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The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review

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  • Emmanuel Saez
  • Joel B. Slemrod
  • Seth H. Giertz

Abstract

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of most of the taxable income elasticities studies to date, both in the United States and abroad, in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15012.

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Date of creation: May 2009
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Publication status: published as 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.
Handle: RePEc:nbr:nberwo:15012

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