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Taxable Income Responses to 1990s Tax Acts: Further Explorations

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  • Giertz, Seth

Abstract

This paper examines alternative methodologies for measuring responses to the 1990 and 1993 federal tax increases. The methodologies build on those employed by Gruber and Saez (2002), Carroll (1998), and Auten and Carroll (1999). Internal Revenue Service tax return data for the project are from the Statistics of Income, which heavily oversamples high-income filers. Special attention is paid to the importance of sample income restrictions and methodology. In general, estimates are quite sensitive to a number of different factors. In contrast to some of the literature, estimates are larger when behavior is measured over three-year intervals as opposed to over one-year intervals – suggesting small transitory responses to tax changes, but larger longer-term responses. When including the richest set of income controls, income-weighted elasticity estimates based on one year differencing range from 0 to 0.19. Similarly estimated elasticities over three year intervals are about 0.32. When adding adjacent year tax rates to model, estimates based on one year differencing now range from 0.30 to 0.43 and estimates when differencing over three year intervals range from 0.97 to 1.37. In most cases, estimates from an end-year approach are not statistically different from 0 for the 1990s. However, even for the approaches that produce statistically significant results, estimates are sensitive to an array of factors and plausible sensitivity checks often result in estimates that differ greatly. A major conclusion is that isolating the true taxable income responses to tax changes is inherently complex and little confidence should be placed on any single estimate.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17602.

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Date of creation: Sep 2008
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Handle: RePEc:pra:mprapa:17602

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Keywords: Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation;

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References

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  1. Robert A. Moffitt & Mark Wilhelm, 1998. "Taxation and the Labor Supply: Decisions of the Affluent," NBER Working Papers 6621, National Bureau of Economic Research, Inc.
  2. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  3. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
  4. Jon Bakija, 2006. "Documentation for a Comprehensive Historical U.S. Federal and State Income Tax Calculator Program," Department of Economics Working Papers 2006-02, Department of Economics, Williams College, revised Aug 2009.
  5. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
  6. Giertz, Seth, 2005. "A Sensitivity Analysis of the Elasticity of Taxable Income," MPRA Paper 17601, University Library of Munich, Germany.
  7. Thomas Piketty & Emmanuel Saez, 2006. "How Progressive is the U.S. Federal Tax System? A Historical and International Perspective," NBER Working Papers 12404, National Bureau of Economic Research, Inc.
  8. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, vol. 95(3), pages 831-849, June.
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Cited by:
  1. 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.

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