Research

A key challenge faced by tax reforms is their short-run welfare consequences. In this paper, I focus on a consumption-based tax reform that, despite the long-run welfare gains it generates, causes the welfare for some groups such as retirees or the working poor to fall during transition between steady states. Using a life-cycle model with heterogeneous households, I show how to devise a transition path from the current U.S. federal tax system to a consumption-based tax system that improves the welfare of current as well as future generations. In a nutshell, all households alive at the time of the policy change can choose when they want to switch to the new tax system, or whether they want to switch at all. I find that implementing a tax reform with this feature improves the welfare of 95% of the population in the short run, compared to less than 25% of population in the simple case with no choice. It takes about 20 years for half of the population to pay their taxes under the new tax code.

Motivated by the Generation-Skipping Transfer Tax (GSTT) in the United States, we examine how varying estate-tax rates by the heir’s age affects welfare. Methodologically, we introduce a parsimonious constant-elasticity-of-substitution (CES) bequest utility that is markedly more tractable than the altruistic specifications commonly used in the literature, delivering closed-form optimal rules and transparent parameterization. Using this new framework, we provide a proof of concept showing how transfers from older to younger generations can enhance equilibrium welfare in a dynamically efficient economy à la Samuelson (1975). We embed the tractable bequest utility in a two-period overlapping-generations model with age-dependent estate-tax schedules. Numerical exercises—parameterized to the fact that estate-tax revenue is small relative to labor-income taxation—indicate that lowering the tax rate on bequests to younger heirs (grandchildren) relative to older heirs (adult children) raises the present value of lifetime resources and overall welfare, effectively reversing the logic of the current GSTT. The findings highlight a practical avenue for implementing a “reverse social security” transfer from old to young that can improve welfare in dynamically efficient economies.

We investigate the impact of tax cascading on innovation activities of both upstream and downstream firms. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, which effectively removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service firms. Around half of the R&D investment increase is driven by outsourcing from manufacturing firms. We document that smaller and less innovative manufacturing firms increase outsourcing more, while larger service firms benefit more from the tax reform. Our study provides new evidence on how taxation affects supplier networks and firms' innovation activities.

In this paper, we construct an elaborate general equilibrium model with a continuum of production fragments for an intermediate good, then embed it in a growth model to address the effects of global production fragmentation, vertical specialization and trade on growth and inequality for a small developing country. Among other results, we show that a small developing economy grows faster than the rest of the world as a result of global fragmentation and trade in intermediates if it is skilled-labor scarce. We also address the effects of such a trade opening on wage inequality.

We study the distortions to aggregate output created by the differential tax treatment of corporations and pass through entities. We develop an industry equilibrium model in which the legal form of organization is an endogenous choice for firms facing trade off between tax treatment of business income, access to external capital, and the evolution of productivity over time. We match this model to features of the US economy. We find that, relative to the benchmark economy, revenue-neutral tax reform in which legal forms receive the same tax treatments leads to 1.25% increase in the aggregate output.

In this paper, we explore the characteristics of newly established firms with different legal forms of organization. Using the Kauffman Firm Survey (KFS), a panel study of businesses established in 2004, we examine the relationship between firm performance and its organizational form and how this relationship changes as firms transition between legal status. We show that firms that are organized into forms that provide liability protection have more debt, higher credit scores, and are more innovative than firms without liability protection. We also observe a larger share of B2B firms with liability protection. Our analysis also indicates that expanding firms, intending to fund their growth via investors' equity, exhibit a preference for C-corporations over S-corporations or LLCs.

This study investigates the differential responses of Subchapter S and C corporation banks within the U.S. community banking sector to significant policy changes following the 2007–2008 financial crisis. Using bank-level data from 2003 to 2019 and employing a difference-in-differences analysis, we explore how legal forms influence banks’ yields on earning assets and funding costs. Our findings reveal that S banks, due to their unique tax status and capital access limitations, exhibited more pronounced reductions in asset yields and increased funding costs compared to C banks.

In a continuous-time lifecycle model with log utility and a general time-inconsistent discount function, we establish necessary and sufficient conditions under which commitment to the initial plan will increase the realized objective function for all future selves. We also establish necessary and sufficient conditions under which the log consumption profile over the lifecycle is locally concave. Empirically, the lifecycle profile of average household consumption is hump-shaped and thus concave at the peak, so this result is useful for identifying what discount functions are consistent with data. We express these conditions in terms of what we call the future weighting factor, which measures the deviation of the discount function from an (arbitrarily chosen) exponential discount function. Both the welfare and concavity conditions depend on how the marginal future weighting factor compares to a weighted average of marginal future weighting factors. If the marginal future weighting factor is sufficiently high at a given delay, i.e. if the discount function decays sufficiently more slowly than the chosen exponential at that delay, this implies that log consumption is concave at a point on the lifecycle profile and there will be a positive contribution to commitment utility relative to the realized utility for one of the selves.

Time-inconsistent preferences, which are modeled by relative discount functions, are a common explanation for the empirical finding that lifecycle profiles of household consumption are typically hump-shaped rather than monotonic. More precisely, a time inconsistent preference which is present-biased can generate a hump-shaped consumption profile over the lifecycle. We develop a general framework for understanding "present bias" in consumption through a “future weighting factor” that perturbs the discount factor of utility at future periods away from exponential discounting. Using our framework we derive necessary and sufficient conditions on the future weighting factors for the consumption profile to be locally concave. We find that these conditions, which are necessary for the consumption profile to be hump-shaped, are stronger than just assuming a present bias. Furthermore, we obtain necessary and sufficient conditions under which the consumption profile determined in the first period of life Pareto dominates the realized consumption profile. Pareto dominance of this initial path must arise when the log consumption profile is strictly concave and the future weighting factor at the longest delay is not too large.

In this paper we analyze the consequences of profit shifting for firm growth. Using firm-level balance sheet data, we show that multi-establishment domestic firms tend to be larger than comparable multinational firms. We attribute this to the fact that some firms may prioritize tax saving and locate their new establishments in low tax countries at the expense of expanding at home. We build a novel firm dynamic model with multi-establishment firms to explain the mechanism driving this empirical observation. In our model, firms choose to expand their operations by either growing the size of each of their establishments or by opening a new establishment. They can open a new establishment either in a domestic, high-tax location or in a foreign, low-tax location. We use our model to show that tax planning incentives result in firms opting to be multinationals and having fewer and smaller establishments. This results in lower levels of output and employment. Our findings suggest that when firms put minimizing their tax bill as their objective, they may forgo a higher level of output and employment.