Firm Responses to Tax Incentives: Theory, Evidence, and Estimation
Paper Session
Saturday, Jan. 4, 2025 10:15 AM - 12:15 PM (PST)
- Chair: Dmitry Taubinsky, University of California-Berkeley
Who Benefits from Payroll Tax Cuts? Market Power, Tax Incidence and Efficiency
Abstract
This paper focuses on the role of market power to study a historically large payroll tax cut that affects a subset of Brazilian firms. Difference-in-differences estimates based on plausibly exogenous legal variation indicate that the payroll tax reduction causes an increase in employment, wages, and profits, while capital decreases. Responses are substantially more pronounced among small firms, which are estimated to possess less market power. Two-thirds of the employment effect arises from plant size expansion and one-third from input substitution. Reduced-form estimates reveal that consumers pay 75% of payroll taxes, firm owners 11%, and workers 14%. Estimates of a monopsonistically competitive model of factor demand suggest that a targeted alternative tax policy focusing on small firms could amplify the efficiency gains of the tax cut by 36% and enhance workers' welfare gains by 95%. These results establish that market power not only mitigates the distortionary costs of taxation but also redistributes the tax burden from workers to firm owners and consumers.Diffuse Bunching with Frictions: Theory and Estimation
Abstract
We incorporate a model of frictions into the bunching-based elasticity estimator to ra- tionalize diffuse bunching around kinks and mass above notches in empirical distributions. Model agents draw a sparse set of opportunities from a Poisson process, approximating a broad class of frictions including search costs, inattention, and lumpy adjustment; the pre- dicted density depends on the standard structural elasticity and a money-metric “lumpi- ness parameter.” We estimate the model using administrative tax data on South African small-businesses, recovering moderate elasticities of taxable income between 0.2 and 0.3 at higher incomes, and larger elasticities at low incomes. Firms appear to treat the bot- tom kink as a notch, and firms with paid tax practitioners exhibit sharper bunching, driven primarily by lower frictions rather than a higher elasticity.Tax Planning and Multinational Behavior
Abstract
We study the adoption and use of sophisticated forms of tax planning by US multinational corporations (MNCs). Using IRS data, we identify ``hybrid'' tax planning structures (HTPs) which can be used to avoid corporate income tax by targeting mismatches between US and Irish, Dutch, and Luxembourgish tax law. By 2016, more than 35% of the foreign profits of US MNCs were linked to HTPs. Difference-in-differences models comparing adopting and non-adopting MNCs reveal that after HTP adoption, MNCs intensify behaviors related to profit shifting, significantly increasing related-party loans, foreign intangible assets, and profits held abroad. These changes result in stark reductions in foreign effective tax rates. Adopting MNCs also experience larger increases in foreign tangible assets and in global R&D, payroll, and investment. Finally, we develop and estimate a model that rationalizes the selection of MNCs into HTPs and their changes in economic activity.JEL Classifications
- H0 - General
- H3 - Fiscal Policies and Behavior of Economic Agents