Individual vs. Joint Taxation
Maurizio Mazzocco
How do different income taxation systems — for instance individual vs. joint — affect people’s decisions and welfare? Answering this question is important because governments can choose among several systems that differ most prominently for the treatment of individuals in married households. They can adopt an individual tax system, following the example of Canada and Sweden, which consider neither spousal earnings nor marital status when determining an individual’s tax schedule. Alternatively, they can employ a joint tax system, like the ones in the U.S. and Germany, which consider only pooled earnings of the couple when determining married individuals’ tax rates and tax liability. Or, they can adopt a hybrid system of the type used by France and the U.K. that borrow elements from both joint and individual schemes. This choice has the potential to produce sizeable short- and long-run effects on individual decisions, economic outcomes, and welfare, as it affects primary and secondary earners’ tax schedules, their contribution to after-tax household income, and correspondingly their incentives to work and save.
In a study titled “Taxation and Household Decisions: An Intertemporal Analysis”, Professor Maurizio Mazzocco and coauthor Mary Ann Bronson (Georgetown University) study this choice between tax systems by estimating how they affect economic decisions, with emphasis on the long-run consequences. The project is divided into two parts.
The first part of the study uses a variety of data sources to document that the choice of a tax scheme has the potential to produce large effects on the decisions to work of primary and secondary earners. The main finding is that the joint taxation system adopted by the U.S. creates incentives for married couples to have the primary earner specialize in labor market activities and the secondary earner in household activities, relative to the individual system. A switch to individual taxation has therefore the potential to significantly increase the labor force participation rate of U.S. women. This first part uses only data to document the effect of changes in tax systems. Thus, as tax reforms affect entire populations, it can only provide suggestive evidence on their effects.
In the second part of the project, Mazzocco and Bronson quantify the short- and long-term effects of tax reforms by developing and estimating a dynamic model of household decisions. They use the model to evaluate three popular tax policies: a shift from a joint to an individual taxation system; the introduction of a secondary earner deduction in a joint taxation system; and the addition of child care subsidies to a joint and to an individual taxation system. The results indicate that the transition from a joint to an individual taxation system has significant long-term effects on choices and welfare, with married households in which only one spouse works being the most affected. The study finds that the labor force participation of secondary earners increases by as much as 5 percentage points. The move to individual taxation changes also how secondary earners allocate time between market and household activities. The authors find that they reduce the time devoted to household activities and increase the hours spent in the labor market, with the increase in labor hours that is smaller than the decline in household time. The corresponding increase in leisure for secondary earners is explained by a shift in intra-household decision power toward women of three percentage points generated by the tax reform. The secondary earner deduction policy generates similar results. The child-subsidy policy also increases the fraction of secondary earners who work and their labor supply at the expenses of time devoted to household activities under both the joint and individual taxation system. But the impact is significantly larger under the individual system. Consequently, if the goal of the child-subsidy policy is to increase female labor force participation, it is more effective and less costly under an individual scheme.
In the current economic environment, there is a general belief that women should be empowered through an increase in their labor force participation. The project’s results indicate that tax reforms are an effective way of achieving this goal.
Aaron Behle
Aaron Behle
“Never pass up on a free meal” might sound like cheeky advice for a college student struggling to get by but for Aaron Behle it means something entirely different.
In fall of his Junior year in the UCLA Economics program, the family member of a friend who worked at Ernst and Young invited Aaron to a free steak dinner. Aaron took him up on the offer and was soon having dinner with a room of public accountants. “I honestly had no idea what public accounting was,” Aaron recalled with a laugh. “I had an amazing dinner with all these smart people and it was a great on-ramp for my career path.” That night ended up being a decisive moment for Aaron as he quickly started adding classes to his schedule for a minor in accounting. A year later, he interviewed for all six top accounting firms at the time and landed a job at Deloitte, as luck would have it, starting his first job post-graduation as a public accountant.
Aaron’s advice has nothing to do with saving on your groceries but instead to never pass up an opportunity when it comes your way. It seems for Aaron many of those opportunities have often come through meeting people, from launching his career in public accounting to ending up in international business years later. Even during his time at UCLA, Aaron says that it was the professors and connections he built through the Honors program that allowed him to gain a greater understanding of economics that would be the foundation of his career.
“I was fortunate enough with the teachers I had that presented with this great bridge between theory and reality and that to me was really important. They gave me this great toolbox of economic theory and equations and then actually taught me how to apply it to the real world.”
In fact, Aaron still remembers his Economics 1 professor, the emeritus chairman of the economics department at the time, William R. Allen. From his first economics class, Aaron built a relationship with Allen, and ultimately the chairman ended up playing a large part in his academic career. In Aaron’s senior year he wrote two papers with Allen, one of them focused on the rapidly transforming state and economy of South Africa which at the time was just leaving behind the system of apartheid. Nearly thirty years later, Aaron still stands by his research, saying “South Africa at that time was at the tipping point of apartheid and my position was that the injection of capital would accelerate free market capitalism, competition and opportunity; there is no room for racism in competitive markets.”
And remarkably, what Aaron learned truly followed him in building his career. In lieu of Aaron’s own advice on taking opportunities, Aaron was interviewing for a finance job when he was unexpectedly offered a position in business development for the global sports equipment and lifestyle brand Oakley. Oakley was expanding to international markets, and when, in a turn of events, Aaron was hired in the development department instead of finance, he ended up in none other than South Africa. Aaron narrated the incredible circumstance, “I graduate in 93, in 96 I’m in South Africa working for Oakley setting up a company!”
Speaking about the trajectory of his career, Aaron says, “There are no straight lines in nature and no straight lines in life, certainly in today’s market more than ever.” He believes that you may never know where you will end up years later, the best approach is to take the opportunities as they come your way. And that is exactly how after starting in public accounting, Aaron was launched into a successful career working with global consumer products brands including Oakley, Reef, Dragon, Skullcandy, and now, Salt Optics.
But when asked if he ever lost his economics knowledge, Aaron laughed, “It never leaves.” He remarked that every step of the way in his career in business, the economics he learned at UCLA was a relevant, key tool for him. On the importance of what he learned in the economics program, Aaron said, “Economics is like studying the organism of commerce… You would be very surprised at the practical application of what you learn.” In fact, he has seen economics concepts reflected in the international markets he has worked in: “Spending almost my 30 years with global businesses, I have seen economic theories play out via changes in political regimes, geopolitical conflict, trade sanctions, currency manipulation, trade agreements…the list is long”
In fact, with Aaron’s background as a student studying economics and now his accumulated years of experience working in international markets, he has come back to guest lecture in the economics department teaching courses in pricing theory and compensation. Now with his “immediate exposure to currency fluctuations and impact on pricing” that he gained from his work in global business, Aaron brings a new, practical perspective to the theory.
“When I do my pricing course I talk a lot about that. When you are involved in global markets where the currency is constantly in flux, we discuss how that impacts your sourcing strategy and how you price the product to the end consumer today, a month from now, six months from now and how you develop product and sourcing strategies with these pricing changes. A lot of that is what I learned first-hand in the context of economics.”
At the beginning of the discussion, Aaron said regarding his humble beginnings as an economics student that from the start “[he] was all in”, and that has stayed true even now. While Aaron has taken every great opportunity that came his way from an unexpected start in public accounting to launching his career in international business, Aaron has stayed true to his commitment to be a lifelong student of economics. He applied it to his career while the experience he gained allowed him to develop a greater understanding of the workings of “the organism of commerce.” Now Aaron’s beginnings in the UCLA economics department has come full circle as he teaches students the connection between theory and application that his professors once taught him. This is the definition of a true Bruin.
Written by Katia Arami, UCLA Undergraduate Student
Adriana Lleras-Muney wins the Warren C. Scoville Distinguished Teaching Award
The UCLA Department of Economics would like to congratulate Adriana Lleras-Muney for being awarded the Warren C. Scoville Distinguished Teaching Award for best undergraduate teaching in Fall 2019 for her class Econ 130–Public Finance.
This course explores the role of governments in the economy. It analyzes why governments intervene in some markets and not others and the history behind some of our social programs. Discussions center on many of the issues currently facing policy makers including Medicare, public education, and tax policy.
Warren C. Scoville was a faculty member for the UCLA Department of Economics for 28 years before his death in 1969. This award is given quarterly in his name to the ladder faculty member who receives the highest teaching evaluation scores from his or hers course.
Professor Giorcelli recognized by Kiel Institute
Professor Michela Giorcelli has been named a winner of a 2020 Excellence Award in Global Economic Affairs from the Kiel Institute for the World Economy. The other award winners are Luigi Bocola (Stanford), Teodora Boneva (Oxford), and Javier Cravino (Michigan and former UCLA Ph.D. student).
The aim of the Excellence Award is “to build a community of the brightest young researchers in the area of global economic affairs.” The Kiel Institute provides award winners with intellectual, financial, and administrative support to pursue focused programs of research in designated areas. The award includes a fellowship and a research visit to the Kiel Institute.
Professor Ohanian’s Research featured in The Economist
Professor Ohanian’s research was recently discussed in an article published in The Economist. The article, “Housing is at the root of many of the rich world’s problems” was published in the January 16th edition and an excerpt can be found below—
Housing is at the root of many of the rich world’s problems
Since the second world war, governments across the rich world have made three big mistakes, says Callum Williams
The financial crisis of 2008-10 illustrated the immense dangers of a mismanaged housing market. In America during the early to mid-2000s irresponsible, sometimes illegal, mortgage lending led many households to accumulate more debt than they could sustain. Between 2000 and 2007 America’s household debt rose from 104% of household income to 144%. House prices rose by 50% in real terms. The ensuing wave of defaults led to a global recession and nearly brought down the financial system.
Predicting and Preventing Homelessness Report
Since being released on December 16th, 2019, the report has been referenced in many articles across the country.
Resources:
Full Report: Predicting_and_Preventing_Homelessness_in_Los_Angeles
LA Action Plan: LA County Homeless Initiative Press Release about their new action plan
Featured Articles:
Los Angeles Times: Is there a way to predict who will become homeless? These UCLA researchers say yes
Santa Monica Mirror: UCLA Study Suggests Algorithm Can Prevent Homelessness
Till von Wachter cited in Washington Post
On January 6th, 2020; the Washington Post published an article regarding the health impacts of recession. In it, the author cited Professor Till von Wachter’s research and paper with Northwestern University’s Hannes Schwandt.
Washington Post Article: Don’t Root For a Recession to Knock Out Trump by Catherine Rampell
Cartels and Productivity
Carrera, Felipe
Cartels are a common feature in most economies. For instance, in the 2015-19 period, the European Commission imposed fines in excess of €8.3 billion in 27 cartel cases. It is well understood that cartels reduce social welfare by increasing prices and restricting output. Cartels may generate additional costs to society by increasing the market share of less efficient producers.
One way in which this may happen is if during cartel episodes low-productivity firms are tempted to enter the market by the artificially high profits generated by the cartel, raising productivity dispersion and reducing total surplus. This intuitive mechanism has so far not been quantified because of data limitations: A researcher dealing with this question needs to know with certainty when cartels started and ended, and to have detailed plant-level data. And, since cartels are illegal throughout the developed world, it is very difficult to access the necessary information in modern settings.
In his job market paper, “Cartels, Entry, and Productivity: Evidence from the Chilean Nitrate Cartels”, UCLA PhD students Felipe Carrera and Vitaly Titov quantify the effect of cartels on the quantity and quality of new firms in an industry with low barriers to entry by studying the Chilean nitrate cartels in the early 20 Century. This industry is attractive because cartels were legally enforceable, entry barriers were low, and, over 35 years, the industry switched between cartel and perfect competition multiple times.
Using a newly collected dataset, created from original handwritten archival records, they show that during cartel periods, average entry increased from 5 to 9 plants per year. Moreover, entrants during cartel periods were one-third less productive than average firms. Building on these findings, they build a model of firm entry and conduct two counterfactual simulations. First, using detailed accounts from historical records about these cartels’ inner workings, together with their structural estimates, they are able to show that low barriers to entry lowered incumbent profits by 40%. Second, they estimate a model of firm dynamics and show that had the cartel not existed, 25% of plants would have postponed or cancelled their entry to the industry.
These findings are important from a historical and present-day perspective. In the early 20 Century, Chile’s nitrate industry dominated the country’s economy, accounting for 65% of exports and 45% of government revenues. The excess entry lowered the mean productivity of the industry by 3% and had a measurable effect on tax revenue and GDP. This poses important lessons for other developing countries that are dominated by extractive industries. Moreover, the paper speaks to the literature on productivity dispersion by showing that market power caused by coordinated action by otherwise independent firms can generate substantial amounts of inefficient entry.
Claudia Toussaint
Claudia Toussaint
Some of the most powerful influences in our lives emanate from things we cannot see – legal frameworks, for example. The impact of the law is pervasive not only in our personal lives, but also in the intricacies of our economy, and Claudia Toussaint has dedicated her career to understanding these intersections.
Growing up in Germany, Claudia originally found out about UCLA through the experiences of her mother, who attended the Westwood institution for a short spell before securing a Fulbright Scholarship. Inspired by her mother’s experience and the school’s reputation, Claudia decided to explore an academic experience in the United States; but her journey was not a walk in the park.
UCLA initially rejected her. So, she made her way to the admissions office, out of genuine curiosity, academic records in hand, to ask how she could improve her future chances. Upon further review, Claudia was offered enrollment at UCLA, and her life as a Bruin began on the heels of perseverance. “When you are curious, when you really want to understand the reasons behind decisions, that is something that can pay off in unexpected ways,” Claudia shared.
Claudia’s immersion at UCLA exposed her to one of the campus’ most appealing traits: its diversity. She did not just experience diversity of race, ethnicity or religion, but diversity of ideas, backgrounds, personalities, and even academic opportunities. In Westwood, she had the ability to take classes across multiple fields of study while establishing a strong quantitative background within her economics major. She found one of her strongest connections with an international student from China, and the two worked together to refine their interdisciplinary skills and exchanged perspectives about their very different countries of origin.
In 1988, Claudia graduated from UCLA with a degree in economics, and quickly sought to expand her skill set. “I thought the law would be a good way to apply what I learned, and build upon what I perceived as my strengths,” Toussaint said.
That fall, Claudia enrolled at University of California, Hastings College of Law, where she could continue exploring the intersections between business and law. Her experiences in law school built upon the analytical skills developed in her economic studies and enabled her to better understand the law’s invisible influence on societies. Once Claudia had earned the credentials necessary to become a practicing attorney, however, a new obstacle confronted her: a professional environment historically dominated by men.
In a field where less than 21% of lawyers were female at the time, Claudia secured a job as a transactional attorney at Morrison & Foerster in Los Angeles, spending five years at a firm that embraced diversity and her ability to practice law at the highest levels. But her greatest strengths still lay in her interdisciplinary thinking, and in 1997, she joined Sprint’s in-house legal team in the Kansas City area. She eventually went on to become the company’s Vice President and Corporate Secretary. She used her talents to build diverse, dynamic and high-functioning legal teams, and to support milestone corporate transactions, including the elimination of the company’s tracking stock structure, the $35 billion merger with Nextel, and the spin-off of Embarq. In the fall of 2014, after General Counsel roles in several companies, Claudia joined Xylem Inc., a water technology business.
At Xylem, Claudia serves as the Senior Vice President, General Counsel and executive sponsor for the company’s ESG (Environmental, Social & Governance) strategy. She helps shape the company’s strategy and execution, all aimed at solving the world’s greatest water challenges with innovative technologies. She also continues to be a strong advocate for building diverse and inclusive teams, knowing it will give Xylem a competitive talent advantage and accelerate the innovation necessary to realize the company’s ambitions. Her contributions go well beyond addressing legal or regulatory matters; her days are largely filled with questions that require policy and resource trade-offs, with a heavy reliance on interdisciplinary data analysis and, ultimately, alignment with the company’s values of respect, responsibility, integrity and creativity.
“In economics, you think about resource allocation, and in my work I spend most days thinking about precisely that,” Claudia said. “In addition, the grounding in economics finally enabled me to feel comfortable understanding, using and challenging numbers, whether they are about finance, operations or social impact,” Claudia said. “To make a difference, whether in business or in broader society, it is incredibly important to be conversant in the language of business, which largely is a language of numbers.”
Claudia now reflects fondly and with gratitude on her days at UCLA, where she says she learned a fundamental lesson: curiosity is invaluable. “Professionally and personally, curiosity will drive your discovery of whether you’re on the right path,” Claudia said. “I really found my path when I became genuinely curious about how and why things are the way they are and I give huge credit to UCLA for awakening and nurturing that curiosity in me. It is the reason I am so passionate about the value of learning for us as individuals and as societies.”
