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Behavioral Responses to Tax Rates: Evidence from TRA86

  • Martin Feldstein

This paper uses the experience after the Tax Reform Act of 1986 to examine how taxes affect three aspects of individual taxpayer behavior: labor supply, total taxable income, and capital gains. The substantial sensitivity of married women's labor supply implies that the efficiency of the tax system could be increased significantly by reducing the marginal tax rates of these women relative to their husbands' marginal tax rates. More generally, the sensitivity of taxable income to the net of tax share implies that lower marginal tax rates would involve much less revenue loss than is traditionally assumed and would bring a much more substantial reduction in the deadweight loss of the tax system. The sharp fall in the real value of realized capital gains since the 1986 rise in tax rates on capital gains confirms earlier research indicating the substantial sensitivity of capital gains realizations to tax rates. A comparison with projections by the Treasury and Congressional Budget Office made in 1988 shows that the current official model greatly understates the sensitivity of capital gains to tax rates.

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File URL: http://www.nber.org/papers/w5000.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5000.

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Date of creation: Jan 1995
Date of revision:
Publication status: published as American Economic Review, AEA Papers and Proceedings, Vol.85, No.2, May 1995.
Handle: RePEc:nbr:nberwo:5000
Note: PE
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  1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  2. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-99, July.
  3. Jerry A. Hausman & Paul Ruud, 1984. "Family Labor Supply With Taxes," NBER Working Papers 1271, National Bureau of Economic Research, Inc.
  4. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-21, May.
  5. Burman, Leonard E & Randolph, William C, 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data," American Economic Review, American Economic Association, vol. 84(4), pages 794-809, September.
  6. MaCurdy, Thomas, 1992. "Work Disincentive Effects of Taxes: A Reexamination of Some Evidence," American Economic Review, American Economic Association, vol. 82(2), pages 243-49, May.
  7. Barry Bosworth & Gary Burtless, 1992. "Effects of Tax Reform on Labor Supply, Investment, and Saving," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 3-25, Winter.
  8. Feldstein, Martin & Yitzhaki, Shlomo, 1978. "The effects of the capital gains tax on the selling and switching of common stock," Journal of Public Economics, Elsevier, vol. 9(1), pages 17-36, February.
  9. Robert K. Triest, 1990. "The Effect of Income Taxation on Labor Supply in the United States," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 491-516.
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