Nada, Eissa and Giertz, Seth (2006): Trends in High Incomes and Behavioral Responses to Taxation: Evidence from Executive Compensation and Statistics of Income Data.
Download (1MB) | Preview
This paper examines income trends from 1992 to 2004 and the responsiveness of different income measures to tax changes for corporate executives and for the very highest income U.S. taxpayers. We detail the growth in executive compensation and break down the components of that growth by sources, such as the value of options and stock grants, as well as bonus income. We then examine income trends at various points in the income distribution for executives and for all taxpayers. An empirical strategy similar to that employed by Goolsbee (2000) is then used to examine the responsiveness to tax rates of broad measures as well as individual sources of executive compensation. Additionally, we investigate the impact of marginal tax rates applying to corporate income, personal income, and capital gains on the composition of executive compensation.
Consistent with other studies, we find that most of the growth and volatility in incomes has been concentrated within the top one percent of taxpayers, for whom income grew sharply between 1992 and 2000, and then declined sharply from 2000 to 2002. Below the top one percent, income patterns are much more stable. Income patterns for executives are similar to, but more volatile than, those for the very highest income taxpayers. Salary income of executives has been relatively stable, while the value of their stock options, stock grants, and bonuses has grown tremendously.
We use data from two sources: a panel of executives and IRS tax returns from the Statistics of Income. Our elasticity estimates based on the panel of executives may be more reliable than those based on the tax panel because the regressions include firm-specific information that helps to explain changes in income. For executives, our permanent earned income elasticity estimate for the early 1990s is 0.19 (with substantial transitory shifting of income into the year prior to the 1993 tax increase). There is also evidence of substantial transitory income shifting around the time of the 2001 Economic Growth Tax Relief and Reconciliation Act (EGTRRA), but the overall estimated elasticity is negative. The results are not definitive, however. Our results are sensitive to many factors, such as the time-period examined, the data set used, and the econometric specification. That inconsistency reflects the complexities inherent in estimating high-income behavioral responses to taxation. The fact that the elasticity estimates differ greatly across time-periods and across the two datasets suggests that non-tax factors are extremely important. That observation is consistent with several other papers (Slemrod 1996, Saez 2004, Kopczuk 2005, Giertz 2006) that all show a great deal of sensitivity surrounding taxable income elasticity estimates.
|Item Type:||MPRA Paper|
|Original Title:||Trends in High Incomes and Behavioral Responses to Taxation: Evidence from Executive Compensation and Statistics of Income Data|
|Keywords:||Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation; Executive Compensation; Income Distribution;|
|Subjects:||H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency ; Optimal Taxation
H - Public Economics > H2 - Taxation, Subsidies, and Revenue
J - Labor and Demographic Economics > J3 - Wages, Compensation, and Labor Costs > J33 - Compensation Packages ; Payment Methods
|Depositing User:||Seth Giertz|
|Date Deposited:||01. Oct 2009 18:14|
|Last Modified:||26. Jun 2015 05:30|
Auten, Gerald and Robert Carroll, “The Effect of Income Taxes on Household Behavior,” Review of Economics and Statistics, November 1999, 81 (4), 681-693.
Bertrand, Marianne and Sendhil Mullainathan, “Are CEOs Rewarded for Luck? The Ones without Principals Are,” The Quarterly Journal of Economics, 116(3), August 2001: 901-932.
Bertrand, Marianne and Sendhil Mullainathan, “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences, Journal of Political Economy, 111(5), October 2003: 1043-1075.
Carroll, Robert, “Do Taxpayers Really Respond to Changes in Tax Rates? Evidence from the 1993 Act,” Office of Tax Analysis Working Paper 78, U.S. Department of Treasury, 1998.
Congressional Budget Office, “Historical Effective Federal Tax Rates: 1979 to 2003,” December 2005, Washington: D.C. www.cbo.gov/ftpdocs/70xx/doc7000/12-29-FedTaxRates.pdf
Congressional Budget Office, “Effective Marginal Tax Rates on Labor Income,” November 2005, Washington: D.C. www.cbo.gov/ftpdocs/68xx/doc6854/11-10-LaborTaxation.pdf
Feenberg, Daniel, and James Poterba, “Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns,” in Tax Policy and the Economy 7, Poterba, J. (Ed.), 1993, Cambridge: MIT Press.
Feenberg, Daniel, and James Poterba, “The Income and Tax Share of Very High-Income Households, 1960-1995,” American Economic Review Papers and Proceedings, May 2000, 90(2), 264-270.
Feldstein, Martin, “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act,” Journal of Political Economy, June 1995, 103 (3), 551-572.
Feldstein, Martin, “Tax Avoidance and the Deadweight Loss of the Income Tax,” Review of Economics and Statistics, November 1999, 4 (81), 674-680.
Gale, William and Peter Orszag, “An Economic Assessment of Tax Policy in the Bush Administration, 2001-2004,” Boston College Law Review, 2004.
Giertz, Seth, “Recent Literature on Taxable-Income Elasticities,” Congressional Budget Office, Technical Paper 2004 16, December 2004, Washington D.C.
Giertz, Seth, “A Sensitivity Analysis of the Elasticity of Taxable Income,” Congressional Budget Office, Working Paper 2005 01, February 2005, Washington D.C. www.cbo.gov/ftpdocs/60xx/doc6077/WP-2005-01.pdf.
Giertz, Seth, “The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis,” Congressional Budget Office, Working Paper 2006 03, February 2006, Washington D.C. http://cbo.gov/ftpdocs/70xx/doc7037/2006-03.pdf.
Goolsbee, Austan, “What Happens When You Tax the Rich? Evidence from Executive Compensation,” Journal of Political Economy, 2000, 108 (2), 352-378.
Goolsbee, Austan, “Evidence on the High-Income Laffer Curve from Six Decades of Tax Reforms,” Brookings Papers on Economic Activity, 1999 (2), 1-47.
Gruber, Jonathan and Emmanuel Saez, “The Elasticity of Taxable Income: Evidence and Implications,” Journal of Public Economics, April 2002, 84 (1), 1-32.
Hall, Brian and Jeffrey Liebman, “Are CEOs Really Paid Like Bureaucrats?,” The Quarterly Journal of Economics, 1998, 113(3), 653-691.
Hall, Brian and Jeffrey Liebman, “The Taxation of Executive Compensation,” in Tax Policy and the Economy, J. Poterba, ed., Cambridge: MIT Press, 2000.
Kopczuk, Wojciech, “Tax Bases, Tax Rates and the Elasticity of Reported Income,” Journal of Public Economics, December 2005, 89(11-12), 2093-2119.
Lazear, Edward and Sherwin Rosen, “Rank-Order Tournaments as Optimum Labor Contracts,” Journal of Political Economy, 1981, 89(5), 841-864.
Lindsey, Lawrence, “Individual Taxpayer Response to Tax Cuts: 1982-1984, with Implications for the Revenue Maximizing Tax Rate,” Journal of Public Economics, July 1987, 33 (2), 173-206.
Maremont, Mark,"Latest Twist in Corporate Pay: Tax-Free Income for Executives," Wall Street Journal, December 22, 2005, A1.
Moffitt, Robert and Mark Wilhelm, “Taxation and the Labor Supply Decisions of the Affluent,” in Does Atlas Shrug? The Economic Consequences of Taxing the Rich, Joel Slemrod, ed., New York: Harvard University Press and Russell Sage Foundation, 2000.
Murphy, Kevin R., “Executive Compensation,” in Handbook of Labor Economics, O. Ashenfelter and D. Card (eds.), North-Holland, 1999, 3 (B).
Piketty, Thomas and Emmanuel Saez, “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, February 2003, 118 (1), 1-39. (For an extended version of this paper, see <www.nber.org/papers/w8467>.)
Saez, Emmanuel, “Reported Incomes and Marginal Tax Rates, 1960–2000: Evidence and Policy Implications,” in Tax Policy and the Economy 18, Poterba, J. (ed.), 2004, Cambridge: MIT Press, 117-173.
Saez, Emmanuel and Michael Veall, “The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence,” American Economic Review 95(3), 2005, 831-849.
Slemrod, Joel, “Methodological Issues in Measuring and Interpreting Taxable Income Elasticities,” National Tax Journal, December 1998, 51 (4), 773-788.
Slemrod, Joel, “High Income Families and the Tax Changes of the 1980s: the Anatomy of Behavioral Response,” in Empirical Foundations of Household Taxation, M. Feldstein and J. Poterba (eds.), University of Chicago, 1996.
Slemrod, Joel and Wojciech Kopczuk, “The Optimal Elasticity of Taxable Income,” Journal of Public Economics, April 2002, 84 (1), 91-112.
Eriksson,Tor, “Executive Compensation and Tournament Theory: Empirical Tests on Danish Data,” Journal of Labor Economics, April 1999, 17 (2), 262-280.
U.S. Department of the Treasury, Internal Revenue Service, 2005, Statistics of Income: Individual Income Tax Returns 2003 (Washington, D.C.).