NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICS

Estimating Income and Payroll Tax Ratesfor SAGE

WiNDC April 2020 Meeting

04/24/2020

NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Outline

1. SAGE Model Overview

2. Why tax rates matter?

3. Effective Marginal Tax Rate Estimates

4. Marginal Tax Rates and Incidence Analysis

5. Ongoing Development

The views expressed in this presentation are those of the author(s) and do not necessarily represent

the views or policies of the EPA

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

SAGE Model

I SAGE is an Applied General Equilibrium model of the U.S.

I Dynamic model with nine regional representations and fiverepresentative households in each region based on income

I Developed by EPA/NCEE to improve our capabilities toestimate the economic impacts of environmental regulations

I Focus on estimating social costs, but could provide informationon incidence and other impacts of concern

https://www.epa.gov/environmental-economics/cge-modeling-regulatory-analysis

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Estimating Regulatory Costs: Tax Interaction Effect

Adapted from Marten, Garbaccio, and Wolverton (JAERE, 2019)

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

First Stage of Tax Calibration Work

I Initial focus on:

I Individual incometaxes

I Payroll taxes

I 2/3 of federal andstate revenue

I Capture differencesacross regions andhousehold incomes

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Estimating Effective Marginal Tax Rates

I Process for estimating effective marginal tax rates

1. Create a sample of individual tax returns from the CurrentPopulation Survey (CPS) Annual Social and EconomicSupplement (ASEC)

2. Run NBER’s TAXSIM model with the sample returns toestimate effective marginal tax rates for each filer in the sample

3. For each region and household, calculate source specificincome (and survey) weighted effective marginal tax rates for:

I Wage income (state + federal)

I FICA payroll taxes (federal)

I Investment income types (state + federal)

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Effective Marginal Tax Rates on Wage Income

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hh1 hh2 hh3 hh4 hh5Household

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hh1 hh2 hh3 hh4 hh5Household

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Pacific

Mountain

West South Central

East South Central

South Atlantic

West North Central

East North Central

Middle Atlantic

New England

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Marginal vs. Avgerage Tax Rates

I Marginal tax rates are important for defining incentives

I Straightforward implementation of marginal tax rates leads tomodeled transfers that are notably larger than in practice

I Model needs to “refund” households taxes collected in excessof the average rate

I In the U.S., over 90% of transfer payments are indexed forinflation (Fullerton et al., 2011)

I In SAGE, all transfers are indexed to the CPI

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Indexing of Tax “Refunds”

I Repricing labor income from the wage rate to the CPI throughthe refund process can impact the incidence estimates forregulatory costs

I Effect on aggregate welfare is small due to government closure

I Need to ensure excess taxes paid by using the marginal taxrate are “refunded“ at the appropriate wage rate

I With EITC refunded closer to CPI to more closely match reality

I Repeat CPS/TAXSIM procedure to estimate region-householdspecific average tax rates to identify the tax “refund”

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Marginal vs. Average Tax Rates on Wage Income

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Effect of Average Tax Adjustment on Incidence

I Effect on costincidence fromrefunding taxoverpayments atwage rate vs. CPI

I Stylized version ofClean Air Actthrough 2011

I Non-trivial differencefor incidence in manycases

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Ongoing Development: Adjusting the Tax Base

I SAM has totalcompensation

I Taxable base is lowerthan total compensation

I Taxable base differsacross taxes

I Adjustments based onnational average is easy

I Addressing benefitheterogenity acrossincomes is challenging

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NCEENATIONAL CENTER FORENVIRONMENTAL ECONOMICSNCEE

Ongoing Development: Other Taxes

I Corporate tax rateI Effective rate pre

TCJA: 19% (CBO)I TCJA rate: 21% +

other changes

I Disaggregating“production” taxesI WiNDC improves

customs dutiesI Working on

regional sales,excise, andproperty tax rates

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