A common concern surrounding minimum wage policies is their impact on independent businesses, which are often feared to be less able to bear or pass on cost increases. We examine how these typically small and medium-size firms accommodate minimum wage increases along product and labor market margins using a matched owner-firm-worker panel data set drawn from the universe of U.S. tax records over a 10-year period, and using state minimum wage changes as identifying variation. We find that on average, firms in highly exposed industries do not substantially reduce employment—they do not lay off workers but moderately reduce part-time hiring. Instead, these firms are able to fully finance the new labor costs with new revenues, leaving average owner profits unchanged. Higher wage floors, however, forestall entry, particularly for less productive firms, reducing the number of independent firms operating in these industries by roughly 2%. Yet these industries do not shrink; instead, incumbent responses and strong positive selection among entrants reshape industries that rely heavily on low-wage workers, yielding fewer but more productive firms after the cost shock. We also take a worker-level perspective to examine how potentially vulnerable individuals are affected by minimum wage increases. Using panels of low-earning and young workers, we find that their average earnings rise substantially with the minimum wage, while they are no less likely to be employed. Worker transitions indicate that minimum wage increases boost retention and that worker reallocation from independent firms toward corporations buffers disemployment impacts from reduced hiring at independent firms.

This article reviews the last few decades of research on tax evasion, focusing on the contributions of Joel Slemrod. Slemrod's work greatly expanded the economists' toolkit for studying tax evasion, including the implementation of field experiments in collaboration with tax authorities, forensic approaches to detecting the traces of tax evasion in observational data, and the use of administrative data to evaluate enforcement policies. Employing these empirical tools deepened our theoretical understanding of tax evasion beyond simple deterrence theory, incorporating more realistic information structures, behavioral and social motivations, and administrative frictions.

Debates about the taxation of business owners often center on the distributional effects of these taxes, particularly the degree to which they affect workers. Drawing on a new linked owner-firm-worker data set created from U.S. administrative tax records, I analyze how an increase in the top marginal tax rate faced by business owners affected the earnings of their employees. I use panel difference-in-differences methods to compare the earnings of workers in similar firms but whose owners were differentially exposed to the tax increase. I estimate that 11-18 cents per dollar of new business income tax liability was passed through to employee earnings. I find no change in employment in response to the tax increase. The responses were generally associated with lower earnings growth, not changes in workforce composition. The burden was not borne equally by all workers. Essentially all of the workers' share of the burden was borne by those in the top 30% of the earnings distribution, highlighting that the ultimate distributional effects of the policy depend not only on the share of the burden borne by workers but on the shares borne by different types of workers. Furthermore, since the owners bore the majority of the burden, the policy resulted in a decrease in after-tax earnings inequality between top-bracket owners and lower-bracket workers. I discuss the implications of the findings for the mediating labor market mechanisms and for welfare analyses of income taxation using a marginal value of public funds framework.

In this paper I discuss what can be learned about 'trickle-down' ideas from recent empirical evidence on tax incidence, or the effect of tax policies on the distribution of welfare. I underscore three lessons. First, recent research suggests that business income taxes affect the earnings of workers, but these effects largely derive from taxing rents and rent-sharing, highlighting the importance of these channels for determining the ultimate incidence. Second, when workers are affected by these taxes, the burden is not borne equally by all workers, but predominantly by those at the top of the earnings distribution. Third, across different tax policies that statutorily affect the rich, the burden is largely borne by the rich, but heterogeneity in responses across tax incentives and taxpayers provides context for incidence analyses. Throughout, I discuss the value of analysing heterogeneous responses, particularly how tax incidence depends on labour markets, product markets, and tax systems.

This paper uses account-level information, reported to the IRS by foreign financial institutions under the Foreign Account Tax Compliance Act (FATCA), to produce new evidence on the foreign financial wealth of U.S. households. We find that U.S. taxpayers hold around $4 trillion in foreign accounts, almost half in jurisdictions usually considered tax havens. Combining the FATCA reports with other administrative tax data and tracing account ownership through partnerships, we document a steep income gradient in the propensity to hold assets in foreign financial institutions. Specifically, more than 60% of the individuals in the top 0.01% of the income distribution own foreign accounts, the vast majority in tax havens and more than half through a partnership. We discuss the likely implications of these findings for the overall impact of FATCA on tax compliance and government revenue.Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. This paper uses administrative microdata to examine the impact of enforcement efforts on taxpayers’ reporting of offshore accounts and income. We find that enforcement caused approximately 50,000 individuals to disclose offshore accounts with a combined value of about $100 billion. Most disclosures happened outside offshore voluntary disclosure programs by individuals who never admitted prior noncompliance. Disclosed accounts were concentrated in countries often characterized as tax havens. Enforcement-driven disclosures increased annual reported capital income by $2–$4 billion, corresponding to $0.6–$1.2 billion in additional tax revenue. (JEL H24, H26, K34)

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly. John Guyton Internal Revenue Service Research, Applied Analytics, and Statistics 77 K Street, NE Washington, DC 20002 john.guyton@irs.gov Patrick Langetieg Internal Revenue Service Research, Applied Analytics, and Statistics 77 K Street, NE Washington, DC 20002 Patrick.T.Langetieg@irs.gov Daniel Reck London School of Economics Department of Economics Houghton Street London WC2A 2AE United Kingdom d.h.reck@lse.ac.uk Max Risch Tepper School of Business Carnegie Mellon University 4765 Forbes Ave. Pittsburgh, PA 15213 United States mwrisch@andrew.cmu.edu Gabriel Zucman Department of Economics University of California, Berkeley 530 Evans Hall, #3880 Berkeley, CA 94720 and NBER zucman@berkeley.edu

The number of U.S. workers classified as independent contractors has risen dramatically over the last two decades. While this trend, in part, reflects technological changes in how work is carried out, some of the increase may also reflect firms and workers taking advantage of the legal ambiguity between classifications to obtain preferential tax treatment or to avoid complying with regulations. To study this phenomenon, we use U.S. tax returns from 1997-2015 to link firm filings to associated employees and independent contractors. Our descriptive findings show that firm use of independent contractors is increasing on both the intensive and extensive margin throughout the first decade of the 21st century, and accelerates sharply after the 2009 financial crisis. In addition, independent contractor relationships increasingly resemble traditional employee relationships in their economic substance: 60% of independent contractors have relationships with three firms or fewer which last for multiple years, and, for the majority these workers, contract income is the primary source of total labor earnings, not simply a wage supplement. Next, we exploit sharp discontinuities in the marginal cost of hiring an employee, created by size based regulatory exemptions to “pay or play” regulations that require employers contribute to the cost of employees’ health insurance costs. Preliminary analysis confirm that size-based regulation can affect the firm size distribution, and may result from substitution towards contract labor. We discuss empirical strategies to distinguish whether this substitution reflects re-organization in the production process (a real response) or misclassification (an evasion response).