Optimal deductibility: Theory, and evidence from a bunching decomposition
I define a new tax instrument, the 'deductibility rate', which specifies the proportion of eligible expenses a taxpayer may deduct when preparing her taxes. If the utilities of gross income and deductions are separable, then the deduction elasticity reflects the revenue leakage caused by greater deductibility. To identify this elasticity, I develop the first method to decompose bunching in taxable income into its constituent parts, exploiting the removal of a notch in the tax schedule. This setting also generates an observed counterfactual density, obviating the parametric assumptions routinely made in bunching studies. Applying this method to new administrative tax data from Australia, I find that while deductions account for just 5% of taxable income, they account for 35% of the response of taxable income to the tax rate. Based on an elasticity of taxable income of 0.06, the deduction elasticity is -0.45, and the gross-income elasticity is 0.04. Consistent with standard optimal-tax logic, the sensitivity of deductions to the tax rate suggests that restricting deductions could raise welfare.
A propensity-score reweighting correction for manipulation bias in regression-discontinuity designs
Manipulation of the running variable can invalidate the use of a regression-discontinuity (RD) design. Many settings in which a RD design would otherwise be appropriate offer a comparison group for which the treatment status does not change at the threshold. I devise a propensity-score reweighting method to correct for bias resulting from manipulation, exploiting information about the comparison group under ‘manipulation-on-observed-variables’ and common-support assumptions. I assess the method in a simulation exercise, and use the method to estimate the effect of an Australian health insurance levy, which applies beyond a certain income to the uninsured, and is subject to manipulation by those seeking to avoid the penalty.
United we evade: A theory of tax evasion under third-party reporting
Download: Short slides (2016 NTA conference)
When a tax authority requires reports from third parties about a taxable transaction, the reporters must collude if evasion is to be feasible. Third-party reporting is effective as an enforcement tool only insofar as such collusion does not occur. Under what conditions is a third-party reporting regime robust to collusion between reporters? I find that the deterrence effect of third-party reporting increases with the number of reporters per transaction, with uncertainty about the other reports, and with the number of related transactions in which there is underreporting. For each transaction, there is a maximum number of related transactions beyond which evasion is infeasible. This is consistent with observations that there is virtually no underreporting of wage and salary income due to the ubiquity of large firms as reporters.
Works in progress
Bunching estimation of the elasticity of taxable income with an observed counterfactual
Bunching estimates of the elasticity of taxable income (ETI) rely on (and can be highly sensitive to) a functional-form assumption for the counterfactual taxable-income density. When a counterfactual is not observed, these methods rely first on identifying ocularly the point of divergence of the actual and unobserved counterfactual densities below the threshold. The point of convergence above the threshold is then varied, given a functional form assumption, to equate the excess mass below the threshold and the missing mass above. Exploiting a large change between years in the threshold of a notch in the Australian personal income tax schedule, which generates an observed counterfactual density, I assess the performance of the widely used bunching method, and uncover systematic underestimation of the ETI due to, among other things, the ocular choice of the divergence point.
Decomposing firm responses to a change in the corporate tax rate: Evidence from Australia
A growing literature is concerned with decomposing the response of firms to a change in the corporate tax rate. In 2012, the Australian government lowered the corporate tax rate only for firms earning less than $2 million of turnover, which gives some firms an incentive to reduce their turnover in order to secure the tax cut. I exploit the universe of Australian corporate tax returns, which has never been used for academic research, to decompose the response of firms to the policy. Comparing firms near the threshold before and after its introduction, and controlling for year-specific effects using a placebo group for which the tax rate never changes, I determine the response of firm turnover, costs, and profits to the policy change. I also investigate the heterogeneity of the response, both in terms of the characteristics of firms that are more likely to respond, and variation among firms in the response.