What do Americans think of a 70% marginal tax rate?

You will find more infographics at Statista

Statista: Ocasio-Cortez's Tax Plan Isn't Unprecedented | Statista

You will find more infographics at Statista

Chart: Ocasio-Cortez's Tax Plan Isn't Unprecedented | Statista

New NBER Working Paper: Redistributing the Gains From Trade Through Progressive Taxation

A new working paper from Spencer G. Lyon and Michael E. Waugh  

Abstract:

Should a nation's tax system become more progressive as it opens to trade? Does opening to trade change the benefits of a progressive tax system? We answer these question within a standard incomplete markets model with frictional labor markets and Ricardian trade.  Consistent with empirical evidence, adverse shocks to comparative advantage lead to labor income losses for import-competition-exposed workers; with incomplete markets, these workers are imperfectly insured and experience welfare losses.  A progressive tax system is valuable, as it substitutes for imperfect insurance and redistributes the gains from trade.  However, it also reduces the incentives for labor to reallocate away from comparatively disadvantaged locations.  We find that optimal progressivity should increase with openness to trade with a ten percentage point increase in openness necessitating a five percentage point increase in marginal tax rates for those at the top of the income distribution.

Gated copy available here.

An excellent post by Scott Sumner

One key point that caught my attention:

To summarize, I see little evidence to support the claims of either the Democrats or Republicans. The tax bill is certainly not revolutionary, although it does have some useful reforms. But it also boosts the budget deficit, which is bad for investment. There has been increased regulation in some areas and reduced regulation in others. In addition, there have been no significant moves to slow the growth in overall government spending.

Read the whole blog entry.  Scott Sumner is always worth reading.

Who's holding the most cash outside of the U.S.?

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Is it worth it to compare state sales taxes when making a purchase?

A new National Bureau of Economic Research working paper from Scott R. Baker, Stephanie Johnson and Lorenz Kueng that might underscore the ongoing effects of interstate sales tax competition. 

Abstract:

Using comprehensive high-frequency state and local sales tax data, we show that household spending responds strongly to changes in sales tax rates.  Even though sales taxes are not observed in posted prices and have a wide range of rates and exemptions, households adjust in many dimensions, stocking up on storable goods before taxes rise and increasing online and cross-border shopping.  Interestingly, households adjust spending similarly for both taxable and tax-exempt goods. We embed an inventory problem into a continuous-time consumption-savings model and demonstrate that this seemingly irrational behavior is optimal in the presence of shopping trip fixed costs. The model successfully matches estimated short-run and long-run tax elasticities with a reasonable implied reservation wage of $7-10.  We provide additional empirical evidence in favor of this new shopping-complementarity mechanism.  While our results reject non-salience of sales tax changes, on average, we also show that upcoming tax changes that are more salient prompt larger responses.

The paper, "Shopping for lower state sales tax rates," can be found here. 

The value of the mortgage interest deduction is overstated

A study that should have implications for tax reform. An optimal tax system collects revenue from the broadest base. Economists have long believed that the homeowner mortgage deduction misallocates capital to the housing sector. This new study, "Do People Respond to the Mortage Interest Deduction?: Quasi-Experimental Evidence from Denmark," from Jonathan Gruber, Amalie Jensen and Henrik Kleven finds that prospective homeowners are not swayed by the tax incentive.

Using linked housing and tax records from Denmark combined with a major reform of the mortgage interest deduction in the late 1980s, we carry out the first comprehensive long-term study of how tax subsidies affect housing decisions.  The reform introduced a large and sharp reduction in the mortgage deduction for top-rate taxpayers, while reducing it much less or not at all for lower-rate taxpayers.  We present three main findings.  First, the mortgage deduction has a precisely estimated zero effect on homeownership. This holds even in the very long run.  Second, the mortgage deduction has a sizeable impact on housing demand at the intensive margin, inducing homeowners to buy larger and more expensive houses.  Third, the largest effect of the mortgage deduction is on household financial decisions, inducing them to increase indebtedness. These findings suggest that the mortgage interest deduction distorts the behavior of homeowners at the intensive margin, but is ineffective at promoting homeownership at the extensive margin and any externalities that may be associated with it.

The paper is available at the National Bureau of Economic Research.

John Cochrane makes the case for a progressive value added tax

A thorough blog post by the University of Chicago's John Cochrane on the virtues of a value added tax, tailored for the U.S. 

I’m proposing a VAT and nothing else, and let’s put all the cross-subsidies and mandates on budget where we can see them. If we make it progressive, the highest rates hit levels that would please Piketty. I’m not sure there is a lot more to squeeze out of this! 

Maybe energy taxes are not so regressive after all

A new NBER paper by William A. Pizer and Steven Sexton suggests that energy taxes levied to curb carbon emissions may not be as hard on low income consumers as commonly believed.

Despite popularity among economists for their efficiency, energy pollution taxes enjoy less political support than standards-based regulation because of common perceptions that they burden the poor relative to the rich. However, the literature on pollution tax incidence and consumption surveys in Mexico, the United Kingdom, and the United States, suggest energy taxes need not be as regressive as often assumed. This paper demonstrates that the incidence of such taxes varies according to the energy commodities that are taxed, the physical, social and climatic characteristics of jurisdictions in which they are implemented, and how the revenue is used. It is also shown that the variation in household energy expenditure within income groups is greater than variation across income groups in many cases. These horizontal equity impacts are reviewed, as are their implications for policy making.

Can a carbon tax be progressive?

From Vertical and Horizontal Redistributions from a Carbon Tax and Rebate by Julie Anne Cronin, Don Fullerton, Steven E. Sexton

Abstract: Because electricity is a higher fraction of spending for those with low income, carbon taxes are believed to be regressive. Many argue, however, that their revenues can be used to offset the regressivity. We assess these claims by employing data on 322,000 families in the U.S. Treasury's Distribution Model to study vertical redistributions between rich and poor, as well as horizontal redistributions among families with common incomes but heterogeneous energy intensity of consumption (different home heating and cooling demands). Accounting for the statutory indexing of transfers, and measuring impacts on annual consumption as a proxy for permanent income, we find that the carbon tax burden is progressive, rising across deciles as a fraction of consumption. The rebate of revenue via transfers makes it even more progressive. In every decile, the standard deviation of the change in consumption as a fraction of consumption varies around 1% or 2% and is larger than the average burden (about 0.7%). When existing transfer programs are used to rebate revenue, the tax and rebate together increase that variation to more than 3% within each decile. The average family in the poorest decile gets a net tax cut of about 1% of consumption, but 44% of them get a net tax increase. Relative to no rebate, every type of rebate we consider increases this variation within most deciles.

Link: NBER #23250