A survey of 745 small businesses shows little change in the size distribution of businesses between 2012 and 2016, except among businesses with 40–74 employees, in a way that is closely related to whether they offer health insurance coverage. Using measures of both size and voluntary regulatory compliance, the paper links these changes to the Affordable Care Act’s employer mandate. As of 2017, between 28,000 and 50,000 businesses nationwide appear to be reducing their number of full-time-equivalent employees to below 50 because of that mandate. This translates to roughly 250,000 positions eliminated from those businesses. The amount and character of distortions going forward may be different if the mandate proves to be exceptionally difficult to enforce.

Tax Prices and Charitable Giving:
Projected Changes in Donations Under the 2017 TCJA

Jonathan Meer, Texas A&M University and NBER
Benjamin Priday, Texas A&M University

The US tax code subsidizes charitable giving through the itemized deduction, with the justification that charitable organizations may provide valuable societal services while being more responsive than the government. The degree to which donations are responsive to the tax incentive is a crucial one, especially in light of the changes introduced by the Tax Cut and Jobs Act of 2017 (TCJA). These include a reduction in marginal tax rates and a substantial increase in the standard deduction. The former directly changes the tax price of charitable giving — that is, the net cost of donating a dollar after accounting for the tax subsidy — while the latter reduces the number of taxpayers who are eligible for that subsidy. This paper provides estimates of the responsiveness of charitable giving to its tax price using newly-updated data, then applies those estimates to the parameters of the TCJA. Consistent with previous findings, giving is sensitive to its tax treatment. A 10 percent increase in the tax price of giving is expected to reduce giving by about 10.4 percent. The TCJA is expected to reduce giving by a significant amount for households that stop itemizing as a result of the policy, but increases in disposable income resulting from the reduction in tax liability offset a small proportion of this projected reduction.

Taxes, Incorporation, and Productivity

Robert J. Barro, Harvard University and NBER
Brian Wheaton, Harvard University

There are differences in the tax liability between businesses organized as C-corporations and those organized as pass-through entities such as S-corporations, limited liability companies (LLCs), and partnerships. Corporate versus pass-through status trades off benefits (perpetual identity, limited liability, public trading, earnings retention) against the tax wedge. Incentives to organize in one form or another are affected by the tax wedge, which has changed over time and was affected by the Tax Cut and Jobs Act of 2017, which lowered the tax rate on C-corporations while also liberalizing some rules on taxation of pass-through entities. Changes in the tax wedge may affect not just the choice of organizational form, but also productivity in the economy.

This paper assembles a data set that charts the changes in the tax wedge over time, the share of economic activity going through C-corporate versus pass-through form, and measures of productivity. The results show that the tax wedge has declined, on average, over time, implying that the C-corporation form has been increasingly favored. In regressions, C corporate economic shares decline with the wedge and exhibit negative trends that we relate to legal changes for LLCs. A calibrated model, fit to observed total factor productivity (TFP) and C corporate shares, implies that, for 1958-2013, the declining wedge and the gap between corporate and pass-through productivity contributed 0.37 percent per year out of a total TFP growth rate of 1.09 percent. From 1994 to 2004, when TFP growth rate was unusually high — 2 percent per year — the contribution from the falling productivity gap was also unusually large — 0.77 percent per year.

Building Emergency Savings
Through Employer-Sponsored Rainy-Day Savings Accounts

John Beshears, Harvard Business School and NBER
James J. Choi, Yale School of Management and NBER
J. Mark Iwry, Brookings Institution and Wharton School
David C. John, AARP and Brookings Institution
David Laibson, Harvard University and NBER
Brigitte C. Madrian, Brigham Young University and NBER

Roughly half of American households live paycheck to paycheck. When financial shocks occur during their working lives, many of these households tap their retirement savings accounts. We explore the practical considerations and challenges associated with helping households accumulate liquid savings that can be deployed when urgent pre-retirement needs arise. In particular, we consider plans that would allow employers to automatically enroll workers in an employer-sponsored payroll deduction “rainy-day” or “emergency” savings account. Having separate rainy-day and retirement savings accounts can facilitate greater saving for short- and long-term purposes by helping to psychologically segregate and catalyze these two motives to save. Auto-features and mental accounting can be jointly deployed to reduce the frequency with which short-term needs crowd out long-run retirement savings.

We describe three specific implementation options: (a) after-tax employee 401(k) accounts; (b) deemed Roth IRAs under a 401(k) plan; and (c) depository institution accounts. We present pros and cons of each approach, given the existing regulatory regime, relative to the following criteria: the ability to automatically enroll employees into the rainy-day account; the targeted size of the rainy-day account; the investment allocation used for the rainy-day account; the fees and expenses associated with setting up and administering the rainy-day account; employers’ ability to match employee contributions to the rainy-day account and the destination of those matching contributions; the ability of the rainy-day account to provide liquidity when the funds are needed; the tax treatment of contributions to, earnings in, and withdrawals from the rainy-day account; the portability of account balances when employees separate from a sponsoring employer; and compliance and potential interactions with the nondiscrimination rules that apply to tax-qualified employer-sponsored plans.

We conclude that field-testing would provide important new information on the performance of each of these options, and that new legislation would be needed to address some of the drawbacks with each approach.

One Medicare for All?
The Economics of a Uniform Health Insurance Program

Mark Shepard, Harvard Kennedy School and NBER
Katherine Baicker, University of Chicago and NBER
Jonathan Skinner, Dartmouth College and NBER

There is increasing interest in expanding Medicare coverage in the US. Traditional Medicare covers a uniform set of benefits for all enrollees that is much more generous than public plans in nearly all other developed countries, but over time the efficiency costs of this uniform structure have grown substantially. Focusing on the elderly Medicare population, we develop an economic framework to assess the potential efficiency and equity gains from reforming Medicare’s current benefit designs. There is an inherent inefficiency in providing a uniform benefit to all enrollees, because those with higher incomes might prefer a more generous insurance plan than those with lower incomes, who might prefer more money income coupled with a less generous plan. We show that three major shifts have increased this cost of uniformity since Medicare began in 1965: rising income inequality, expanding availability of expensive medical technologies, and increasing costs of financing the program. We calculate that the optimal uniform Medicare benefit would be substantially less generous than the current plan; and that an alternative design with a basic insurance plan that could be supplemented with additional benefits – as seen in many other countries – would generate even higher social welfare benefits. Such a plan may appear less equitable, but we demonstrate that the resulting Medicare savings could be distributed in a manner that raised social welfare for all income levels.