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Household Behavior and the Tax Reform Act of 1986

  • Jerry A. Hausman
  • James M. Poterba

This paper evaluates the effects of the 1986 Tax Reform Act on household labor supply and savings. It describes the tax bill's effects on incentives to work and to save, and uses recent econometric estimates of labor supply and savings elasticities to describe the reform's impact on household behavior. Two factors lead us to conclude that the new law will have small aggregate effects. First, most households experience only small changes in their marginal tax rates. Forty-one percent of the taxpaying population will face marginal tax rates as high, or higher, under the new law as under the previous tax code. Only eleven percent of taxpayers receive marginal tax rate reductions of ten percentage points or more. Second, plausible estimates of both the labor supply and savings elasticities suggest that even for those households that receive rate reductions, behavioral changes will be small. Our analysis suggests that the tax reform will increase labor supply by about one percent, and slightly reduce private savings.

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File URL: http://www.nber.org/papers/w2120.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2120.

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Date of creation: Jan 1987
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Publication status: published as Hausman, Jerry A. and James M. Poterba. "Household Behavior and the Tax Reform Act of 1986," Journal of Economic Perspectives, Vol. 1, No. 1, 1987, pp . 101-119.
Handle: RePEc:nbr:nberwo:2120
Note: PE
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  1. King, Mervyn & Leape, Jonathan, 1985. "Wealth and Portfolio Composition: Theory and Evidence," CEPR Discussion Papers 43, C.E.P.R. Discussion Papers.
  2. Michael J. Boskin, 1978. "Taxation, Saving, and the Rate of Interest," NBER Chapters, in: Research in Taxation, pages 3-27 National Bureau of Economic Research, Inc.
  3. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
  4. Fumio Hayashi, 1985. "Tests for Liquidity Constraints: A Critical Survey," NBER Working Papers 1720, National Bureau of Economic Research, Inc.
  5. Daniel R. Feenberg & Harvey S. Rosen, 1983. "Alternative Tax Treatments of the Family: Simulation Methodology and Results," NBER Chapters, in: Behavioral Simulation Methods in Tax Policy Analysis, pages 7-46 National Bureau of Economic Research, Inc.
  6. James M. Poterba & Lawrence H. Summers, 1985. "The Economic Effects of Dividend Taxation," NBER Working Papers 1353, National Bureau of Economic Research, Inc.
  7. Jerry A. Hausman & Paul Ruud, 1984. "Family Labor Supply With Taxes," NBER Working Papers 1271, National Bureau of Economic Research, Inc.
  8. MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
  9. Summers, Lawrence H, 1981. "Capital Taxation and Accumulation in a Life Cycle Growth Model," American Economic Review, American Economic Association, vol. 71(4), pages 533-44, September.
  10. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1987. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
  11. Boskin, Michael J, 1978. "Taxation, Saving, and the Rate of Interest," Journal of Political Economy, University of Chicago Press, vol. 86(2), pages S3-27, April.
  12. Alan J. Auerbach & James M. Poterba, 1987. "Why Have Corporate Tax Revenues Declined?," NBER Working Papers 2118, National Bureau of Economic Research, Inc.
  13. 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.
  14. Robert E. Hall, 1985. "Real Interest and Consumption," NBER Working Papers 1694, National Bureau of Economic Research, Inc.
  15. repec:cup:cbooks:9780521299169 is not listed on IDEAS
  16. Yolanda K. Henderson, 1986. "Lessons from federal reform of business taxes," New England Economic Review, Federal Reserve Bank of Boston, issue Nov, pages 9-25.
  17. Hansen, Lars Peter & Singleton, Kenneth J, 1983. "Stochastic Consumption, Risk Aversion, and the Temporal Behavior of Asset Returns," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 249-65, April.
  18. Lawrence H. Summers, 1982. "Tax Policy, the Rate of Return, and Savings," NBER Working Papers 0995, National Bureau of Economic Research, Inc.
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