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The Elasticity of Taxable Income during the 1990s: New Estimates and Sensitivity Analyses

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  • Seth H. Giertz

    ()
    (Department of Economics, CBA 368, P.O. Box 880489, University of Nebraska-Lincoln, Lincoln, NE 68588-0489, USA;)

Abstract

Over the past two decades, the elasticity of taxable income has emerged as the central parameter for assessing efficiency and revenue implications from changes to tax policy. This article estimates short- and longer-run responses of taxable (and gross) income to changes in tax rates using panels of U.S. tax returns for the 1990s. With the richest set of income controls, income-weighted elasticity estimates range from 0.19 to 0.33, depending on whether responses are measured over one- or three-year intervals. An alternative approach designed to capture delayed and anticipatory responses yields much larger estimates—ranging from 0.43 over the short term and from 0.78 to 1.46 over the longer term. A continuing obstacle to identification encountered here is that the income controls most likely to control for mean reversion and divergence within the income distribution are also the most likely to absorb independent variation in tax rates, also needed for identification.

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Bibliographic Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2010)
Issue (Month): 2 (October)
Pages: 406-433

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Handle: RePEc:sej:ancoec:v:77:2:y:2010:p:406-433

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Web page: http://www.southerneconomic.org/
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Cited by:
  1. Simon Carey & John Creedy & Norman Gemmell & Josh Teng, 2013. "Regression Estimates of the Elasticity of Taxable Income and the Choice of Instrument," Treasury Working Paper Series 13/08, New Zealand Treasury.
  2. Robert McClelland & Shannon Mok, 2012. "A Review of Recent Research on Labor Supply Elasticities: Working Paper 2012-12," Working Papers, Congressional Budget Office 43675, Congressional Budget Office.
  3. John Creedy & Norman Gemmell, 2013. "Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures," Treasury Working Paper Series 13/27, New Zealand Treasury.
  4. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(1), pages 3-50, March.
  5. Dwenger, Nadja & Steiner, Viktor, 2012. "Profit Taxation And The Elasticity Of The Corporate Income Tax Base: Evidence From German Corporate Tax Return Data," National Tax Journal, National Tax Association, vol. 65(1), pages 118-50, March.
  6. Tuomas Matikka, 2014. "Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland," Working Papers, Government Institute for Economic Research Finland (VATT) 55, Government Institute for Economic Research Finland (VATT).
  7. Massarrat-Mashhadi, Nima & Werdt, Clive, 2012. "Estimating dynamic income responses to tax changes Massarrat-Mashhadi: Evidence from Germany," Discussion Papers 2012/22, Free University Berlin, School of Business & Economics.
  8. Karel Mertens, 2013. "Marginal Tax Rates and Income: New Time Series Evidence," NBER Working Papers 19171, National Bureau of Economic Research, Inc.

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