September 16, 2019

Today’s Economist: Casey B. Mulligan: The Wealthy Keep the Tax Man Guessing

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

Although wealthy people are a small fraction of the population, their behavior is of great practical interest to Treasury officials.

Today’s Economist

Perspectives from expert contributors.

Every year, the United States Treasury receives extraordinary amounts of personal income tax revenue in April as individuals file their returns and reconcile the taxes they owe with the taxes that were withheld from their paychecks during the previous calendar year. Most people do not owe much, if anything, when they file their return but a small group of taxpayers has large balances to settle.

The chart below shows the inflation-adjusted amount of individual income tax receipts by the Treasury in April of each year since 1998, as reported by in the Daily Treasury Statement. The amount has fluctuated wildly, from a low of $122 billion to a high of $235 billion. The standard deviation of these April receipts is $36 billion.

United States Treasury

The general state of the economy in the calendar year helps to predict the amount the Treasury receives in following April. At the same time, additional fluctuations in April receipts derive from the situations and behaviors of a small segment of the population not well represented in the unemployment rate and other measures of the business cycle: the wealthy.

First of all, taxes are withheld less often from asset income like dividends and capital gains than they are withheld from wages. The wealthy receive a larger share of their income from assets than from wages, not to mention that by definition the wealthy have more of both types of income. Second, much of the population does not owe any income tax – let alone owe extra in April – and the wealthy pay a disproportionate share of income taxes.

The wealthy have become an even more important driver of tax revenues in recent history, as an increasing share of the nation’s income has accrued to them. Thomas Piketty and Emmanuel Saez have compiled decades of data for the United States (and other countries). They find, for example, that the very wealthiest of America’s households — the top one-tenth of 1 percent — recently received about one-thirteenth of the nation’s income, while they received only one-fiftieth in the 1960s and 1970s.

The wealthy are sometimes idolized and other times envied, and for these reasons alone their behavior is of interest. But Treasury officials have another reason to stay abreast of the wealthy: their activities are an important determinant of the amount of revenue received by the Treasury, and when it is received.

If you have special insights into how the wealthy behave, consider applying for a job at the Treasury.

Article source: http://economix.blogs.nytimes.com/2013/04/17/the-wealthy-keep-the-tax-man-guessing/?partner=rss&emc=rss

Today’s Economist: Casey B. Mulligan: Earned-Income Ironies

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Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

The “earned income tax credit” is, ironically, more likely to be received by unemployed people than by workers who do not spend any time unemployed.

Today’s Economist

Perspectives from expert contributors.

The credit was created years ago to reduce tax burdens on the poor and to “provide a genuine incentive for working;” a household must have some wage and salary income in order to receive the credit.

However, because the credit is administered on a calendar-year basis and is phased out with calendar-year wages and salaries, it is disproportionately received by people unemployed after a layoff.

As I illustrated in an earlier post, the credit follows a mountain-plateau pattern: an increasing portion for the lowest calendar incomes, a flat portion, a decreasing portion and then a flat portion of zero.

Internal Revenue Service

You might think that unemployed people do not receive the credit because they do not have any wage or salary income, but typically people unemployed from layoff do have wages or salary income during the calendar year of their unemployment from their previous job. Their layoff might have occurred after the beginning of the calendar year. Even a layoff occurring in December of the previous year might generate wage and salary income in the current year because of a severance payment or accumulated sick and vacation pay.

Moreover, an unemployed person might have a spouse with wage and salary income, and the spouse’s income counts toward the credit.

Because unemployment compensation is supposed to be reported on the recipient’s federal individual income tax return, I was able to further investigate this issue by examining a large sample of individual income tax returns for the years 2000-07 provided by the Internal Revenue Service to the National Bureau of Economic Research and other institutions for research purposes.

In 2007, 97 percent of the 7.6 million returns showing unemployment-compensation income (that is, the taxpayer or spouse was unemployed and receiving benefits some time during the calendar year) also had wage and salary income during the year. That percentage was essentially the same in each of the years 2000-06.

Of the same 7.6 million returns with unemployment income in 2007, one quarter received the earned income tax credit. By comparison, the credit was received by only one-sixth of the returns with wage and salary income but no unemployment income.

Among returns with unemployment income, the average earned income tax credit was $486, compared with $347 among the returns with wages but not unemployment income.

For most of the returns with both unemployment income and the earned income tax credit, the credit would have been even greater if the taxpayer had been employed fewer weeks than he or she actually was. Still more returns with unemployment income but no earned income tax credit would have received the credit if the unemployment had lasted longer.

This situation occurs so often because unemployment benefits are based on a person’s weekly work situation while the earned income credit is based on a household’s annual wages and salaries, and because weekly unemployment benefits by themselves are usually less than weekly wages and salaries.

The earned income tax credit is thus a good example of how a so-called tax credit can act like a tax from a working person’s point of view.

Article source: http://economix.blogs.nytimes.com/2013/02/06/earned-income-ironies/?partner=rss&emc=rss