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Tax Deductions and the Marginal Welfare Cost of Taxation

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  • Ian Parry

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Abstract

Recent work emphasizes the efficiency costs of tax deductions that distort the pattern of household spending. Using evidence on the sensitivity of taxable income to tax rates, this work suggests that the marginal welfare cost (MWC) of income taxes in the United States could be dramatically higher because of tax deductions, and might exceed unity. This paper develops an alternative approach for assessing the MWC using evidence on underlying parameters (e.g., labor supply elasticities, the demand elasticity for tax-favored goods). A MWC of around 0.3 to 0.5 seems more consistent with these parameter values, though this estimate is still significantly higher because of tax deductions. Copyright Kluwer Academic Publishers 2002

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File URL: http://hdl.handle.net/10.1023/A:1020992803400
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Bibliographic Info

Article provided by Springer in its journal International Tax and Public Finance.

Volume (Year): 9 (2002)
Issue (Month): 5 (September)
Pages: 531-552

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Handle: RePEc:kap:itaxpf:v:9:y:2002:i:5:p:531-552

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Web page: http://www.springerlink.com/link.asp?id=102915

Related research

Keywords: tax deductions; marginal welfare cost; income taxes; consumption distortions;

References

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Citations

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Cited by:
  1. Parry, Ian & Toman, Michael, 2000. "Early Emissions Reduction Programs: An Application to CO2 Policy," Discussion Papers dp-00-26, Resources For the Future.
  2. Åsa Hansson, 2007. "Taxpayers' responsiveness to tax rate changes and implications for the cost of taxation in Sweden," International Tax and Public Finance, Springer, vol. 14(5), pages 563-582, October.
  3. Will Martin & James E. Anderson, 2005. "Costs of Taxation and the Benefits of Public Goods: The Role of Income Effects," Boston College Working Papers in Economics 617, Boston College Department of Economics.
  4. Liqun Liu & Andrew Rettenmaier & Thomas Saving, 2011. "The welfare gain from replacing the health insurance tax exclusion with lump-sum tax credits," International Journal of Health Care Finance and Economics, Springer, vol. 11(2), pages 101-113, June.

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