Published and Forthcoming

Does Taxing Business Owners Affect Employees? Evidence from a Change in the Top Marginal Tax Rate (Accepted, The Quarterly Journal of Economics)

Debates about the taxation of business owners often center on the distributional impacts of these taxes, particularly the degree to which they affect workers. Drawing on a new linked owner-firm-worker dataset created from U.S. administrative tax records, I analyze how an increase in the top marginal tax rate faced by business owners affected the earnings of their employees. I use panel difference-in-differences methods to compare the earnings of workers in similar firms, but whose owners were differentially exposed to the tax increase. I estimate that 11 to 18 cents per dollar of new business income tax liability was passed through to employee earnings. I find no change in employment in response to the tax increase. The responses were generally associated with lower earnings growth, not changes in workforce composition. The burden was not borne equally by all workers. Essentially all of the workers’ share of the burden was borne by those in the top 30% of the earnings distribution, highlighting that the ultimate distributional effects of the policy depend not only the share of the burden borne by workers, but on the shares borne by different types of workers. Further, since the owners bore the majority of the burden, the policy resulted in a decrease in after-tax earnings inequality between top-bracket owners and lower-bracket workers. I discuss the implications of the findings for the mediating labor market mechanisms and for welfare analyses of income taxation using a marginal value of public funds framework.

Trickle-Down Revisited. Forthcoming, Oxford Review of Economic Policy, edited by İrem Güçeri and Joel Slemrod 

In this paper I discuss what can be learned about “trickle-down” ideas from recent empirical evidence on tax incidence, or the effect of tax policies on the distribution of welfare. I underscore three lessons: First, recent research suggests that business income taxes affect the earnings of workers, but these effects largely derive from taxing rents and rent-sharing, highlighting the importance of these channels for determining the ultimate incidence. Second, when workers are affected by these taxes, the burden is not borne equally by all workers, but predominantly by those at the top of the earnings distribution. Third, across different tax policies that statutorily affect the rich, the burden is largely borne by the rich, but heterogeneity in responses across tax incentives and taxpayers provides context for incidence analyses.  Throughout, I discuss the value of analyzing heterogeneous responses, particularly how tax incidence depends on labor markets, product markets and tax systems. 

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.

Working Papers

Tax Evasion at the Top of the Income Distribution: Theory and Evidence (Submitted) (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.

The Offshore World According to FATCA: New Evidence on the Foreign Wealth of U.S. Households, (with John Guyton, Niels Johannesen, Patrick Langetieg, Daniel Reck, Joel Slemrod), NBER working paper #31055, March 2023.

This paper uses account-level information, reported to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA), to produce new evidence on the foreign financial wealth of U.S. households. We find that U.S. taxpayers hold around $4 trillion in foreign accounts, almost half in jurisdictions usually considered tax havens. Combining the FATCA reports with other administrative tax data and tracing account ownership through partnerships, we document a steep income gradient in the propensity to hold assets in foreign financial institutions. Specifically, more than 60% of the individuals in the top 0.01% of the income distribution own foreign accounts, the vast majority in tax havens and more than half through a partnership. We discuss the likely implications of these findings for the overall impact of FATCA on tax compliance and government revenue. 

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

How Do Small Firms Accommodate Minimum Wage Increases?  Evidence from Matched Employer-Employee Tax Returns, with Nirupama Rao (public draft coming soon!) 

Intergenerational Mobility and Housing Wealth in the United States, with Ariel Binder, Kate Pennington and John Voohreis

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