Advanced Search
MyIDEAS: Login to save this paper or follow this series

Marginal Deadweight Loss when the Income Tax is Nonlinear

Contents:

Author Info

  • Blomquist, Sören

    ()
    (Department of Economics)

  • Simula, Laurent

    ()
    (Department of Economics)

Abstract

Almost all theoretical work on how to calculate the marginal deadweight loss has been done for linear taxes and for variations in linear budget constraints. This is quite surprising since most income tax systems are nonlinear, generating nonlinear budget constraints. Instead of developing the proper procedure to calculate the marginal deadweight loss for variations in nonlinear income taxes a common procedure has been to linearize the nonlinear budget constraint and apply methods that are correct for variations in a linear income tax. Such a procedure leads to incorrect results. The main purpose of this paper is to show how to correctly calculate the marginal deadweight loss when the income tax is nonlinear. A second purpose is to evaluate the bias in results that obtains when the traditional linearization procedure is used. We perform calculations based on the 2006 US tax system and find that the relative deadweight loss caused by increasing existing tax rates is large but less than half of Feldstein’s (1999) estimates for the 1994 tax system.

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://uu.diva-portal.org/smash/get/diva2:292527/FULLTEXT01.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Uppsala University, Department of Economics in its series Working Paper Series with number 2010:3.

as in new window
Length: 21 pages
Date of creation: 01 Feb 2010
Date of revision:
Handle: RePEc:hhs:uunewp:2010_003

Contact details of provider:
Postal: Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden
Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Email:
Web page: http://www.nek.uu.se/
More information through EDIRC

Related research

Keywords: Deadweight Loss; Taxable Income; Nonlinear Budget Constraint;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

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. 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, vol. 50(1), pages 3-50, March.
  2. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
  3. Kopczuk, Wojciech, 2005. "Tax bases, tax rates and the elasticity of reported income," Journal of Public Economics, Elsevier, vol. 89(11-12), pages 2093-2119, December.
  4. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  5. Richard Blundell & Hilary W. Hoynes, 2004. "Has 'In-Work' Benefit Reform Helped the Labor Market?," NBER Chapters, in: Seeking a Premier Economy: The Economic Effects of British Economic Reforms, 1980-2000, pages 411-460 National Bureau of Economic Research, Inc.
  6. Bruce Chapman & Andrew Leigh, 2009. "Do Very High Tax Rates Induce Bunching? Implications for the Design of Income Contingent Loan Schemes," The Economic Record, The Economic Society of Australia, vol. 85(270), pages 276-289, 09.
  7. Martin Feldstein, 1995. "Behavioral Responses to Tax Rates: Evidence from TRA86," NBER Working Papers 5000, National Bureau of Economic Research, Inc.
  8. Leora Friedberg, 1999. "The Labor Supply Effects of the Social Security Earnings Test," NBER Working Papers 7200, National Bureau of Economic Research, Inc.
  9. Raj Chetty, 2009. "Bounds on Elasticities with Optimization Frictions: A Synthesis of Micro and Macro Evidence on Labor Supply," NBER Working Papers 15616, National Bureau of Economic Research, Inc.
  10. Saez, Emmanuel, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 205-29, January.
  11. Arnold C. Harberger, 1962. "The Incidence of the Corporation Income Tax," Journal of Political Economy, University of Chicago Press, vol. 70, pages 215.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Laurence Jacquet & Etienne Lehmann & Bruno Van der Linden, 2010. "Optimal Redistributive Taxation with both Extensive and Intensive Responses," CESifo Working Paper Series 3308, CESifo Group Munich.
  2. John Creedy & Norman Gemmell, 2013. "Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors," International Tax and Public Finance, Springer, vol. 20(6), pages 974-991, December.

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:hhs:uunewp:2010_003. 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: (Katarina Grönvall).

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.