Average Marginal Tax Rates Revisited: A Comment

We show how Barro and Sahasakul (1986) and Stephenson’s (1998) different methods for calculating time series of average marginal personal federal labor income tax rates are based on very different models of tax evasion and avoidance. One model assumes that taxable and untaxable income are (imperfectly) substitutable at the margin for all taxpayers, while the other assumes that substitution is not possible for any taxpayer, and that the average and marginal propensities to earn taxable income are the same. Using data provided in Stephenson we then update, for the years 1984-94, the Barro and Sahasakul comprehensive tax series based on the Barro and Sahasakul model of tax evasion and avoidance, and show how different it is from Stephenson’s series for the same years. For example, Stephenson finds that from 1988-1994 the comprehensive average marginal income tax rate fell from 22.2% to 21.5% while Barro and Sahasakul’s method implies that it rose from 30.3% to 32.1%.