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Tax Avoidance And The Deadweight Loss Of The Income Tax

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Listed author(s):
  • Martin Feldstein

Abstract

Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption. The full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure, excludable income, and deductible consumption are a Hicksian composite good. Microeconomic estimates imply a deadweight loss of as much as 30% of revenue or more than ten times Harberger's classic 1964 estimate. The relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed $2 per $1 of revenue. © 2000 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/003465399558391
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Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 81 (1999)
Issue (Month): 4 (November)
Pages: 674-680

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Handle: RePEc:tpr:restat:v:81:y:1999:i:4:p:674-680
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Find related papers by JEL classification:
  • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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  1. Daniel Feenberg & Jonathan Skinner, 1989. "Sources of IRA Saving," NBER Chapters,in: Tax Policy and the Economy, Volume 3, pages 25-46 National Bureau of Economic Research, Inc.
  2. Gale, William G & Scholz, John Karl, 1994. "IRAs and Household Saving," American Economic Review, American Economic Association, vol. 84(5), pages 1233-1260, December.
  3. Browning, Edgar K, 1987. "On the Marginal Welfare Cost of Taxation," American Economic Review, American Economic Association, vol. 77(1), pages 11-23, March.
  4. Martin Feldstein, 1978. "The Welfare Cost of Capital Income Taxation," NBER Chapters,in: Research in Taxation, pages 29-51 National Bureau of Economic Research, Inc.
  5. B. Douglas Bernheim & John Karl Scholz, 1993. "Private Saving and Public Policy," NBER Chapters,in: Tax Policy and the Economy, Volume 7, pages 73-110 National Bureau of Economic Research, Inc.
  6. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier.
  7. Joel Slemrod, 2001. "A General Model of the Behavioral Response to Taxation," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 8(2), pages 119-128, March.
  8. Poterba, James M. & Venti, Steven F. & Wise, David A., 1995. "Do 401(k) contributions crowd out other personal saving?," Journal of Public Economics, Elsevier, vol. 58(1), pages 1-32, September.
  9. Auerbach, Alan J., 1985. "The theory of excess burden and optimal taxation," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 2, pages 61-127 Elsevier.
  10. Steven F. Venti & David A. Wise, 1990. "Have IRAs Increased U. S. Saving?: Evidence from Consumer Expenditure Surveys," The Quarterly Journal of Economics, Oxford University Press, vol. 105(3), pages 661-698.
  11. James M. Poterba & Steven F. Venti, 1994. "401(k) Plans and Tax-Deferred Saving," NBER Chapters,in: Studies in the Economics of Aging, pages 105-142 National Bureau of Economic Research, Inc.
  12. Triest, Robert K, 1992. "The Effect of Income Taxation on Labor Supply when Deductions Are Endogenous," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 91-99, February.
  13. Arnold Harberger, 1964. "Taxation, Resource Allocation, and Welfare," NBER Chapters,in: The Role of Direct and Indirect Taxes in the Federal Reserve System, pages 25-80 National Bureau of Economic Research, Inc.
  14. Ballard, Charles L & Shoven, John B & Whalley, John, 1985. "General Equilibrium Computations of the Marginal Welfare Costs of Taxes in the United States," American Economic Review, American Economic Association, vol. 75(1), pages 128-138, March.
  15. Sandmo, Agnar, 1985. "The effects of taxation on savings and risk taking," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 5, pages 265-311 Elsevier.
  16. Eric M. Engen & William G. Gale & John Karl Scholz, 1994. "Do Saving Incentives Work?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 25(1), pages 85-180.
  17. Stuart, Charles E, 1984. "Welfare Costs per Dollar of Additional Tax Revenue in the United States," American Economic Review, American Economic Association, vol. 74(3), pages 352-362, June.
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  1. Does it Matter Where the Laffer Curve Bends?
    by Megan McArdle in Megan McArdle on 2010-08-12 18:47:54
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