JATA - Spring 1990

Volume 11, No. 2

The Interpretation of Econometric Estimates of the Tax Incentive to Engage in Philanthropy

Charles W. Christian, James R. Boatsman and J. Hal Reneau


The economic concept of price elasticity emerges from a maximization problem faced by a price-taking individual. That is, price does not depend on quantity consumed. If the complement of the marginal income tax rate is interpreted as the price of a deductible expenditure, this price is unrelated to the amount expended only if marginal rate is constant., When marginal rates increase with taxable income, i.e., progressive taxation, price and amount expended are related. As a result, the underlying maximization problem is not analogous to the one from which a crisp notion of price elasticity obtains, and thus econometric estimates of the price elasticity are difficult to interpret. We demonstrate the nature of this problem, focusing on estimates of the price elasticity of charitable contributions, and provide empirical evidence that estimated price elasticities are not well suited for predicting the effects of tax reform.

An Empirical Analysis of Equity and Efficiency Attributes of Degressive Forms of a Flat Tax

Charles R. Enis and Darryl L. Craig


The equity and efficiency attributes of degressive flat tax systems are examined and compared with those of the true flat and pre-1987 tax system. The 1984 National Tax Model was used to empirically estimate the true and two degressive flat tax regimes, and to simulate the Hall-Rabushka degressive system. Among the alternative tax systems, progressiveness and efficiency varied inversely. A degressive model estimated using regression was significantly more progressive than the other alternatives and the 1984 extant system. The latter regime was associated with the greatest wage efficiency cost. A switch to a degressive system would be associated with a shift in tax burden from lower to upper and especially middle income families.

Social Security Growth Versus Income Tax Reform: An Analysis of Progressivity and Horizontal Equity in the Federal Tax System in the 1980s

Robert C. Ricketts


The substantial reductions in individual income tax rates that have characterized the 1980s have been accompanied by continued growth in the social security tax. In this study, data from the IRS Individual Tax Model File and the Arthur Young/University of Michigan Taxpayer Panel is used to simulate the effects of tax law changes in this decade on progressivity and horizontal equity in the combined distribution of income and social security taxes. The results suggest that the regressive effects of increases in the social security tax have dominated the progressive effects of individual income tax reform during this decade. With regard to horizontal equity, the results indicate that social security tax growth has contributed to the general increase in horizontal equity resulting from the Tax Reform Act of 1986.

Estimating Corporate Marginal Tax Rates with Asymmetric Tax Treatment of Gains and Losses

Terry Shevlin


A number of recent studies of business decision-making have used the firm's tax status as an explanatory variable, with tax status often represented as a binary variable for the existence of a net operating loss (NOL) carryforward. This paper defines corporate marginal tax rates based on the change in taxes payable as a result of earning an additional dollar of taxable income in the current period. four scenarios are presented to illustrate this definition and to highlight the impact of both the NOL rules and future taxable incomes (TIs) on marginal tax rates. The shortcomings of the existing proxies are obvious from this analysis. A simulation procedure (generating future TI series for each firm) is outlined and illustrated on a stratified random sample of 200 firms selected from the Compustat tapes. Some sensitivity analysis is also conducted. The simulation procedure is relatively simple-to-implement for researchers requiring firm-specific estimates of corporate marginal tax rates or wanting to examine the potential effects of proposed tax law changes.

Enriching Tax Research Through Database Merging

Suzanne M. Luttman


Tax researchers have been plagues by incompleteness or lack of data when attempting to conduct certain types of empirical research. This paper discusses database merging, which is one method of overcoming these data problems. Database merging is useful when all of the data needed for an analysis are not contained in one database. The method of database merging suggested in this paper, statistical matching, attempts to match records from two different databases on the basis of variables common to both databases. The merging procedure and its merits are discussed, and an example is presented.

The Relationship Between Firm Size and Effective Tax Rate: A Reconciliation of Zimmerman [1983] and Porcano [1986]

Patrick J. Wilkie and Stephen T. Limberg


In a widely cited study on the distribution of corporate tax burdens Zimmerman [1983] concludes that, "The roughly fifty largest U.S. . . . firms . . . have significantly higher worldwide tax rates than other firms." However, Porcano [1986] provides conflicting evidence, finding an inverse relationship between firm size and U.S. effective tax rate. In this paper we use the 1989 COMPUSTAT data base to replicate and reconcile the results obtained in Zimmerman and Porcano. We demonstrate that the disparate results reported in these studies can be attributed largely to the differences in their empirical procedures. In particular, we show and explain how alternate effective tax rate definitions, sample selection procedures, firm size proxies, and data aggregation methods affect the direction and degree of the relationship between firm size and effective tax rate. Our results suggest that the theories which purport to explain cross-firm differences in effective tax rates, and the empirical representations of the conceptual variables, need to be further refined before consistent results can be obtained.