Ellen McGrattan, John Taylor, Adrien Auclert, Jerry Auten, Doug Branch, Luigi Bocola, Jeremy Bulow, John Cochrane, Dean Corbae, Sebastian Di Tella, Doug Diamond, Alessandra Fogli, Paul Gregory, John Grigsby, Bob Hall, Rick Hanushek, Robert Hodrick, Erik Hurst, Chad Jones, Patrick Kehoe, Peter Klenow, Evan Koenig, Jeff Lacker, David Laidler, Ilian Mihov, Dinsha Mistree, David Neumark, Radek Paluszynski, Elena Pastorino, Fabrizio Perri, Paul Peterson, Ned Prescott, Alvin Rabushka, Raghuram Rajan, Valerie Ramey, Josh Rauh, David Splinter, Juan Carlos Suarez, Luigi Zingales


Ellen McGrattan, Visiting Fellow at the Hoover Institution and Professor of Economics at the University of Minnesota, discussed “Business Income Underreporting and Public Finance,” a paper with Anmol Bhandari (University of Minnesota) and Yuki Yao (University of Kent).

John Taylor, the Mary and Robert Raymond Professor of Economics at Stanford University and the George P. Shultz Senior Fellow in Economics at the Hoover Institution, was the moderator.


This paper proposes a new dynamic theory of business taxation that takes into account income underreporting by owners and potential reputational losses if tax evasion is discovered. Taxpayers are assumed to be of two types: those that are always compliant regardless of opportunity and those that cheat if it is economically beneficial to do so. Opportunities arise in self-employment but, in equilibrium, only for business owners that can weather the costs of an audit, which include fines for past taxes owed and losses in business brand. The theory is used to predict the aggregate and distributional impacts of increased enforcement efforts and then to run policy counterfactuals. In order to assess quantitative impacts, a baseline model is parameterized to be in line with data from the U.S. national accounts and National Research Program (NRP) random audits. The main policy experiments compare the impacts of increased public spending financed either by increased taxation on business incomes or increased enforcement efforts aimed at their owners. Higher enforcement leads to a larger decline in entrepreneurship, less investment in business and financial assets, and lower average business ages. However, changes in business incomes are roughly equal in the two experiments because of selection: higher enforcement drives out owners that are unproductive.

To read the paper, click here
To read the slides, click here


Topic: “Business Income Underreporting and Public Finance”
Start Time: February 14, 2024, 12:00 PM PT

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