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High-Income Families and the Tax Changes of the 1980s: The Anatomy of Behavioral Response

In: Empirical Foundations of Household Taxation

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  • Joel Slemrod

Abstract

The relative income gains of the affluent after the passage of the Tax Reform Act of 1986 (TRA86), which sharply lowered tax rates at high income levels, are overstated by comparing cross-sectional slices using concurrent income definitions, but they are large nevertheless. Although an index of the demand-side factors affecting inequality throughout the income distribution can explain much of the increased high-income concentration until 1985, it cannot adequately explain the post-TRA86 spurt. Thus, TRA86 is likely to have been a principal cause of the large increase in the reported personal income of the affluent. A close look at the sources of the post-1986 increases in the reported individual income of high-income households suggests that much of it represents shifting of income -- for example, from the corporate tax base to the individual tax base -- and not income creation such as additional labor supply. This distinction is critical because knowing how much the reported individual income of a particular group of people changes in response to a tax change is not a sufficient statistic for evaluating adequately its revenue consequences, incidence, and efficiency.
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Suggested Citation

  • Joel Slemrod, 1996. "High-Income Families and the Tax Changes of the 1980s: The Anatomy of Behavioral Response," NBER Chapters,in: Empirical Foundations of Household Taxation, pages 169-192 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:6240
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    References listed on IDEAS

    as
    1. Joel B. Slemrod, 1992. "Taxation and Inequality: A Time-Exposure Perspective," NBER Chapters,in: Tax Policy and the Economy, Volume 6, pages 105-128 National Bureau of Economic Research, Inc.
    2. Nada Eissa, 1995. "Taxation and Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment," NBER Working Papers 5023, National Bureau of Economic Research, Inc.
    3. Mackie-Mason, Jeffrey K & Gordon, Roger H, 1997. " How Much Do Taxes Discourage Incorporation?," Journal of Finance, American Finance Association, vol. 52(2), pages 477-505, June.
    4. Daniel R. Feenberg & James M. Poterba, 1993. "Income Inequality and the Incomes of Very High-Income Taxpayers: Evidence from Tax Returns," NBER Chapters,in: Tax Policy and the Economy, Volume 7, pages 145-177 National Bureau of Economic Research, Inc.
    5. 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.
    6. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    7. Claudia Goldin & Robert A. Margo, 1992. "The Great Compression: The Wage Structure in the United States at Mid-Century," The Quarterly Journal of Economics, Oxford University Press, vol. 107(1), pages 1-34.
    8. repec:hrv:faseco:30703979 is not listed on IDEAS
    9. James M. Poterba, 1993. "Tax Policy and the Economy, Volume 7," NBER Books, National Bureau of Economic Research, Inc, number pote93-1.
    10. Levy, Frank & Murnane, Richard J, 1992. "U.S. Earnings Levels and Earnings Inequality: A Review of Recent Trends and Proposed Explanations," Journal of Economic Literature, American Economic Association, pages 1333-1381.
    11. Andrew A. Samwick, 1996. "Tax Shelters and Passive Losses after the Tax Reform Act of 1986," NBER Chapters,in: Empirical Foundations of Household Taxation, pages 193-233 National Bureau of Economic Research, Inc.
    12. Fisher, Franklin M, 1970. "Tests of Equality Between Sets of Coefficients in Two Linear Regressions: An Expository Note," Econometrica, Econometric Society, vol. 38(2), pages 361-366, March.
    13. James M. Poterba (ed.), 1993. "Tax Policy and the Economy, Volume 7," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262660814, January.
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    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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