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The clean income tax reform is in the spirit of Crawford's calculations, and in our results the long-run impact on output is realized almost immediately. If, however, the tax reform involves changing the tax base in a fundamental way in both versions of our flat tax experiments the base shifts from income to consumption , then the ultimate effects are felt only gradually.
In our flat tax experiments, the longer-run effects on income are in the neighborhood of three times as large as the near-term effects. All of the experiments described were done under the assumption of revenue neutrality, so questions of the right policy for budget balancing exercises weren't explicitly addressed. Nor is it the nature of the experiment contemplated in the Angry Bear post. Nonetheless, they do suggest that deficit reduction exercises that involve changes in tax rates and the tax base will have differential effects over time, and realizing the full benefits of tax reform may require a modicum of patience.
Note: A user-friendly description of the paper that the chart above is based on appeared in an Economic Commentary article published by the Cleveland Fed. I apologize for the mistake and draw your attention to Kimel's follow-up post. By Dave Altig senior vice president and research director at the Atlanta Fed. Listed below are links to blogs that reference The long and short runs of tax reform :.
Posted by: kharris May 20, at AM.
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So when does your theoretical chart reflect the dramatic plunge that has occurred in real nations with flat taxes e. Must be in year 14, right? Posted by: Devin May 20, at AM. Thanks for mentioning the post. I modified it to take into account some of your comments. Now I use the tax rates in any given year to explain annualized growth rates over the subsequent ten years. Additionally, I've included quadratic forms of both the top and bottom rates, which allows me to compute growth maximizing rates at both ends of the scale.
It turns out that the growth maximizing top marginal rate isn't much changed from the first post i. I think that indicates that using historical US data at least, a flat tax is a bad idea, as the top and bottom marginal rates would be identical if rates were flat. With respect, given the choice between the outcomes predicted by a simulation, and historical outcomes, I'd go with the historical outcomes. Dave, I would be interested is learning more as to why this is the case Posted by: Chris May 26, at PM.
In September, the Federal Reserve Bank of Atlanta's Center for Real Estate Analytics sponsored a conference to examine the impact the real estate downturn is having on public sector finances. It's no secret that state and local governments are currently experiencing substantial revenue declines. One popular explanation is that deteriorating local real estate conditions are responsible for a portion of that decline, but it turns out that this explanation is not the main cause, at least not yet. One of the sessions in the conference featured attempts by three economists from the Federal Reserve Board of Governors Lutz, Molloy, and Shan and two from Florida State University Doerner and Ihlanfeldt to estimate the direct impact of the decline in real estate values on local tax revenues.
Both papers examined the multiple channels of influence between the decline in real estate values and local revenues. The largest channel, of course, is the decline in property tax income related to declining assessed property values. Of course, property owners don't pay property taxes based on the current value of their home.
They pay based on an assessment that is at least a year old. Thus, the decline in property values takes considerable time to work its way through the assessment process and into property tax revenues. Consequently, declines in property values have only more recently started to be reflected in lower property tax revenues. Experts expect the decline in those revenues to continue for another couple of years, with the worst shortfall two or three years out. Some of the assessments are fairly gloomy. To illustrate that point, I've pulled a few charts from the Lutz, Molloy, and Shan paper.
The first chart illustrates the decline in revenues led by individual and sales taxes. Notably, property tax collections grew at an increasing rate in over The next chart directly depicts the relationship or the short-run lack thereof between housing price growth changes and property tax revenue.
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Lags in changes in assessments and the ability of local governments to change property tax rates can go a long way in explaining why overall property tax revenue continues to grow. Finally, Lutz, Molloy, and Shan broke down the data by some states, and I include the case of Georgia below. The Ihlanfeldt and Doerner paper does something similar—and in great detail for the state of Florida.
The Georgia case clearly shows the effect of the lags: property values rose through the first part of the last decade and, even though tax rates were falling, overall tax revenue rose. Post, however, market values of homes declined while the aggregate assessed values continued to rise through along with property tax revenue. It is hard to imagine the trend of aggregate increased assessed valuation continuing. If the assessed values begin to track the market values, pressures will emerge on the government entities that depend on property taxes. Listed below are links to blogs that reference Real estate and municipal revenue :.
I think many, if not all, munincipalities change the mill rate of the tax assessment to collect the tax revenue needed. As in, they take their budget and divide THAT by the new lower total property values in the district to arrive at the new higher rate of individual parcel tax liability, so a lower property value does not necessarily mean lower taxes! Lower tax revenues are the result of income, sales, and other taxes, not property taxes.
Posted by: Thrill November 01, at PM. I disagree Thrill. I think that this is a fantastic post. In Illinois, virtually all property tax revenue goes to pay for local schools. When a house is valued at k and resells at k, the property tax won't remain the same. Government revenue should decrease. Posted by: Jeff November 04, at PM. You would only get a 3 BR if there were one male and one female child.
Bear in mind, as well, that you may not get any voucher at all, if your area has a waiting list. The funding for Sec 8 is not unlimited, and it's generally a 'first come, first served' situation. There are many Sec 8 areas of the country in which the lists are so lengthy that they aren't even accepting applications. While discussions of the Obama administration's tax plan focus on the expected impact on consumer spending and the federal deficit, not much attention has been given to the incentives of the plan for work effort.
Different tax rates, deductions, and rebates provide varying degrees of incentives to work less or work more, and those incentives differ across income groups. Here I want to focus on just one of the proposed changes: the reinstatement of the Supply side economists tout low tax rates across the board as a way to provide incentives for people to work harder and thus for the economy to grow faster; with this thinking, people work harder because they get to keep more of the money they're working for.
Results in a recent working paper , with coauthor Robert Moore, confirm these predictions by finding that work effort increased across all income levels when tax rates were cut among other things in the Bush administration tax reform. But work effort increased much less among the more educated higher income families. The administration's current budget plan includes a reversion of the marginal tax rate among the wealthiest to the pre-Bush tax rates—an increase from 35 to This tax rate increase is equivalent to reducing a worker's wage by 7 percent.
The analysis found that husbands with a high school degree only would reduce their hours worked by about 63 hours per year about 2. Working wives in these families would also reduce their hours of work. So, based on my research, if a need to raise some revenue means tax rates have to be increased for someone, raising them on the wealthiest will result in a smaller reduction in work effort than raising tax rates on the middle class. The calculations here use results obtained from estimating a joint labor supply model for dual-earner families with different levels of education for the year A complete analysis of the work effort implications from the administration's tax plan would require accounting for all the changes to marginal tax rates, phase-outs of deductions, and tax credits simultaneously, as well as considering the impact on decisions of family members to enter or exit the labor market in response to the tax changes.
An additional relevant question remains: What is the implication of changing work effort for GDP growth? The relationship between work effort and value of output is not necessarily the same across income levels.
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In other words, one hour of high-income higher education labor is expected to yield a higher value of output in the economy than one hour of labor from a middle-income lower education worker. A complete analysis of the aggregate impact of the administration's tax plan would have to also take this into account. By Julie Hotchkiss , research economist and policy adviser at the Atlanta Fed.
This is misleading. The increase is an increase in marginal rates only: only on the income above a set level. Further, workers' incentives are no doubt in response to marginal total taxation, not just marginal Fed Income tax. The brackets for which margina Fed income tax is actually increasing from But why is there no mention of the income and substitution effects, and the backward bending labor supply curve?
As income gets higher, at some point the income effect outweighs the substitution effect, and the resulting labor supply curve bends back, implying that people at that income level and above would work more when their taxes are raised because of the strong income effect, because they have to to maintain their current lifestyle. Last I checked, research implied that the backward bend began at about the upper middle class level.
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Posted by: Richard H. Serlin March 11, at PM. For an excellent brief article on the income and substitution effects and the backward bending labor supply curve, and the historically weak relationship between income, taxes, and hours worked, see Cornell Economist Robert Frank's article:.
What did high income folks do with their lower-marginal tax rate enhanced take-home pay? It appears that more than a few bought second homes and third homes and more. They bought real estate assets. They "invested" the money, but unlike in past cycles the investments were in hedge funds and derivatives. Financial devices that added relatively little to the real stock of capital goods and productive capability in the economy. As for the additional homes, I don't think that's worked out too well for us, has it? Your analysis is in a vacuum.
What if the hours that the wealthy work are more productive than the hours the middle class work? The other issue in the Obama tax plan is the increase in not only marginal tax rates, but increases in FICA tax rates, reductions in the ability to deduct to charities and mortgages, and the other increases in the federal bureaucracy that will explode entitlement spending.
I have hearsay anecdotes that say that if you collect welfare under the Obama plan it is more than working 8 hours a day for a minimum wage job. This will certainly also decrease production. Posted by: jeff March 11, at PM.