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25 Fla. Tax Rev. 388 (2021-2022)
Work Hours & Income Tax Cuts: Evidence from Federal-State Tax Interactions

handle is hein.journals/ftaxr25 and id is 388 raw text is: FLORIDA TAX REVIEW Volume 25 2021 Number] WORK HOURS & INCOME TAX CUTS: EVIDENCE FROM FEDERAL-STATE TAX INTERACTIONS by Michael Simkovic* and Eric J Allen* ABSTRACT We investigate how income tax reductions affect work hours. Our empirical strategy relies on the fact that, in states where taxpayers can deduct federal tax payments from state taxable income, federal tax changes are dampened. We study 2003 tax reforms (JGTRRA) that dra- matically reduced federal tax rates on dividends and capital gains, and moderately reduced rates on ordinary income. Difference-in- Difference analysis indicates that work hours decreased most among high income and wealthy taxpayers who were most directly affected by the tax reductions. The decrease in hours was larger for residents of states in which the effective tax reductions were larger. Conversely, we find possible evidence that larger ordinary income tax rate reductions in the 1980s, accompanied by effective tax increases on capital gains, had the opposite effect and induced an increase in work hours. These * Michael Simkovic, Professor of Law and Accounting, University of Southern California, USC Gould School of Law (msimkovic@law.usc .edu). Eric J. Allen, Assistant Professor of Accounting, University of Califor- nia, Riverside, School of Business (eric.allen@ucr.edu). Thanks to Kevin Cope, Andrew Hayashi, Edward Kleinbard, Susan Morse, Gregg Polsky, Lawrence Zelenak, participants at the 2019 Conference on Empirical Legal Studies, 2019 National Tax Association conference, the 2020 EALE annual conference, 2020 Mid-career Tax conference, and workshop participants at the University of Southern California and University of Virginia for helpful comments and suggestions. Thanks to Zak Baron, James Robichaud, Carolyn Hudson and Joseph Yim for research assistance. 388

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