Paying Taxes Automatically: Behavioral Effects of Withholding Income Tax (Job Market Paper)
Employers withhold employees' income taxes in nearly all modern tax systems, but the consequences of this arrangement are not well understood. I use IRS administrative data to study how much late payment withholding prevents and why. Exploiting a policy change, I find that withholding reduces late payment substantially. If people pay late because of liquidity constraints, withholding may place harmful limits on their choice to pay late. Yet the liquidity-constraint explanation is inconsistent with evidence that people earning interest income, who are unlikely to be liquidity-constrained, respond just as much to the policy change. Withholding may also help people to avoid the costs and frictions they face when making on-time payments for themselves. Consistent with frictions, I find that late payers make more errors on their tax returns. My findings suggest that withholding both eases the administrative burden of collecting late taxes and benefits taxpayers by making payment automatic.
Heard it through the Grapevine: Direct and Network Effects of a Tax Enforcement Field Experiment (with John Guyton, Ronald R. Hodge II, Joel Slemrod, and Ugo Troiano). NBER Working Paper No. 24305
Download: NBER Working Paper
Tax enforcement may affect both the behavior of those directly treated and of some taxpayers not directly treated but linked via a network to those who are treated. A large-scale randomized field experiment enables us to examine both the direct and network effects of letters and in-person visits on withheld income and payroll tax remittances by at-risk firms. Visited firms remit substantially more tax. Their tax preparers’ other clients also remit slightly more tax, while their subsidiaries remit slightly less. Letters have a much smaller direct effect and no network effects, yet may improve compliance at lower cost.
Real Firms in Tax Systems (with Joel Slemrod). FinanzArchiv: Public Finance Analysis 74(1) (2018), 131-143.
Economic analysis of taxation often assumes a homogeneous, usually perfectly competitive production sector in which individual firms are immaterial. This paper discusses some recent developments bringing key characteristics of real firms into the analysis of tax systems, which include enforcement rules and remittance regimes alongside tax rates and bases. Introducing more realistic firms into the analysis of tax systems has enabled progress in understanding the role of information in tax administration, the tradeoff between production efficiency and minimizing the administrative costs of tax collection, the consequences of remittance responsibility, and the fundamental role of firm heterogeneity in tax incidence.
Work in Progress
Norderfriedrichskoog! Tax Havens, Tax Competition and the Introduction of a Minimum Tax Rate (with Joel Slemrod and Robert Ullmann)
German municipalities levy local business taxes (Gewerbesteuer) by choosing a tax rate to apply to local reported business income, where tax base is defined uniformly on a national level. Prior to the federal government's imposition of a minimum tax rate in 2004, some municipalities, such as the tiny North Sea town of Norderfriedrichskoog, chose to act as tax havens by setting a tax rate of zero. We combine administrative microdata from firm tax returns with information at the municipality level to study the choice to become a tax haven; the extent to which havens attracted income from other municipalities before and after the introduction of a minimum tax rate; and how introducing a minimum tax rate affected the tax competition equilibrium among non-haven countries. Evidence suggests that income was shifted into haven municipalities both before and after the introduction of the minimum tax rate. Preliminary findings also indicate that the mandated increase in havens’ tax rates did not lead to rate increases (or decreases) among either municipalities in general or tax haven municipalities’ geographic neighbors. In contrast to the literature on global business tax competition, our preferred specifications, which leverage the minimum tax rate imposition for identification, find no evidence of competition in business tax rates. We find that tax havens largely do not affect the business tax rates set by non-havens, suggesting that a global minimum tax rate applied only to international tax havens would have little effect on tax competition of non-haven countries.
Tax Enforcement, Cash Availability, and Small Firms' Operations: Evidence From a Randomized Tax Enforcement Experiment
This paper uses variation from a randomized experiment to study the effect of tax enforcement and cash flow on small firms' operations. Firms depositing declining amounts of payroll and income taxes were randomly assigned to receive an in-person contact, a letter, or no contact. Contacted firms remit much more tax. Tax enforcement may affect firms' operations both by changing firms' perceptions about the probability that evasion will be detected and by reducing the cash available to finance operations net of taxes remitted. I use a difference-in-difference approach to study the effect of enforcement and the resulting reduction in available cash on firm hiring, revenue, and continued operations. I then use a model to bound the effect through the tax enforcement channel and estimate the effect of the shock to available cash.