This paper describes a method to calculate income and payroll taxes from Panel Study of Income Dynamics data using the NBERʼs Internet TAXSIM version 9 (http://users.nber.org/~taxsim/taxsim9/), for PSID survey years 1999, 2001, 2003, 2005. 2007, 2009, and 2011 (tax years n-1). These methods are implemented in two Stata programs, designed to be used with the PSID public-use zipped Main Interview data files: PSID_TAXSIM_1of2.do and PSID_TAXSIM_2of2.do. The main program (2of2) was written by Sara Kimberlin (skimberlin@berkeley.edu) and generates all TAXSIM input variables, runs TAXSIM, adjusts tax estimates using additional information available in PSID data, and calculates total PSID family unit taxes. A separate program (1of2) was written by Jiyoon (June) Kim (junekim@umich.edu) in collaboration with Luke Shaefer (lshaefer@umich.edu) to calculate mortgage interest for itemized deductions; this program needs to be run first, before the main program. Jonathan Latner contributed code to use the programs with the PSID zipped data. The overall methods build on the strategy for using TAXSIM with PSID data outlined by Butrica & Burkhauser (1997), with some expansions and modifications. Note that the methods described below are designed to prioritize accuracy of income taxes calculated for low-income households, particularly refundable tax credits such as the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit. Income tax liability is generally low for low-income households, and the amount of refundable tax credits is often substantially larger than tax liabilities for this population. Payroll tax can also be substantial for low-income households. Thus the methods below focus on maximizing accuracy of income tax and payroll tax calculations for low-income families, with less attention to tax items that largely impact higher-income households (e.g. the treatment of capital gains).
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