Publications
- Gradual Tax Reforms: If You Like It, You Can Keep It Journal of Economic Dynamics and Control, 2020, Vol. 111 (published version)
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.
- Output Distortions and the Choice of Legal Form of Organization, with Katarzyna Bilicka, Economic Modelling, 2023, Vol. 119, published paper)
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.
- Lifecycle Consumption and Welfare with Nonexponential Discounting in Continuous Time, with James Feigenbaum , Journal of Mathematical Economics, 2023, Vol. 107
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.
- How the Future Shapes Consumption with Time-Inconsistent Preferences, with James Feigenbaum, The B.E. Journal of Theoretical Economics, 2024, Vol. 24
- Business Legal Status and New Firm Performance: Evidence From Kauffman Firm Survey, with Katarzyna Bilicka (Forthcoming, Public Finance Analysis)
- Vertical Specialization, Global Expansion of Supply Chain, and Convergence , with Hamid Beladi, Sugata Marjit, and Reza Oladi (Forthcoming, Macroeconomic Dynamics)
Working Papers
- Turnover Taxes and Innovation, with Katarzyna Bilicka, Xipei Hou, and Jing Xing (R&R, Journal of Development Economics)
removed tax cascading. We find a relative increase in sales, R&D investment, and employment for affected service rms. Around half of the R&D investment increase is driven by outsourcing from manufacturing rms. We document that smaller and less
innovative manufacturing rms 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 rms' innovation activities.
- Reforming Estate Taxation by Reversing the Generation-Skipping Transfer Tax, with James Feigenbaum and Scott Findley, (submitted)
Although the existing U.S. code through its Generation-Skipping Transfer Tax levies a higher tax on estates passed directly to grandchildren rather than to children when children are still alive, previous work on estate taxes has largely ignored the effect of estate-tax rates that depend on the age of heirs. Using a two-period overlapping-generations model, we examine how steady-state
welfare varies as we change the estate tax rate imposed on young vs old heirs. In our baseline calibration, as in reality, the estate tax does not generate a large amount of revenue relative to the labor tax, but we find that welfare can be improved, on account of a higher present value of lifetime income, if, in contrast to the existing code, we set the tax rate paid by young heirs to zero and raise the tax on old heirs to maintain total tax revenue. This effect can be magnified if we raise the tax on old heirs even further and decrease the labor tax accordingly.
- Profit Shifting and Firm Growth, with Katarzyna Bilicka and Kahlil Esmkhani
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.
- Legal Forms and Regulatory Responses: A Comparative Analysis of S and C Corporation Community Banks, with Shi Qi (submitted)
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. Utilizing 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, owing to their unique tax status and capital access limitations, exhibited more pronounced reductions in asset yields and increased funding costs compared to C banks. This paper contributes to the broader discourse on financial regulation, highlighting the importance of considering the legal forms in designing banking regulatory policies.
Work in Progress:
- Community Banks, Relationship Banking, and Business Credit Risks, with Khalil Esmkhani, Shi Qi and Don Schlagenhauf
- Rethinking Taxing Capital in a Segregated Economy via Estate Taxation, with James Feigenbaum and Scott Findley
- Firm dynamics and the legal form of organization, ongoing project in the Census research data lab, with Katarzyna Bilicka