Advanced Search
MyIDEAS: Login to save this article or follow this journal

The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review

Contents:

Author Info

  • Emmanuel Saez
  • Joel Slemrod
  • Seth H. Giertz

Abstract

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research. ( JEL H24, H31, J22)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.aeaweb.org/articles.php?doi=10.1257/jel.50.1.3
Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by American Economic Association in its journal Journal of Economic Literature.

Volume (Year): 50 (2012)
Issue (Month): 1 (March)
Pages: 3-50

as in new window
Handle: RePEc:aea:jeclit:v:50:y:2012:i:1:p:3-50

Note: DOI: 10.1257/jel.50.1.3
Contact details of provider:
Email:
Web page: https://www.aeaweb.org/journal
More information through EDIRC

Order Information:
Web: https://www.aeaweb.org/subscribe.html

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Feenberg, D.R. & Poterba, J.M., 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 92-16, Massachusetts Institute of Technology (MIT), Department of Economics.
  2. Giertz, Seth, 2004. "Recent Literature on Taxable-Income Elasticities," MPRA Paper 16159, University Library of Munich, Germany.
  3. Slemrod, Joel & Yitzhaki, Shlomo, 2002. "Tax avoidance, evasion, and administration," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 22, pages 1423-1470 Elsevier.
  4. Anthony B. Atkinson & Thomas Piketty & Emmanuel Saez, 2011. "Top Incomes in the Long Run of History," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 49(1), pages 3-71, March.
  5. Maki, Dean M., 1996. "Portfolio Shuffling and Tax Reform," National Tax Journal, National Tax Association, vol. 49(3), pages 317-29, September.
  6. Emmanuel Saez, 2004. "Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications," NBER Working Papers 10273, National Bureau of Economic Research, Inc.
  7. Singleton, Perry, 2011. "The Effect Of Taxes On Taxable Earnings: Evidence From The 2001 And Related U.S. Federal Tax Acts," National Tax Journal, National Tax Association, vol. 64(2), pages 323-51, June.
  8. Sillamaa, Mary-Anne & Veall, Michael R., 2001. "The effect of marginal tax rates on taxable income: a panel study of the 1988 tax flattening in Canada," Journal of Public Economics, Elsevier, Elsevier, vol. 80(3), pages 341-356, June.
  9. Emmanuel Saez, 2000. "The Optimal Treatment of Tax Expenditures," NBER Working Papers 8037, National Bureau of Economic Research, Inc.
  10. Daniel Feenberg & Elisabeth Coutts, 1993. "An introduction to the TAXSIM model," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 12(1), pages 189-194.
  11. Laura Blow & Ian Preston, 2002. "Deadweight loss and taxation of earned income: evidence from tax records of the UK self-employed," IFS Working Papers, Institute for Fiscal Studies W02/15, Institute for Fiscal Studies.
  12. Karlan, Dean & List, John, 2006. "Does Price Matter in Charitable Giving? Evidence from a Large-Scale Natural Field Experiment," Working Papers, Yale University, Department of Economics 13, Yale University, Department of Economics.
  13. Mirrlees, James A, 1971. "An Exploration in the Theory of Optimum Income Taxation," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 38(114), pages 175-208, April.
  14. Blomquist, Sören & Selin, Håkan, 2010. "Hourly wage rate and taxable labor income responsiveness to changes in marginal tax rates," Journal of Public Economics, Elsevier, Elsevier, vol. 94(11-12), pages 878-889, December.
  15. Edward L. Glaeser & Jesse M. Shapiro, 2002. "The Benefits of the Home Mortgage Interest Deduction," NBER Working Papers 9284, National Bureau of Economic Research, Inc.
  16. Alvaredo, Facundo & Saez, Emmanuel, 2006. "Income and Wealth Concentration in Spain in a Historical and Fiscal Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5836, C.E.P.R. Discussion Papers.
  17. Chetty, Nadarajan, 2009. "Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods," Scholarly Articles 9748528, Harvard University Department of Economics.
  18. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  19. Ohanian, Lee & Raffo, Andrea & Rogerson, Richard, 2008. "Long-term changes in labor supply and taxes: Evidence from OECD countries, 1956-2004," Journal of Monetary Economics, Elsevier, Elsevier, vol. 55(8), pages 1353-1362, November.
  20. Pirttilä, Jukka & Selin, Håkan, 2006. "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993," Working Paper Series, Uppsala University, Department of Economics 2006:26, Uppsala University, Department of Economics.
  21. Raj Chetty & Emmanuel Saez, 2010. "Dividend and Corporate Taxation in an Agency Model of the Firm," American Economic Journal: Economic Policy, American Economic Association, American Economic Association, vol. 2(3), pages 1-31, August.
  22. Bruce D. Meyer & Dan T. Rosenbaum, 2001. "Welfare, The Earned Income Tax Credit, And The Labor Supply Of Single Mothers," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(3), pages 1063-1114, August.
  23. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
  24. Emmanuel Saez, 1999. "Do Taxpayers Bunch at Kink Points?," NBER Working Papers 7366, National Bureau of Economic Research, Inc.
  25. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
  26. 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.
  27. Raj Chetty & Emmanuel Saez, 2004. "Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut," NBER Working Papers 10841, National Bureau of Economic Research, Inc.
  28. Atkinson, Anthony B. & Leigh, Andrew, 2010. "The Distribution of Top Incomes in Five Anglo-Saxon Countries over the Twentieth Century," IZA Discussion Papers 4937, Institute for the Study of Labor (IZA).
  29. Raj Chetty & Emmanuel Saez, 2007. "An Agency Theory of Dividend Taxation," NBER Working Papers 13538, National Bureau of Economic Research, Inc.
  30. Bradley T. Heim, 2009. "The effect of recent tax changes on taxable income: Evidence from a new panel of tax returns," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 28(1), pages 147-163.
  31. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, Elsevier, vol. 89(11-12), pages 2093-2119, December.
  32. Gerald E. Auten & Holger Sieg & Charles T. Clotfelter, 2002. "Charitable Giving, Income, and Taxes: An Analysis of Panel Data," American Economic Review, American Economic Association, American Economic Association, vol. 92(1), pages 371-382, March.
  33. Roine, Jesper & Vlachos, Jonas & Waldenström, Daniel, 2007. "The Long-run Determinants of Inequality: What Can We Learn from Top Income Data?," Working Paper Series, Research Institute of Industrial Economics 721, Research Institute of Industrial Economics, revised 30 Apr 2008.
  34. Slemrod, Joel, 1995. "Income Creation or Income Shifting? Behavioral Responses to the Tax Reform Act of 1986," American Economic Review, American Economic Association, American Economic Association, vol. 85(2), pages 175-80, May.
  35. Roger H. Gordon & Joel Slemrod, 1998. "Are "Real" Responses to Taxes Simply Income Shifting Between Corporate and Personal Tax Bases?," NBER Working Papers 6576, National Bureau of Economic Research, Inc.
  36. Kubik, Jeffrey D., 2004. "The incidence of personal income taxation: evidence from the tax reform act of 1986," Journal of Public Economics, Elsevier, Elsevier, vol. 88(7-8), pages 1567-1588, July.
  37. Raj Chetty & Emmanuel Saez, 2009. "Teaching the Tax Code: Earnings Responses to an Experiment with EITC Recipients," NBER Working Papers 14836, National Bureau of Economic Research, Inc.
  38. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, Elsevier, vol. 84(1), pages 1-32, April.
  39. Aarbu, Karl O. & Thoresen, Thor O., 2001. "Income Responses to Tax Changes--Evidence from the Norwegian Tax Reform," National Tax Journal, National Tax Association, vol. 54(n. 2), pages 319-38, June.
  40. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  41. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
  42. Looney, Adam & Singhal, Monica, 2006. "The Effect of Anticipated Tax Changes on Intertemporal Labor Supply and the Realization of Taxable Income," Working Paper Series, Harvard University, John F. Kennedy School of Government rwp06-031, Harvard University, John F. Kennedy School of Government.
  43. Joel Slemrod, 1995. "High-Income Families and the Tax Changes of the 1980s: The Anatomy of Behavioral Response," NBER Working Papers 5218, National Bureau of Economic Research, Inc.
  44. Seth H. Giertz, 2010. "The Elasticity of Taxable Income during the 1990s: New Estimates and Sensitivity Analyses," Southern Economic Journal, Southern Economic Association, vol. 77(2), pages 406-433, October.
  45. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  46. Alan J. Auerbach & Joel Slemrod, 1997. "The Economic Effects of the Tax Reform Act of 1986," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 35(2), pages 589-632, June.
  47. Randolph, William C, 1995. "Dynamic Income, Progressive Taxes, and the Timing of Charitable Contributions," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 103(4), pages 709-38, August.
  48. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  49. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers, Institute for Fiscal Studies W98/18, Institute for Fiscal Studies.
  50. Martin Feldstein & Daniel Feenberg, 1996. "The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases," NBER Chapters, in: Tax Policy and the Economy, Volume 10, pages 89-118 National Bureau of Economic Research, Inc.
  51. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 8-27, March.
  52. Gorodnichenko, Yuriy & Martinez-Vazquez, Jorge & Peter, Klara Sabirianova, 2007. "Myth and Reality of Flat Tax Reform: Micro Estimates of Tax Evasion Response and Welfare Effects in Russia," IZA Discussion Papers 3267, Institute for the Study of Labor (IZA).
  53. Robert A. Moffitt & Mark Wilhelm, 1998. "Taxation and the Labor Supply: Decisions of the Affluent," NBER Working Papers 6621, National Bureau of Economic Research, Inc.
  54. Giertz, Seth, 2008. "Taxable Income Responses to 1990s Tax Acts: Further Explorations," MPRA Paper 17602, University Library of Munich, Germany.
  55. Facundo Alvaredo & Emmanuel Saez, 2009. "Income and Wealth Concentration in Spain from a Historical and Fiscal Perspective," Journal of the European Economic Association, MIT Press, MIT Press, vol. 7(5), pages 1140-1167, 09.
  56. Anthony B. Atkinson & Andrew Leigh, 2007. "The Distribution of Top Incomes in Australia," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 83(262), pages 247-261, 09.
  57. Auten, Gerald & Carroll, Robert & Gee, Geoffrey, 2008. "The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the Taxable Income Response," National Tax Journal, National Tax Association, vol. 61(3), pages 345-64, September.
  58. A. B. Atkinson & Andrew Leigh, 2008. "Top Incomes In New Zealand 1921-2005: Understanding The Effects Of Marginal Tax Rates, Migration Threat, And The Macroeconomy," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 54(2), pages 149-165, 06.
  59. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  60. Giertz, Seth, 2007. "The Elasticity of Taxable Income over the 1980s and 1990s," MPRA Paper 18313, University Library of Munich, Germany.
  61. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
  62. Saez, Emmanuel, 2003. "The effect of marginal tax rates on income: a panel study of 'bracket creep'," Journal of Public Economics, Elsevier, Elsevier, vol. 87(5-6), pages 1231-1258, May.
  63. Seth H. Giertz, 2004. "Recent Literature on Taxable-Income Elasticities: Technical Paper 2004-16," Working Papers, Congressional Budget Office 16189, Congressional Budget Office.
  64. Burman, Leonard E. & Clausing, Kimberly A. & O'Hare, John F., 1994. "Tax Reform and Realizations of Capital Gains in 1986," National Tax Journal, National Tax Association, vol. 47(1), pages 1-18, March.
  65. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 831-849, June.
  66. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, Oxford University Press, vol. 126(2), pages 749-804.
  67. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters, in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
  68. 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.
  69. Thomas Piketty & Emmanuel Saez, 2003. "Income Inequality In The United States, 1913-1998," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(1), pages 1-39, February.
  70. James Poterba, 1993. "Tax Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number pote93-1, July.
  71. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, Elsevier, vol. 33(2), pages 173-206, July.
  72. Jon Bakija & Bradley Heim, 2008. "How Does Charitable Giving Respond to Incentives and Income? Dynamic Panel Estimates Accounting for Predictable Changes in Taxation," NBER Working Papers 14237, National Bureau of Economic Research, Inc.
  73. Katz, Lawrence F. & Autor, David H., 1999. "Changes in the wage structure and earnings inequality," Handbook of Labor Economics, Elsevier, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 26, pages 1463-1555 Elsevier.
  74. Chiaki Moriguchi & Emmanuel Saez, 2008. "The Evolution of Income Concentration in Japan, 1886-2005: Evidence from Income Tax Statistics," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 713-734, November.
  75. Joel Slemrod & Wojciech Kopczuk, 2000. "The Optimal Elasticity of Taxable Income," NBER Working Papers 7922, National Bureau of Economic Research, Inc.
  76. Nada, Eissa & Giertz, Seth, 2006. "Trends in High Incomes and Behavioral Responses to Taxation: Evidence from Executive Compensation and Statistics of Income Data," MPRA Paper 17604, University Library of Munich, Germany.
  77. Brian J. Hall & Jeffrey B. Liebman, 2000. "The Taxation of Executive Compensation," NBER Working Papers 7596, National Bureau of Economic Research, Inc.
  78. Giertz, Seth, 2008. "Panel Data Techniques and the Elasticity of Taxable Income," MPRA Paper 17600, University Library of Munich, Germany.
Full references (including those not matched with items on IDEAS)

Citations

Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Links for the (two) week(s) - (31 May and) 7 June 2013
    by Jonas Feit in Conscience Warrior on 2013-06-09 19:32:00
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:aea:jeclit:v:50:y:2012:i:1:p:3-50. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jane Voros) or (Michael P. Albert).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.