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Taxes, High-Income Executives, and the Perils of Revenue Estimation in the New Economy

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  • Austan Goolsbee

Abstract

This paper attempts to help explain the unforecasted, excess' personal income tax revenues of the last several years. Using panel data on executive compensation in the 1990s, it argues that because the gains on most stock options are treated as ordinary income for tax purposes, rising stock market valuations are directly tied to non-capital gains income. This blurred line between capital and wage income for has affected tax revenue in three ways, at least for these high-income people. First, stock performance has directly affected the amount of ordinary income that people report by influencing their stock option exercise decisions. Second, the presence of options gives executives more flexibility in changing the timing of their reported income and appears to make them much more sensitive to the short-run timing of tax changes, even accounting for the stock market changes of the period. Third, because of the tax rules on options, changing the capital gains tax rate, as the U.S. did in the late 1990s, can lead individuals to exercise their options early to convert the expected future gains into lower-taxed forms. The data show significant evidence of each of these effects and in all three cases, executives working in the new' economy and high-technology sectors

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 90 (2000)
Issue (Month): 2 (May)
Pages: 271-275

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Handle: RePEc:aea:aecrev:v:90:y:2000:i:2:p:271-275

Note: DOI: 10.1257/aer.90.2.271
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  1. John R. Graham & Michael L. Lemmon, 1998. "Measuring Corporate Tax Rates And Tax Incentives: A New Approach," Journal of Applied Corporate Finance, Morgan Stanley, Morgan Stanley, vol. 11(1), pages 54-65.
  2. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, American Economic Association, vol. 84(4), pages 794-809, September.
  3. Jerry Hausman, 2009. "Taxation by Telecommunications Regulation," Books, American Enterprise Institute, number 24216, December.
  4. Brian J. Hall & Jeffrey B. Liebman, 2000. "The Taxation of Executive Compensation," NBER Chapters, in: Tax Policy and the Economy, Volume 14, pages 1-44 National Bureau of Economic Research, Inc.
  5. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
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Cited by:
  1. Paul van den Noord & Chistopher Heady, 2001. "Surveillance of Tax Policies: A Synthesis of Findings in Economic Surveys," OECD Economics Department Working Papers 303, OECD Publishing.
  2. Jin, Li & Kothari, S.P., 2008. "Effect of personal taxes on managers' decisions to sell their stock," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 46(1), pages 23-46, September.
  3. Hanlon, Michelle & Heitzman, Shane, 2010. "A review of tax research," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 50(2-3), pages 127-178, December.
  4. Daniel R. Feenberg & James M Poterba, 2000. "The Income and Tax Share of Very High Income Households, 1960-1995," NBER Working Papers 7525, National Bureau of Economic Research, Inc.
  5. Peter Hoeller & Isabelle Joumard & Mauro Pisu & Debra Bloch, 2012. "Less Income Inequality and More Growth – Are They Compatible? Part 1. Mapping Income Inequality Across the OECD," OECD Economics Department Working Papers 924, OECD Publishing.
  6. Marcelo Medeiros, 2006. "Poverty, inequality and redistribution: A methodology to define the rich," Working Papers 18, International Policy Centre for Inclusive Growth.

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