Adam Looney

 

Economist

Division of Research and Statistics

Board of Governors of the Federal Reserve System

20th St. and Constitution Ave., NW

Washington, DC 20551

 

Email:  adam.looney_at_frb_._gov

Tel:  (202) 452-3703

Fax: (202) 736-1937

 

Curriculum Vitae

 

Research

 

 

This paper presents evidence that consumers underreact to taxes that are not salient and characterizes the welfare consequences of tax policies when agents make such optimization errors. The empirical evidence is based on two complementary strategies. First, we conducted an experiment at a grocery store posting tax inclusive prices for 750 products subject to sales tax for a three week period. Scanner data show that this intervention reduced demand for the treated products by 8 percent. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce alcohol consumption significantly more than increases in sales taxes (which are added at the register and are hence less salient). We develop simple, empirically implementable formulas for the incidence and efficiency costs of taxation that account for salience effects as well as other optimization errors. Contrary to conventional wisdom, the formulas imply that the economic incidence of a tax depends on its statutory incidence and that a tax can create deadweight loss even if it induces no change in demand. Our method of welfare analysis yields robust results because it does not require specification of a positive theory for why agents fail to optimize with respect to tax policies.

 

 

This paper examines the welfare consequences of social safety nets in developing economies relative to developed economies. Using panel surveys of households in Indonesia and the United States, we find that food consumption falls by approximately ten percent when individuals become unemployed in both countries. This finding suggests that introducing a formal social insurance program would have small benefits in terms of reducing consumption fluctuations in Indonesia. However, in contrast with households in the U.S., Indonesians use costly methods such as reducing human capital investment to smooth consumption. The primary benefit of social insurance in developing countries may therefore come not from consumption smoothing itself but from reducing the use of inefficient smoothing methods.

 

 

Studies of risk in developing economies have focused on consumption fluctuations as a measure of the value of insurance. A common view in the literature is that the welfare costs of risk and benefits of social insurance are small if income shocks do not cause large consumption fluctuations. We present a simple model showing that this conclusion is incorrect if the consumption path is smooth because individuals are highly risk averse. Empirical studies find that many households in developing countries rely on inefficient methods to smooth consumption, suggesting that they are indeed quite risk averse. Hence, social safety nets may be valuable in low-income economies even when consumption is not very sensitive to shocks.

 

 

We use anticipated changes in tax rates associated with changes in family composition to estimate intertemporal labor supply elasticities and elasticities of taxable income with respect to the net-of-tax wage rate. A number of provisions of the tax code are tied explicitly to child age and dependent status. Changes in the ages of children can thus affect marginal tax rates through phase-in or phase-out provisions of tax credits or by shifting individuals across tax brackets. We identify the response of labor and income to these tax changes by comparing families who experienced a tax rate change to families who had a similar change in dependents but no resulting tax rate change. A primary advantage of our approach is that the changes are anticipated and therefore should not cause re-evaluations of lifetime income. The estimates of substitution effects should consequently not be confounded by life-cycle income effects. The empirical design also allows us to compare similar families and can be used to estimate elasticities across the income distribution. In particular, we provide estimates for low and middle income families. Using data from the Survey of Income and Program Participation (SIPP), we estimate an intertemporal elasticity of family labor earnings close to one for families earning between $30,000 and $75,000. Our estimates for families in the EITC phaseout range are lower but still substantial. Estimates from the IRS-NBER individual tax panel are consistent with the SIPP estimates. Tests using alternate control groups and simulated “placebo” tax schedules support our identifying assumptions. The high-end estimates suggest substantial efficiency costs of taxation.

 

 

 

This paper examines the economic incidence of non-refundable child-related tax benefits in low-income single parent families. Because non-refundable tax benefits only reduce taxes due, many argue that they cannot help low-income families without tax liability. Single parents may be an exception because tax law permits separated or divorced parents to exchange the tax benefits tied to their children. If parents exchange child-related tax benefits and custodial parents are compensated for the trade, then the incidence of such benefits is more progressive than a naive estimate would suggest. Using data from the Survey of Income and Program Participation (SIPP) and exploiting variation in the value of child-related tax benefits due to differences in state tax systems and changes in federal tax law, I find evidence that parents exploit these arbitrage opportunities and that custodial mothers receive increased child support as a result.

 

 

This paper examines how changes in tax policy, welfare programs, public health insurance, and economic conditions during the 1990s affected welfare use and employment among single mothers. Drawing on panel data from the Survey of Income and Program Participation, I give new estimates of the effects of specific policy changes and use those estimates to explain changes in economic behavior. The results suggest that Welfare Reform policies, the EITC, and improved economic conditions, in that order, were the primary determinants of changes in welfare use and employment between 1993 and 1999.

 

Research in Progress

 

 

Revised: June, 2007