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Tax Avoidance And The Deadweight Loss Of The Income Tax

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  • Martin Feldstein

Abstract

Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption. The full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure, excludable income, and deductible consumption are a Hicksian composite good. Microeconomic estimates imply a deadweight loss of as much as 30% of revenue or more than ten times Harberger's classic 1964 estimate. The relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed $2 per $1 of revenue. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/003465399558391
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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 4 (November)
Pages: 674-680

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Handle: RePEc:tpr:restat:v:81:y:1999:i:4:p:674-680

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  1. Gale, W.G. & Scholtz, J.K., 1992. "IRAs and household saving," Discussion Paper 1992-44, Tilburg University, Center for Economic Research.
  2. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer, vol. 8(2), pages 119-128, March.
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  7. Bernheim, B.D. & Scholz, J.K., 1992. "Private Saving and Public Policy," Working papers 9226, Wisconsin Madison - Social Systems.
  8. 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.
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    • Daniel Feenberg & Jonathan Skinner, 1989. "Sources of IRA Saving," NBER Chapters, in: Tax Policy and the Economy, Volume 3, pages 25-46 National Bureau of Economic Research, Inc.
  11. Feldstein, Martin S, 1978. "The Welfare Cost of Capital Income Taxation," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S29-51, April.
  12. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  13. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-38, March.
  14. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-62, June.
  15. James M. Poterba & Steven F. Venti, 1994. "401(k) Plans and Tax-Deferred Saving," NBER Chapters, in: Studies in the Economics of Aging, pages 105-142 National Bureau of Economic Research, Inc.
  16. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier.
  17. Triest, Robert K, 1992. "The Effect of Income Taxation on Labor Supply when Deductions Are Endogenous," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 91-99, February.
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  1. Does it Matter Where the Laffer Curve Bends?
    by Megan McArdle in Megan McArdle on 2010-08-12 18:47:54
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