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A Guide to Using the Synthetic Control Method to Quantify the Effects of Shocks, Policies, and Shocking Policies, 2022, The American Economist, 67(1): 46-63.
Abstract: Governments introduce various policies intending to improve the overall economy or to influence individual behavior. However, estimating the causal impact of these policies is challenging. I describe how the Synthetic Control Method (SCM) can be used in undergraduate econometrics or capstone courses to estimate the impact of economic policies. The SCM is a data-driven design that provides a systematic way of constructing a comparison group that looks very similar to the group implementing the policy. Thus, it allows us to estimate the policy’s impact by comparing the outcome variable’s post-policy path between the policy group and the comparison group. I review a broad range of policies and events that are analyzed using this method, briefly describe the theory behind the method, discuss various best practices, and provide a step-by-step implementation guide using the adoption of a value-added tax (VAT) by France as an example.
Using a Natural Experiment in the Taxicab Industry to Analyze the Effects of Third-Party Income Reporting (Lead Author, with James Alm, Brett Collins, Michael Sebastiani, and Eleanor Wilking). 2022, Journal of Economic Behavior and Organization, 193: 312-333.
Abstract: This paper uses confidential tax returns data from sole proprietor businesses to estimate behavioral responses to the introduction of Form 1099-K, a third-party income reporting law that requires credit and debit card companies to report to the Internal Revenue Service gross of payment transactions that businesses receive through their payment systems. We estimate the causal impact of Form 1099-K on business reporting by exploiting a natural experiment in which some cities in the U.S. passed ordinances requiring taxicabs to install credit card readers in their vehicles, while other cities did not pass such ordinances, creating plausibly exogenous variation in the share of receipts reported on Form 1099-K. We find that taxpayers respond to third-party information reporting in offsetting ways. In particular, we find that businesses from cities with mandatory credit card in taxicab ordinances reported more receipts after the introduction of Form 1099-K compared to similar businesses from cities without mandatory credit card in taxicab ordinances, but they also reported an increase in expenses of similar magnitude. On net, third-party information reporting led to small and statistically insignificant changes in taxable income, profit, and tax liability. These results are robust to a variety of alternative specifications and placebo tests.
Small Business Tax Compliance under Third-Party Reporting (with James Alm and Timothy Harris). 2021, Journal of Public Economics, 203: 104514.
Abstract: How does third-party income reporting affect tax compliance? We use confidential administrative data from tax returns and information reports to estimate the impact of third-party income reporting on small business tax compliance. Since 2011, payment settlement entities (e.g., American Express) were required to report payment card transactions to both the firm and the Internal Revenue Service using Form 1099-K. This requirement made businesses’ receipts from payment cards—but not their cash receipts—third-party reported. Consequently, businesses located in higher payment card use areas experienced greater levels of third-party reporting than businesses located in lower credit card use areas. We construct an index of payment card use at the commuting zone level and we use this variation to identify the effect of Form 1099-K on reported receipts and deductions by small businesses. Overall, we find that the legislation modestly increased reported receipts without significantly increasing deductions. We also find substantial heterogeneity, with smaller firms, firms in business-to-consumer industries, and partnerships reporting a relatively large increase in receipts and a partially offsetting increase in deductions, implying a modest increase in tax compliance.
Decentralization and Regional Convergence: Evidence from Night-time Lights Data (with Saroj Dhital), 2021, Economic Inquiry, 59(3):1066-1088.
Abstract: The proponents of decentralization argue that it improves economic growth, while critics say it increases regional inequality. The empirical evidence is mixed and based mostly on developed countries due to a lack of income data for lower administrative regions. We combine night-lights data captured by satellites with a new database on decentralization derived from actual laws that are institutionalized and circumscribed from a global sample of countries. We then analyze the impact of decentralization on regional convergence using income data from the first and second administrative regions. We find that decentralization hinders within-country regional convergence, especially in the developing countries.
Information Reporting and Tax Compliance (with James Alm and Timothy Harris), 2020, American Economic Association: Papers and Proceedings, 110:1-6.
Abstract: Ensuring tax compliance is an enduring problem for governments in all countries. In this paper, we examine the role of information reporting in increasing tax compliance. We first discuss the practice of information reporting in the US, including a recent IRS initiative that implemented information reporting for income received through debit and credit cards via the new Form 1099-K. We then review the literature on the compliance effects of information reporting. Finally, we report some new evidence that indicates that Form 1099-K information reporting had significant—but heterogeneous—impacts on compliance rates of different types of business reporting.
Does a Value-Added Tax Increase Economic Efficiency?, 2020, Economic Inquiry, 58(1): 496-517.
Media Coverage: Business Insider, Tax Foundation
Abstract: Theory predicts that a value-added tax (VAT) is an efficient tax system, which is one of the primary reasons for its rapid adoption worldwide. However, there is little empirical evidence supporting this prediction, especially for developing countries. I estimate the efficiency gains of introducing a VAT using the synthetic control method. I find that a VAT has, on average, positive and economically meaningful impact on economic efficiency. This result, however, is driven by richer countries only. There is no significant impact of the VAT on poorer countries. The findings are robust across a series of placebo studies and sensitivity checks.
Can Reform Waves Turn the Tide? Some Case Studies Using the Synthetic Control Method (with Romain Duval, Bingjie Hu, and Prakash Loungani), 2018, Open Economies Review, 29(4):879-910, IMF Working Paper Version.
Media coverage: VoxEU
Abstract: A number of advanced economies carried out a sequence of extensive reforms of their labor and product markets in the 1990s and early 2000s. Using the Synthetic Control Method (SCM), this paper implements six case studies of well-known waves of reforms, those of New Zealand, Australia, Denmark, Ireland and Netherlands in the 1990s, and the labor market reforms in Germany in the early 2000s. In four of the six cases, GDP per capita was higher than in the control group as a result of the reforms. No difference between the treated country and its synthetic counterpart could be found in the cases of Denmark and New Zealand, which in the latter case may have partly reflected the implementation of reforms under particularly weak macroeconomic conditions. Overall, also factoring in the limitations of the SCM in this context, the results are suggestive of a positive but heterogenous effect of reform waves on GDP per capita.
Evaluating the Economic Effects of Flat Tax Reforms Using Synthetic Control Methods (with James Alm), 2016, Southern Economic Journal, 83(2):437–463.
Abstract: Tax reforms are often motivated by their potential to improve economic performance. However, their actual impacts are difficult to quantify. We analyze the impact of flat tax reform on incomes using “synthetic control” methods. We identify the eight Eastern and Central European countries that adopted flat tax systems between 1994 and 2005, and then compare post-reform GDP per capita of “treated” countries with a convex combination of similar but “untreated” countries, while accounting for the time-varying impact of unobservable heterogeneity. We find positive impacts in all eight countries, with seven out of eight cases significant at the conventional level.
Research in Progress
- Corporate Taxpayer Responses to Size-Based Enforcement and Disclosure Thresholds (with Jason DeBacker and Erin Towery).
- Pass-Through of a Really High Excise Tax
- Sales and Personal Income Tax Exemptions in Louisiana. (with James Alm). 2018, Tax Reform in Louisiana, Editors: James Richardson, Steven Sheffrin, and James Alm, Louisiana State University Press.
- Taxpayer Responses to Third-Party Income Reporting: Preliminary Evidence from a Natural Experiment in the Taxicab Industry (with James Alm, Brett Collins, Michael Sebastiani, and Eleanor Wilking), 2017, IRS Research Bulletin, Editor: Alan Plumley.
- Internal Revenue Services and the American Middle Class. (with James Alm). 2017, The American Middle Class: An Economic Encyclopedia of Progress and Poverty, Editor: Robert Rycroft, ABC-CLIO/Greenwood Press.
- Did Latvia’s Flat Tax Reform Improve Growth? (with James Alm). 2013, National Tax Association Proceedings from the 106th Annual Conference in Taxation, 106:1-9.