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Do Taxes Matter? Lessons from the 1980's

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  • Slemrod, Joel

Abstract

The response of the economy to two major -- although in important respects offsetting -- tax reforms has been much smaller than ardent supply-side revolutionaries expected, thus suggesting that a reassessment of the grounds for revolt is in order. This paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation -- with particular reference to savings and capital gains realizations. I then reconstruct a 1992 view about how taxes affect behavior. A unifying theme is that the tax system does much more than alter the relative prices of real variables -- it also provides incentives to misreport income, restructure financial claims, time transactions, change the legal form of organization, and so on. For this reason, observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways. Disentangling these explanations requires an emphasis on the transaction-based nature of the tax system and the administration and enforcement of tax laws.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 82 (1992)
Issue (Month): 2 (May)
Pages: 250-56

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Handle: RePEc:aea:aecrev:v:82:y:1992:i:2:p:250-56

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  1. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 19-46, January.
  2. Martin Feldstein, 1983. "Inflation, Tax Rules, and Investment: Some Econometric Evidence," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 243-286 National Bureau of Economic Research, Inc.
  3. Feldstein, Martin & Slemrod, Joel & Yitzhaki, Shlomo, 1980. "The Effects of Taxation on the Selling of Corporate Stock and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 94(4), pages 777-91, June.
  4. Auten, Gerald E & Clotfelter, Charles T, 1982. "Permanent versus Transitory Tax Effects and the Realization of Capital Gains," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(4), pages 613-32, November.
  5. Slemrod, Joel, 1990. "Optimal Taxation and Optimal Tax Systems," Journal of Economic Perspectives, American Economic Association, vol. 4(1), pages 157-78, Winter.
  6. Hall, Robert E, 1988. "Intertemporal Substitution in Consumption," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 96(2), pages 339-57, April.
  7. Douglas Holtz-Eakin & Harvey S. Rosen, 1987. "Tax Deductibility and Municipal Budget Structure," NBER Working Papers 2224, National Bureau of Economic Research, Inc.
  8. Brunner, Karl & Meltzer, Allan H., 1976. "The Phillips curve," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 1(1), pages 1-18, January.
  9. Alan J. Auerbach, 1988. "Capital Gains Taxation in the United States: Realizations, Revenue, and Rhetoric," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(2), pages 595-638.
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Citations

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Cited by:
  1. Agell, Jonas & Englund, Peter & Södersten, Jan, 1996. "Tax Reform of the Century - The Swedish Experiment," Working Paper Series, Uppsala University, Department of Economics 1996:13, Uppsala University, Department of Economics.
  2. Raj Chetty, 2008. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," NBER Working Papers 13844, National Bureau of Economic Research, Inc.
  3. Carola Frydman & Raven S. Molloy, 2011. "Does Tax Policy Affect Executive Compensation? Evidence from Postwar Tax Reforms," NBER Working Papers 16812, National Bureau of Economic Research, Inc.
  4. Rebecca M. Blank & Kerwin Kofi Charles & James M. Sallee, 2009. "A Cautionary Tale about the Use of Administrative Data: Evidence from Age of Marriage Laws," American Economic Journal: Applied Economics, American Economic Association, vol. 1(2), pages 128-49, April.
  5. Francis A. Longstaff & Ilya A. Strebulaev, 2014. "Corporate Taxes and Capital Structure: A Long-Term Historical Perspective," NBER Working Papers 20372, National Bureau of Economic Research, Inc.
  6. Miyazaki, Takeshi & Kitamura, Yukinobu, 2014. "Redistributive Effects of Income Tax Rates and Tax Base 1984-2009: Evidence from Japanese Tax Reforms," Discussion Paper Series, Institute of Economic Research, Hitotsubashi University 610, Institute of Economic Research, Hitotsubashi University.
  7. Dirk Niepelt, 2004. "Timing Tax Evasion," Working Papers 04.07, Swiss National Bank, Study Center Gerzensee.
  8. Lüthi, Sonja & Wüstenhagen, Rolf, 2012. "The price of policy risk — Empirical insights from choice experiments with European photovoltaic project developers," Energy Economics, Elsevier, Elsevier, vol. 34(4), pages 1001-1011.
  9. Erlend Bø & Peter Lambert & Thor Thoresen, 2012. "Horizontal inequity under a dual income tax system: principles and measurement," International Tax and Public Finance, Springer, Springer, vol. 19(5), pages 625-640, October.
  10. Gunter, Samara, 2013. "State Earned Income Tax Credits And Participation In Regular And Informal Work," National Tax Journal, National Tax Association, vol. 66(1), pages 33-62, March.
  11. Seppo Kari & Jarkko Harju, 2011. "Dividend taxes and decisions of MNEs: Evidence from a Finnish tax reform," Working Papers 27, Government Institute for Economic Research Finland (VATT).
  12. repec:hal:wpaper:halshs-00588318 is not listed on IDEAS
  13. Joel Slemrod, 1995. "Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.

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