report deadweight loss

[MattHJensen]

It would be nice to report estimates of deadweight loss given

1. user-specified assumptions for the elasticity of taxable income (following Feldstein 1999) or
2. user-specified assumptions for taxable and total income elasticities and the marginal resource cost of sheltering (following Chetty 2009).

cc @feenberg, @martinholmer, @viard.

[MattHJensen]

Would this also give us the implied cost of an additional dollar of government spending, assuming revenue is raised by the income+payroll taxes on the margin?

[feenberg]

I know that Marty has asked me for DWL numbers in the past, but I don't think they are legitimate in this context.

The incrmental value of deadweight loss from a change in the income tax depends on all the taxes and increasing returns everywhere in the economy, not just on the ones in the tax model. The change in DWL from the sales tax, when the income tax is changed can easily outstrip the loss we would calculate in the model. Add in the changes in all the other taxes and increasing returns industries, and the delta DWL we would calculate is not dominant at all.

This is something that Kevin and Alan should have a role in deciding.

dan

On Sat, 17 Oct 2015, Matt Jensen wrote:

It would be nice to report estimates of deadweight loss given

1. user-specified assumptions for the elasticity of taxable income (following Feldstein 1999) or
2. user-specified assumptions for taxable and total income elasticities and the marginal resource cost of sheltering (following Chetty 2009).

cc @feenberg, @martinholmer, @viard.

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[Viard]

That’s an excellent point.

All taxes need to be included to compute deadweight loss of any tax.

From: feenberg [mailto:notifications@github.com] Sent: Saturday, October 17, 2015 3:10 PM To: OpenSourcePolicyCenter/Tax-Calculator Tax-Calculator@noreply.github.com Cc: Alan Viard AViard@AEI.org Subject: Re: [Tax-Calculator] report deadweight loss (#403)

I know that Marty has asked me for DWL numbers in the past, but I don't think they are legitimate in this context.

The incrmental value of deadweight loss from a change in the income tax depends on all the taxes and increasing returns everywhere in the economy, not just on the ones in the tax model. The change in DWL from the sales tax, when the income tax is changed can easily outstrip the loss we would calculate in the model. Add in the changes in all the other taxes and increasing returns industries, and the delta DWL we would calculate is not dominant at all.

This is something that Kevin and Alan should have a role in deciding.

dan

On Sat, 17 Oct 2015, Matt Jensen wrote:

It would be nice to report estimates of deadweight loss given

1. user-specified assumptions for the elasticity of taxable income (following Feldstein 1999) or
2. user-specified assumptions for taxable and total income elasticities and the marginal resource cost of sheltering (following Chetty 2009).

cc @feenberg, @martinholmer, @viard.

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— Reply to this email directly or view it on GitHubhttps://github.com/OpenSourcePolicyCenter/Tax-Calculator/issues/403#issuecomment-148944778.

[MattHJensen]

@feenberg said:

The incremental value of deadweight loss from a change in the income tax depends on all the taxes and increasing returns everywhere in the economy, not just on the ones in the tax model. The change in DWL from the sales tax, when the income tax is changed can easily outstrip the loss we would calculate in the model. Add in the changes in all the other taxes and increasing returns industries, and the delta DWL we would calculate is not dominant at all.

@feenberg, my understanding is that these factors mean we can only calculate a lower bound for the delta DWL. Is that right?

cc @khecon.

[Viard]

Of course, you actually need to know all of the other taxes in order to do a correct dynamic revenue estimate – the problem is not unique to deadweight loss.

From: Matt Jensen [mailto:notifications@github.com] Sent: Saturday, October 17, 2015 4:09 PM To: OpenSourcePolicyCenter/Tax-Calculator Tax-Calculator@noreply.github.com Cc: Alan Viard AViard@AEI.org Subject: Re: [Tax-Calculator] report deadweight loss (#403)

@feenberghttps://github.com/feenberg said:

The incremental value of deadweight loss from a change in the income tax depends on all the taxes and increasing returns everywhere in the economy, not just on the ones in the tax model. The change in DWL from the sales tax, when the income tax is changed can easily outstrip the loss we would calculate in the model. Add in the changes in all the other taxes and increasing returns industries, and the delta DWL we would calculate is not dominant at all.

@feenberghttps://github.com/feenberg, my understanding is that these factors mean we can only calculate a lower bound for the delta DWL. Is that right?

cc @kheconhttps://github.com/khecon.

— Reply to this email directly or view it on GitHubhttps://github.com/OpenSourcePolicyCenter/Tax-Calculator/issues/403#issuecomment-148948230.

[feenberg]

On Sat, 17 Oct 2015, Viard wrote:

Of course, you actually need to know all of the other taxes in order to do a correct dynamic revenue estimate – the problem is not unique to deadweight loss.

Well, I would characterize "other taxes" as second order for revenue estimates, but first order for DWL. Consider that the DWL on the income tax will be a triangle, but the effect on DWL of other taxes will be a rectangle whose long dimension may be income or consumption.

dan

From: Matt Jensen [mailto:notifications@github.com] Sent: Saturday, October 17, 2015 4:09 PM To: OpenSourcePolicyCenter/Tax-Calculator Tax-Calculator@noreply.github.com Cc: Alan Viard AViard@AEI.org Subject: Re: [Tax-Calculator] report deadweight loss (#403)

@feenberghttps://github.com/feenberg said:

The incremental value of deadweight loss from a change in the income tax depends on all the taxes and increasing returns everywhere in the economy, not just on the ones in the tax model. The change in DWL from the sales tax, when the income tax is changed can easily outstrip the loss we would calculate in the model. Add in the changes in all the other taxes and increasing returns industries, and the delta DWL we would calculate is not dominant at all.

@feenberghttps://github.com/feenberg, my understanding is that these factors mean we can only calculate a lower bound for the delta DWL. Is that right?

cc @kheconhttps://github.com/khecon.

— Reply to this email directly or view it onGitHubhttps://github.com/OpenSourcePolicyCenter/Tax-Calculator/issues/403#issuecomme nt-148948230.

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[MattHJensen]

@feenberg, the general public thinks the cost of an additional $1 of government spending is $1. If we can show that, no, the lower bound (perhaps extreme lower bound) of the cost of an additional $1 of government spending is in fact (1+x) * $1, that seems like a major improvement. Am I making a mistake? If we were to report this, it would be extremely helpful to have something written down for our users explaining why the number is likely a lower bound.

Also, we could make some crude, or not so crude, imputations for many other taxes, and this would provide the community a strong incentive to get to work on those.

[feenberg]

On Mon, 19 Oct 2015, Matt Jensen wrote:

@feenberg, the general public thinks the cost of an additional $1 of government spending is $1. If we can show that, no, the lower bound (perhaps extreme lower bound) of the cost of an additional $1 of government spending is in fact (1+x) * $1, that seems like a major improvement. Am I making a mistake? If we were to report this, it would be extremely helpful to have something written down for our users explaining why the number is likely a lower bound.

Also, we could make some crude, or not so crude, imputations for many other taxes, and this would provide the community a strong incentive to get to work on those.

I think this is getting away from "providing a tool" and moving towards "doing a research project". But, I recall that Robert Hall has some work on price-cost margins that might be usable as a base.

http://www.nber.org/papers/w1785

Taxes would be in addition to the effect of increasing returns. There would be a lot more work. The problem is that providing a lower bound that is 1% of the true value may be more misleading than helpful.

dan

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[MattHJensen]

Closing this based on the argument that it involves a research project and is not essential for the tax-calculator project. It would still be nice to see a researcher undertake it sometime in the future, but it doesn't need an open issue in Tax-Calculator.