Essays on Income Taxation

He, Tianying, Economics - Graduate School of Arts and Sciences, University of Virginia
Friedberg, Leora, Department of Economics, University of Virginia
Pepper, John, Department of Economics, University of Virginia
Olsen, Edgar, Department of Economics, University of Virginia
Sandas, Patrik, McIntire School of Commerce, University of Virginia

My dissertation examines empirically how the tax code influences household deductions, how the availability of deductions alters the elasticity of taxable income (ETI), and how deductions change deductible commodities’ prices. I develop theoretical results linked with my estimates and draw conclusions about base-broadening reform design.
The first chapter, “Substitutability among Federal Income Tax Deductions: Implications for Optimal Tax Policy”, studies households making joint decisions about two tax-deductible activities: charitable giving and paying interest on home equity lines of credit (HELOC). By allowing for interactions, either substitutability or complementarity, between deductions, I provide a fuller understanding of the elasticity of taxable income (ETI) and the tax-price elasticity of charitable giving. The tax-price of paying HELOC interest depends on the tax schedule as well as current interest rates. Therefore, the two activities have different tax-prices and the identification of their interaction is possible. Using the Survey of Consumer Finances, I find that the level of each activity falls with its own tax-price and rises with the other activity’s tax-price. I show that in theory the ETI is a weighted sum of such own and cross tax-price effects between activities. I then apply this theory and my estimates to illustrate the trade-offs of three base-broadening tax policies. A conventional policy which removes a subset of deductions while keeping other deductions intact cannot guarantee either more tax revenue or greater efficiency. In contrast, an optimal policy would lower all deductions by differing degrees. However, designing an optimal policy requires knowing the values of all own and cross tax-price elasticities between deductions. Instead, I recommend a second-best policy of “uniform partial deductibility” which lowers all deductions to the same degree; it can guarantee improvement without prior knowledge about elasticities between deductions.
In the second chapter, “The Impact of Taxation on Charitable Giving by Itemizers and Non-Itemizers”, co-authored with Leora Friedberg, we estimate how the income tax code affects charitable giving by exploiting variation in the federal tax schedule arising between 1988 and 2006. We make two contributions to the literature. We use the Survey of Consumer Finances (SCF) for our analysis. The SCF reports donations for both itemizers and non-itemizers, which is important because non-itemizers do not appear in tax return data. Besides, the SCF has detailed information on individual correlates of giving and covers a long time period. Second, we estimate how giving responds to marginal tax rates not only for “exogenous itemizers”, who have high enough non-charity deductions to itemize, and who have been well studied in the literature, but also for “exogenous non-itemizers,” who face a non-convex budget constraint in their price of giving. We characterize the incentives of non-itemizers based on the tax-price they will face if they give enough to itemize, as well as the “distance” in giving required for them to reach this itemization threshold. Our results show that (1) exogenous itemizers are responsive to tax incentives, with an estimated price elasticity of around -1 for the full sample (which is similar to representative studies in the literature) and more than double for the self-employed; (2) “exogenous non-itemizers” also respond to tax incentives involving both the price and distance associated with itemizing, with sensitivity to the tax price diminishing as distance increases.
The third chapter, “Do mortgage borrowers gain the full benefit of the mortgage interest deduction?”, estimates the incidence of the mortgage interest deduction. This chapter studies whether the mortgage interest deduction benefits lenders by raising mortgage interest rates and, if so, by how much. I link the Fannie Mae Single Family Loan Level dataset and Freddie Mac Single Family Loan Level dataset with the Home Mortgage Disclosure dataset. Under both of my empirical approaches I find that rising tax rates raise mortgage interest rates, and translate these results into the incidence results that lenders capture between 3.2% and 9.3% of the benefit of the mortgage interest deduction.

PHD (Doctor of Philosophy)
charitable giving, home equity lines of credit, tax-price elasticity, elasticity of taxable income, income tax, tax expenditure, optimal taxation, mortgage interest deduction, tax incidence
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