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Do Taxes Matter? Lessons From the 1980s

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  • Joel Slemrod

Abstract

The response of the economy to two major -- although in important respects offsetting -- tax reforms has been much smaller than ardent supply-side revolutionaries expected, thus suggesting that a reassessment of the grounds for revolt is in order. This paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation -- with particular reference to savings and capital gains realizations. I then reconstruct a 1992 view about how taxes affect behavior. A unifying theme is that the tax system does much more than alter the relative prices of real variables -- it also provides incentives to misreport income, restructure financial claims, time transactions, change the legal form of organization, and so on. For this reason, observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways. Disentangling these explanations requires an emphasis on the transaction-based nature of the tax system and the administration and enforcement of tax laws.

Suggested Citation

  • Joel Slemrod, 1992. "Do Taxes Matter? Lessons From the 1980s," NBER Working Papers 4008, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4008
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    7. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    Cited by:

    1. Miyazaki, Takeshi & Kitamura, Yukinobu, 2014. "Redistributive Effects of Income Tax Rates and Tax Base 1984-2009: Evidence from Japanese Tax Reforms," Discussion Paper Series 610, Institute of Economic Research, Hitotsubashi University.
    2. Neisser, Carina, 2017. "The elasticity of taxable income: A meta-regression analysis," ZEW Discussion Papers 17-032, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    3. Christopher A. Hennessy & Ilya A. Strebulaev, 2015. "Beyond Random Assignment: Credible Inference of Causal Effects in Dynamic Economies," NBER Working Papers 20978, National Bureau of Economic Research, Inc.
    4. Frydman, Carola & Molloy, Raven S., 2011. "Does tax policy affect executive compensation? Evidence from postwar tax reforms," Journal of Public Economics, Elsevier, vol. 95(11), pages 1425-1437.
    5. Facundo Alvaredo, 2007. "The Rich in Argentina over the twentieth century: From the Conservative Republic to the Peronist experience and beyond 1932-2004," Working Papers halshs-00588318, HAL.
    6. Rebecca M. Blank & Kerwin Kofi Charles & James M. Sallee, 2009. "A Cautionary Tale about the Use of Administrative Data: Evidence from Age of Marriage Laws," American Economic Journal: Applied Economics, American Economic Association, vol. 1(2), pages 128-149, April.
    7. repec:wly:jpamgt:v:37:y:2018:i:2:p:301-330 is not listed on IDEAS
    8. Raj Chetty, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 31-52, August.
    9. Agell, Jonas & Englund, Peter & Sodersten, Jan, 1996. "Tax Reform of the Century -- the Swedish Experiment," National Tax Journal, National Tax Association;National Tax Journal, vol. 49(4), pages 643-664, December.
    10. Rebecca M. Blank & Kerwin Kofi Charles & James M. Sallee, 2007. "Do State Laws Affect the Age of Marriage? A Cautionary Tale About Avoidance Behavior," NBER Working Papers 13667, National Bureau of Economic Research, Inc.
    11. Gunter, Samara, 2013. "State Earned Income Tax Credits and Participation in Regular and Informal Work," National Tax Journal, National Tax Association;National Tax Journal, vol. 66(1), pages 33-62, March.
    12. Jarkko Harju & Seppo Kari, 2017. "Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform," CESifo Economic Studies, CESifo, vol. 63(1), pages 45-77.
    13. Sara LaLumia & James M. Sallee & Nicholas Turner, 2015. "New Evidence on Taxes and the Timing of Birth," American Economic Journal: Economic Policy, American Economic Association, vol. 7(2), pages 258-293, May.
    14. Hoopes, Jeffrey L. & Robinson, Leslie & Slemrod, Joel, 2018. "Public tax-return disclosure," Journal of Accounting and Economics, Elsevier, vol. 66(1), pages 142-162.
    15. Harju Jarkko, 2014. "Policy evaluation methods in tax research – new evidence and interpretations," Nordic Tax Journal, Sciendo, vol. 2014(1), pages 76-92, May.
    16. Joel Slemrod, 1995. "What Do Cross-Country Studies Teach about Government Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
    17. Hennessy, Christopher & Strebulaev, Ilya, 2015. "Natural Experiment Policy Evaluation: A Critique," CEPR Discussion Papers 10455, C.E.P.R. Discussion Papers.
    18. Niepelt, Dirk, 2005. "Timing tax evasion," Journal of Public Economics, Elsevier, vol. 89(9-10), pages 1611-1637, September.
    19. Lüthi, Sonja & Wüstenhagen, Rolf, 2012. "The price of policy risk — Empirical insights from choice experiments with European photovoltaic project developers," Energy Economics, Elsevier, vol. 34(4), pages 1001-1011.
    20. Erlend Bø & Peter Lambert & Thor Thoresen, 2012. "Horizontal inequity under a dual income tax system: principles and measurement," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(5), pages 625-640, October.
    21. repec:eee:advacc:v:34:y:2016:i:c:p:55-63 is not listed on IDEAS
    22. Francis A. Longstaff & Ilya A. Strebulaev, 2014. "Corporate Taxes and Capital Structure: A Long-Term Historical Perspective," NBER Working Papers 20372, National Bureau of Economic Research, Inc.
    23. Denvil Duncan & Klara Sabirianova Peter, 2010. "Does labour supply respond to a flat tax?," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 18(2), pages 365-404, April.

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