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High-Income Families and the Tax Changes of the 1980s: The Anatomy of Behavioral Response

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  • Joel Slemrod

Abstract

The relative income gains of the affluent after the passage of the Tax Reform Act of 1986 (TRA86), which sharply lowered tax rates at high income levels, are overstated by comparing cross-sectional slices using concurrent income definitions, but they are large nevertheless. Although an index of the demand-side factors affecting inequality throughout the income distribution can explain much of the increased high-income concentration until 1985, it cannot adequately explain the post-TRA86 spurt. Thus, TRA86 is likely to have been a principal cause of the large increase in the reported personal income of the affluent. A close look at the sources of the post-1986 increases in the reported individual income of high-income households suggests that much of it represents shifting of income -- for example, from the corporate tax base to the individual tax base -- and not income creation such as additional labor supply. This distinction is critical because knowing how much the reported individual income of a particular group of people changes in response to a tax change is not a sufficient statistic for evaluating adequately its revenue consequences, incidence, and efficiency.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5218.

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Date of creation: Aug 1995
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Publication status: published as Empirical Foundations of Household Taxation, Martin Feldstein and James M. Poterba, eds., University of Chicago Press, 1996, pp. 169-189.
Handle: RePEc:nbr:nberwo:5218

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  1. Andrew A. Samwick, 1996. "Tax Shelters and Passive Losses after the Tax Reform Act of 1986," NBER Chapters, National Bureau of Economic Research, Inc, in: Empirical Foundations of Household Taxation, pages 193-233 National Bureau of Economic Research, Inc.
  2. Joel B. Slemrod, 1992. "Taxation and Inequality: A Time-Exposure Perspective," NBER Chapters, National Bureau of Economic Research, Inc, in: Tax Policy and the Economy, Volume 6, pages 105-128 National Bureau of Economic Research, Inc.
  3. Daniel Feenberg & James Poterba, 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," NBER Working Papers 4229, National Bureau of Economic Research, Inc.
  4. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 30(3), pages 1333-81, September.
  5. Joel Slemrod, 1998. "A General Model of the Behavioral Response to Taxation," NBER Working Papers 6582, National Bureau of Economic Research, Inc.
  6. Claudia Goldin & Robert A. Margo, 1991. "The Great Compression: The Wage Structure in the United States at Mid- Century," NBER Working Papers 3817, National Bureau of Economic Research, Inc.
  7. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, American Finance Association, vol. 52(2), pages 477-505, June.
  8. Fisher, Franklin M, 1970. "Tests of Equality Between Sets of Coefficients in Two Linear Regressions: An Expository Note," Econometrica, Econometric Society, Econometric Society, vol. 38(2), pages 361-66, March.
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