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Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors

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  • John Creedy
  • Norman Gemmell

Abstract

This paper shows how income changes in response to changes in marginal income tax rates (MTRs) translate into tax revenue changes for the familiar multi-step income tax function used in many countries. Previous literature has focused on the relatively straightforward case of a proportional income tax or the top MTR only. The paper examines revenue responses at both the individual and aggregate levels, and it is shown that for individual MTRs within a multi-rate regime, simple expressions for tax revenue responsiveness can be derived that nevertheless capture the various behavioural and structural responses to income tax reforms involving changes to multiple rates and thresholds. 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. Copyright Springer Science+Business Media New York 2013

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  • John Creedy & Norman Gemmell, 2013. "Measuring revenue responses to tax rate changes in multi-rate income tax systems: behavioural and structural factors," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(6), pages 974-991, December.
    • Handle: RePEc:kap:itaxpf:v:20:y:2013:i:6:p:974-991
    DOI: 10.1007/s10797-012-9255-7
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    1. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Fiscal Studies, Institute for Fiscal Studies, vol. 33(3), pages 287-303, September.
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    15. 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.
    16. Koen Caminada & Kees Goudswaard, 1996. "Progression and revenue effects of income tax reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 57-66, January.
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    19. Iris Claus & John Creedy & Josh Teng, 2012. "The Elasticity of Taxable Income in New Zealand," Fiscal Studies, Institute for Fiscal Studies, vol. 33(3), pages 287-303, September.
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    Cited by:

    1. Creedy, John & Gemmell, Norman, 2012. "Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures," Working Paper Series 18713, Victoria University of Wellington, Chair in Public Finance.
    2. Creedy, John & Gemmell, Norman & Hérault, Nicolas & Mok, Penny, 2018. "Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand," GLO Discussion Paper Series 213, Global Labor Organization (GLO).
    3. John Creedy & Norman Gemmell, 2020. "The elasticity of taxable income of individuals in couples," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 931-950, August.
    4. Ana Gamarra Rondinel & José Félix Sanz-Sanz & María Arrazola, 2024. "The individual Laffer curve: evidence from the Spanish income tax," Empirical Economics, Springer, vol. 67(6), pages 2719-2769, December.
    5. Nazila Alinaghi & John Creedy & Norman Gemmell, 2021. "Designing Personal Income Tax and Transfer Reforms: Alternative Modelling Approaches," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(4), pages 445-461, December.
    6. Gemmell, Norman & Hasseldine, John, 2013. "Taxpayers' Behavioural Responses and Measures of Tax Compliance 'Gaps': A Critique," Working Paper Series 18786, Victoria University of Wellington, Chair in Public Finance.
    7. John Creedy, 2015. "The elasticity of taxable income, welfare changes and optimal tax rates," New Zealand Economic Papers, Taylor & Francis Journals, vol. 49(3), pages 227-248, August.
    8. Arrazola, María & de Hevia, José & Romero, Desiderio & Sanz-Sanz, José Félix, 2014. "Personal Income Tax Reforms and the Elasticity of Reported Income to Marginal Tax Rates: An Empirical Analysis Applied to Spain," Working Paper Series 3593, Victoria University of Wellington, Chair in Public Finance.
    9. Ana Gamarra & José Félix Sanz-Sanz & María Arrazola, 2023. "The individual Laffer curve: evidence from the Spanish income tax," Melbourne Institute Working Paper Series wp2023n05, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
    10. Alinaghi, Nazila & Creedy, John & Gemmell, Norman, 2020. "Designing Direct Tax Reforms: Alternative Approaches," Working Paper Series 9338, Victoria University of Wellington, Chair in Public Finance.
    11. Sanz-Sanz, José Félix, 2022. "A full-fledged analytical model for the Laffer curve in personal income taxation," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 795-811.
    12. Creedy, John & Gemmell, Norman & Hérault, Nicolas & Mok, Penny, 2018. "Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand," GLO Discussion Paper Series 213, Global Labor Organization (GLO).
    13. Arrazola, María & de Hevia, José & Romero, Desiderio & Sanz-Sanz, José Félix, 2014. "Personal Income Tax Reforms and the Elasticity of Reported Income to Marginal Tax Rates: An Empirical Analysis Applied to Spain," Working Paper Series 18851, Victoria University of Wellington, Chair in Public Finance.
    14. Alinaghi, Nazila & Creedy, John & Gemmell, Norman, 2020. "Designing Direct Tax Reforms: Alternative Approaches," Working Paper Series 21093, Victoria University of Wellington, Chair in Public Finance.
    15. John Creedy, 2015. "The elasticity of taxable income, welfare changes and optimal tax rates," New Zealand Economic Papers, Taylor & Francis Journals, vol. 49(3), pages 227-248, August.

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    More about this item

    Keywords

    Income tax revenue; Elasticity of taxable income; Revenue elasticity; H24; H31; H26;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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