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Publication The Tax Cuts and Jobs Act’s Incorporation “Incentive”(2019-10-28) Knoll, Michael S.; Knoll, Michael S.Many observers have asserted that the reduced corporate tax rate instituted by the 2017 Tax Cuts and Jobs Act (TCJA) has transformed entity choice for business owners, incentivizing owners of businesses structured as sole proprietorships or passthrough entities to incorporate their businesses and to use these new corporations as pocketbook investment vehicles to invest in and hold portfolio investments, substantially reducing wealthy individuals’ tax obligations and Treasury’s tax collections. This brief offers a different view, and discusses why predictions of widespread conversions to the corporate form at a substantial cost to the fiscal position of the U.S. are overstated. The brief explores the various purported tax advantages to incorporating, both when business owners are looking to invest substantial profits in portfolio assets, as well as when retained earnings are reinvested in the business and produce ordinary income.Publication Addressing Personal-Income-Tax Manipulation with Tools from Psychology(2017-10-01) Rees-jones, Alex; Rees-jones, AlexIn order to better understand the tax manipulation decision-making process—both legal uses of tax deductions and illegal tax evasion—this brief looks at the impact of gain/loss framing. Analysis of tax data confirms that tax decisions are influenced by “loss aversion.” For instance, taxpayers are more likely to pursue tax reduction activities when they make a loss smaller, as compared to when they make a gain larger. The brief looks at tools that policymakers have at their disposal for both deterring tax evasion and making exiting tax incentives maximally effective. The brief discusses instances when such gain/loss framing interventions might be deployed, and provides estimates around the size of the revenue responses they may generate. The author estimates that if tax filers who face losses experienced the lower motivation to manipulate shown by those facing gains, annual tax revenue would increase by $1.4 billion. Even attempts at marginal interventions, though smaller in predicted effects, might be financially worthwhile.Publication Ending the R&D Tax Credit Stalemate(2015-04-01) Rao, NirupamaThe 113th Congress extended the research and development (R&D) tax credit through the end of 2014 by passing the Tax Increase Prevention Act (H.R. 5771), which President Obama signed into law on December 19, 2014. That the fate of this credit in 2015 remains unknown is not surprising. This brief explores the history, logistics, and policy implications of the temporary R&D tax credit, and offers recommendations for additional research that would help determine the merit of making the credit permanent. Using new, restricted-access IRS data and an instrumental variables strategy, the brief offers an unbiased estimation of the effectiveness of the R&D tax credit, showing that corporate research intensity—the ratio of R&D spending to sales—is indeed highly sensitive to the tax subsidy rate. When it gets cheaper for firms to spend on qualified R&D, they actually do spend more, as policymakers hope.Publication As American as Apple Inc.: Corporate Ownership and the Fight for Tax Reform(2016-01-01) PPI, Penn Wharton; PPI, Penn WhartonBoth supporters and critics of the current tax advantages enjoyed by U.S. multinational corporations (MNCs) bolster their arguments with appeals to patriotism: the MNCs and their political supporters argue that allowing inversions or other similar arrangements and instituting another tax holiday for “repatriating” overseas earnings are good for the American economy as a whole; opponents condemn these tax advantages as unpatriotic in depriving the U.S. of enormous sums of needed revenue. But where, precisely, is the “home” to which profits held offshore return? For many purposes, home is where the shareholders are. Determining ownership of U.S. MNCs such as Apple and GE, however, is extremely hard to do. Appeals for policies that promote U.S. competitiveness by presuming U.S. ownership of U.S. incorporated parent companies rest, in the end, on very little.Publication Tax Policy and the Dividend Clientele Effect(2013-10-01) Kawano, LauraThe Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) significantly changed tax policy by cutting long-term capital gains tax rates and taxing dividend income at the same rates as long-term capital gains. Following the reduction in the tax disadvantage of dividends, investors gravitated toward dividend-paying investments—especially high-income investors who previously had faced the highest tax rates on dividends. The behavior of investors before and after the passage of JGTRRA suggests that they divide into “clienteles” based on dividend payouts when the tax disadvantage of dividends varies across investors. Policymakers therefore need to build a proper appreciation of investor behavior, particularly among affluent households, into their thinking about any tax reform proposal affecting capital income. If dividend clientele effects are ignored, estimates of the revenue that can generated by changes in capital tax rates will be off-base.Publication Insurance against Extreme Events: Pairing Short-Term Incentives with Long-Term Strategies(2016-10-01) Kunreuther, Howard; Kunreuther, HowardConsumers tend to purchase too little insurance or purchase it too late. Consequently, taxpayers wind up bearing substantial burdens for paying reconstruction costs from extreme events. The 2005 and 2012 hurricane seasons alone cost taxpayers nearly $150 billion. There is much that can be done to better facilitate the role that insurance can play in addressing losses from extreme events, both natural and man-made.Publication Should We Broaden the Fuel Tax Base?(2013-07-01) Marion, JustinCurrently, the rules of fuel taxation in the U.S., like the U.S. tax code more generally, is complex and riddled with inconsistencies. The tax rate applied to carbon-based fuels varies widely depending on the type of fuel, purpose of consumption, and identity of the user. These inconsistencies only invite tax evasion and result in fuel tax revenues that fall short of even covering the costs associated with fuel consumption. Not simply for the sake of environmental policy, but as a matter of deficit reduction, the tax reform concept of base broadening can and should be applied to fuel taxation. Taxing carbon-based fuels more consistently will lead to increased revenues without raising the tax rate. The resultant gain in tax revenue could be as high as $28 billion per year at current levels of fuel consumption.Publication Do Capital Income Taxes Hinder Growth?(2013-02-01) Sanchirico, Chris W; Sanchirico, Chris WOne of the main arguments against raising capital income tax rates is that doing so discourages savings and investment and hinders economic growth. However, academic research on taxes and growth suggests that this argument has no real basis. And the primary alternatives to capital income taxation — labor income taxes and increased government borrowing — carry their own potentially adverse effects on growth. Available for download at http://ssrn.com/author=2205Publication Why Taxing Carbon May Not Make the World More Green(2017-12-01) Netessine, Serguei; Aflaki, SamAlthough taxing carbon is an idea that enjoys significant support among policymakers and business leaders, new research indicates that carbon taxation can actually cause energy investments to gravitate away from the cleanest energy technologies. This counterintuitive finding reflects two key characteristics of energy markets: the worldwide increase in renewable energy sources whose output is intermittent and variable; and greater market liberalization, which has made the spot driving of electricity more volatile. The intermittency of renewable energy sources requires backup generation, typically from generators using fossil fuels. The dynamics of market liberalization amplify this negative effect of intermittency. Policymakers need to take steps to reduce intermittency by supporting storage technologies or setting monetary incentives to increase renewable generation capacity investment.Publication The Potential Effect of Offering Lump Sums in the Social Security Program(2015-11-01) Mitchell, Oliver S; Mitchell, Oliver S; Rogalla, Ralph; Schimetschek, TatjanaNew research reframes the debate about Social Security solvency and moves away from questions of who should bear the greater burden of fixing the system by offering a lump sum payment model as a way to encourage people to delay claiming their Social Security benefits. Under one of the lump sum alternatives presented in this brief, survey participants indicated a willingness to delay claiming Social Security by up to eight months, on average, compared to the status quo, and to continue working for four of them. Delayed claiming would mean additional months or years of Social Security payroll tax contributions, which could modestly improve the program’s solvency.