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Trends in High Incomes and Behavioral Responses to Taxation: Evidence from Executive Compensation and Statistics of Income Data

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  • Nada, Eissa
  • Giertz, Seth

Abstract

This paper examines income trends from 1992 to 2004 and the responsiveness of different income measures to tax changes for corporate executives and for the very highest income U.S. taxpayers. We detail the growth in executive compensation and break down the components of that growth by sources, such as the value of options and stock grants, as well as bonus income. We then examine income trends at various points in the income distribution for executives and for all taxpayers. An empirical strategy similar to that employed by Goolsbee (2000) is then used to examine the responsiveness to tax rates of broad measures as well as individual sources of executive compensation. Additionally, we investigate the impact of marginal tax rates applying to corporate income, personal income, and capital gains on the composition of executive compensation. Consistent with other studies, we find that most of the growth and volatility in incomes has been concentrated within the top one percent of taxpayers, for whom income grew sharply between 1992 and 2000, and then declined sharply from 2000 to 2002. Below the top one percent, income patterns are much more stable. Income patterns for executives are similar to, but more volatile than, those for the very highest income taxpayers. Salary income of executives has been relatively stable, while the value of their stock options, stock grants, and bonuses has grown tremendously. We use data from two sources: a panel of executives and IRS tax returns from the Statistics of Income. Our elasticity estimates based on the panel of executives may be more reliable than those based on the tax panel because the regressions include firm-specific information that helps to explain changes in income. For executives, our permanent earned income elasticity estimate for the early 1990s is 0.19 (with substantial transitory shifting of income into the year prior to the 1993 tax increase). There is also evidence of substantial transitory income shifting around the time of the 2001 Economic Growth Tax Relief and Reconciliation Act (EGTRRA), but the overall estimated elasticity is negative. The results are not definitive, however. Our results are sensitive to many factors, such as the time-period examined, the data set used, and the econometric specification. That inconsistency reflects the complexities inherent in estimating high-income behavioral responses to taxation. The fact that the elasticity estimates differ greatly across time-periods and across the two datasets suggests that non-tax factors are extremely important. That observation is consistent with several other papers (Slemrod 1996, Saez 2004, Kopczuk 2005, Giertz 2006) that all show a great deal of sensitivity surrounding taxable income elasticity estimates.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 17604.

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Date of creation: Dec 2006
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Handle: RePEc:pra:mprapa:17604

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Keywords: Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation; Executive Compensation; Income Distribution;

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References

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  1. Emmanuel Saez & Michael R. Veall, 2005. "The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence," American Economic Review, American Economic Association, American Economic Association, vol. 95(3), pages 831-849, June.
  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. Robert A Moffitt & Mark Wilhelm, 2000. "Taxation and the Labor Supply - Decisions of the Affluent," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 414, The Johns Hopkins University,Department of Economics.
  4. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
  5. Brian J. Hall & Jeffrey B. Liebman, 1998. "Are CEOs Really Paid Like Bureaucrats?," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 653-691, August.
  6. Martin Feldstein, 1995. "Tax Avoidance and the Deadweight Loss of the Income Tax," NBER Working Papers 5055, National Bureau of Economic Research, Inc.
  7. Eriksson, Tor, 1999. "Executive Compensation and Tournament Theory: Empirical Tests on Danish Data," Journal of Labor Economics, University of Chicago Press, University of Chicago Press, vol. 17(2), pages 262-80, April.
  8. Austan Goolsbee, 1999. "Evidence on the High-Income Laffer Curve from Six Decades of Tax Reform," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 30(2), pages 1-64.
  9. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, Elsevier, vol. 84(1), pages 91-112, April.
  10. Edward P. Lazear & Sherwin Rosen, 1979. "Rank-Order Tournaments as Optimum Labor Contracts," NBER Working Papers 0401, National Bureau of Economic Research, Inc.
  11. Giertz, Seth, 2005. "A Sensitivity Analysis of the Elasticity of Taxable Income," MPRA Paper 17601, University Library of Munich, Germany.
  12. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
  13. Giertz, Seth, 2004. "Recent Literature on Taxable-Income Elasticities," MPRA Paper 16159, University Library of Munich, Germany.
  14. Brian J. Hall & Jeffrey B. Liebman, 2000. "The Taxation of Executive Compensation," NBER Working Papers 7596, National Bureau of Economic Research, Inc.
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Cited by:
  1. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  2. Dana Andersen & Ramón López, 2012. "Do Tax Cuts Encourage Rent-Seeking by Top Corporate Executives? Theory and Evidence," Working Papers, University of Chile, Department of Economics wp360, University of Chile, Department of Economics.

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