a A Does Atlas Shrug? The Economic Consequences of Taxing the Rich LoS Joel B. Slemrod EDITOR RUSSELL SAGE FOUNDATION New York HARVARD UNIVERSITY PRESS Cambridge, Massachusetts, and London, England AooeChapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Part UI Chapter 14 Chapter 15 Commentary on Chapter 8 David F, Bradford Portfolio Responses to Taxation: Evidence from the End of the Rainbow Andrew A. Samwick Commentary on Chapter 9 James R. Hines Jr ‘The Estate Tax and After-Tax Investment Returns James M. Poterba Commentary on Chapter 10 William G. Gale Capital Gains Taxation and Tax Avoidance: New Evidence from Panel Data Alan J Auerbach, Leonard E. Burman, and jonathan M. Siegel Commentary on Chapter 11 Jane G. Gravelle Taxes and Philanthropy Among the Wealthy Gerald E. Auten, Charles T. Clotfelter, and Richard L, Schmalbeck Commentary on Chapter 12 Jobn B. Shoven Entrepreneurs, Income Taxes, and Investment Robert Carroll, Douglas Holtz-Eakin, Mark Rider, and Harvey . Rosen Commentary on Chapter 13 R Glenn Hubbard ALTERNATIVE PERSPECTIVES Why Do the Rich Save So Much? Christopher D. Carroll Commentary on Chapter 14 Stephen P. Zeldes Progressive Taxation and the Incentive Problem Robert H. Frank Contributors Index 281 289 324 329 350 355 389 392 425 427 456 463 465 485 490 508 suAan 7 eS Taxation and the Labor Supply Decisions of the Affluent Robert A. Moffitt and Mark O. Wilhelm Resse the labor supply effects of taxation has a long history (Hausman 985), but very little research has been directly concerned with high-income taxpayers. This isa serious deficiency in the literature, owing to the widespread tscumption that high-income taxpayers may be more responsive to tax rate changes than other income groups, both because their marginal fax rates are very high and because they have more opportunities for altering their behavior. In part this neglect has been the result of data difficulties, for relatively few data sets have contained labor supply information on a sufficient number of high-income taxpayers (for example, hours of work). The most widely used data sets for tax analysis of high- income taxpayers have contained information from TRS tax returns (see, for exam- ple, Feldstein 19952), but these data sets contain no direct information on labor apply other than whether family earnings are positive. We address this data diff culty by using the Survey of Consumer Finances (SCF), a data set that oversampled high-income taxpayers and was conducted at several points during the 1980s and 1990s. We use the SCF to analyze the effects of the 1986 Tax Reform Acton the labor supply decisions of the affluent. "A nuraber of methodological issues must be addressed itvany study of the labor supply effects of income taxation, and several special issues must be addressed in = study ofthe affluent. Among the general issues are those concerning how to obtain crose-cectional variation in changes in marginal tax rates, for the same federal tax fav in essence, applies to everyone. Another, separate issue concems the nonlin- arity of the tax schedule when a nonproportional tax schedule i in force. Because ofits special importance, we address the first issue in detail here, The latter issue receives only cursory attention. “The first section reviews prior work in evaluating the effects on high-income tax- payers. The second section outlines our approach to estimation, and the next sec- tion presents our data and results PRIOR WORK ON TAXATION AND LABOR, SUPPLY "The empirical workcon the effect of taxation on labor supply through the early 1980s is reviewed by Jexy Hausman (1985). By and large those studies suggested that male fabor supply is rather insensitive to tax rates, but that female labor supply at least that of married women, is considerably more sensitive,’ Studies of the effects of 1981 nd 1986 tax legislation have found generally consistent results, with responses farger for women than for men and small, if not zero, effects for the latter (Bosworth194 Does Atlas Shrug? and Burtless 1992; Eissa 1995, 1996a, 1996b; Mariger 1995; Zital 1996). With the exception of two recent studies of high-income physicians, lawyers, and managers (Showalter 1997; Showalter and Thurston 1997), these studies have hot had large numbers of observations of high-income taxpayers * Because IRS data have many more such observations, there have been more: stud- jes of the effects of the 1981 and 1986 legislation on incomes as reported to the IRS. These studies have generally revealed quite significant responses to tax rates, although the magnitude ofthe effect differs considerably across studies (Auten and Canroll 1999; Feenberg and Poterba 1993; Feldstein 1995a; Feldstein and Feen- berg, 1996; Lindsey 1987)? "Ee methodological issue that has preoccupied much of the recent literature has concerned how to identify the effects of the federal income tax on either labor sup~ ply o income, given tat individuals with the same characteristics face the same tx Pefedule ata given point in time. Ifthe social and economic characteristics that sone eax achedules to differ across individuals (marital status, family size, forms of sankibor income, and so on) have independent effects on behavior, there js no Tomaining variation in tax rates to permit the identification of tax responsiveness cace these variables are controlled for. Although many of the earlier studies Scviewed in Flausman (1985) made the assumption that some of those characteris or did notin fact affect behavior independently, the studies since that time have se hewed that variation in favor of other forms of identification. Cross-sectionally, Few studies have sed state variation in taxes for identification (Auten and Carroll 1999; Showalter and Thurston 1997), but these studies ignore migration and income shifting across states. The more common methods of identification have ined the “difference-in-differences” method, which uses variation over time in tax schedules for different individuals to identify tax effects (for U.S. studies, see Fissa 1995, 19962, 1996b; fora U.K. study using this method, see Blundell, Duncan, and Meghir 1998). We devote the next section to a discussion of this method and its underlying assurnptions, We show that the most relevant form of the dfference-in-differences method for tax response estimation js a form of instrumental-variables estimation that requires exclusion restrictions for identification, We then proceed with our tmpirical work and apply that method tothe effect ofthe 1986 tx act on the labor supply of high-income men, using the SCF data MODELING THE LABOR SUPPLY EFFECTS OF TAXATION ‘As just noted, a major problem in estimating the effects of nationwide tax systems is that they provide no varintion on which to base estimation, a least holding con, went individual characteristics ‘The methodology of “difference-in-differences,” seared effects, which is employed in some of the recent studies, makes use of panel data or repeated cross-section data to addyess these problems. This methodology an be applied in a simple tabular fashion but can also be applied in a regression context. We begin by discussing this method in general and show that, when put foto a regression framework, the method can be seen to rely for identification on se Gusion restrictions of a particular kind and that a leading case of the methodolTaxation and the Labor Supply Decisions of the Affluent 185 ogy is equivalent to instrumental-variables estimation with panel data. We then Lay discuss the issues raised by using repeated cross-section data and by he nom linearity of the budget constraint.* Difference-in-Differences (Fixed Effects) with Panel Data “The difference-in-differences methodology can be viewed within the context of tie ae cir ects literature (for example, Heckman and Robb 1985), in which eat ngnterson the effect of some treatment (usually defined as a dummy vas py on some outcome variable y, possibly conditional on a vector of other seBite ible) Om hich we take to be individual socioeconomic characteristics (possbiy ‘erhuting income amounts). Hlowever, the models with which we ate concerned dif- seein art mnportant respect from the standard model in the treatment effects Her eee or re iti assumed that d has no cross-sectional vaziation conditions’ on are edo income tax i ofthis type because all individuals withthe samme char acteristics face the same schedule, and all individuals with the same characteristics sett income components and amounts face the same marginal tax rate dace pat the tax schedule does vary with individual characteristics and sncome implies thatthe stimulus induced by the tax system is a function of and Foren? urnishes variation that ean be used for identification. In the. case of tax systems che tax formula dictates that marginal tax rates differ for individuals with ‘Ter enicharacteristics (marital status, number of dependents, income, homeown= trship, and other variables) Letting p denote the time period, our starting point ‘linear model of the form Yp = Op + BAO) + Yosy * Op aay where d(x) is the treatment variable of interest, which is often the marginal tax we faced ty the individual For a particular choice of tax variable day) the param ee ofinterests the effect of that variable, which i B. For the most part, we assurng that ds) is 2 known parametric function because the tax formals is known and hhence’s, are the variables that go into the tax formula, However, all of our impor- ae x jusions apply as well tothe case in which d, is an observed variable, are sr coronts, and 6,04) is a function to be estimated (For example, in a first-stage regression); in this interpretation the identification problem arises if there are no instruments that do not appear independently in the equation ‘We assume that equation (7.1) is derived from theory and hence is the “true” equation, ot at least that it can be formally derived as an approximation to that the- Ory. That i, we assume thatthe theory puts no other restrictions on the equation thaemight furnish sources ofidentfieation. This san issue in the labor sy ply case, ta me clement of, (the wage rae) interact with d(x) (the marginal tax rte) wing to most theories. We address this issu later for now we restrict ourselves to the clas of theories, whether a large or small class, that generate equations ofthe form of equation (7.1). ‘To illustrate the problem most simply, we assurne in equation (7.1) that the set ofa tat enters the tax formula is equivalent to the sec that appears independently196 Does Atlas Shrug? in equation (7-1); in practice, the former is likely to bea subset of the latter, but this inecay would mean that we should add another set of variables into equation (71)¢ ‘hiding such a set does not affect the identification problem, so we do not do so ‘Ai\iachables and parameters in equation (7-1) are assumed to vary over time excep Ba vhieh is not allowed to vary because itis the main parameter of inweeet and itis genetlly desired to estimate only a single time-invariant response cffect, at least ‘over a short period of time. “Aa eandis, with a single cross-section of data, is identifiable from nonlinear” tics in the dG) function because x, appears linearly in the equation. But this source sees hottion is weak because suficient relaxations of linearity would resulein 2 cease Gntification ’ Hinstead variables can be found that affect marginal tax rates tesa cee affecty, directly, the effect of d(x) on y, would be nonparametrcety oar (atleast gver the range of the data) and the problem would be solved. We ‘assume throughout, however, that such variables are not available. Lhe crea! vector of variables inthis model is x», and a number of different cases canbe distinguished depending on the nature of tha vector, One major distingion cape rr its time-invariant or varies overtime another is whether it is endoge hous (that is, correlated with €,) or exogenous. For an income tx application, the meee nt ease ie clealy endogenous, time-varying x, because x includes income, cee ios overtime and is endogenous because y if abor supply, is one deter” eanentof income. However, we build up to that case by first considering exogenous Fanart ariant x and then exogenous time-variant x, we then consider endogenous xand x,® ‘Thcvcase that serves as the prototype for all the others is the case of « time” invariant exogenous x. In the tax case, filing status, if taken as exogenous and time seevant in the short term, is one example. Assuming that panel data on 2 set of eee ule are availabe for to periods (we consider later the ease of more than two aonyee of data), and that the law changes between the periods, we have Ypet— Yo (Opes — Op) + Bld «a68) — ,G0) + pes Wx + Eps ~ Ep) (7.2) “With this fist-differenced equation, is identifiable (apart from nonlinearities in Axl) if Yp a = Yo in which ease x drops out of equation (7 2) as an independent oe ie Lee change in y. In other words, it must be assumed that there is. no trend in the independent effect of x on y. This is the assumption that has figured in cre i the difference in-differences analysis of tax effects (see for example, Eissa 1995, 1996a, 1996b; Feldstein 1995a; Blundell et al, 1998; Carroll et al. 1998; for 4 challenge to the method, see Goolsbee, this volume). Thus, at least of variable a aipe found that affects how individuals react to the program but whose inde- pendent effect is stationary, thats, an exclusion restriction is necessary for equation PF) ‘This is the critical assumption inal the models tobe discussed: Nore that the radel is equivalent toa fxed-effects model where x is the fixed effect thar differ- ences out” The assumption Ype1 © Ye i8 @ nontestable, just-dentifying assumption in the mcd aa tated becatse estimates of B cannot be obtained if iis relaxed. However, Trajata on additional periods prior to p are available, the assumption can be relaxed‘Taxation and the Labor Supply Decisions of the Affluent 197 to.some degree because atime pattern of yp can be estimated and it can thereby be determined whether contains a time trend. Although it can never be known for Certain whether the independent effect of x on y would have changed from p to p+ Tin the absence of a change in the d (this is the usual problem of the missing coun tehurwal in treatment-eflects models), more history on y and x can at least assist in establishing priors on whether the effect changed between p and p+ 1. Tex is a time-varying exogenous variable (for example, number of dependents, if taken as exogenous), a differenced equation (7.1) is Ype1 ~Yp = (Ops 1 Oy) + Bldp +s Gps) ~ dpGG)] + Ye rps Xp PE &p (7.3) where the effect of taxes is again unidentified ifthe linearity assumptions in equa- tion (7.3) are sufficiently relaxed. Here the problem is not solved if jx = %p (again, if linearities are relaxed). Bur a simple way of dealing with this issue is to select the subsample for which x =% for that subsample, Ys = %p again isa sufficient con~ dition for identification. Because both x, and x, are exogenous, this selection introduces no bias. ‘Many of the more important applications of the difference-in-differences, fixed effects approach are cases where the excluded variable in firs differences is instead endogenous. To keep this case notationally separate from the previous ones, we Use oto denote the variable instead of x, where now it is assumed that z and €, are not independent. Here the difference between time-invariant z and time-varying 2 is more important, and most of the interesting cases arise when z is time-varying, But time-invariant 7 is an important case as well, although examples are more difficult to imagine in practice. In the tax ease where y is labor supply, selecting 2 subsam- ple for whom marital status is unchanged from p to p+ 1 is one such if marital Status is considered to be jointly determined with labor supply. "The application of the methodology in this case can be most easily rationalized by the assumption of the panel data random-effects model. Hence, we assume Yo Op Baylz) + 1+ Vp a) Svhere jt is a time-invariant individual effect. In equation (7.4), 2 is not included as ‘separate regressor because itis assurned to be an endogenous variable jointly deter- mined with y and hence not to have an independent structural effect on y. The endogeneity of z can arise cither from a relation to jt or to v, or both, but itis the former that can be addressed by first differencing. Because # and z are both time- invariant, it follows that E(ji|z)is constant over time and therefore that the “types” (w) of individuals associated with different values of z do not change. Hence Ype1~Yp = (Oly 41~ OG) + Bldpss(@) ~ d,C2)] + (Vpes— Vp) (75) ‘The assumption needed in this model for consistent estimation of B is that z is uncorrelated with (Vpa1 ~ Vp) the trend in the unobservables in the equation (or more precisely, that the function [d,..(2) ~ dy(2)] is uncorrelated with [¥pu1~ Vol) This case is thus once again equivalent to a simple fixed-effects model. The assump-198 Does Atlas Shrug? tion that’y, = Ypes in prior models is equivalent in this model to the assumption that there is no time-varying coefficient on pL If vis a time-varying endogenous variable, we have, again assuming the presence of an individual effect, Yo = Op + Bdy (ap) + M+ Vp (76) Ypr1 = Apert Bdps raper) tH + Vest (77) and, first-differencing, Yer ~Yp = (per ~ Op) + BLbp 41 (2p 1) — dyl2p)] + (Vpaa > Vp) (7.8) The leading case in the tax application is that in which income or some function of, income, which determines the individual marginal tax bracket, is used for z. Thus, consistent estimation of f again requires that [d,,,(2)+1) ~ d,(z,)] and (ps1 — Vp) be uncorrelated. This is a much stronger assumption than has been needed thus far because iis jointly determined with y (as income and labor supply are, for exarn- ple), then 21 is likely to be correlated with Vp.1, and 2, with V). lence, the fun- Tamental exclusion restriction necessary for the difference-in-difYerences approach is in jeopardy. "The conventional solution to problems of endogenous regressors isto seek cor relates of those regressors that satisfy exclusion and other restrictions for identifi- cation. Instrumental-variables (IV) is one method, among others, for consistent tstimation subject to those restrictions, In the IV case, we seek an instrument that is asymptotically correlated with [dys (2y43) ~ dy(z,)] but not with (Vp —Vq) and is excluded from equation (7.8). The classes of instruments that can be sought for this purpose are precisely the three we have already discussed—time-invariant and exogenous x, time-variant and exogenous x», and time-invariant but endogenous z—in each ease again requiring that the exclusion and orthogonality restrictions in the first-differenced equations we have already discussed for these three classes of variables be satisfied. With d(x), dj(x,), and d,(2) new reinterpreted as to-be- ctimated functions of instruments, al of the above analysis applies. Thus, the analysis at this point comes fall circle back to the original three cases, with time- invariant exogenous variables x with stationary coefficients constituting presumably the strongest instruments. Tn our empirical discussion later, we are more specific about the types of instru- ments in the labor-supply-tax application that might satisfy these conditions. However, here we discuss an approach used in a number of prior applications, namely, the use of the period~p value of z as an instrument (see, for example, Feld- stein 1995a). The variable 2, is an endogenous but time-invariant variable (if it is held constant through p +1, that is) and hence, assuming it is both correlated with the change in the tax variable and independent of (Vp «1 ~ Vp), it is a candidate instrument. In the two-stage-least-squares version of its application, [d,.1(2 +3) ~ dy(a,)] is regressed on 2», and its predicted value replaces the actual value in equa tion (78). In an alternative version, one linearizes the tax schedule with the approximation‘Taxation and the Labor Supply Decisions of the Affluent ‘199 dy a(tp+1) = Bo + Or dp o1(2) +1 (7.9) and uses predicted values from estimates of this equation in place of actual dy +1 (Gnas) in equation (7-8). Consistent estimation requires in either case thatthe pre- inted values be asymptotically uncorrelated with (¥pa1~ Vp) “The difficulty with this instrument is that 2, is unlikely to be correlated to the same degree with Vand V1 and hence is likely to be correlated with the differ. nce Vycr-V, Because 2, and y, are jointly determined—either because is equal to yp (that i, if the lagged dependent variable is used) ori a dizect function of Yy (as income is of labor supply)—the transitory error V, has a direct effect on % This SOvatianee translates into a dependence of 7, on the differenced error, pos ~ Vo because pis almost certainly not related to Vpy1 inthe same way that itis related to Va For etample ifvp,1 and V, are independent, there is no relation between zp and Veg), and the resulting bias takes the form of regression to the mean. “Eke influence of v, could be accounted for by entering 2, directly and indepen- dently into equation {(7.), but then identification of B would be Jost because the Change in d would bave no variation independent of 2 in this senge the isue is an {dentifeation problem more than a regression-to-the-mean problem. But if zis entered independently in the regression, some other instrument is needed to address the initial endogeneity problem, and there one again returns to the need for one of the Classes of instruments, discussed previously, that satisfies the same set of conditions. Inaddition, adding a lagged dependent variable changes the model and the interpre tation of By which makes the estimate noncomparable to estimates without the lag." “A variant ofthis procedure that has apparently not been reported in the published literature ie the use of 2p as the instrument. That instrument qualifies under the same conditions a8 23 equation (7.8) is perfectly symmetrical with respect to peri~ fds p and p + 1, and the fact that period p + 1 is after the tax law change has no Girext bearing on the validity of z,.1 2s an instrament. To the contrary, there is it= tle a prori reason to suppose thatthe correlation between 7p and Vpex differs from that between z, and ¥,. Trnfortunately, Fboth are tested as instruments and the esti- nates of are the same, this can aise either because there is no bias or because the bias is the seme for both. If the estimates differ, itis likely that they are biased in opposite directions, and this can indicate the presence of serial correlation in the cape. Ta the simple case where the instrument i Yp OF Yp+1» Which contain vp and Veer tespectvely the covariances between the error term in equation (7.8) and these teen eaments are [Cov(VpVp +1) ~ Var(¥,)} and [Var(vp 1) ~ CovYn¥e-)}- ‘Assuming the variances aze the same in the two periods, the estimated Busing. yy &8 the instrament is higher (lower) than the estimated B using yp+1 a5 the instrament if serial correlation is positive (negative) Repeated Cross-Sections Because our empirical work uses panel data, we do not discuss the application ofthe principles just outlined to data consisting of a series of repeated cross-sections Frowever, we provide inthe appendixa surnmary ofthe issues that arise in thatcase, ‘As the analysis there shows, the models discussed here that rely on time-invariant200 Does Atlas Shrug? sor» for identification can be applied to repeated-cross-section data with only small ‘odifieation, and consistent estimates of 8 obtained under the same conditions However, models using time-variant x require additional assumptions for identif- cation, and models using time-variant z are very difficult, if not impossible, ro use swith repeated cross-section data without the imposition of implausible restrictions Piecewise-Linear Tax Schedules The federal income tax creates a piecewise-linear budget constraint from which i Jy locations. The econometrics of this problem have been analyzed extensively in past work (Hausman 1985; Moffitt 1986, 1990; MaCurdy, Green, and Paarsch 1990; Blundell and MaCurdy 1999), The impli tion of this body of literature For present purposes is that the interpretation of the Coefficient on the marginal tax rate variables that we estimate, and that other inves tigators have estimated using similar methods, must be made with caution. "The object of interest in the piecewise-lineat-constraint literature has generally been the estimation of the parameters of a static utility function U(E,C)—where Tis hours of work and C is consumption. Tf the labor supply function is linear, those parameters are the coefficients in the equation for H if utility maximization occurs on segment s of the constraint: H= 04 BWE14,60] + NG) + x te (7.10) where W is the hourly wage rate, tx) is the marginal tax rate on segment s for an Individual with characteristics x, and Ny, is virtual nonlabor income for segment s ‘Aside from the interaction berween W and the marginal tax rate, tx), and the pres- ence of the virtual income variable, equation (7.10) fits into the framework of equa~ tion (7.1) that formed the basis for the earlier econometric analysis. ‘Unfortunately, as shown in the appendix, the values of FH] observed in a cross sectional data set to be located on a segment sare not generated by equation (7.10), for segment classification error implies that the observed segments is not the true segment s generating H. Such error is necessarily present if the variance of & is nonzero; consequently, assuming sway such classification ersor is inconsistent with the existence of €. Instead, H observed along a segment s is determined by a weighted average of marginal tax rares on all other segments ofthe constraint, Fur- ther first-differencing in the manacr of the difference-in- differences, fixed-effects model does not lessen this problem. in light of these issues, estimates of the effect of t(x), or of WICI ~ £G)] on Hy where ss the observed segment in the data, cannot be interpreted as representing totimates of B in equation (7.10). Instead, those estimates must be interpreted as the net effect of a change in the marginal tax rate in one segment on H, including those effects arising from correlated changes in the marginal tax rates of other seg ments. This is the interpretation we give to our parameter estimates “We should also note at this point that the static labor supply theory clearly implies that an income term should be included in the equation and that the wage rate should be interacted with the marginal tax rate, regardless of nonlinear constraintissues. WeTaxation and the Labor Supply Decisfons of the Affluent 201 test an income term in our models, and we also test interactions of W with the mar- ginal tx rat in our empirical work. However, we do not use the theoretically implied aireracrion between W and the marginal tox rate as a source of identifying variation (for example, we enter W separately as well) on the presumption that the effects of the two variables may be different for a variety of reasons."” Applying the Methodology In the labor-supply-tax case, we study the federal income tax and its effect on hours ofwork There are many variables in the federal income tax code thataffect the indi- idual’s marginal tax eate and are thus candidaces for x or 2. These variables include djusted gross income (AGT); deductions, exemptions, and filing status, which eyermine raxable income; and various tax credits and adjustments for other taxes Ench of these categories includes subcategories as well. However, few of these vari- ables ave ditect candidates for'x of %p for most are likely to be endogenous because they arc related too closely to income and hence labor supply: Enrned income is Clealy in this eategory, but unearned income in its many forms is as well, for the iajorty of that income arises from investment decisions that are probably jointly made with labor supply decisions. As for the remaining variables that go into the tax formula, we are constrained by our data, which are household survey in nature {Gee discussion later in the chapter), to those obtained in the questionnaire, The only tyro major non-ineome-tax-formula variables in our data are marital status, which is highly correlated with filing status, and family size, which is correlated with the praraber of exemptions. We test both of these variables as instruments When instruments for the endogenous earned and unearned income variables are considered, a larger number of instruments might seem to be available. Any instru nents that can be thought of as determinants of permanent income or wages arc nndidates, because they should be correlated with contemporaneous income and hence tat rates, but uncorrelated with the transitory income components that are probably correlated with the change in Inbor supply, Tn this category we consider eleeation and broad-category occupation, which arc both roughly constant over short periods of time." We also test as instruments various forms of assets thar are Tnoderately illiquid in form, such as the value of a house or the value of life insur smee, Because these assets are fairly illiquid and do not generate cash income flows, they should not be directly correlated with contemporaneous income but should be correlated with permanent income."” ‘As noted previously, because the static labor supply model implies that W is interacted with (1 ~t), we also test interactions of our instrumented tax variable vith the wage rate and with its predictors (such as education) We also test specifi~ cations that directly incorporate income effects. ‘We will also test the use of 7, (the pre-law-change value of income or AGI or hours of work) as an instrament, 28 Well as various transforms of 2. Of the transforms, the one we use most heavily is the period-p value of the marginal tax rate, (2) This is the instrament used by Feldstein (1995a). We also test including 2, as an indepen dlent regressor and using the other instruments we have described co identify the model; this controls for regression-to-the-mean and other serial correlation effects202 Does Atlas Shrug? ‘The major focus of our empirical work is specifically on the labor supply response of the rich. To maintain this focus we test instruments that stratify the population into groups that separate individuals in the upper tail of the distribution from the rest of the population. Thus, our instruments are variously formulated as those with very high period-p income, period-p marginal tax rates, very high education or high-carning occupations, and very high asset levels. "As we have stressed in our earlier analysis, the major condition needed for valid- ity of the instruments is that their effects on labor supply be constant over time. Obtaining evidence on this question is not possible with only a two-period, before~ nd-after panel such as the one we use, but indirect evidence can be obtained from other data sets, The Current Population Survey (CPS) contains information on income, earnings, and labor supply for a number of years, as well as on education, ‘occupation, marital status, and family size. Figures 7.1 through 7.4 provide infor- mation on the a priori validity of education and occupation in this respect. Figure 7.1 shows trends in annual hours of work for prime-age men in high-carning occupa- tions (professionals and managers) and all others, while figure 7.2 shows such trends for those with high education (college degree or more) and all others ® Interestingly, the figures demonstrate relatively litte trend in the hours-worked gap prior to 1986 for either variable, suggesting that they might be suitable as instruments.” The fig- ures also show little evidence of a widening of the gap after 1986, but this has no bearing on the validity of the variables as instruments, because the true effect of the law affects the post-1986 trends. These results do not extend to family income and male earnings; those varinbles significantly widened prior to 1986, between both the two education groups and the two occupation groups (figures not shown).. Annual Hours of Work by Occupational Category: Male Heads 3 2,000 z 1965 170197819818 199019952000, Yeor 4 Frofersionaie and Managers —™— All Othe ‘Source Avthors calculationsee Taxation and the Labor Supply Decistons of the Afluent 208 Figure 72. Annvsl Hous of Work by Educational Category: Mite Heads 2,500 2,300 2,100 19001 Nate n eet getter eee et 1.700 jo ane SR Neeen entnn, pceret tees 2,100 0 710 soo soem T88S HO HS 7000 Your Tan Gallege or More => All Others ‘Sourer Rathors caleulations Figuce 73_Family Income by Occupational Category: Male Heads $70,000 60,000 50,000 3 0,000 30,000 20,000 30,000 smo 1975198 sos 19801995 1000 Year Ar Frofesionals and Managers 8+ All Ochers ‘Same Authors calculations204 Does Aas Shrug? Figure 7.4 Individual Earnings by Occupational Group: Male Heads 545,000 40,000 35,000, 30,000 25,000 20,000 15,000 Earamgs 10,000 5,000 ° 1965 197039751980 1989909952000 Yeu a= Professionals and Managers _—€ All Orhers Source Authors calculations DATA AND RESULTS ‘The Survey of Consumer Finances ‘The Survey of Consumer Finances (SCF) is « household survey conducted to gather financial information from a nationally representative sample of American house~ holds (Kennickell and Shack-Marquez 1992). Since 1983 the SCF has been fielded triennially, and in 1983 and 1989 the surveys had a panel feature for which a sub- sample of households appexred in both. The primary focus of the survey is on wealth information, and considerable detail is devoted to the composition of financial and nonfinancial assets and various types of debt. Because wealth holdings are very con~ centrated at the top of the wealth distribution, the SCF oversamples high-income houscholds, The relatively large size of the affluent sample in the SCF has been used for estimating aggregate wealth and studying trends in wealth inequality (sce, for example, Wolff 1994, 1995). We use this oversample feature of the SCF to analyze the labor supply of the rich 2 ‘We use only the 1983 and 1989 waves of the SCF and the panel of individuals who appeared in both. The 1986 Tax Reform Act took effect midway between these years, but not close enough to either to warrant concern about contamination due to timing responses. The fortuitous fielding of the SCF before and after the act makes it particularly useful both for purposes of reexamnining the effect of the tax changes on adjusted gross income with data other than those available from tax returns and for investigating the response of labor supply to the act. An additional advantage of the SCF is that it contains data that enable us to examine the sensi-‘Taxation and the Labor Supply Decisions of the Affluent 205 tivity of our results—and by extension the previous results of others—to the use of a faitly wide array of alternative instruments. Importantly, many of these instru~ ments are not based on income, or some function of income, from the first period. “The SCF obtained AGI information using different methods in 1983 and 1989. In 1989 respondents were queried directly about 1988 AGI in a section of the sur- vey dealing with their federal income taxes. In 1983 there was no direct query bout AGI, but rather the SCF constructed two measures of respondent AGI from the responses to questions in the sections on income and household characteristics One measure was designed to be current-law (1982) AGI, and the other was con- structed to include full capital gains and the dividend exclusion (unlike 1982 law). When the weighted 1983 cross-section SCF is used to generate aggregate 1982 AGI, the first measure underestimates the published IRS totals for 1982 AGI by $200 billion, or 11 percent (Internal Revenue Service 1984), but the second mea sure (adjusted to current 1982 law by subtracting 60 percent of capital gains and the dividend exclusion) differs from the IRS totals by only $1 billion. Hence, we use the second measure. Because it already includes full capital gains and the dividend exclusion, itis comparable in definition to 1989 (tax law 1988); hence, when we use the change in AGI from 1983 to 1989 as the dependent variable, itis relatively free of definitional changes. ‘We use several eriteria to select a sample for analysis, Table 7A.1 provides a sum- ary of these criteria as well as their effects on sample size. We analyze male heads of households aged twenty-five to fifty-four in 1983. The age restriction implies that the oldest men were no more than sixty in the second period of the panel and, for the most part, were probably not considering retirement decisions. We select men for whom there was no ambiguity in linking 1983 data from the household record to the data from 1989. Lastly, we analyze men who had positive AGT and positive wage rates and who worked more than two hundred hours in both years, we also exclude the few observations whose labor hours were imputed in the 1989 survey. Our final sample consists of 490 men ‘We calculate a marginal tax rate (MTR) for each observation in each year from the data available on the SCF, using tax rules applicable in 1982 and 1988. To cal- oe aaa of tecble jncors, actual ACI (in 1982 AGI is reduced by 60 ercent of capital gains and the dividend exclusion) is reduced by the number of ousehold members times the exemption amount and by an estimate of average deductions of those with similar AGI based on published IRS tables (Internal Rev- enue Service 1984, 1991) This estimate of taxable income is then used with the tax tables to determine the MTR as well as the value of the tax payment. For 1983 the MTR is reduced by 5 percent if the deduction for a second worker was effective (thatis, the man's earnings had to have been under $30,000 and less than his wife's). “Table 7.1 shows the means and standard deviations of the major variables in the analysis in 1983 and 1989. The sample for this table includes only 406 men with 1983 MTR greater than 0.20, for reasons we discuss later (this is the sample clos- est to that used by Feldstein [1995a}); means for the entire sample of 490 observa tons, as well as for those with lower 1983 MTR values, are presented in Table 7A.2. The last four columns in table 7-1 subdivide the sample into groups with midrange 1983 MTR values (from 0.20 to 0.44) and high 1983 MTR values (over 0.44)(revo) - Ter0 = = = seis poyssnoy wr surge ov xpis afiua919g (ren) (eee) ow wor) 8167 20r'S B6rE Loc 321 plonpanoyy (60) - - - 8780 - - snqess enews ut usp ou ya afewuaaseg (z9¢0) (sco) sr80 oreo paurepy (ezs'sct) —(Ov6'7S) uses 660°Lr suousted xe (osse) (9°92) seo 99°06 MIN* AM (seat) (18S) $68 809 (on) te 38m AHO (800) (9000) (900) 600-0 9080 90 (0-1 = LN) se en yoaaN tiszis) (ere) (cee) (oor'ett) To'sse ——_198'Z9T 606'rr ser'e9 ‘susoaunssouisng pur Aras pur ali, (roost) —_‘(or8"T8) (s00's1) (e99'e) wezT 08'S LOU6E eor'es x ‘susoour aes pu afi, (ces'669) ——(946°T€2) (e9e't2) (608'¥51) (atv'0) Sere §—«L96'UIT eteor 10°69 €2L'Ss ‘suso>u feo, (970) (Sra) a) (99) (u19) 108 vere ose'c ore payom sinoy penuuy (oss'e9s) —_(Szs'661) «so8'871) (szr'er) SIVLST 668'891 E1619 Ozer {1D ¥) awoout ss0u8 poisnipy 6861 e861 686 £86 6861 e86t aE LW E861 FH ULI E861 BUPA, “LIN £861 Sep 20 a8 uespeyy TenGT Bang Aig ov Bag TavSm, Uap) ea ZOS GBET PHP ERT AH UTsUONENACT prEpuRg pur SmAIY TL AGELbitddddbeterad pitrdeaen titdbdyaaeedied pregdbar dd (o00'0) 0000 (reo) 690°0 (90) 690 (see'0 1070 (reco) 9610 (9960) 991'0 (c6e"0) 66t'0 prod bears baba bibadbdadd (6r'0) or0'0 (6r70) 9900 {o9¢0) oro (s6e"0) coro (tee'0) osos3>+r0 prOS2>0r0 oros?> E60 Ero53>6r0 6@032>Sc0 seoss>ceo ze053>0C0 ULI ER6T 30 Hounginsig] angy yy 02 Ay BY ure Aas9y or aay-arey ay anoy-Aaroy 01 405 BY auru-Aut on aay-Cosip 3By snoj faa 0 aang oy“spre soup a8 Sones BLEW EE HH PUE “ppg 2 TEN 20 MEY S59] pu gT-D UetA anEOL sou ave sone x Hy EBST ABUEIP ‘asoynuased ut stadde suoueuop prepung snap gg Ut ne suunowe AamoUOU TY “95° a bo J0 Ue ssf UE pO UE spanyBions S08 S90yes Ya ‘suonejnop2 soyiny runes ett ez ee 90r 90F (pauyfiamun) suouearasqQ, = (rer) - = (szeo) {(éusunp) omen = 250 = - erro ‘soumnsut 294] 30 20ree 25n0y E86 HSH = (or00) = - (0970) - oro - ~_ £100 (Gurump) soueansut 3p $861 227, — (8991) = - (60's) _ peel _ - 89c'or ‘yea aaweansur ayy £867 307] - (sro) - - (sero) - 900 - - 10 (4ususnp) anpes osnoy Egor 997 = (c60's) - - (168) ad SBPTT - _ 8198 anyea asnoy g86r 307, — eo - - (s0r0) — 288° = = esr'0 snBeuvun-seuoisaposg = sro) - - (08¢-0) - soe" - ~ sero sBoqO>I80q - «isz0) - (ost'0) - (0920) = vt60 = 800 = Stoo (daruinp yout) awoout eg6t Yat 6661 eer 6861 e861 686t 861 aqeHe A WLW £861 YH LIN c86t Hep {LLIN f86t Sip 30 28usuprpy pony TLL,‘Yaxation and the Labor Supply Decisions of the Affluent 209 Approximately 68 percent of the sample is in the former group, and 32 percent (but only 4 percent of the weighted population) is in the latter group; thus, the latter is our “high-income” sample. “The first several rows in table 7.1 show mean 1983 and 1989 AGI, hours of work, and other outcome variables of interest.* Although AGI grew for midrange-MTR men, it grew more in both absolute and percentage terms for high-MTR men ‘Annual hours worked (calculated from the product of normal weekly hours and nor~ ‘mal annual weeks worked) increased for both MTR groups, but by approximately the same amount.” Total income, wage and salary income, and the latter combined with business income also increased for all men, but more for those with high 1983 MTR values* A key variable in the table is the net-of-tax rate (NTR), equal to 1 minus the ‘marginal tax rate. Between 1983 and 1988 the NTR increased much more for those with high initial MTR values than for those with lower values, consistent with many prior calculations of the effect of the 1986 Tax Reform Act (see, for example, Haus- man and Poterba 1987). It is this differential effect that forms the basis for all the difference-in-differences, fixed-effects estimates in this chapter and in much recent work. The table also shows that both gross and net hourly wage rates increased over the period, but more for the high-initial-IMTR group. 1¢ rest of the variables in table 7.1 are used in the subsequent analysis as con~ trol variables (particularly masital status, household size, and age) or as instruments for the change in the NTR. In all cases, only the 1983 value of the variable is used In addition to the distribution of the observations across seven (rather than two) 1983 MTR groups, the table shows the means of several additional variables. These include a high-income (“rich”) dummy, equal to 1 if 1983 total income exceeded $100,000; a dummy for educational experience after college; a dummy for those in professional or managerial occupations; variables for the value of a house and of life insurance plans, as well as a dummy for those either owning an expensive house (greater than $200,000 in value) or holding a large amount of life insurance (greater than $300,000). Results Although our major focus is on hours of work, we initially benchmark our results against those of Feldstein (1995a), both to determine whether our data give simi~ lar results to his for AGI and to illustrate the use of alternative instruments. We find results for AGI in our data quite similar to those of Feldstein, although we also find the magnitude to be somewhat sensitive to the use of alternative instruments AGI Results Table 7.2 shows the estimates of effects of the 1986 tax act on AGI using a tabular methodology similar to that of Feldstein, and table 7.3 shows those estimates using a regression methodology. The instrument used in the Feldstein ‘povel is the ingual period level of the MIR grouped into categories, We construct three groups—low (less than or equal to 0.20), midrange (0.20 to 0.44) and high (0.44 to 0.50)—that differ slightly from a four-group categorization used by Feld- stein” Feldstein omits the first group, those with low MTRs, from the sample, so ve also omit that group for our initial analysis (though we subsequently add that210 Does Atlas Shrug? Table 7.2 Difference-in-Differences Estimates of the Effect of NTR on AGI 31989-1983 Differences by 1983 MTR Group High 1983 Midrange 1983. Difference of |—_Implied Variable MIR MTR Differences Elasticity AGI ‘Average linear difference 118,000 7947 310,000 1.992" Percentage change in average 0700 0173 0527 1.828 Average of percentage changes 0,706 0213, 0494 LIST NIR ‘Average linear difference 0203 0.079 0124 Percentage change in average 0.401 0113 0.288 Average of percentage changes 0.401 0.120 0.281 Source Authors calculations * The absolute difference-in-differences estimate is 890,000 [~(118,000 ~7,747)/{0 203 ~0079)], We con vert to an arc elasticity by multiplying by {(0 203 + 0.079)/(118,000 + 7,747). N = 406 subsample back in). In table 7.2 the first two columns show changes in AGI and in the NTR for the midrange- and high-MTR groups. For linear differences (AGI and ANTR), it can be readily seen that the high-MTR group experienced greater increases both in AGI and in the NTR. The magnitudes imply that a 0.01 increase in the change-in-NTR is associated with a large absolute increase of $8,900 of annual AGT (1988 dollars). Converted to an elasticity at the means of the data, this yields a sizable elasticity of 1.92. Feldstein estimated elasticities in the range (@.10,3.05) for a taxable-income-related concept and (0.26,0.88) for an AGI- related concept.” Although the latter is closer in concept to our income definition than the former, our estimates are closer to the former range. Given the marked dif- ferences in the way income information is obtained in the two data sets, our esti- mates should be judged to be reasonably consistent with those of Feldstein. Feldstein calculates his elasticities somewhat differently, however, by first calcu- lating mean AGI and NTR for each group, then calculating the percentage change in that mean between the years and using the difference in the differences of these percentages for his calculations. As shown in table 7.2, when we apply this method to our data, we obtain an elasticity estimate of 1.828, quite close to the linear difference calculation and again reasonably consistent with the Feldstein elastici ties, We also show in table 7.2 a third possible means of calculating an elasticity: computing percentage changes in AGI and NTR at the individual level and then computing an elasticity from the means of these percentage changes. This yields an elasticity of 1.757, which is close to our estimates from the other methods. Ofthe three methods of calculating elasticities reported in table 7.2, only the first and third—not the second, which is the precise method used by Feldstein—can be formulated in regression terms. We do this in table 7.3, where we show IV esti- mates of two types of equations, one for which the linear change in AGI is the dependent variable and one for which the percentage change in AGI (For the indi~ vidual observation) is the dependent variable. In both cases there isa single regres~ sor, which is either the linear change in the NTR or the percentage change in NTR.Table 7.3. Regressions to Generate Difference-in-Differences Estimates of NTR on AGI Linear Differences Tndividual Peccentage Changes ‘AGI NTR AGI AGI NTR AGI (Reduced-Formn) (First Stage) sis) (Reduced-Form) (First Stage) (2SL8) Midrange 1983 MTR 7747 0079" = ase 0.120" = group dummy (5,934) (0.004) - (0084) (0.006) - High 1983 MTR ous" 0.203" - 0.706" 401 - group dummy (0.029) (0.018) = (0.216) (0.029) - Change in NTR - - 390,000" - = ast" = = (289,000) - - (0.882) Constant - - ~62,464" - - 0.002 - = (25,250) = - (0.126) Seurce: Aothors calealanons. ‘Saure: ethan leer ependsntvagble the ines change in AGI; an clas 2 the dependent arable the rear change 0 NTR; in columns 4 dnd b the dependent variable is the percentage change in AGI; n column ‘weighted. Standard errors appear in parentheses, N= 406. Signfiean a.10 evel; “significant a 05 level, “significant ot-01 level § the dependent variable ss the percentage change in the NTR, All regressions aze212 Does Atlas Shrug? Instrumental-variables is applied by using a single dummy, in effect—whether the 1983 MTR is in the high category—as the instrument." Table 7.3 shows, for both ‘methods, the reduced forms as well as the first-stage regressions, whose coefficients dire identical to the entries in table 7.2. The second-stage IV coefficient on the change in NTR is 890,000 in the linear model and 1.757 in the percentage-change model, thus replicating the estimates in table 7.2; the former must be converted to dn elasticity, which we showed to be 1.992 in table 7.2. Table 7.3 shows standard errors on the estimates that are far below the coefficient magnitudes and hence imply highly significant effects. able 7.4 shows the effect of adding additional independent variables to the model as well as, more importantly, the effect of using alternative instruments, on the second-stage estimated coefficient on the linear change in NTR in regressions for the linear change in AGI. The first row shows the coefficient that results when a number of additional regressors are included (in both the first and second stages)—family size, masital status, and age. This addition has little effect on the coefficient. The second half of the table shows the F-statistic on the instruments, Table 7.4 2SLS Estimates of the Effect of NTR on AGI with Alternative Instruments ‘Second-Stoge Equation’ First Stage Equation Coefficient on Standard Instrument(s) Change inNTR__—_Ecor__F-Statistie_P-Value Two 1983 MTR groups 0.96" 0320 38578 0000 0.126 Seven 1983 MTR groups 0.162 0126 «© 42742 0.000 0420 High 1983 income dummy 0-839 0297 41.756 = 0.000 0.132 Log 1983 AGI o3ase 0140-20216 = 0000 0.365 1983 marital stanus (married 0.123 1.343 0672 (0328-0065 dummy) 1983 household size 0152 1.128 0683 03170075 Postcollege 34 0435 © 14336 = 0.000.074 Professional-manager 1974 274 0662 03380043 Log 1983 house value and log 64g" 0289 9.824 0,000 0.128 1983 life insurance vedue? High 1983 house value or life 0.660" 32730465 0.000 0.109 insurance value (dummy) Source Kuthors caledations ‘Noten Sample of men with midrange and high 1983 MTR (V = 406). All regressions are weighted two- stage least squares using linear differences in AGF and NTR in second and fist stages, respectively, Each line in ble shows results from a different model with a different set of instruments The F-statstics test ‘zero seericions on the instruments in the fst stage and the p-values associated with those statistics are Shown along with the R? from the first-stage regression, Each model contains in both the fist and second tages constant term and independent vasiables for 1983 age, marital status (dummy for whether marsied), ‘tnd household size; the estimates on these control variable are presented in table 7A 3 fortwo of the mod ‘ds When marital status and household size are used as instruments, these vasiables are omitted from the fecond stage, When these two instruments are used, only those with no change in marital status or howse- bold sae are included * Coefficients and standard errors divided by 10° ¥ Instruments also include dummies for zero house value and life insurance ‘Significant at-10 level, “significant at O5 level *signficant at 0% level‘Faxation and the Labor Supply Decisions of the Aluent 218 the p-value for that statistic, and the R-squared of the first-stage regression; the high F-statistic on the instrument (that is, the MTTR dummy) shows this instra- ment to be strong. “The second row shows the effect of using seven separate 1983 MTR groups as instruments instead of the two used heretofore. (See table 7.1 for group definitions; the highest ofthe groupsis the same as the 0 44-and-over group.) Interestingly, the NTR coefficient lores significance in this specification. The source of the difference isillustrated in figure 7.5, which shows the change in AGT between the time peri- we tp for the different MTR groups. The figure includes the less-than-or-equal-to- 6.20 MTR group, so it shows three and eight MTR groups instead of two and seven, respectively ® For all of the eight MTR groups except the highest (MTR between 0-44 and 0.50), the relationship between initial-period MTR (and hence the change in NTR) is lator negative, but the highest-IMTR group has avery lange jncrease in AGI. Thus, it appears that itis the highest-MTR group that is respon sible for the positive elasticities being estimated.” Because initial-period MTR is primarily a function of initial-period AGI, we examine whether using AGI itself as the instrument would alter any of these con- Sfusions, ‘The third and fourth cows of table 7.4 show that it would not. Using 2 dummy for high 1983 income, a positive and significant elasticity is obtained in the same range as that obtained by using the two-MTR groups, But when the log of ‘AGI is used=thereby not making a special distinction between the highest-AGI group and the rest of the population—the estimated coefficient i significant but drastically reduced in magnitude. “That initial-period AGI is the implicit instrument in this approach, even if MTR groups are used, brings the two issues described earlier into consideration, Figute 75 _ Change in AGI by Change in NTR $140,000 120000 100,000 80,000 60,000 (Change AGL 0,000 20,000 bs 0 905 on 015 02 025 Change in NTR “a Fhnce Group MTR —e— Bight-Group MTR Source Authors calculations214 Does Atlas Shrug? Regression-to-the-mean effects in AGI—or more generally, serially correlated cerrors—bias estimates that use AGI as an instrament. In addition, even ifa measure of permanent income or AGI were used (that is, one purged of serially correlated transitory components), the more fundamental issue arises of whether its coefficient has been changing over time. For these reasons, we test several alternative instru- ments shown in table 7.4. First, we test the 1983 values of marital status and house- hold size, because these both enter the tax formula independently of AGI How- ever, as the table indicates, they are extremely weak instruments—they do not discriminate well between different change-in-NTR values—and yield insignificant results, Inasmuch as the results using AGI and MTR instruments have indicated that positive tax effects are arising only from the very top of the distribution, the fact that marital status and houschold size do not discriminate well between that upper group and the rest of the population makes their insignificance not unexpected. ‘We next test education and occupation as instruments. To discriminate to the greatest extent possible between the upper tail of the distribution and the rest of the population, we construct a dummy for whether an individual has postcollege edu- ational experience and a dummy for whether an individual is in a professional or managerial occupation, the highest-paid occupations. As table 7.4 shows, the occu- pational dummy is a very weak instrument, but the education dummy is not (per- haps because the occupational dummy has a mean of only 0.45); nevertheless, even the latter yields an insignificant tax response estimate. However, the tax response estimate when education is used is still positive and sizable in economic terms, even though its standard error is also quite large, indicating imprecision in the estimate We test in the last two rows two measures of assets that are available in our data—the value of an owned house and the value of life insurance. These variables, while financial in nature, are sufficiently loosely connected to current income flows as to increase their likelihood of exogeneity and, similarly, are less likely to be af fected by regression-to-the-mean effects than AGI. In addition, assets are less equally distributed than income or the other instruments we have tested and hence have a better chance of discriminating between the top earners and those below. However, asset values are subject to the trending-coefficient problem, because asset inequality bas been growing (Wolff 1994, 1995) We test a set of instruments that include the log of house value, log of life insur- ance value, and dummies for those with zero house value and life insurance; and a dummy for whether either is high (see discussion of table 7.1 for exact definitions). ‘As the results in the table show, these instruments are strong in the first stage and also yield significant estimated tax response coefficients, albeit only about two- thirds the magnitude of those using the two-MTR or top-AGI-group instruments. Finally, we show in table 7.5 the effects of adding the low-MTR group back into the sample (which we have continued to exclude, for comparability with the Feldstein analysis), as well as tests for the importance of regression-to-the-mean effects. Adding the low-MTR group into the sample lowers the estimated tax effect arising when the small-MTR-group instruments are used.°6 We also show results from using the asset instruments, because they not only ate strong instru- ments but yielded significant results in table 7.4; the estimated coefficient falls slightly when the low-MTR group is added as well (from 0.649 in table 7.4 to‘Taxation and the Labor Supply Decistons of the Affluent 215 ‘Table 7.5 2SL$ Estimates ofthe Effect of NTR on AGI Using Alternative Instruments and Samples and Controls for Regression to Mean, Tnstrament Set Two 1983, ‘Log 1983 House Value ‘High 1983 House Value MTRGroups Log 983 Life Insurance _or Life Insurance Value Change in NTR’ gis 0552" 0.885 1.006" 0977" (0.255) (0224) (0.430) (0.443) (0510) 1983 AGI — = -04i4" ~0.698"" 0674" - — 249) (0329) (371) Low 1983 MTR y y n y y group included? First stage: Fstatistic 44408 1203652014432 13033 p-value 0.000 0000 © 0.000 0.002 0000 R 0.128 0135 0173211 0208 Observations 490 490406490 490 (unweighted) Source Authors calealations ‘Notes All regressions are weighted two-stage last squares using linear differences in AGT, Standard errors appear in parentheses * Coefficients and standard errors divided by 10° “Significant at 10 level; “significant 0S lve ignificant at O1 level 0.552 in table 7.5, for example, for the log asset instrument). With these instru ments, we can also test for regression-to-the-mean effects by entering AGI into both the first- and second-stage equations.” As table 7.5 shows, controlling for ‘AGI in this way increases the estimated tax response coefficient. This should be expected, because pure regression-to-the-mean effects would tend to bias the coef ficient in a negative direction. (Those with positive 1983 transitory errors should experience declines in AGI over time.) ‘We thus have replicated the sizable tax elasticities for AGI found by Feldstein (1995a) and have shown that those elasticities arise from behavior of the extreme upper tail of the income distribution that is quite discontinuous with that of the rest of the population. Instruments that are successful in discriminating between that top group and the balance of the population, even if they are instruments not strictly AGL based (for example, asset instruments), yield similarly sizable tax elasticities even if regression-to-the-mean effects are accounted for. Results for Hours Worked Having tested instruments for AGT, we now turn to hours of work and apply the same steategy and test the same set of instruments. Figure 7.6 shows the distribution of 1983 annual hours worked by the three 1983 MTR groups we used for the AGI analysis. The distribution is remarkably different for the high-MTR group and the rest of the population, with about 60 percent of the high-MTR group working more than 2,500 hours per year and almost 30 percent working more than 3,000 hours per216 Does Atlas Shrug? Figure 7.6 Annual Hours Worked by Marginal Tax Rate, 1983 70 @ 50 0 Percentage 0 20 10 4,000 t0 1750 1,751102,250 2,251 102,500 2,501 to 3,000 3,001 to 4,000 Hours Seurce, Aathors calculations. year. For the rest ofthe population the mode s typically in the range of 1,751 to 2,250 Hours. Given these high hours of work, there is at least some prin facie question of whether there is much opportunity for additional work among the rich. "Table 7.6 shows IV estimates of the effect of NTR on annual hours worked, using the same methodology as in table 7 4—with the exact same specification and sample for each equation but with a different dependent variable, As the tble indi- cater, none of the effects are significant except that for the high-asset group, and that effect is negative. The strength of the estimates, shown in the latter columns of the table, is necessarily the same as in table 7.4; thus, the insignificance of the estimated effects cannot be ascribed to the weakness of the instruments. Figure 7.7 shows the pattern of changes in hours worked over the period by 1983 MIR group, in analogy to figure 7.5. The relative hours changes for the midrange- and high-MTR groups are Shehtly positive but small in magnitode; the coefficient in table 7.6 is negative because of the addition of the other independent variables, but itis still insignificant. Even if the lack of hours response of the upper tail of the distribution can be ascribed to hours that are already near their maximum, this is not true for the rest of the population. Indeed, the very high hours worked of the upper tal is incon frovertible evidence that hours of work are fundamentally flexible upward in the US. labor market for those who are working “only” two thousand hours per year (that i, year-round full-time). Yet figure 7.7 does not show any particular positive relationship between initial MTR (and hence the change in ‘Byand the change in hours worked. Nor do the instruments in table 7.6 that treat all parts of the popeee ‘Taxation and the Labor Supply Decisions of the Affluent 217 Tuble 7.6. Estimates of the Effect of NTR on Annual Hours Worked with Alternative Instruments Second-Stage Equation" First Stage Equation Coefficient on Standard Instruments) Changein NTR Error F-Staitie_P-Value_R? Two 1983 MTR groups 0.010 0135 38578 ~©—:0000 0.126 Seven 1983 MTR groups 0013 0063 «42.742 «0.000 0420 High 1983 income dummy 0246 os «417560000, 0.132 Log 1983 AGI 0.038 0069 © 0216 = 0.000 0365, 1983 marta status (massied 2011 2211 0672 0328 0065 p dummy) i 1983 household size 0.936 1.088 0683 03170075 i Postcollege 0.320 0229 © 14336 ©0000-0074 rofessional-manager 1369 1.627 0662 0338 0.043 Log 1983 house value and log 0072 ous 9824 0000 0128 "1983 life insurance value? High 1983 house value or life 0.488" 0173 30.465 00000 0.109 insurance value (dummy) Source: Kuthow calealations aan een of men wich nkdunge and hgh 1985 MTR. All egressons ae weighed S68 lease ‘eames, ving inesedflerences in AGI and NTR in cond and fist sec respectively. Bach line in table saa eee om a diferent mode with a different se of instruments, The F-statises et 250 OS a ements inthe ft stage ad the pales sociated with chose statics af shown slong, f Hi the at-sage regression, Each model contains in bth the fst and second og: 1S Wh te pendent vara for 989 ape, rata stats (dummy fr whether marie) snd hoe Be er hs ennteson these contol variable are presented in tbls 7A 3 fer cvo of ‘models, When held ze ld sie neue ae nsurent, hese varnbles ar omit fom the scones ar ae ament reused, ony thas th nochange im marital satus os household dear included. S Coficints and standard errors divided by 108, ‘nearuments also include daramies for zero house value and life insurance, *Signfeane at JO evel: “significant at 05 level, “significant a 01 level ulation distribution equally show any more positive sponses than those that focus Sa the upper tail. Consequently, the vidence in these datas that hours of work are, one eee rch previous work, inelastic for prime-age males in the United States ‘Ruble 77 provides several additional specifications to test alternative hypotheses for the efaet of hours worked. Adding the low-MTR group into the sample has Te ee the significance ofthe tax effects, nor does controlling for regression no CE effectein hours of work, We als show in the last two colurnns of table Sern ification that includes the change in tax payment as well asthe change in TRUNPRR This specification approximates more closely the neoclassical Isbo! uP ply function by accounting for income effects” ‘The results show insignificant Pane fonts and do not change the insignificance of the NTR effects. The house scorn thie insurance variables are exzermely weak instruments for the change in tax payment that could, in principle, be responsible fr this result "We turn in table 7.8 to test whether NTR effects might be significant on hours of work far some subportions of the distribution, The theoretically appropriate price of218 Does Atlas Shrug? Figure 7.7_Change in Hours Worked by Change in NTR, 150 ‘Change in Hours Worked (Change in NTR =<" Three- Group MTR —e— Fight Group MTR| Scurce Rathors calculations leisure is W(1 ~ 0), which, unless it affects hours of workin simple logarithmic form, implies that the percentage effect of a change in NTR should vary with the value of the wage rate. For completeness, we also test such interactions for AGI as a depen- dent variable. We test the same sets of samples and instruments shown in table 7.7. ‘The results in table 7.8 show no effects of this type to be present in the data for hours of work. When the NTR change is interacted with our postcollege dummy (a predictor of the wage), the interaction coefficients are insignificant in all cases save one where the coefficient is a counterintuitive negative. When the net wage itself is treated as the endogenous variable of interest and is instrumented accord- ingly, the same pattern results. ‘Interestingly, several positive and significant education interaction effects are found when AGI is the outcome of interest. Indeed, for some specifications the AGI effects are insignificant for the population without postcollege experience. “These results are consistent with the hypothesis that higher-wage taxpayers respond more heavily to changes in their marginal tax rates than those with lower wages. However, these results ate sensitive to adjustment for regression to the mean. As table 7.8 shows, when such adjustment is made the AGI results disappear for the high-educated group but are stronger for the rest of the population; interestingly, hours of work effects appear for the latter as well Income Decomposition To explore the mechanism by which the AGI tax response occurs, we briefly decompose income into three major constituent parts— ‘wage and salary income, business income, and other income—and apply our same methodology © estimating tax sesponses for these three variables. We should notea ‘Taxation and the Labor Supply Decisions of the Affluent 219 ‘Table 7.7 28LS Estimates of the Effect of NTR on Annual Hours Worked Using Alternative Instruments and Contcols for Regression to Mean Instrument Set Instrument Set High House Two 1983 Valucor Life Log 1983 House Value MTR Groups _Insorance Value Log 1983 Life Insurance Change in NTR’ 0025 Tose O1G4 —-0024 -0015 0129 (0127) (0117) 141) (0122) (0300) (0231) ‘Change in tax - - = — 0001 -0.001 payment - - - — (0.030) (0.024) 1983 hours - “sos 0600" — 081 worked - (oom) = (02) — = = ——(0075) Low 1983 MIR y D 8 y y y ‘group incloded? First-stage NTR equation Fstatistic 44.408 32329 «982412036. 12036 12536 pevalue 0.000 ‘0000 © 0600» 0.000 0000 0.000 R 0128 0113 0128-01350 135 «0140 First-stage tax payment equation Fstatistic - - - - 077 12 pevalue - - - - 0253 0293 R - — _ - 0012 001 ‘Observations 490 406 406 «490490490 (unweighted) Source: Ruther? calculations ‘Nore Al regressions ae weighted two-stage least squares using linea differences Standard errs appear in parentheses Coefficients and seandaed errors divided by 10° ‘Signifeanc at 10 evel; significant. level, “significant at O1 level that the sum of these three components, or total income, is not the same as AGI in Surdata set, Total income is the sum of all forms of income reported on the surveys potonly is AGI not fiom tax records, but itis the response to a specific question on the survey “Fable y 9 shows the results of this exercise. The first column shows the results of applying the Feldetein methodology to total income, wage and salary income, and the gum of wage and salary income and business income. Business income is in~ Guided with wage and stlary because it is zero for most of the simples business Jncome responses are necessarily equal to the difference in the coefficients jn the second and third rows of the table. The coefficients for other income are also Sbtainable by subtracting the third row froma the fist. The Feldstein methodology Shows significant tax effects on wage and salary income and its sum. with business income, and the larger coefficient when business income is included indicates that business income isthe largest source of the response. However, this result does not220 Does Atlas Shrug? Table 78 Estimates ofthe Effects of NTR on AGI and Annual Hours Worked with Education and ‘Wage Interactions Using Alternative Instruments and Samples and Controls for Regres- sion to Mean Tnstrument Set 1983 House ‘Value Two 1983, or Life MTR Log 1983 House Value Insurance Groups Log 1983 Life Insurance Value Hours worked: I NTR ~0077 0272042356 O23 ora (0.260) (0.169) (0155) (0435) (0122) (0158) NTR x (postcollege) 0186-0528 0063 «0263. «0033 -0.407* (0.294) (0358) (0348) (0.287) (0278) (0.246) Hours worked: IT NIRxW 4344-3996 --3752,- 3.908 2860-7311" (4042) (3395) (3.746) (2684) (3.012) (4405) AGLI NIR 1202" 0452 0393-0823" 1.047" 0.972" (0.499) (0328) (0250) (0427) (0398) (0.475) NIRx(postcollege) 0.149 1448" 1.298" 06450423, .167 (0565) (0694) (0560) (O84) (0.328) (0315) AGEI NIRXW 2215 6 16060" 16797" 14,7530" 1,963.9" 9471 (6552) (559.7) (5192) (6798) (6333) (986.4) Low 1983 MIR 2 8 y a y y group included? Control forregression on ® A y y y to mean? Observations 06 406 490 406 490 490 (unweighted) Source, Rathore calculations [Notes All regressions are weighted two-stage last squares using linear differences, and all include the afore~ mentioned contol variables in both stages. The regression-to-the-mean specifications include the 1983 value ofthe respective dependent variables, The coefficients in the AGI models are divided by 10, and those inthe hours worked models are divided by 10¢ * Significant at 10 level; “significant at 05 level significant at 01 level hold up when asset instruments are used and regression-to-the-mean effects are allowed, as the remaining columns show. The major change occurs when regres- sion-to-the-mean effects are permitted, thus wiping out the business income effect. (In fact, it turns negative.) This result implies that serial correlation in business income between 1983 and 1988 was positive, not negative; those with above~ average (below-average) business income in 1983 had even greater (lesser) business income in 1988. Thus, the implication of the table is that the large business income responses shown in the first column are incorrectly assigning differential growth rates of such income to the tax law change.eeoE Texation and the Labor Supply Deetsions of the Affluent 221 Table 79 ISLS Estimates of the Elect of NTR on Other Dependent Variables Using Alternative Tnataaments and Samples and Controls for Regression to Mean Tastrument Set High 1983 House Value Two 1983 or Life Dependant MIR Log 1983 House Value Insurance Variable Groups Log 1983 Life Insurance Value Total income. poe Ose (OSO OATS 0500028 (o3a7) (0316) (0243) (0452) (0398) 486) Wage/Salary aon 029s" o2a7™ ava” 60s O88 (0106) (110) (0092), 153) 17H] aa) Wage/salary and yom 0052" 0377 «0153037, 146 business income (0256) (0235) (0180) (0367) (0396) (481) Low 1983 MTR 0 n y A y y ‘group included? LLagged dependent ® 8 , y y y variable included? Observations 406406 490 406 490 490 (unweighted) Teurce Author eaelations Sree egreona are weighted Worstag lat squares wnginea diffrness Each ow shows the NTR oelcient fora diferent dependent variable, All models Jackale aconstant term and independent variables feeages mail eats, aod household number in 1983 in both stages © Coeficents and standard ercors are divided by 10 “Sigaeane a 10 evel "significant at 05 love, “signfcans at Olt “The tax response does remain for wage and ealary income, however and itis neta ite orm of income that we conclude constitutes the major sours of adjustment tothe act. Because we have found no hhours-of-work response, we there~ agian Fond implicitly that the entire response ro the Tax Reform Act of 1986 for men occusred in hourly wage rates. CONCLUSIONS A tong-standing isue in the effects of taxation on individual behavior concerns aoe Sabor supply, most commonly mensured by hours of work, responds to tax- net pave ecarvined whether high-income men—the rich~-o respond High- income taxpayers are often thought fo have more opportunities te respond to tax tavy changes and to have a greater incentive to do so because of their high marginal da ra neE ar analyis of changes in the hours of work of such men benwec? 1983, tnd 1989, in response to the marginal tax rate reductions legislated in the 1986 Tax aa ae ate Fn! exsentally no evidence of any such response, We speculate that222 Does Atlas Shrug? this is partly a result of the fact that such men are already working long hours (often more than three thousand per year) that there is little remaining opportunity for response. ‘The major limitation of our study for learning about the behavior of the rich in response to taxation arises from the limitations of the data in yielding information about other aspects of the labor-force behavior of the rich. Incentives to work as self-employed and incentives to work in jobs in which compensation is deferred or otherwise tax-sheltered are just two examples. Better data on these behaviors of the rich are required before further progress can be made in investigating them APPENDIX: MODELING ISSUES IN THE USE OF REPEATED CROSS-SECTIONS AND IMPLICATIONS OF PIECEWISE-LINEAR TAX SCHEDULES Repeated Cross-Sections Here we discuss the application of the difference-in-differences, fixed-effects method of estimation with repeated cross-section (RCS) data instead of panel data. Wee assume we have two independent cross-sections of the population with infor- mation on y and x or z, but that the individuals in the two are different.*? Estima- tion of the models with time-invariant x or z is not difficult because the invariance of x and z implies that individuals in the two cross-sections can be matched to one another using common values of x and g; although they are not the same individu- als, they are drawn from the same strata of the population. This also implies that all time-invariant error terms (like }!) will have the same mean for individuals with the same value of z in both populations. In the case of time-invariant x, equation (7.1) can be pooled across periods to estimate Ye= Op + [Aor,]D, + Bld, xx) — d,G)JD, + Bd, (x) + yx + (VAX) (t=pp+t) where D, equals 1 ift = p+ 1 and 0 otherwise. The coefficient on the change in law shown in brackets is identified (apart from nonlinearities) by virtue of the assump- tion that y does not vary with p; ifit did, then an extra term D,x would be required and the effects of the two x variables would be confounded with the effect of the change in law. Note that the separate d,(x) variable could either be allowed to have a different coefficient than that on the law-change variable, or it could be folded into it. In the case of time-invariant 2, equation (7.4) can be pooled across periods to give c= Opt [Ace ]D, + Bld, «1(2) ~ d,(2)]D, + Bd,(2) + p+ & (78.2) (c= pp+t) In this case, the coefficient on d,(z) is a biased estimate of B because z and 1 are not independent, but the coefficient on the change in d is asymptotically unbiased because that variable is independent of jt conditional on d,(2).!‘Taxation and the Labor Supply Decisions of the Affluent 223 “Time-varying cand zraise more difficult issues because the populations with the same values of and 2 from which the two cross-sections are drawn are not com~ pored of the same individuals. However, at least ifthe variable is exogenous (the x” hee), those with the same value of x in the two cross-sections will have the same mean y in the absence of an effect ofthe law. Consequently, in this case equation (7.1) can be pooled across periods to obtain an estimating equation analogous to equation (7A.2), namely, Ye = Oy + [Ad,ID. + Bldp +1 Ofpo1) ~ dy G%p)ID. + Bd, (,) +¥ix,(1 - D)) DN Ey) (t=p,p+1) [Asin equation (7A.2), the separate term for d,(s,) could be used to obtain a sepa: rate estimate of B or be included in the first term in brackets for asingle B estimate.” On the other hand, if time-varying, endogenous z is the variable used for identifi- cation, using RCS data is more problematic, Pooling equations (7.6) and (7.7) across periods, we have: Ye = Op + [AO ]De + Bld + i(2pes) ~ dye IID. + Baap) + H+ € (7.4) (t=pp+D Once again the issue is whether zs independent of, and m of 44. Itis dif- ficult to generalize across all applications because the degree of jointness of y (and therefore of €) and 2 depends on the particular variables in question, but in many cases such independence is unlikely to hold. “Tf the independence condition fails, the distribution of individuals with different values of 2 will change between the periods, as will the mean of y among individu~ lls with fixed values of z. Thus, the implicit groups formed by different values of 2 wvill be endogenous, thus biasing the estimated effects. The availablity of lagged 2 in panel data made possible an approach that used z» as an instrument (albeit with the regression-to-the-mean problems noted there), but this approach is not possi- ble with RCS data. Piecewise-Linear Tax Schedules The common approach to estimation of labor supply choice in the face of a bracket income tax system has been to specify the “marginal” labor supply function along 2 Segment of the budget constraint—that is, bor supply as a function of the “Tocal” marginal ax rate (or net wage rate) and “virtual” nonlabor income (see references to this literature given in the text). Assume that the marginal tax rate in bracket sis t= 4,...8) and that the value of income (or a transform of income, like AGI) ae the beginning, of bracket s is a(x), where xis a set of socioeconomic chartcter- istice that affect the individual's tax position (chat is, variables affecting AGI or affecting which schedule is applied, such as filing status). These 2S parameters char acterize the tax system completely for a taxpayer with characteristics x. Maximizing224 Does Atlas Shrug? a utility function U(HLY - Tix) along segment s, where H is hours of work, Y is gross income, T is the amount of the tax payment, and x is vector of exogenous eecioeconomic characteristics that affect preferences for work, gives the “marginal” Jabor supply function He g(WIt- ,Q).Noda) +e = 0+ BWEl ~WGx)] + BNO) + +e (AS) as given in equation (7.10) and with variables as defined there. if individuals observed to locate on only one segment in a cross-section are used for estimation of equation (7A.5), the model is identified only under the same conditions described for equation (7.1). Thus, the basic identification problem posed in the text is present here as well, Variation in the net wage and Ti rtual nonlabor income can instead be obtained by pooling the data across seg ments, because different individuals with the same x will usually choose a variety of segments. However, this variation is endogenous, because the segment upon Which an individual is observed is a function of €, an error term that includes het- cerogeneity of preferences, measurement error, and “optimization” error (that is, deviations from optimal choice arising from the cost of fine-tuning labor supply location relative to the brackets). Further, this endogeneity cannot be eliminat- ‘ed for the same reason already discussed, namely, that there are no exclusion restrictions that, apart from nonlinearities in functional form, could be used to identify the model. “Formally, let D, be a dummy variable equal to 1 if the individual is observed on segment § and equal to 0 otherwise. Then implicitly all variables in equation (7A.5) are multiplied by D,. Denote by V the set of variables W, N, all 38 para meters of the tax schedule, and x. Then D, = f(V,e). If instrumental variables esti- mation is used to address the endogeneity, then identification is not achievable (apart from nonlinearities) because all variables in V are already in equation (7A'5) and there is no variation in the tax parameters in V independent of W,N, ‘and x5 Thus, obtaining variation by pooling across segments does not solve the identification problem. With it therefore established that the fundamental identification problem dis~ cussed in the text applies as well to the model when the piecewise-linear nature of the budget constraint is accounted for, it may be asked whether the use of first- differencing and the existence of a variable in x with stationary effects on Hi may ‘ermit identification here as well. In a fundamental sense, the answer is affirmative, ‘ecause the effect of tax rates is nonparametrically identified under those conditions and hence must be here as well. 1f E(H,|x) = {[T,(«).x], where T, is the 2S vector of tax parameters that change with time (p), then the existence of an x with sta- tionary effects is equivalent to the assumption that p does not enter the function f independently or, equivalently, that the function f is not indexed by p. Two waves ofa panel thus identify the effect of T,() on E(H, |x). The question instead is what parameters aze identified by this strategy, and here the answer is that no simple function of the parameters in equation (7A.5) are iden~ tified. This is easy to see if we consider the inean of equation (7A.5) conditional on being on segment s: E(HIV,D, = 1) = 0+ BWI -.)] + 8N,0) +x + EE|V,D, = 1) (7A6)Taxation and the Labor Supply Decisions of the Affluent 225 from which it is clear that the residual term B(€|V,D, = 1) is not constant over time if che tax schedule changes and hence does not cancel out in first-differencing, even ifpedoes. An additional complication, which is more fundamental, is that equation (7A.3) is not consistent with a nonzero variance of €in the first place because of the problem of segment classification error. Given the presence of measurement error Endl optirnization error in ¢, a sufficiently large positive ot negative value of ¢ moves the inglividual to a segment other than s. Thus, the H of some individuals observed fon segment sis not generated by the net wage and virtual nonlabor income on that Segment, and hence E(H|V,D, » 1) is not equal to g(WI = nGObNG)}a) + BEIV.D, = Din general, where sis the observed (rather than true) segment. Thus, the tegressors are misspecified. The mean H of those observed to be on segment s is consequently not the mean of equation (7A.5) but is rather E(HIV,D, =3) ze. (v) B{alv.D: =1)+ ERA) E(HIV,D,=1) (@A7) where Dy’, is a dummy variable equal to 1 if the true segment (defined as that {implied by utility maximization with no optimization costs) is segments; Q-y.(V) is the probability that an individual observed on s js optimizing on sD,’ is a dummy variable equal to 1 if the true optimizing point is at the kink at the begin- hing of segment i; and Ry(V) is the probability that an individual observed on seg nent sis optimizing at kink k Thus, observed H is a weighted average of the net “Wage raees and virtual nonlabor incomes on all segments for these are the determi- nants oF Hl on each segment. The fact that D,* and D," are not observed implies that the conditional means in equation (7A.7) cannot be directly estimated.” ‘ation (7A.7) thus represents the function whose mean can be thought to be approximated by the local net wage and vitual income: A liness projection of equa HEN(ZA.D) onto those two local variables, and x, yields as coefficients nonlinear fanctons of the other parameters and variables in the model, including the other tax parameters. It isthe coefficient on the net tax rate in such a projection that ig the 'B" estimated by the models reported in the text tables 7.6,7.7,78, and related tables for AGL APPENDIX “Table 7A-1_ Sample Inclusion Criteria and Sample Size Jaclusion Criteria ‘Sample Size Remaining Full SCF panct 1983 to 1989 1479 Including only ‘Male heads of households azad ‘Aged twenty-five to fifty-four in 1983 695 No ambiguity in tracing individuals berween 1983 and 1989 628 AGT in both 1983 and 1989 greater than zero 563 ‘Wages in both 1983 and 1989 greater than zero 498 ‘Annual hours worked ia both 1983 and 1989 greater than 496 ‘or equal to 200 1989 hours worked not imputed 490 Souce Authors calculations226 Does Atlas Shrug? ‘Table 7A2 Means and Standard Deviations in the 1983 and 1989 SCF Panel (Men Twenty-Five to Fifty-Four in 1983): All Men and Men with Low 1983 Marginal Tax Rates ‘Men with Low 1983 All Men ‘Marginal Tax Rates Variable 1983 1989 1983. 1989 Adjusted gross income (AGI) 43,129 ——597,082—+20,084 40,193 (45,408) (135,515) (5,450) (40,294) Annual hours worked 2,325 2371 2,272 2,337 (21) (584) (631) G02) Total income 48,995 63,285 25,470 40,602 (54,645) (138,570) (8,839) (43,383) ‘Wage and salary income 35,390 48,342,15,964 30,625 (25,383) (41,926) (9,981) (28,881) Wage and salary and business income 44,000» S7,474._ 23,524 37,669 (36,468) (102,962) (8,407)_———(36,405) Net-of-tax rate (NTR = 1-1) 0.723 0786 (0832 0.823 (0088) (0.065) (0.024) (0.051) Hourly wage rate (W) 1575 1982 931 1286 a9) 4062) 3.67) (21.62) WxNTR 3071 1507 27 1036 (765) 29.12) (296) (8.27) Tax payment 6,898 8587 1,365, 4727 (12529) (26,377) (694) 94,758.) Married 0867 0858 0.926 0.899 (0340) (0349) (0261) (0301) Percentage with no change in = 0861 = 0973, sata status - (0346) = (0.162) Household size 3405 3.255 4.100 3.833 (1492) 374) 515) (467) Percentage with no change in - oan = 0.461 houschold ~ (0499) (0.499) Age thiry to thirty-four ous 0.168 = (0.409) 37) = Age thiny-five to thirty-nine 0.175 ~ 0160 - (0.380) - (0367) _ Age forty to forty-four 0.140 0.165 = os = 037) Age forty-five to forty-nine 0183, - 0172 - (0387) = 0378) = Age fifty to fifty-four 0.093 - 0.066 - (0.290) _ (0247) - Distribution of 1983 MTR o0s¢s020 0222 = 1.000 - 0416) = 000) = 020<< 0.22 01g 0.000 = (0356) (0000) = 022

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