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Marginal Tax Rates and Income: New Time Series Evidence

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  • Karel Mertens
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    Abstract

    This paper estimates the dynamic effects of marginal tax rate changes on income reported on tax returns in the United States over the 1950-2010 period. After isolating exogenous variation in average marginal tax rates in structural vector autoregressions using a narrative identification approach, I find large positive effects in the top 1% of the income distribution. In contrast to earlier findings based on tax return data, I also find large effects in other income percentile brackets. A hypothetical tax reform cutting marginal rates only for the top 1% leads to sizeable increases in top 1\% incomes and has a positive effect on real GDP. There are also spillover effects to incomes outside of the top 1%, but top marginal rate cuts lead to greater inequality in pre-tax incomes.

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    Bibliographic Info

    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19171.

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    Date of creation: Jun 2013
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    Handle: RePEc:nbr:nberwo:19171

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    1. Triest, Robert K., 1998. "Econometric Issues in Estimating the Behavioral Response to Taxation: A Nontechnical Introduction," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 761-72, December.
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    3. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
    4. Mertens, Karel & Ravn, Morten O., 2009. "Empirical Evidence on the Aggregate Effects of Anticipated and Unanticipated U.S. Tax Policy Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7370, C.E.P.R. Discussion Papers.
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    6. Mertens, Karel & Ravn, Morten O., 2009. "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks," CEPR Discussion Papers, C.E.P.R. Discussion Papers 7505, C.E.P.R. Discussion Papers.
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    17. Alan J. Auerbach & Yuriy Gorodnichenko, 2010. "Measuring the Output Responses to Fiscal Policy," NBER Working Papers 16311, National Bureau of Economic Research, Inc.
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    21. Karel Mertens & Morten Overgaard Ravn, 2010. "Online Appendix to "Understanding the Aggregate Effects of Anticipated and Unanticipated Tax Policy Shocks"," Technical Appendices, Review of Economic Dynamics 09-221, Review of Economic Dynamics.
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    Cited by:
    1. Guner, Nezih & Lopez-Daneri, Martin & Ventura, Gustavo, 2014. "Heterogeneity and Government Revenues: Higher Taxes at the Top?," IZA Discussion Papers 8335, Institute for the Study of Labor (IZA).

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