Taxing Hidden Wealth: The Consequences of U.S. Enforcement Initiatives on Evasive Foreign Accounts (with Niels Johannesen, Patrick Langetieg, Daniel Reck and Joel Slemrod), American Economic Journal: Economic Policy, 2020, 12(3): 312-346. [Online Appendix]

In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. This paper uses administrative microdata to examine the impact of enforcement efforts on taxpayers’ reporting of offshore accounts and income. We find that enforcement caused approximately 50,000 individuals to disclose offshore accounts with a combined value of about $100 billion. Most disclosures happened outside offshore voluntary disclosure programs, by individuals who never admitted prior noncompliance. Disclosed accounts were concentrated in countries often characterized as tax havens. Enforcement-driven disclosures increased annual reported capital income by $2-$4 billion, corresponding to $0.6-$1.2 billion in additional tax revenue.

  • referenced in testimony before the U.S. Permanent Subcommittee on Government Operations. [NBER digest]

Working Papers

Does Taxing Business Owners Affect Employees? Evidence from a Change in the Top Marginal Tax Rate

This paper analyzes the role of the firm in mediating responses to income taxation. The majority of business income in the United States is earned by pass-through entities. I study how a recent increase in the top marginal personal income tax rate faced by pass-through business owners affected the compensation of their employees. I use a new linked owner-firm-employee dataset and panel difference-in-differences methods to compare the earnings of employees in similar firms, but whose owners were differentially exposed to the tax change. I estimate that approximately 18 cents per dollar of new tax liability was passed through to employee earnings. This resulted from lower earnings growth among employees attached to their firms, not compositional changes in employment. The results show behavioral responses to the business income taxation embedded in the personal income tax system and imply that the incidence of the personal income tax was not fully borne by those directly subject to the tax change.

Tax Evasion at the Top of the Income Distribution: Theory and Evidence (with John Guyton, Patrick Langetieg, Daniel Reck and Gabriel Zucman), NBER working paper #28542, March 2021.

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.

Independent Contractors in the U.S.: New Trends from 15 years of Administrative Tax Data, with Katie Lim, Alicia Miller and Eleanor Wilking

There is growing interest among policy makers and researchers in measuring the prevalence of independent contractors (ICs), partially due to concern that these workers do not enjoy the benefits provided to employees. However, identifying IC income is difficult because most existing datasets do not track it. We make two contributions to understanding changing patterns of IC income receipt. First, we translate the legal concept of an IC relationship into one that can be used to identify these relationships in tax data. Second, we use those data to establish several new empirical facts about individuals who receive IC income and the firms that contract them. We find that the share of workers with IC income has grown by 1.5 percentage points, or 22 percent, since 2001, pre-dating the rise of the gig economy and in line with previous estimates of IC growth. Independent contractor income receipt and its growth are not evenly distributed across workers. The largest share of workers with IC income are those in the top quartile of earnings who primarily receive wage income. But the fastest growing group are those in the bottom quartile of earnings who primarily receive IC income. Women saw more growth in IC income receipt than men, and smaller firms saw more growth in IC labor usage than larger firms. Together, these trends suggest that the long-run growth in IC labor in the U.S. cannot solely be attributed to individuals seeking supplemental income, or to the rise of a few online platform firms, but may represent a structural shift in the labor market, particularly for women.

Selected Work in Progress

The (Offshore) World According to FATCA, with John Guyton, Niels Johannesen, Patrick Langetieg, Daniel Reck, Joel Slemrod and William Strang

Incidence of the Minimum Wage, with Nirupama Rao

Taxation of Innovation and Innovators, with Joel Slemrod and Stefanie Stantcheva