The Effects of Tax Expenditures on Intergenerational Mobility

An important new project from Chetty, Hendren, Kline, and Saez starts with this paper, which they will be presenting at the NBER today.

This paper develops a framework to study the effects of tax expenditures on intergenerational mobility using spatial variation in tax expenditures across the United States. We measure intergenerational mobility at the local (census commuting zone) level based on the correlation between parents’ and children’s earnings. We show that the level of local tax expenditures (as a percentage of AGI) is positively correlated with intergenerational mobility and that this correlation is robust to introducing controls for local area characteristics. To understand the mechanisms driving this correlation, we analyze the largest tax expenditures in greater detail. We find that the level and the progressivity of state income taxes are positively correlated with intergenerational mobility. Mortgage interest deductions are also positively related to intergenerational mobility. Finally, we find significant positive correlations between state EITC policy and intergenerational mobility. We conclude by discussing other applications of this methodology to evaluate the net benefits of tax expenditures.

In his story on the study, David Leonhardt notes that one out of three 30-year-olds who grew up in the top 1% was already making at least $100,000 in family income. The figure is only 1/25 for those who grew up in the bottom half of the income distribution. 

And mobility varies considerably across space:

mobiltiy_1

mobility_2

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About ozidar

I'm an Assistant Professor of Economics at the University of Chicago Booth School of Business and a Faculty Research Fellow at National Bureau of Economic Research. You can follow me on twitter @omzidar. http://faculty.chicagobooth.edu/owen.zidar/index.html
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One Response to The Effects of Tax Expenditures on Intergenerational Mobility

  1. Daniel Gross says:

    Two comments on that article after skimming the paper and data:

    1. Talking about 30 year-olds “growing up” in a given percentile might be a little bit of a mischaracterization – the data measure parental income in 1996-2000, when the child cohort (1980-81 births) was 15-20. But given that I’m not sure how they make the charts showing the effect of moving at as young as 10 or as old as 25.

    2. Can’t figure out where they get the 1/3 and 1/25 number. If you pull the Quintile_Final.xls from the website, there’s a tab with national-level transition probs. Pr(Kid is in top quintile, i.e. >$100k|parent in top quintile [not 1%]) is 1/3… and it actually looks like Pr(Kid makes >$100k|parent in top 1%) is more like 1/2 based on Fig A4 of the whitepaper. But Pr(Kid is in top quintile|parent in middle quintile)=1/5. Really weird.

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