Tax Policy and the Economy

There is increasing interest in expanding Medicare health insurance coverage in the United States, but it is not clear whether the current program is the right foundation on which to build. Traditional Medicare covers a uniform set of benefits for all income groups and provides more generous access to providers and new treatments than public programs in other developed countries. We develop an economic framework to assess the efficiency and equity trade-offs involved with reforming this generous uniform structure. We argue that three major shifts make a uniform design less efficient today than when Medicare began in 1965. First, rising income inequality makes it more difficult to design a single plan that serves the needs of both higher- and lower-income people. Second, the dramatic expansion of expensive medical technology means that a generous program increasingly crowds out other public programs valued by the poor and middle class. Finally, as medical spending rises, the tax financing of the system creates mounting economic costs and increasingly untenable policy constraints. These forces motivate reforms that shift toward a more basic public benefit that individuals can “top up” with private spending. If combined with an increase in other progressive transfers, such a reform could improve efficiency and reduce public spending while benefiting low-income populations.

Roughly half of Americans live paycheck to paycheck. When financial shocks occur during their working lives, many of these households tap their retirement savings accounts. We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent preretirement needs arise. In particular, we consider plans that would allow employers to automatically enroll workers into an employer-sponsored payroll deduction “rainy-day” or “emergency” savings account.

Having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save. Auto-features and mental accounting can be jointly deployed to reduce the frequency with which short-term needs crowd out long-run retirement savings.

We describe three specific implementation options: (a) after-tax employee 401(k) accounts, (b) deemed Roth individual retirement accounts (Roth IRAs) under a 401(k) plan, and (c) depository institution accounts. We present pros and cons of each approach, given the existing regulatory regime, relative to the following criteria: the ability to automatically enroll employees into the rainy-day account; the targeted size of the rainy-day account; the investment allocation used for the rainy-day account; the fees and expenses associated with setting up and administering the rainy-day account; employers’ ability to match employee contributions to the rainy-day account and the destination of those matching contributions; the ability of the rainy-day account to provide liquidity when the funds are needed; the tax treatment of contributions to, earnings in, and withdrawals from the rainy-day account; the portability of account balances when employees separate from a sponsoring employer; and compliance and potential interactions with the nondiscrimination rules that apply to tax-qualified employer-sponsored plans.

We conclude that each of the three implementation options merits exploration and field testing.

US businesses can be C-corporations or pass-throughs in the forms of S-corporations and partnerships. C-corporate form confers benefits from perpetual existence, limited liability, potential for public trading of shares, and ability to retain earnings. However, legal changes especially since the 1980s have improved the status of pass-throughs. The C-corporate form has typically been subject to a tax wedge, which has diminished since the 1960s. In our formal model, the tax wedge determines the fraction of firms opting for C-corporate form, the level of output (business productivity), and the C-corporate share of output. This framework underlies our empirical analysis, wherein long-difference regressions for 1978–2013 show that a higher tax wedge reduces the C-corporate share of net capital stock and gross assets. A calibrated model, fit to observed total factor productivity (TFP) and C-corporate share of economic activity, implies that, for 1958–2013, the declining tax wedge and gap between C-corporate and pass-through productivity contributed 0.37% per year out of a total TFP growth rate of 1.09% per year. From 1994 to 2004, the TFP growth rate was unusually high at 2.00% per year, and the estimated contribution from the falling productivity gap between C-corporate and pass-through status was particularly large at 0.77% per year. The last channel lines up with legal changes related especially to limited liability companies.

We estimate the tax price elasticity of charitable giving using newly available data from the Panel Study of Income Dynamics spanning 2001–17. We find that households that always itemize are less sensitive to changes in the tax treatment of donations than households that switch itemizing status. We apply these results to the provisions of the Tax Cuts and Jobs Act of 2017, taking into account the marginal propensity to donate from the increase in disposable income expected for most households, and we predict significant reductions in charitable giving.

A new survey of 745 small businesses shows little change in the size distribution of businesses between 2012 and 2016, except among businesses with 40–74 employees, in a way that is closely related to whether they offer health insurance coverage. Using measures of both size and voluntary regulatory compliance, the paper links these changes to the Affordable Care Act’s employer mandate. As of 2017, between 28,000 and 50,000 businesses nationwide appear to be reducing their number of full-time-equivalent employees to below 50 because of that mandate. This translates to roughly 250,000 positions eliminated from those businesses.