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The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'

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Emmanuel Saez

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Abstract

This paper uses a panel of individual tax returns and the `bracket creep' as source of tax rate variation to construct instrumental variables estimates of the sensitivity of income to changes in tax rates. From 1979 to 1981, the US income tax schedule was fixed in nominal terms while inflation was high (around 10%). This produced a real change in tax rate schedules. Taxpayers near the top-end of a tax bracket were more likely to creep to a higher bracket and thus experience a rise in marginal rates the following year than the other taxpayers. Compensated elasticities can be estimated by comparing the differences in changes in income between taxpayers close to the top-end of a tax bracket to the other taxpayers. These estimates, based on comparisons between very similar groups, are robust to underlying changes in the income distribution, such as a rise in inequality. The elasticities found are higher than those derived in labor supply studies but smaller than those found previously with the same kind of tax returns data.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7367.

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Date of creation: Sep 1999
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Handle: RePEc:nbr:nberwo:7367

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Find related papers by JEL classification:
H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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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.:
  1. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May. [Downloadable!] (restricted)
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  3. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier. [Downloadable!] (restricted)
  4. Saez, Emmanuel, 2003. "The effect of marginal tax rates on income: a panel study of 'bracket creep'," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1231-1258, May. [Downloadable!] (restricted)
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  5. Joel B. Slemrod, 1992. "Taxation and Inequality: A Time-Exposure Perspective," NBER Chapters, in: Tax Policy and the Economy, Volume 6, pages 105-128 National Bureau of Economic Research, Inc. [Downloadable!]
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  6. van der Klaauw, Wilbert, 1997. "A Regression-Discontinuity Evaluation of the Effect of Financial Aid Offers on College Enrollment," Working Papers 97-10, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
  7. Macurdy, T. & Green, D. & Paarsch, H., 1990. "Assessing Empirical Approaches For Analyzing Taxes And Labor Supply," Papers e-90-11, Stanford - Hoover Institution.
  8. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May. [Downloadable!] (restricted)
  10. Topel, Robert H, 1994. "Regional Labor Markets and the Determinants of Wage Inequality," American Economic Review, American Economic Association, vol. 84(2), pages 17-22, May. [Downloadable!] (restricted)
  11. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Daniel R. Feenberg & James M. Poterba, 1993. "Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns," NBER Chapters, in: Tax Policy and the Economy, Volume 7, pages 145-177 National Bureau of Economic Research, Inc. [Downloadable!]
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  13. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-99, July. [Downloadable!] (restricted)
    Other versions:
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(explanations, 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.)

  1. Michiel Evers & Ruud de Mooij & Daniel J. van Vuuren, 2005. "What Explains the Variation in Estimates of Labour Supply Elasticities?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  2. Blomquist, Sören & Selin, Håkan, 2008. "Hourly Wage Rate and Taxable Labor Income Responsiveness to Changes in Marginal Tax Rates," Working Paper Series 2008:16, Uppsala University, Department of Economics. [Downloadable!]
    Other versions:
  3. Adam Looney & Monica Singhal, 2005. "The effect of anticipated tax changes on intertemporal labor supply and the realization of taxable income," Finance and Economics Discussion Series 2005-44, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  4. Conesa, Juan Carlos & Kitao, Sagiri & Krüger, Dirk, 2006. "Taxing Capital? Not a Bad Idea After All!," CEPR Discussion Papers 5929, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. Emmanuel Saez, 1999. "The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'," NBER Working Papers 7367, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  6. Raj Chetty, 2003. "A New Method of Estimating Risk Aversion," NBER Working Papers 9988, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Jane K. Dokko, 2008. "The effect of taxation on lifecycle labor supply: results from a quasi-experiment," Finance and Economics Discussion Series 2008-24, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  8. Mary-Anne Sillamaa & Michael R. Veall, 2000. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1988 Tax Flattening in Canada," Social and Economic Dimensions of an Aging Population Research Papers 25, McMaster University. [Downloadable!]
    Other versions:
  9. Sören Blomquist & Vidar Christiansen & Luca Micheletto, 2008. "Public Provision of Private Goods and Nondistortionary Marginal Tax Rates," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
    Other versions:
  10. Robert Gagné & Jean-François Nadeau & François Vaillancourt, 2000. "Taxpayers' Response to Tax Rate Changes: A Canadian Panel Study," CIRANO Working Papers 2000s-59, CIRANO. [Downloadable!]
  11. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. Selén, Jan, 2002. "Taxable Income Responses to Tax Changes - A Panel Analysis of the 1990/91 Swedish Reform," Working Paper Series 177, Trade Union Institute for Economic Research. [Downloadable!]
  13. Bertil Holmlund & Martin Söderström, 2007. "Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach," IZA Discussion Papers 3088, Institute for the Study of Labor (IZA). [Downloadable!]
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  14. Emmanuel Saez, 1999. "Do Taxpayers Bunch at Kink Points?," NBER Working Papers 7366, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Robert Carroll & Warren Hrung, 2005. "What Does the Taxable Income Elasticity Say About Dynamic Responses to Tax Changes?," American Economic Review, American Economic Association, vol. 95(2), pages 426-431, May. [Downloadable!]
  16. Emmanuel Saez, 2004. "Reported Incomes and Marginal Tax Rates, 1960-2000: Evidence and Policy Implications," NBER Working Papers 10273, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
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