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Tax Rates and Revenue Changes: Behavioural and Structural Factors

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Author Info

  • John Creedy
  • Norman Gemmell

    ()
    (The Treasury)

Abstract

This paper examines the elasticity of tax revenue with respect to a marginal rate change, at both the individual and aggregate level. The roles of the elasticity of taxable income (the behavioural effect on taxable income of a tax rise) and the revenue elasticity (the structural effect on revenue of a change in taxable income) are highlighted. The revenue elasticity is the central concept in examining fiscal drag, but it has an additional role in the context of the revenue effects of tax changes when incomes respond to rate changes. Illustrations are provided using changes to the New Zealand income tax structure in the 2010 Budget. This reduced all marginal tax rates while leaving income thresholds unchanged.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-05/twp11-05.pdf
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Bibliographic Info

Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 11/05.

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Length: 20
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:nzt:nztwps:11/05

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Related research

Keywords: income tax revenue; elasticity of taxable income; revenue elasticity;

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References

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  1. Don Fullerton, 1982. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues," NBER Working Papers 0467, National Bureau of Economic Research, Inc.
  2. Adam Wagstaff & Eddy van Doorslaer, 2001. "What Makes the Personal Income Tax Progressive? A Comparative Analysis for Fifteen OECD Countries," International Tax and Public Finance, Springer, vol. 8(3), pages 299-316, May.
  3. Claus, Iris & Creedy, John & Teng, Josh, 2012. "The Elasticity of Taxable Income in New Zealand," Working Paper Series 2427, Victoria University of Wellington, Chair in Public Finance.
  4. Koen Caminada & Kees Goudswaard, 1996. "Progression and revenue effects of income tax reform," International Tax and Public Finance, Springer, vol. 3(1), pages 57-66, January.
  5. Emmanuel Saez & Joel B. Slemrod & Seth H. Giertz, 2009. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," NBER Working Papers 15012, National Bureau of Economic Research, Inc.
  6. Creedy, John & Gemmell, Norman, 2005. "Wage growth and income tax revenue elasticities with endogenous labour supply," Economic Modelling, Elsevier, vol. 22(1), pages 21-38, January.
  7. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  8. Giertz, Seth H., 2007. "The Elasticity of Taxable Income over the 1980s and 1990s," National Tax Journal, National Tax Association, vol. 60(4), pages 743-68, December .
  9. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-72, June.
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