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Marginal tax rates and income in the long run: Evidence from a structural estimation

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  • Macnamara, Patrick
  • Pidkuyko, Myroslav
  • Rossi, Raffaele

Abstract

We estimate a life-cycle model of savings, labor productivity and entrepreneurs to measure the long-run response of income to marginal tax rate cuts in the US. Long-run tax elasticities of income are largest for the richest 1% but are also positive and substantial for other income groups. In equilibrium, entrepreneurs obtain higher returns on wealth. This increases the investment response of rich, high-return entrepreneurs, amplifying their income elasticity to tax cuts. This leads to a reallocation of capital which increases TFP, and generates a boost in wages that magnifies the estimated income response of the bottom 90% as well.

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  • Macnamara, Patrick & Pidkuyko, Myroslav & Rossi, Raffaele, 2024. "Marginal tax rates and income in the long run: Evidence from a structural estimation," Journal of Monetary Economics, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:moneco:v:142:y:2024:i:c:s0304393223001010
    DOI: 10.1016/j.jmoneco.2023.09.001
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    Cited by:

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    More about this item

    Keywords

    Marginal tax rate changes; Elasticity of taxable income; Life-cycle; Entrepreneurs; Structural estimation;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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