparable countries without capital controls. These effects are reversed when countries liberalize their capital account restrictions.
2004-2	Mihir A. Desai and James R. Hines Jr., “Market Reactions to Export Subsidies,” January 2004.
This paper analyzes the economic impact of export subsidies by investigating stock price reactions to a critical event in 1997. On November 18, 1997, the European Union announced its intention to file a complaint before the World Trade Organization (WTO), arguing that the United States provided American exporters illegal subsidies by permitting them to use Foreign Sales Corporations to exempt a fraction of export profits from taxation. Share prices of American exporters fell sharply on this news, and its implication that the WTO might force the United States to eliminate the subsidy. The share price declines were largest for exporters whose tax situations made the threatened export subsidy particularly valuable. Share prices of exporters with high profit margins also declined markedly on November 18, 1997, suggesting that the export subsidies were most valuable to firms earning market rents. This last evidence is consistent with strategic trade models in which export subsidies improve the competitive positions of firms in imperfectly competitive markets.
2003-7	Naomi E. Feldman and James R. Hines Jr., "Tax Credits and Charitable Contributions in Michigan," October 2003.
This paper analyzes the impact of tax credits on charitable giving in Michigan and around the United States. The evidence indicates that the availability of tax benefits, in the form of federal and state tax deductions and state credits, significantly encourages charitable giving. The state of Michigan permits taxpayers to claim tax credits for contributions to public institutions, community foundations, and homeless shelters and food banks. While only a small fraction of the Michigan population claims these credits, their aggregate value exceeds $40 million a year. Contributors claiming credits in Michigan are disproportionately drawn from the high-income part of the population, though the ratio of tax credit benefits to total tax obligations is approximately equal for all income groups. The estimates imply that the availability of tax credits in Michigan increases annual credit-eligible contributions by more than $40 million, possibly at the expense of contributions to other nonprofit recipients.
2003-6	Matthew D. Shapiro and Joel Slemrod, “Did the 2001 Tax Rebate Stimulate Spending? Evidence from Taxpayer Surveys,” July 2003.
In 2001, many households received rebate checks as advanced payments of the benefit of the new, 10 percent federal income tax bracket. A survey conducted at the time the rebates were mailed finds that few households said that the rebate led them mostly to increase spending. A follow-up survey in 2002, as well as a similar survey conducted after the attacks of 9/11, also indicates low spending rates. This paper investigates the robustness of these survey responses and evaluates whether such surveys are useful for policy evaluation. It also draws lessons from the surveys for macroeconomic analysis of the tax rebate.
2003-5	Mihir A. Desai and James R. Hines Jr., “Evaluating International Tax Reform,” June 2003.
This paper introduces “capital ownership neutrality” (CON) and “national ownership neutrality” (NON) as benchmarks for evaluating the desirability of international tax reforms, and applies them to analyze recent U.S. tax reform proposals. Tax systems satisfy CON if they do not distort the ownership of capital assets, which promotes global efficiency whenever the productivity of an investment differs based on its ownership. A regime in which all countries exempt foreign income from taxation satisfies CON, as does a regime in which all countries tax foreign income while providing foreign tax credits. Tax systems satisfy NON if they promote the profitability of domestic firms, and therefore home country welfare, by exempting foreign income from taxation. Standard normative benchmarks of capital export neutrality, national neutrality, and capital import neutrality carry very different implications, since they fail to account for the productivity effects of tax-induced changes in capital ownership. Proposed U.S. tax reforms that reduce the taxation of foreign income, thereby bringing the U.S. tax system more in line with the systems of other countries, have the potential to advance both American interests and global welfare.
2003-4	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., “A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," May 2003.
This paper examines the impact of local tax rates and capital market conditions on the level and composition of borrowing by foreign affiliates of American multinational corporations. The evidence indicates that 10 percent higher local tax rates are associated with 2.8 percent higher debt/asset ratios of American-owned affiliates, and that borrowing from related parties is particularly sensitive to tax rates. Borrowing by American affiliates responds to local inflation and political risks, and is more costly in countries with underdeveloped capital markets and those providing weak legal protections for creditors. Affiliates in environments where external borrowing is costly borrow less from unrelated parties: one percent higher interest rates are associated with 1.4 to 2.0 percent less external debt as a fraction of assets. Instrumental variables analysis reveals that affiliates substitute loans from parent companies for between half and three quarters of the reduced borrowing from unrelated parties stemming from adverse local capital market conditions. These patterns suggest that multinational firms are able to structure their finances in response to tax and capital market conditions, thereby creating opportunities not available to many of their local competitors.
2003-3	James R. Hines Jr., "Might Fundamental Tax Reform Increase Criminal Activity?" March 2003.
There is a widely held perception that fundamental tax reform would reduce the level of criminal and other “underground” economic activity. The popular argument relies on the idea that replacing the income tax with a sales tax would implicitly tax the return to criminal activity, whereas the return to crime is effectively untaxed by an income tax. This paper finds instead that the impact of tax reform on the underground sector of the economy depends on the relative labor intensity of production in the legitimate and illegitimate sectors of the economy. In the likely event that illegal output is produced using more labor-intensive techniques than is legitimate output, then replacing an income tax with a sales tax reduces the cost of criminal and other underground activity, thereby increasing such activity.
2003-2	Claudio A. Agostini, "Tax Interdependence in American States," January 2003.
State governments finance their expenditures with multiple tax instruments, so when collections from one source decline, they are typically compensated by greater revenues from other sources. This paper addresses the important question of the extent to which personal and corporate income taxes are used to compensate for sales tax fluctuations within the U.S. states. The results show that one percent increase in the sales tax rate is associated with a half and a third percent decrease in the personal and corporate income tax rates respectively. In terms of tax revenues per capita, the results show that a one percent increase in the sales tax revenue per capita is associated with a 3 percent and a 0.9 percent decrease in the corporate and personal income tax revenue per capita respectively.
2003-1	James R. Hines Jr., "Michigan's Flirtation with the Single Business Tax," January 2003.
This paper evaluates Michigan's experience with the Single Business Tax (SBT). Michigan adopted the SBT in 1975; the SBT currently accounts for 10 percent of state tax revenue, but is being phased out and is slated for elimination in 2010. The SBT differs from standard corporate income taxes in two ways: first, it applies to all business entities, not only corporations, and second, it is a tax on value-added rather than income. In the original design of the SBT, taxpayers could deduct capital expenditures from the SBT base, but complications stemming from the taxation of multi-state businesses ultimately dictated a regime in which expenditures on capital located in Michigan cannot be deducted but are instead eligible for investment credits. Numerous other credits and exemptions are available for taxpayers subject to the SBT. The SBT is nevertheless imposed at a very high average rate; business income is taxed more heavily by Michigan's SBT than it is by the corporate income taxes of other states. The evidence indicates that the SBT has proven to be a very stable source of tax revenue, one that is much less prone to fluctuate with the business cycle than are the corporate income taxes used by other states. Revenue stability, together with the efficiency of the incentives created by its value-added structure, makes the SBT an attractive tax for Michigan, particularly compared to the leading alternatives.
2002-10	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., "Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment," September 2002.
This paper considers the effect of taxation on the location of foreign direct investment (FDI) and taxable income reported by multinational firms with particular attention to the regional dynamics of tax competition and the role of chains of ownership. Confidential affiliate-level data are used to compare the investment and income-reporting behavior of American-owned foreign affiliates across ownership forms and regions. Ten percent higher tax rates are associated with 5.0 percent lower FDI, controlling for parent company and observable aspects of local economies, and 0.9 percent lower returns on assets, controlling for parent company and level of FDI. Tax effects are particularly strong within Europe, where ten percent higher tax rates are associated with 7.7 percent lower FDI and 1.7 percent lower returns on assets. Indirectly owned foreign affiliates also exhibit strong tax effects, ten percent higher tax rates being associated with 12.0 percent lower FDI and 1.4 percent lower returns on assets. American firms finance a growing fraction of their foreign operations indirectly through chains of ownership, which now account for more than 30 percent of aggregate foreign assets and sales. Ownership chains are particularly concentrated among European affiliates. Since multinational firms from countries other than the United States face tax environments similar to those faced by indirectly owned affiliates of American companies, these results suggest a greater sensitivity of FDI to taxes for non-American firms. The results also suggest that European economic integration may have the effect of intensifying tax competition between European jurisdictions.
No. 2002-9	Wojciech Kopczuk, Joel Slemrod, and Shlomo Yitzhaki, "Why World Redistribution Fails," September 2002.
An optimal linear world income tax that maximizes a border-neutral social welfare function provides a drastic reduction in world consumption inequality, dropping the Gini coefficient from 0.69 to 0.25. In contrast, an optimal decentralized (i.e., within countries) redistribution has a miniscule effect on world income inequality. Thus, the traditional public finance concern about the excess burden of redistribution cannot explain why there is so little world redistribution. Actual foreign aid is vastly lower than the transfers under the simulated world income tax, suggesting that countries such as the United States either place a much lower value on the welfare of foreigners or else expect that a very significant fraction of cross-border transfers is wasted. The product of the welfare weight and one minus the share of transfers that are wasted constitutes an implied weight that the United States assigns to foreigners. We calculate that value to be as low as 1/2000 of the value put on the welfare of an American, suggesting that U.S. policy implicitly assumes either that essentially all transfers are wasted or places essentially no value on the welfare of the citizens of the poorest countries.
No. 2002-8	Joel Slemrod and Peter Katuscak, "Do Trust and Trustworthiness Pay Off?" September 2002.
Are individuals who trust others better off than those who do not? Do trustworthy people prosper more than untrustworthy ones? We first pose these questions in a search model where individuals faced repeated choices between trusting (initiating an investment transaction) and not trusting, and between being trustworthy (not stealing the investment) and cheating. We then derive predictions for the relationship between observed individual behavior, aggregate attitudes, and individual prosperity. Finally, we evaluate these predictions empirically using household-level data for eighteen (mostly developed) countries from the World Values Survey. We find that, on average, a trusting attitude has a positive impact on income, while trustworthiness has a negative impact on income. In addition, we find evidence of complementarity between these two attitudes and the aggregate levels of the complementary attitudes. Most strikingly, the payoff to being trustworthy depends positively on the aggregate amount of trust in a given country.
No. 2002-7	Joel Slemrod, "Trust in Public Finance," September 2002.
Using data on trust and trustworthiness from the 1990 wave of the World Values Survey, I first investigate a model of the extent of tax cheating and the size of government that recognizes the interdependence of the two. The results reveal that tax cheating is lower in countries that exhibit more (not-government-related) trustworthiness. However, holding that constant, tax cheating becomes more acceptable as government grows. All in all, there is some weak evidence that the strong positive cross-country correlation between the size of government and tax cheating masks the fact that big government induces tax cheating while, at the same time, tax cheating constrains big government. I then add to the structural model an equation determining the level of prosperity, allowing prosperity to depend, inter alia, on the level of government and on trust in others. I find some evidence that both prosperity and government involvement are higher in more trusting societies. Moreover, holding these measures of trust constant, the association of government size with prosperity is positive until a level of government spending somewhere between 31% and 38% of GDP, after which its marginal effect is negative. Thus, although a trusting citizenry allows larger government, the tax burden this entails erodes the rule obedience taxpayers exhibit toward government.
No. 2002-6	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., "International Joint Ventures and the Boundaries of the Firm," July 2002.
This paper analyzes the determinants of partial ownership of the foreign affiliates of U.S. multinational firms and, in particular, why partial ownership has declined markedly over the last 20 years. The evidence indicates that whole ownership is most common when firms coordinate integrated production activities across different locations, transfer technology, and benefit from worldwide tax planning. Since operations and ownership levels are jointly determined, it is necessary to use the liberalization of ownership restrictions by host countries and the imposition of joint venture tax penalties in the U.S. Tax Reform Act of 1986 as instruments for ownership levels in order to identify these effects. Firms responded to these regulatory and tax changes by expanding the volume of the intrafirm trade as well as the extent of whole ownership; four percent greater subsequent sole ownership of affiliates is associated with three percent higher intrafirm trade volumes. The implied complementarity of whole ownership and intrafirm trade suggests that reduced costs of coordinating global operations, together with regulatory and tax changes, gave rise to the sharply declining propensity of American firms to organize their foreign operations as joint ventures over the last two decades. The forces of globalization appear to have increased the desire of multinationals to structure many transactions inside firms rather than through exchanges involving other parties.
No. 2002-5	Julie Berry Cullen and Roger H. Gordon, "Taxes and Entrepreneurial Activity: Theory and Evidence for the U.S." June 2002.
Entrepreneurial activity is presumed to generate important spillovers, potentially justifying tax subsidies. How does the tax law affect individual incentives? How much of an impact has it had in practice? We first show theoretically that taxes can affect the incentives to be an entrepreneur due simply to differences in tax rates on business vs. wage and salary income, due to differences in the tax treatment of losses vs. profits through a progressive rate structure and through the option to incorporate, and due to risk-sharing with the government. We then provide empirical evidence using U.S. individual tax return data that these aspects of the tax law have had large effects on actual behavior.
No. 2002-4	Mihir A. Desai and James R. Hines Jr., "Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions," June 2002.
This paper investigates the determinants of corporate expatriations. American corporations that seek to avoid U.S. taxes on their foreign incomes can do so by becoming foreign corporations, typically by "inverting" the corporate structure, so that the foreign subsidiary becomes the parent company and U.S. parent company becomes a subsidiary. Three types of evidence are considered in order to understand this rapidly growing practice. First, an analysis of the market reaction to Stanley Works's expatriation decision implies that market participants expect its foreign inversion to be accompanied by a reduction in tax liabilities on U.S. source income, since savings associated with the taxation of foreign income alone cannot account for the changed valuations. Second, statistical evidence indicates that large firms, those with extensive foreign assets, and those with considerable debt are more the most likely to expatriate - suggesting that U.S. taxation of foreign income, including the interest expense allocation rules, significantly affect inversions. Third, share prices rise by an average of 1.7 percent in response to expatriation announcements. Ten percent higher leverage ratios are associated with 0.7 percent greater market reactions to expatriations, reflecting the benefit of avoiding the U.S. rules concerning interest expense allocation. Shares of inverting companies typically stand at only 88 percent of their average values of the previous year, and every 10 percent of prior share price appreciation is associated with 1.1 percent greater market reaction to an inversion announcement. Taken together, these patterns suggest that managers maximize shareholder wealth rather than share prices, avoiding expatriations unless future tax savings - including reduced costs of repatriation taxes and expense allocation, and the benefits of enhanced worldwide tax planning opportunities - more than compensate for current capital gains tax liabilities.
No. 2002-3	James R. Hines Jr., "On the Timeliness of Tax Reform," March 2002.
This paper analyzes efficient reactions of policy makers to unanticipated tax avoidance. The strategy of many governments is to reform their tax laws and regulations to reduce the effectiveness of elaborate tax avoidance techniques as soon as they are identified. This tax reform process can successfully prevent the widespread use of new tax avoidance strategies, and in that way prevents erosion of the tax base. But it also encourages the rapid development of new tax avoidance techniques by innovators whose competitors are thereby unable to copy their methods - as a consequence of which, there can be a great premium on being the first to develop and use a new tax avoidance method. An activist reform agenda may therefore divert greater resources into tax avoidance activity, and lead to a faster rate of tax base erosion, than would a less reactive government strategy. Efficient government policy therefore often entails a slow and deliberate pace of tax reform in response to taxpayer innovation.
No. 2002-2	Roger H. Gordon and James R. Hines Jr., "International Taxation," January 2002.
The integration of world capital markets carries important implications for the design and impact of tax policies. This paper evaluates research findings on international taxation, drawing attention to connections and inconsistencies between theoretical and empirical observations. Diamond and Mirrlees (1971) note that small open economies incur very high costs in attempting to tax the returns to local capital investment, since local factors bear the burden of such taxes in the form of productive inefficiencies. Richman (1963) argues that countries may simultaneously want to tax the worldwide capital income of domestic residents, implying that any taxes paid to foreign governments should be merely deductible from domestic taxable income. Governments do not adopt policies that are consistent with these forecasts. Corporate income is taxed at high rates by wealthy countries, and most countries either exempt foreign-source income of domestic multinationals from tax, or else provide credits rather than deductions for taxes paid abroad. Furthermore, individual investors can use various methods to avoid domestic taxes on their foreign-source incomes, in the process also avoiding taxes on their domestic-source incomes. Individual and firm behavior also differs from that forecast by simple theories. Observed portfolios are not fully diversified worldwide. Foreign direct investment is common even when it faces tax penalties relative to other investment in host countries. While economic activity, and tax avoidance activity, is highly responsive to tax rates and tax structure, there are many aspects of tax-motivated behavior that are difficult to reconcile with simple microeconomic incentives. There are promising recent efforts to reconcile observations with theory. To the extent that multinational firms possess intangible capital on which they earn returns with foreign direct investment, even small countries may have a degree of market power, leading to fiscal externalities. Tax avoidance is pervasive, generating further fiscal externalities. These concepts are useful in explaining behavior, and observed tax policies, and they also suggest that international agreements have the potential to improve the efficiency of tax systems worldwide.
No. 2002-1	James R. Hines Jr., "Applied Public Finance Meets General Equilibrium: The Research Contributions of Arnold Harberger," January 2002.
This essay reviews Arnold Harberger's major research contributions, noting their place in the development of modern public finance and their implications for future research. Harberger triangles are used to calculate the efficiency costs of taxes, government regulations, monopolistic practices, and various other market distortions. Prior to the publication of Arnold Harberger's papers, economists very rarely estimated deadweight losses; such estimation is now common, the literature having expanded manyfold since the 1960s. Critical evaluation of deadweight loss estimates led to new theories of rent-seeking and other inefficiencies of economies with multiple distortions. Harberger's analysis of the general equilibrium incidence of the corporate income tax was the foundation of subsequent research on corporate taxation, as well as providing the basis for subsequent general equilibrium analysis of the incidence of other taxes. Harberger's contributions to the literature on project evaluation, economic development, international trade, and the likely directions of desirable tax reforms likewise advance their respective fields. What unifies this work is that the theoretical development is innovative and insightful, while remaining resolutely practical. Furthermore, these papers helped to transform the analysis of applied problems by using general equilibrium approaches to answer what had previously been cast as partial equilibrium problems.
No. 2001-21	Randall Reback, "Capitalization Under School Choice Programs: Are the Winners Really the Losers?" November 2001.
This paper examines the capitalization effects of public school choice programs. Under an inter-district choice program, one would expect changes in local property values caused by the weakening of local monopolies for the provision of free schooling. Using data from Minnesota, I find that property values decline in desirable districts that accept transfer students, whereas property values increase in districts where students are able to transfer to preferred districts. The capitalization effects are of sufficient magnitude that a district losing (gaining) students because of transferring may not actually lose (gain) much financially, or may even have a moderate gain (loss), as a result of school choice. These effects may undermine attempts to use a school choice program as a means of financially punishing or rewarding districts based on preexisting differences in popularity.
No. 2001-20	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., "Dividend Policy inside the Firm," December 2001.
This paper analyzes dividend remittances by a large panel of foreign affiliates of U.S. multinational firms. The dividend policies of foreign affiliates, which convey no signals to public capital markets, nevertheless resemble those used by publicly held companies in paying dividends to diffuse common shareholders. Robustness checks verify that dividend policies of foreign affiliates are little affected by the dividend policies of their parent companies or parent company exposure to public capital markets. Systematic differences in the payout behavior of affiliates that differ in organizational form, and those that face differing tax costs of paying dividends, reveal the importance of tax factors; nevertheless, dividend policies are not solely determined by tax considerations. The absence of capital market considerations and the incompleteness of tax explanations together suggest that dividend policies are largely driven by the need to control managers of foreign affiliates. Parent firms are more willing to incur tax penalties by simultaneously investing funds while receiving dividends when their foreign affiliates are partially owned, located far from the United States, or in jurisdictions in which property rights are weak, all of which are implied by control theories of dividends.
No. 2001-19	Claudio Agostini and Soraphol Tulayasathien, "Tax Effects on Investment Location: Evidence from Foreign Direct Investment in the U.S. States," December 2001.
This paper examines the effects of state corporate income taxes on location of foreign direct investment, taking into account the state governments' behavior when setting taxes. Ignoring the tax setting behavior of states may bias the estimate of the tax effects on foreign direct investment. States have a set of characteristics that influence investors' decisions, some of them are not observable by a researcher but states take them into account when they set taxes. States can also act strategically with respect to other states when setting taxes. The former behavior bias the estimated tax effects because it creates correlation between the error term and the tax rate. The latter behavior directly implies an endogenous tax rate. We adapt a discrete choice model of differentiated products to estimate the tax effects. This approach allows us at the same time to control for the outside options of investors and to use instrumental variables to solve the problem of tax endogeneity. We find the tax elasticity to be consistently around -1.
No. 2001-18	Peter Birch Sørensen, "International Tax Coordination: Regionalism Versus Globalism," April 2001.
Tax competition for mobile capital can undermine the attempts of governments to redistribute income from rich to poor. I study whether international tax coordination can alleviate this problem, using a general equilibrium model synthesizing recent contributions to the tax competition literature. The model highlights the crucial distinction between global tax coordination and regional coordination. With high capital mobility between the tax union and the rest of the world, the welfare gain from regional capital income tax coordination is only a small fraction of the gain from global coordination, even if the tax union is large relative to the world economy.
No. 2001-17	John Whalley, "Puzzles over International Taxation of Cross Border Flows of Capital Income," May 2001.
I discuss the tax treatment of transborder capital income, focusing on prevailing arrangements rather than de novo design of optimal tax arrangements. These comprise unilateral reliefs from double taxation under credit or exemption systems, and treaty reliefs (largely following the OECD model treaty) which jointly lower withholding tax rates on interest, dividends, and royalties in both host and source countries. I suggest that these arrangements involve both seemingly non-strategic unilateral actions and cooperative arrangements which are difficult to reconcile both with tax competition literature and with national interest. I pose four puzzles in this regard. The first is that from a national welfare point of view, the unilateral reliefs in use seem inferior to no relief since with competitive markets investors equate the private return on investments at home and abroad, while tax revenues largely accrue to the foreign government. Private returns are equated, but national returns are not. The second is that tax treaties only have lump sum effects between national governments if the more common credit arrangements of unilateral reliefs apply and if tax rates are similar in host and source countries (approximately the OECD situation). This raises the issue of why governments negotiate them. The third is the sharp contrast to international treaty arrangements for goods flows under the WTO; and the fourth is the absence of side payments in tax treaties. The picture emerging is that making sense of present arrangements from a national welfare point of view and in terms of efficient instrument design seems difficult. The gap relative to optimal tax consideration also seems large.
No. 2001-16	Harry Huizinga and Gaëtan Nicodème, "Are International Deposits Tax-Driven?" July 2001.
This paper investigates the impact of tax policy on international depositing. Non-bank international deposits are shown to be positively related to interest income and wealth taxes and to the presence of domestic bank interest reporting. This suggests that international deposits are in part intended to facilitate tax evasion. The tax sensitivity of international deposits is estimated to be higher in 1999 than before. At present, only part of international interest flows are covered by either non-resident interest withholding taxes or international exchange of information. This incomplete coverage may be a reason that these policies currently appear to have little impact on international depositing.
No. 2001-15	Jack Mintz and Michael Smart, "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," July 2001.
We study corporate income tax competition when firms operating in multiple jurisdictions can shift income using financial planning strategies. Several such strategies, particularly intra-corporate lending, appear to be actively pursued by companies to reduce subnational corporate taxes in Canada. A simple theoretical model shows how interjurisdictional tax planning can give rise to asymmetries in jurisdictions' tax policies, with one jurisdiction becoming a "tax haven" to attract taxable income through financial transactions, while others set higher statutory rates. Further, increased competition from tax havens may paradoxically lead to tax increases by high-tax jurisdictions. Analysis of data from administrative tax records suggests income shifting has pronounced effects on provincial tax bases in Canada. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for "tax shifting" firms is 4.3, compared to 1.6 for other, comparable firms.
No. 2001-14	Richard Chisik and Ronald B. Davies, "Asymmetric FDI and Tax-Treaty Bargaining: Theory and Evidence," June 2001.
Tax treaties are often viewed as a mechanism for eliminating tax competition, however this approach ignores the need for bargaining over the treaty's terms. This paper focuses on how bargaining can affect the withholding taxes set under the treaty. In a simple framework, we develop hypotheses about patterns in treaty tax rates. A key determinant for these patterns is the relative size of bilateral foreign direct investment (FDI) activity. In plausible situations, more asymmetric countries will negotiate treaties with higher tax rates. This theory is then tested using 1997 data from U.S. bilateral tax treaties. Overall, the data supports the prediction that greater asymmetric FDI activity increases the negotiated tax rates.
No. 2001-13	Reuven S. Avi-Yonah, "Tax Competition and E-Commerce" April 2001.
Current data on tax competition present a puzzle: On the one hand, they indicate that effective corporate tax rates in most countries have been declining, and that the worldwide effective tax rate on multinational enterprises (MNEs) has been going down as well. On the other hand, macroeconomic revenue data show no significant decline in corporate tax revenues collected by OECD member countries. This paper suggests that one key to this puzzle may lie in the slow development of e-commerce. On the basis of discussions with informed tax planners, it turns out that in current market conditions, it may be harder for MNEs to avoid having a "permanent establishment" in market countries than previously supposed. Thus, MNEs are still subject to tax in those countries even if their production takes place in low-tax jurisdictions. The paper then explores the implications of this suggestion for developed and developing countries, and what data are needed to further explore this hypothesis.
No. 2001-12	Joel Slemrod, "Are Corporate Tax Rates, or Countries, Converging?" July 2001.
Many empirical examinations of tax competition have considered certain patterns about corporate taxation, in particular convergence and/or a decline toward zero, as evidence of tax competition. However, this conculusion is not convincing in the absence of some notion of what the pattern of corporate rates over time would have been in the absence of international competitive pressures. This paper investigates the pattern of corporate taxation across countries in several years, beginning in an era before the advent of intense fiscal competition and ending well into the "competitive" era. It separately investigates a set of domestic influences on corporate tax rates that are arguably distinct from competitive pressures, and a set of indicators of competitive pressures.
No. 2001-11	John Douglas Wilson and David E. Wildasin, "Tax Competition: Bane or Boon?" August 2001.
This paper describes some approaches to modeling the potential benefits of tax competition, including both existing approaches and some new approaches, and how they contrast with models of welfare-worsening tax competition. We discuss issues associated with how tax competition handles inefficiencies in both the private sector and the public sector, including the need to carefully model the "political market structure." An emerging theme is that tax competition can lead to higher public expenditures and taxes on mobile factors, and that such effects can be a sign of efficiency-enhancing tax competition. In other cases, these effects may represent important changes in the distribution of income.
No. 2001-10	Mihir A. Desai, C. Fritz Foley, and James R. Hines Jr., "Repatriation Taxes and the Dividend Distortions," August 2001.
This paper analyzes the effect of repatriation taxes on dividend payments by the foreign affiliates of American multinational firms. The United States taxes the foreign incomes of American companies, grants credits for any foreign income taxes paid, and defers any taxes due on the unrepatriated earnings for those affiliates that are separately incorporated abroad. This system thereby imposes repatriation taxes that vary inversely with foreign tax rates and that differ across organizational forms. As a consequence, it is possible to measure the effect of repatriation taxes by comparing the behavior of foreign subsidiaries that are subject to different tax rates and by comparing the behavior of foreign incorporated and unincorporated affiliates. Evidence from a large panel of foreign affiliates of U.S. firms from 1982 to 1997 indicates that one percent lower repatriation tax rates are associated with one percent higher dividends. This implies that repatriation taxes reduce aggregate dividend payouts by 12.8 percent, and, in the process, generate annual efficiency losses equal to 2.5 percent of dividends. These effects would disappear if the United States were to exempt foreign income from taxation.
No. 2001-9	Mihir A. Desai and James R. Hines Jr., "Foreign Direct Investment in a World of Multiple Taxes," July 2001.
While governments have multiple tax instruments available to them, studies of the effect of tax policy on the locational decisions of multinationals typically focus exclusively on host country corporate income tax rates and their interaction with home country tax rules. This paper examines the impact of indirect (non-income) taxes on the location and character of foreign direct investment by American multinational firms. Indirect tax burdens significantly exceed foreign income tax obligations for these firms and appear to influence strongly their behavior. The influence of indirect taxes is shown to be partly attributable to the inability of American investors to claim foreign tax credits for indirect tax payments. Estimates imply that 10 percent higher indirect tax rates are associated with 9.2 percent lower reported income of American affiliates and 8.6 percent lower capital/labor ratios. These estimates carry implications for efficient tradeoffs between direct and indirect taxation in raising revenue while attracting mobile capital.
No. 2001-8	James R. Hines Jr., Hilary Hoynes, and Alan B. Krueger, "Another Look at Whether a Rising Tide Lifts All Boats," July 2001.
Periods of rapid U.S. economic growth during the 1960s and 1970s coincided with improved living standards for many segments of the population, including the disadvantaged as well as the affluent, suggesting to some that a rising economic tide lifts all demographic boats. This paper investigates the impact of U.S. business cycle conditions on population well-being since the 1970s. Aggregate employment and hours worked in this period are strongly procyclical, particularly for low-skilled workers, while aggregate real wages are only mildly procyclical. Similar patterns appear in a balanced panel of PSID respondents that removes the effects of changing workforce composition, though the magnitude of the responsiveness of real wages to unemployment appears to have declined in the last 20 years. Economic upturns increase the likelihood that workers acquire jobs in sectors with positively sloped career ladders. Spending by state and local governments in all categories rises during economic expansions, including welfare spending, for which needs vary countercyclically. Since the disadvantaged are likely to benefit disproportionately from such government spending, it follows that the public finances also contribute to conveying the benefits of a strong economy to diverse population groups.
No. 2001-7	Alan J. Auerbach and James R. Hines Jr., "Taxation and Economic Efficiency," February 2001.
This paper analyzes the distortions created by taxation and the features of tax systems that minimize such distortions (subject to achieving other government objectives). It starts with a review of the theory and practice of deadweight loss measurement, followed by characterizations of optimal commodity taxation and optimal linear and nonlinear income taxation. The framework is then extended to a variety of settings, initially consisting of optimal taxation in the presence of externalities or public goods. The optimal tax analysis is subsequently applied to situations in which product markets are imperfectly competitive. This is followed by consideration of the features of optimal intertemporal taxation. The purpose of the paper is not only to provide an up-to-date review and analysis of the optimal taxation literature, but also to identify important cross-cutting themes within that literature.
No. 2001-6	James R. Hines Jr., "Corporate Taxation," February 2001.
This paper reviews the economic impact of corporate taxation, first surveying the principle features and recent history of corporate taxation, followed by considering the incentives that tax systems provide for the behavior of corporations. Tax systems encourage firms to use debt rather than equity finance and more generally to economize on dividend payments to shareholders. Taxation reduces corporate investment and directs investment to assets receiving favorable tax treatment. Tax considerations influence particularly strongly the operations of multinational corporations, due in part to their ability to choose between jurisdictions with different tax features. The location and magnitude of foreign direct investment respond to tax rate differences, as does international tax avoidance through financial and other means. But in spite of growing knowledge of the effect of taxation on corporate activity, it is still not known whether owners of corporations or others in the economy ultimately bear the burden of corporate taxes.
No. 2001-5	William G. Gale and Joel Slemrod, "Rethinking Estate and Gift Tax: Overview," January 2001
This paper surveys, integrates, and extends research on estate and gift taxes. The paper begins with information on features of U.S. transfer taxes, characteristics of recent estate tax returns, the evolution of transfer taxes, the role of such taxes in other countries, and theory and evidence concerning why people give intergenerational transfers. The next sections examine the incidence, equity, and efficiency of transfer taxes. Subsequent sections cover administrative issues and the effects on saving, labor supply, entrepreneurship, inter vivos gifts, charitable contributions, and capital gains realizations. The paper closes with a discussion of policy options and a short conclusion.
No. 2001-4	Joel Slemrod and Shlomo Yitzhaki, "Integrating Expenditure and Tax Decisions: The Marginal Cost of Funds and the Marginal Benefits of Projects," February 2001.
This paper seeks to clarify the extent to which the rule for providing public goods ought to correct for the distortionary cost of raising funds. We argue that, in evaluating public projects, the marginal cost of funds (MCF) concept must be supplemented by a symmetrical concept, which we label the marginal benefit of public projects, or MBP, which indicates the value to individuals of the dollars spent. Each of these concepts can be decomposed into two separate components, one reflecting efficiency and the other characterizing the distributional impact of the project itself or its financing. We conclude that efficiency of the financing cannot be ignored, that distributional considerations are also relevant, and that the availability and optimality of tax instruments is critical for evaluating the appropriateness of proceeding with a public good-cum financing project. However, one can construct special cases, as in Kaplow (1996), where the simple cost-benefit criterion applies.
No. 2001-3	Wojciech Kopczuk and Joel Slemrod, "Dying to Save Taxes: Evidence from Estate Tax Returns on the Death Elasticity," February 2001.
This paper examines data from U.S. federal tax returns to shed light on whether the timing of death is responsive to its tax consequences. We investigate the temporal pattern of deaths around the time of changes in the estate tax system - periods when living longer, or dying sooner, could significantly affect estate tax liability. We find some evidence that there is a small death elasticity, although we cannot rule out that what we have uncovered is ex post doctoring of the reported date of death. However, the fact that we find that postponement, rather than acceleration, of death is more likely to occur suggests that this phenomenon is at last partly a real (albeit timing) response to taxation.
No. 2001-2	Alan J. Auerbach and James R. Hines Jr., "Perfect Taxation with Imperfect Competition," February 2001.
This paper analyzes features of perfect taxation - also known as optimal taxation - when one or more private markets is imperfectly competitive. Governments with perfect information and access to lump-sum taxes can provide corrective subsidies that render outcomes efficient in the presence of imperfect competition. Relaxing either of these two conditions removes the government's ability to support efficient resource allocation and changes the perfect policy response. When governments cannot use lump-sum taxes, perfect tax policies represent compromises between the benefits of subsidizing output in the imperfectly competitive sectors of the economy and the costs of imposing higher taxes elsewhere. This tradeoff is formally identical for ad valorem and specific taxes, even though ad valorem taxation is welfare superior to specific taxation in the presence of imperfect competition. When governments have uncertain knowledge of the degree of competition in product markets, perfect corrective tax policy is generally of smaller magnitude than that when the degree of competition is known with certainty.
No. 2001-1	Mihir A. Desai and James R. Hines Jr., "Exchange Rates and Tax-Based Export Promotion," January 2001.
This paper examines the impact of tax-based export promotion on exchange rates and patterns of trade. The threatened removal of Foreign Sales Corporations (FSCs) due to the 1997 European Union complaint before the World Trade Organization (WTO) is used to identify the adjustment of exchange rates to reduced after-tax margins for American exporters. The evidence indicates that days associated with significant developments in the European complaint are characterized by predicted changes in the value of the U.S. dollar. Additionally, foreign trading relationships with the United States appear to influence currency responses to the possibility of FSC repeal. Exchange rate movements on the date of the initial European complaint indicate that 10 percent greater net trade deficits with the United States are associated with currency appreciations of 0.2 percent against the U.S. dollar. This evidence is consistent with a combination of trade-based exchange rate determination and important effects of U.S. export promotion policies.
No. 2000-12	Mihir A. Desai and James R. Hines Jr., "The Uneasy Marriage of Export Incentives and the Income Tax," October 2000.
This paper investigates the economic impact of tax incentives for American exports. These incentives include a partial tax exemption for export profits (available by routing exports through Foreign Sales Corporations), and the allocation of some export profits to foreign source income for purposes of U.S. taxation. The analysis highlights three important aspects of these policies. First, official figures appear to understate dramatically the tax expenditures associated with some U.S. export incentives. Correctly measured, total export benefits provided through the income tax are equivalent to a one percent ad valorem subsidy. Second, the 1984 imposition of more rigorous requirements for obtaining export subsidies through Foreign Sales Corporations is contemporaneous with a significant change in the pattern of U.S. exports. Estimates imply that the 1984 changes reduced U.S. manufacturing exports by 3.1 percent. Third, there were significant market reactions to the 1997 event in which the European Union charged that U.S. income tax provisions are inconsistent with World Trade Organization rules prohibiting export subsidies. Filing of the European complaint coincides with a 0.1 percent fall in the value of the U.S. dollar and steep drops in the share prices of major American exporters.
No. 2000-11	William G. Gale and Joel Slemrod, "We Tax Dead People," October 2000.
In both 1999 and 2000, the U.S. Congress voted to eliminate the federal estate and gift tax, only to have President Clinton veto the bill. Republican presidential nominee George W. Bush favors eliminating it, as well. Regardless of the outcome of the 2000 election, the intensity of the debate will surely increase, as increasing wealth puts more people at risk of entering its tax net. This paper reviews the history of the estate tax and the state of current law. It then assesses the arguments made against and in favor of the tax in light of economic theory and evidence. It concludes that wealth transfer taxes can play an important role in the U.S. tax system. Although many of the charges leveled against the tax are specious, there is also an important undercurrent of truth. A tax that features effective marginal tax rates of up to 73 per cent with substantial opportunities to shelter assets is likely to be problematic. It remains, however, the most progressive instrument in the federal tax system at a time of growing wealth inequality.
No. 2000-10	David Joulfaian, "Charitable Giving in Life and Death," July 2000.
This paper examines the patterns of charitable giving during life and at death, doing so with a 10-year panel of data of income tax returns and their associated estate tax returns. The findings suggest a strong preference for charitable bequests over lifetime contributions in the case of the very wealthy. In contrast, contributions are the preferred mode of transfers for the less wealthy.
No. 2000-9	Barry W. Johnson, Jacob M. Mikow, and Martha Britton Eller, "Elements of Federal Estate Taxation," July 2000.
This paper begins with a brief history of federal transfer taxation and an overview of current estate tax law, along with estimates of both the revenue generated by the tax and the share of the U.S. decedent population for whom returns are filed. The paper then presents a profile of the estate tax decedent population and contrasts these relatively wealthy decedents with the overall U.S. decedent population. It also provides a detailed description of the types of assets owned by estate tax decedents, the gross estate, and the allowable deductions from gross estate reported.
No. 2000-8	Richard Schmalbeck, "Avoiding Federal Wealth Transfer Taxes," July 2000.
It is widely assumed that federal wealth transfer taxes can be easily avoided. Although the amount of such taxes paid each year -- frequently by very large and presumably well-advised estates -- belies this assumption, there is nevertheless some truth in the idea that avoidance devices exist and are to a considerable degree effective in reducing the size of transfer tax liabilities. This paper explores the major avoidance options currently in use, with short explanations of how each major category of avoidance measures operates, and the costs associated with the various strategies described. The paper addresses marital deduction trusts, insurance trusts, grantor retained annuity trusts (and close relatives), and family partnerships, among others.
No. 2000-7	Jonathan S. Feinstein and Chih-Chin Ho, "Elderly Asset Management and Health: An Empirical Analysis," June 2000.
This paper analyzes asset management by the elderly. The results for gift-giving indicate that at least some elderly are quite planful about estate transfer those that have established trust funds or for which household assets exceed the estate tax filing threshold have a significantly greater propensity to give gifts. The average level of gift-giving is lower for those in poor health, but the marginal effect of increasing wealth on gift-giving is much greater. Income is an important determinant of saving and spend-down and those households that save are also more likely to give gifts. Becoming a widow or widower is associated with a significant increase in the likelihood of spending out of assets and of making gifts.
No. 2000-6	Martha Britton Eller, Brian Erard, and Chih-Chin Ho, "The Magnitude and Determinants of Federal Estate Tax Noncompliance," June 2000.
This paper assesses the magnitude and determinants of estate tax noncompliance. The results suggest that estate tax noncompliance, as a percentage of tax liability, is higher than noncompliance with the individual income tax. The paper performs an econometric analysis of the determinants of estate tax noncompliance, finding that, contrary to popular belief, noncompliance is not limited to the estates of widowed and other unmarried decedents. Controlling for wealth and other factors, the results suggest that a married decedent's return has a similar likelihood of a positive audit assessment to a widowed decedent's return and that the expected magnitude of noncompliance is actually larger.
No. 2000-5	Wojciech Kopczuk and Joel Slemrod, "The Impact of the Estate Tax on the Wealth Accumulation and Avoidance Behavior of Donors," June 2000.
This paper uses estate tax return data from 1916 to 1996 to investigate the impact of the estate tax on reported estates, which reflects the impact of the tax on both wealth accumulation and avoidance. An aggregate measure of reported estates is generally negatively correlated with summary measures of the level of estate taxation, holding constant other influences. More specifically, the paper finds that the tax rate that prevailed at age 45, or ten years before death, is more clearly (negatively) associated with reported estates than the tax rate prevailing at death.
No. 2000-4	James M. Poterba and Scott Weisbenner, "The Distributional Burden of Taxing Estates and Unrealized Capital Gains at the Time of Death," June 2000.
This paper uses data from the Survey of Consumer Finances to estimate the revenue effects of changes in both estate tax provisions and capital gains tax rules. It finds that among those with small estates ($1 million or less), taxing capital gains at death would collect more revenue than the current estate tax from roughly half of the decedents. For those with larger estates, replacing the estate tax with a tax on unrealized gains at death would result in a substantial reduction in total tax payments.
No. 2000-3	John Laitner, "Simulating the Effects on Inequality and Wealth Accumulation of Eliminating the Federal Gift and Estate Tax," June 2000.
This paper employs a neoclassical general equilibrium model to study the effect on steady-state aggregate wealth accumulation and the cross-sectional distribution of wealth of eliminating the U.S. gift and estate tax. Under the assumption that households are altruistic, the model suggests that eliminating the U.S. gift and estate tax leaves the steady-state equilibrium aggregate capital stock virtually unchanged. The degree of inequality in the cross-sectional distribution of wealth would, however, rise slightly.
No. 2000-2	Louis Kaplow, "A Framework for Assessing Estate and Gift Taxation," June 2000.
Arguments for and against various forms of transfer taxation have focused on concerns about the distribution of income and wealth, intergenerational equity, raising revenue, savings incentives, and other economic and philosophical issues. This essay examines the conceptual basis for various arguments for and against the current estate and gift tax regime and proposed alternatives. It also integrates policy analysis of transfer taxation with that of the rest of the tax system, notably, the income tax.
No. 2000-1	James R. Hines Jr. and Adam B. Jaffe, "International Taxation and the Location of Inventive Activity," May 2000.
This paper considers the effect of tax rules on the distribution of inventive activity between the United States and foreign countries. The empirical work analyzes the effect of U.S. tax changes on international patenting by a panel of American multinational firms. American firms differ in the extent to which they were affected by the R&D provisions of the Tax Reform Act of 1986. The evidence indicates that firms for which the after-tax cost of performing R&D in the United States for use abroad rose most rapidly after 1986 exhibit the slowest growth of foreign patenting in subsequent years. This pattern suggests that tax incentives influence subsequent patenting patterns of individual firms, and that foreign and domestic innovative activities are complements at the firm level.
No. 99-5	Julie Berry Cullen, "The Impact of Fiscal Incentives on Student Disability Rates," May 1999.
Student disability rates have grown by over 50 percent over the past two decades and are continuing to rise. Policy discussion has linked this trend to state funding formulas that reward local school districts for identifying additional students with special needs. However, there is little empirical evidence on the role of these fiscal parameters in explaining student disability rates, or, more generally, on the responsiveness of the local program take-up rates to intergovernmental fiscal incentives. In order to estimate the elasticity of student disability rates with respect to the generosity of state reimbursements, I use variation in the state aid generated by serving a disabled student across local school districts in Texas from 1991-92 through 1996-97. The take-up response is identified from sharp changes in the relative treatment of districts of differing wealth that arise from court-mandated changes in the structure of school finance equalization. My central estimates imply that fiscal incentives can explain over 35 percent of the recent growth in student disability rates in Texas. The magnitude of the institutional response varies by district size and enrollment concentration, student race/ethnicity composition, and the level of fiscal constraint.
No. 99-4	James R. Hines Jr., "The Case Against Deferral: A Deferential Reconsideration," May 1999.
The ability to defer home-country taxation of foreign income is widely criticized as encouraging excessive foreign investment. This criticism is based on a model in which the function of deferral is to reallocate a fixed supply of capital between foreign and domestic uses. In realistic situations, however, deferral enhances the value to home countries of inframarginal foreign investment, taxation raises the value of marginal foreign investment, and the tradeoff between foreign and domestic investment need not be one-for-one. Together, these considerations imply that deferring home taxation of foreign income can enhance economic efficiency.
No. 99-3	Joel Slemrod and Jon Bakija, "Does Growing Inequality Reduce Tax Progressivity? Should It?" February 1999.
This paper explores the links between two phenomena of the past two decades: striking increase in the inequality of pre-tax incomes, and the failure of tax-and-transfer progressivity to increase. We emphasize the causal links going from inequality to progressivity, noting that optimal taxation theory predicts that growing inequality should increase progressivity. We discuss public choice alternatives to the optimal progressivity framework. The paper also addresses the opposite causal direction: that it is changes in taxation that have caused an apparent increase in inequality. Finally, we discuss the "non-event-study" offered by the large changes in the distribution of income--with no major tax changes--since 1995, and discuss its implications for the link between progressivity and inequality.
No. 99-2	Joel Slemrod and Wojciech Kopczuk, "The Optimal Elasticity of Taxable Income," November 1998.
The optimal progressivity of the tax system depends inversely on the compensated elasticity of taxable income with respect to the net-of-tax rate. Recent empirical evidence suggests that this elasticity is subject to manipulation by government policy with respect to tax administration and enforcement, as well as the choice of tax policy. This paper formalizes this notion, first in a general model and then in a particular example in which the elasticity of taxable income is determined by how broad the tax base is. In the context of the example, we show that a larger tax base implies a higher optimal degree of progressivity, and vice versa. Moreover, more egalitarian societies will have lower taxable income elasticities. This notion can help explain the pattern of income tax changes and empirical results of the past decade in the United States.
No. 99-1	James R. Hines Jr., "Lessons from Behavioral Responses to International Taxation," February 1999.
This paper considers the impact of international taxation on patterns of foreign direct investment and on the extent of international tax avoidance activity. Recent evidence indicates that taxation significantly influences the location of foreign direct investment, corporate borrowing, transfer pricing, dividend and royalty payments, and R & D performance. Reactions to worldwide tax rate differences, as well as to changes in international tax rules, provide important information concerning the extent to which taxpayers respond to incentives. The generally high degree of responsiveness in turn carries implications for the design of domestic as well as international tax policy.
No. 98-22	Eduardo M. R. A. Engel and James R. Hines Jr., "Understanding Tax Evasion Dynamics," December 1998.
Americans who are caught evading taxes in one year may be audited for prior years. While the IRS does not disclose its method of selecting tax returns for audit, it is widely believed that a taxpayer's probability of being audited is an increasing function of current evasion. Under these circumstances, a rational taxpayer's current evasion is a decreasing function of prior evasion, since, if audited and caught evading this year, the taxpayer may incur penalties for past evasions. The paper presents a model that formalizes this notion, and derives its implications for the responsiveness of individual and aggregate tax evasion to changes in the economic environment. The aggregate behavior of American taxpayers over the 1947-1993 period is consistent with the implications of this model. Specifically, aggregate tax evasion is higher in years in which past evasions are small relative to current tax liabilities -- which is the case when incomes or tax rates rise. Furthermore, aggregate audit-related fines and penalties imposed by the IRS are positively related not only to aggregate current-year evasion but also to evasion in prior years. The estimates imply that the average tax evasion rate in the United States over this period is 42% lower than it would be if taxpayers were unconcerned about retrospective audits.
No. 98-21	James R. Hines Jr., "Three Sides of Harberger Triangles," November 1998.
Harberger triangles are used to calculate the efficiency costs of taxes, government regulations, monopolistic practices, and various other market distortions. This paper considers the historical development of Harberger triangles, the associated theoretical controversies, and the contribution of Harberger triangles to subsequent empirical work and theories of market imperfections. Prior to the publication of Arnold Harberger's papers, economists very rarely estimated deadweight losses. The empirical deadweight loss literature expanded greatly since the 1960s, making such estimation now quite common. Meanwhile, critical evaluation of deadweight loss estimates led to new theories of rent-seeking and other inefficiencies of economies with multiple distortions.
No. 98-20	Joel Slemrod, "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," August 1998.
Because the response of taxable income to the income tax rate captures all of the responses to taxation, it holds the promise of more accurately summarizing the marginal efficiency cost of taxation than a narrower measure of taxpayer response such as the labor supply elasticity. The promise does, though, come with problems and caveats. This paper reviews the key issues in empirically measuring the taxable income elasticity, and in using it to evaluate tax reform. I stress the idea that the taxable income elasticity is a matter of government policy, rather than an immutable parameter, and note the importance of looking for revenue offsets in other tax bases and other time periods.
No. 98-19	James R. Hines Jr., "Nonprofit Business Activity and the Unrelated Business Income Tax," October 1998.
American nonprofit organizations are generally exempt from federal income tax, with the exception that profits earned from activities that are "unrelated" to exempt purposes are subject to the Unrelated Business Income Tax (UBIT). The UBIT is intended to prevent "unfair" competition between tax-exempt nonprofits and taxable for-profit firms, and also to prevent erosion of the federal tax base through tax-motivated transactions between taxable and tax-exempt entities. The evidence indicates that American nonprofit organizations engage in very little unrelated business activity, paying aggregate UBIT of less than $200 million annually. Large nonprofit organizations, and those with pressing financial needs due to high program-related expenses and low receipts of contributions and government grants, are the most likely to have unrelated business income. The same organizational characteristics are not associated with earning income from inventory sales that are "related" to exempt purposes. This evidence suggests that nonprofits incur important organizational costs in undertaking unrelated business activity, since unrelated business income is concentrated among organizations facing the strongest financial pressures. This, in turn, carries implications for the efficiency of the UBIT as a source of tax revenue and for the need to tax the business income of nonprofit organizations in order to prevent "unfair" competition.
No. 98-18	James R. Hines Jr., "'Tax Sparing' and Direct Investment in Developing Countries," August 1998.
This paper analyzes the effect of "tax sparing" on the location and performance of foreign direct investment (FDI). "Tax sparing" is the practice of adjusting home country taxation of foreign investment income to permit investors to receive the full benefits of host country tax reductions. For example, Japanese firms investing in countries with whom Japan has "tax sparing" agreements are entitled to claim foreign tax credits for income taxes that they would have paid to foreign governments in the absence of tax holidays and other special abatements. Most high-income capital-exporting countries grant "tax sparing" for FDI in developing countries, while the United States does not. Comparisons of Japanese and American investment patterns reveal that the volume of Japanese FDI located in countries with whom Japan has "tax sparing" agreements is 1.4-2.4 times larger than it would have been otherwise. In addition, Japanese firms are subject to 23% lower tax rates than are their American counterparts in countries with whom Japan has "tax sparing" agreements. Similar patterns appear when "tax sparing" agreements with the United Kingdom are used as instruments for Japanese "tax sparing" agreements. This evidence suggests that "tax sparing" influences the level and location of foreign direct investment and the willingness of foreign governments to offer tax concessions.
No. 98-17	James R. Hines Jr., "Investment Ramifications of Distortionary Tax Subsidies," May 1998.
This paper examines the investment effects of tax subsidies for which some assets and not others are eligible. Distortionary tax subsidies encourage firms to concentrate investments in tax-favored assets, thereby reducing the expected pre-tax profitability of investment and reducing payoffs to bondholders in the event of default. Anticipation of asset substitution makes borrowing more expensive, which in turn discourages investment. Borrowing rates react so strongly that aggregate investment may rise very little, or even fall, in response to higher tax credits. Observed positive corporate bond market reactions to events surrounding passage of the U.S. Tax Reform Act of 1986 are consistent with the model's implications.
No. 98-16	Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey S. Rosen, "Entrepreneurs, Income Taxes, and Investment," December 1997.
This paper investigates the effect of entrepreneurs' personal income tax situations on their capital investment decisions. It examines the income tax returns of a sample of sole proprietors before and after the Tax Reform Act of 1986, and determines how the substantial reductions in marginal tax rates for the relatively affluent associated with that law affected their decisions to invest in physical capital. The authors find that individual income taxes exert a statistically and quantitatively significant influence on investment decisions: a 5 percentage point increase in marginal tax rates is estimated to reduce the proportion of entrepreneurs who make new capital investments by 10.4 percent, and decrease mean investment expenditures by 9.9 percent.
No. 98-15	Gerald E. Auten, Charles T. Clotfelter, and Richard L. Schmalbeck, "Taxes and Philanthropy Among the Wealthy," December 1997.
The Auten-Clotfelter-Schmalbeck paper investigates the environment of the rich as it relates to contributions, both during life and in bequests, and reconsiders the magnitude of the permanent and transitory effect on giving of income tax deductibility. Based on analysis of panel data from 1979 to 1990, they conclude that taxes do have a permanent effect on the level of giving by the rich, although it is not as large as that implied by a number of previous studies. The other consequence of the current tax system is complexity: as a result of high rates of tax and serpentine provisions, the wealthy engage in much more elaborate arrangements associated with their charitable donations, at the cost of valuable human resources.
No. 98-14	James Alm and Sally Wallace, "Are the Rich Different?" October 1997.
Alm-Wallace examine whether the rich are more or less responsive to changes in taxes than other individuals. Based on "difference-in difference" analysis of cross-sectional tax return data from 1984, 1989, and 1994, they conclude that the rich are different from the rest of us, but also that the rich are different from each other, and that they are different now from what they were a decade ago. The differential responses are due largely to the greater control and flexibility of the rich in overall financial matters and, especially, in the forms of their compensation.
No. 98-13	Alan J. Auerbach, Leonard E. Burman, and Jonathan M. Siegel, "Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data," December 1997.
Auerbach-Burman-Siegel investigate to what extent high-income individuals utilize sophisticated strategies to avoid taxes on capital gains and to generate capital losses to offset ordinary income. Based on an analysis of a panel data set that tracks every capital gains realization of a large number of high-income individuals from 1985 to 1994, they conclude that this kind of avoidance is not prevalent, even after passage of tax reform, and that most high-income people realize gains that are not sheltered by losses. However, they do find evidence that tax avoidance increased after 1986, especially for high-income, high-wealth taxpayers.
No. 98-12	Christopher D. Carroll, "Why Do the Rich Save So Much?" December 1997.
This paper considers several alternative explanations for the fact that households with higher levels of lifetime income have higher lifetime saving rates. The paper argues that the saving behavior of the richest households cannot be explained by models in which the only purpose of wealth accumulation is to finance future consumption, either their own or that of their heirs. The paper concludes that the simplest model that explains the relevant facts is one in which either consumers regard the accumulation of wealth as an end in itself, or unspent wealth yields a flow of services (such as power or social status) which have the same practical effect on behavior as if wealth were intrinsically desirable.
No. 98-11	James Poterba, "The Estate Tax and After-Tax Investment Returns," December 1997.
This paper explores the effect of estate and gift taxes on the after-tax rate of return earned by savers. The estate tax can be viewed as a tax on capital income, with the effective rate depending on the statutory tax rate as well as the potential taxpayer's mortality risk. Because mortality rates rise with age, the effective estate tax burden is therefore greater for older than for younger individuals. The estate tax adds approximately 0.3 percentage points to the average tax burden on capital income for households headed by individuals between the ages of 50 and 59. For households headed by individuals between the ages of 70 and 79, however, the estate tax increases the tax burden on capital income by approximately 3 percentage points. The paper also concludes that actual levels of inter vivos giving are much lower than the levels that one would expect if households were taking full advantage of this estate tax avoidance strategy.
No. 98-10	Andrew Samwick, "Portfolio Responses to Taxation: Evidence from the End of the Rainbow," December 1997.
This paper uses comprehensive wealth data from the Surveys of Consumer Finances to analyze the effects of recent tax changes on the portfolio holdings of households, particularly those at the top of the wealth distribution. Although marginal tax rates are shown to have explanatory power for cross-sectional differences in portfolio allocations, the role of tax changes in determining the observed changes in household portfolios relative to the market portfolio over time is more limited. Evidence on the changes in portfolio allocations by marginal tax rate also fails to support an important time-series role for marginal tax rates.
No. 98-9	Roger H. Gordon and Joel Slemrod, "Are 'Real' Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?" December 1997.
Gordon-Slemrod investigate to what extent the difference between the corporation income tax rate and personal income tax rates cause shifting of income between the two bases, affecting the interpretation of both reported corporate rates of return and changes in the concentration of personal income. Analysis of the patterns of corporate rates of return and labor income receipts do suggest the presence of income shifting. The potential importance of income shifting requires a reinterpretation of both the efficiency and distributional consequences of changes in the tax system.
No. 98-8	Robert Moffitt and Mark Wilhelm, "Labor Supply Decisions of the Affluent," March 1998.
Moffitt-Wilhelm examine the effect of the 1986 Tax Reform Act on the labor supply of affluent men. The Act reduced marginal tax rates for the affluent more than for other taxpayers. Using instrumental-variables methods with a variety of identifying variables, they find essentially no responsiveness of the hours of work of high-income men to the tax reduction. However, they do find that hourly wage rates of such men to have increased over the period.
No. 98-7	Austan Goolsbee, "It's Not About the Money: Why Natural Experiments Don't Work on the Rich," December 1997.
An influential literature on the effects of marginal tax rates on the behavior of the rich has claimed that the elasticity of taxable income with respect to the net of tax share is very high, possibly exceeding one. To identify this elasticity, these studies have conducted "natural experiments" comparing the rich to other income groups and assuming that they are the same except for changes in their tax rates. This paper tests the natural experiment assumption using alternative data on the compensation of a panel of several thousand corporate executives and finds it clearly to be false. Compared to others, the very rich have incomes which trend upward at a faster rate, are much more sensitive to demand conditions, and have compensation which is much more likely to be in a form whose timing can be shifted in the short run. These three facts may reduce previously estimated elasticities by up to 75 percent or more.
No. 98-6	Edward N. Wolff, "Who Are the Rich? A Demographic Profile of High-Income and High-Wealth Americans," September 1997.
Wolff's paper, which draws primarily on data from the 1992 Survey of Consumer Finances, addresses to what extent the characteristics of the rich differ significantly from those of the general population, and if there have been any changes in these characteristics from 1983 to 1992. Among his conclusions are that there were notable increases in the number of young families in the ranks of the very rich, and that there was no corresponding increase in the educational attainment of the top one percent as ranked by wealth. There was also some evidence that by 1992 entrepreneurial activity played much more of a role in gaining entry to the ranks of the very rich, and that many of the new rich were also more apt than in 1983 to rely on wages and salaries as a source of income.
No. 98-5	Douglas A. Shackelford, "The Tax Environment Facing the Wealthy," September 1997.
Shackelford analyzes the effect of income and transfer taxes on the sources and uses of wealth, in order to estimate the real tax burden on working and saving and the relative prices of certain forms of consumption. After detailing the real burden and avoidance opportunities under the income and estate tax, Shackelford concludes with the assessment that abandonment of income as a tax base and movement to alternative tax systems, e.g., consumption taxes, probably is the only realistic means of remedying the avoidance opportunities provided by income tax realization, and that any tax system built on income will have inherent avoidance opportunities depending on the triggering device for determining income.
No. 98-4	Robert H. Frank, "Progressive Taxation and the Incentive Problem," September 1997.
This paper questions the conventional wisdom about the tradeoff between equity and efficiency, and concludes with the suggestion that the very same tax policies that promote equity may also promote efficiency. This idea is based on two assumptions: that monetary rewards in many of the top-paying occupations depend on relative, in addition to absolute performance; and that people care not just about absolute but also about relative consumption.
No. 98-3	W. Elliot Brownlee, "Historical Perspective on U.S. Tax Policy Toward the Rich," December 1997.
Brownlee reviews the history of the U.S. income tax and attempts to resolve an apparent conflict within the twentieth century American tax code: the existence of on the one hand sharply progressive personal and corporate income rates, a highly progressive system of estate and gift taxation, and an income tax that has generally taxed capital income at higher rates than "earned" income, and on the other hand a wide variety of "tax expenditures," many of which served to reduce the progressivity of the tax system.
No. 98-2	Joel Slemrod, "The Economics of Taxing the Rich," February 1998.
How much and how to tax high-income individuals is at the core of many recent proposals for incremental as well as fundamental tax reform. This overview piece for the conference critically reviews the economics literature and argues that the right answers to those questions depend in part on value judgements to which economic analysis has little to contribute, but they also depend on standard economic concerns such as the process generating income and wealth, and whether wealthy individuals' economic activities generate positive externalities. How much and how to tax the rich also depend critically on how the rich will respond to attempts to tax them because, other things equal, it is wise to limit the extent to which they are induced to pursue less socially productive activities in order to avoid taxes.
No. 98-1	James R. Hines Jr., "What Is Benefit Taxation?" February 1998.
Benefit taxation is a system in which individuals are taxed according to the benefits they receive from public expenditures. This paper describes an alternative to the standard Lindahl method of determining the distribution of individual benefits from government-provided public goods, and uses this alternative to calculate benefit taxes. This new method of benefit taxation avoids some of the paradoxical features of Lindahl pricing, and generates outcomes in which all consumers benefit (or at least none are made worse off) from reduced costs of providing public goods. An illustrative calculation shows that benefit taxes defined in this way may be quite regressive.
No. 97-4	Mihir A. Desai and James R. Hines Jr., "'Basket' Cases: International Joint Ventures After the Tax Reform Act of 1986," July 1997.
This paper examines the impact of the Tax Reform Act of 1986 (TRA) on international joint ventures by American firms. The evidence suggests that the TRA had a significant effect on the organizational form of U.S. business activity abroad. The TRA mandates the use of separate "baskets" in calculating foreign tax credits on income received from foreign corporations owned 50 percent or less by Americans. This limitation on worldwide averaging greatly reduces the attractiveness of joint ventures to American investors, particularly ventures in low-tax foreign countries. Aggregate data indicate that U.S. participation in international joint ventures fell sharply after 1986. The decline in U.S. joint venture activity is most pronounced in low-tax countries, which is consistent with the incentives created by the TRA. Moreover, joint ventures in low-tax countries use more debt and pay greater royalties to their U.S. parents after 1986, which reflects their incentives to economize on dividend payments.
No. 97-3	James R. Hines Jr., "Taxed Avoidance: American Participation in Unsanctioned International Boycotts," October 1997.
American firms are subject to tax and civil penalties for participating in international boycotts (other than those sanctioned by the U.S. government). These penalties apply primarily to American companies that cooperate with the Arab League's boycott of Israel. The effectiveness of U.S. antiboycott legislation is reflected in the fact that American firms comply with only 30 percent of the 10,000 boycott requests they receive annually. The cross-sectional pattern is informative: the U.S. tax penalty for boycott participation is an increasing function of foreign tax rates, and reported compliance rates vary inversely with tax rates. Tax rate differences of 10 percent are associated with 6 percent differences in rates of compliance with boycott requests. This evidence suggests that U.S. antiboycott legislation significantly reduces the willingness of American firms to participate in the boycott of Israel, lowering boycott participation rates by as much as 15-30 percent.
No. 97-2	Mihir A. Desai and James R. Hines Jr., "Excess Capital Flows and the Burden of Inflation in Open Economies," July 1997.
This paper estimates the efficiency consequences of interactions between nominal tax systems and inflation in open economies. Domestic inflation changes after-tax real interest rates at home and abroad, thereby stimulating international capital movement and influencing domestic and foreign tax receipts, saving, and investment. The efficiency costs of inflation-induced international capital reallocations are typically much larger than those that accompany inflation in closed economies, even if capital is imperfectly mobile internationally. Differences between inflation rates are responsible for international capital movements and accompanying deadweight losses, suggesting that international monetary coordination has the potential to reduce the inefficiencies associated with inflation-induced capital movements.
No. 97-1	Joel Slemrod, "Measuring Taxpayer Burden and Attitudes for Large Corporations: 1996 and 1992 Survey Results," March 1997.
This paper presents evidence from two surveys, conducted in 1992 and 1996, of large corporations in the United States concerning their cost of complying with federal and subfederal income taxes. It also investigates the attitudes of corporate tax officers concerning their interactions with the members of the IRS examination team, the appeals and litigation process and the head office and national office attorneys.
No. 95-3	Harry Grubert and T. Scott Newlon, "The International Implications of Consumption Tax Proposals," September 1995.
This paper argues that, contrary to the general view, a shift from an income tax to a consumption tax could either decrease or increase the U.S. capital stock because, although equity capital would likely flow into the U.S., debt capital might flow out. It accepts that a consumption tax would permit substantial simplification of existing international tax rules, but notes that it would create some new administrative and compliance issues. The paper also compares destination basis taxes, in which there are adjustments at the border, with origin basis taxes, with regard to their effect on trade, the location of investment, transition incidence, and compliance problems.
No. 95-2	Alan L. Feld, "Living with the Flat Tax," September 1995.
This paper examines the implementation problems associated with the Hall-Rabushka flat tax, which is similar to the plan championed by House Majority leader Dick Armey and Republican presidential candidate Steve Forbes. It argues that the tax would eliminate at least four features of the current income tax system that create complexity: bracket arbitrage, recovery of investment over different time periods, the capital gains-ordinary income distinction, and arbitrage between different accounting systems. Other causes of complexity would remain, though, and some new distinctions introduced by the flat tax would require new statutory solutions.
No. 95-1	Martin D. Ginsburg, "Life Under a Personal Consumption Tax, Some Thoughts on Working, Saving, and Consuming in Nunn-Domenici's Tax World," September 1995.
This paper examines the implementation problems associated with the USA tax, which combines a broad-based graduated personal consumption tax with a subtraction-method value-added tax on business entities. It concludes that the tax is riddled with inconsistencies, and would induce socially costly avoidance activities. It does not, though, condemn the personal consumption tax model out of hand, arguing that such a tax, which includes borrowed amounts in the tax base but does not hold the recovery of pre-enactment basis hostage to taxpayers' post-enactment conduct, will perform better than the USA plan.
No. 94-1	Joel Slemrod, Carl Hansen and Roger Procter, "The Seesaw Principle in International Tax Policy," April 1994.

No. 93-11	Joel Slemrod and Marsha Blumenthal, "The Income Tax Compliance Cost of Business," July 1993.

No. 93-10	Joel Slemrod, Tax Progressivity and Income Inequality: Introduction, May 1993.

No. 93-9	Richard A. Musgrave, "Progressive Taxation, Equity and Tax Design," January 1993.

No. 93-8	Steven M. Sheffrin, "Perceptions of Fairness in the Crucible of Tax Policy," October 1992.

No. 93-7	Michael Haliassos and Andrew B. Lyon, "Progressivity of Capital Gains Taxation with Optimal Portfolio Selection," March 1993.

No. 93-6	John Karl Scholz, "Tax Progressivity and Household Portfolios: Descriptive Evidence from the Surveys of Consumer Finances," May 1993.

No. 93-5	Joel Slemrod, "On the High-Income Laffer Curve," March 1993.

No. 93-4	Robert K. Triest, "The Efficiency Cost of Increased Progressivity," January 1993.

No. 93-3	Lynn A. Karoly, "Trends in Income Inequality: The Impact of, and Implications for, Tax Policy," January 1993.

No. 93-2	Gilbert E. Metcalf, "The Lifetime Incidence of State and Local Taxes: Measuring Changes During the 1980s," January 1993.

No. 93-1	Richard Kasten, Frank Sammartino, and Eric Toder, "Trends in Federal Tax Progressivity: 1980-1993," January 1993.

No. 90-18	Charles H. Berry, David F. Bradford, and James R. Hines, Jr., "Arm's Length Pricing -- Some Economic Perspectives," September 1991.

No. 90-17	Stanley Langbein, "A Modified Fractional Apportionment Proposal For Tax Transfer Pricing," September 1991.

No. 90-16	Bibliography on Tax Compliance and Tax Law Enforcement, December 1990.

No. 90-15	Michelle J. White, "Why Are Taxes So Complex and Who Benefits?," December 1989.

No. 90-14	Susan Chaplinsky and Greg Niehaus, "The Tax and Distributional Effects of Leverages ESOPs," October 1989.

No. 90-13	Jeffrey K. MacKie-Mason, "Do Firms Care Who Provides Their Financing?," February 1990.

No. 90-12	Jeffrey K. MacKie-Mason, "Some Nonlinear Tax Effects on Asset Values and Investment Decisions Under Uncertainty," December 1989.

No. 90-11	Jeffrey K. MacKie-Mason, "Do Taxes Affect Corporate Financing Decisions?," November 1989.

No. 90-10	Henry J. Aaron, "Lessons for Tax Reform," November 1989.

No. 90-9	John Whalley, "Foreign Responses to U.S. Tax Reform," December 1989.

No. 90-8	Paul N. Courant and Edward M. Gramlich, "The Impact of TRA on State and Local Fiscal Behavior," November 1989.

No. 90-7	Charles T. Clotfelter, "The Impact of Tax Reform on Charitable Giving: A 1989 Perspective," December 1989.

No. 90-6	Joel Slemrod, "The Impact of the Tax Reform Act of 1986 on Foreign Direct Investment to and from the United States," December 1989.

No. 90-5	James M. Poterba, "Taxation and Housing Markets: Preliminary Evidence on the Effects of Recent Tax Reforms," December 1989.

No. 90-4	Roger H. Gordon and Jeffrey K. MacKie-Mason, "Effects of the Tax Reform Act of 1986 on Corporate Financial Policy and Organizational Form," December 1989.

No. 90-3	Jonathan Skinner and Daniel Feenberg, "The Impact of the 1986 Tax Reform Act on Personal Saving," November 1989.

No. 90-2	Alan J. Auerbach and Kevin Hassett, "Investment, Tax Policy and the Tax Reform Act of 1986," December 1989.

No. 90-1	Joel Slemrod, "Do Taxes Matter?: The Economic Impact of the Tax Reform Act of 1986," January 1990.

Office of Tax Policy Research Working Papers can be obtained by sending $5 per paper to the address below. Limited quantities are free to academics, journalists, and government staff.

Office of Tax Policy Research
University of Michigan Business School
701 Tappan Street, Room A2120D
Ann Arbor, MI 48109-1234

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