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The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'

  • Emmanuel Saez

This paper uses a panel of individual tax returns and the `bracket creep' as source of tax rate variation to construct instrumental variables estimates of the sensitivity of income to changes in tax rates. From 1979 to 1981, the US income tax schedule was fixed in nominal terms while inflation was high (around 10%). This produced a real change in tax rate schedules. Taxpayers near the top-end of a tax bracket were more likely to creep to a higher bracket and thus experience a rise in marginal rates the following year than the other taxpayers. Compensated elasticities can be estimated by comparing the differences in changes in income between taxpayers close to the top-end of a tax bracket to the other taxpayers. These estimates, based on comparisons between very similar groups, are robust to underlying changes in the income distribution, such as a rise in inequality. The elasticities found are higher than those derived in labor supply studies but smaller than those found previously with the same kind of tax returns data.

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File URL: http://www.nber.org/papers/w7367.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7367.

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Date of creation: Sep 1999
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Publication status: published as Saez, Emmanuel. "The Effect Of Marginal Tax Rates On Income: A Panel Study Of 'Bracket Creep'," Journal of Public Economics, 2003, v87(5-6,May), 1231-1258.
Handle: RePEc:nbr:nberwo:7367
Note: PE
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  1. 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.
  2. Jon Gruber & Emmanuel Saez, 2000. "The Elasticity of Taxable Income: Evidence and Implications," NBER Working Papers 7512, National Bureau of Economic Research, Inc.
  3. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
  4. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
  5. Emmanuel Saez, 2000. "Using Elasticities to Derive Optimal Income Tax Rates," NBER Working Papers 7628, National Bureau of Economic Research, Inc.
  6. Slemrod, Joel, 1995. "Income Creation or Income Shifting? Behavioral Responses to the Tax Reform Act of 1986," American Economic Review, American Economic Association, vol. 85(2), pages 175-80, May.
  7. Jerry A. Hausman, 1983. "Taxes and Labor Supply," NBER Working Papers 1102, National Bureau of Economic Research, Inc.
  8. 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 551-72, June.
  9. Joel Slemrod, 1995. "High-Income Families and the Tax Changes of the 1980s: The Anatomy of Behavioral Response," NBER Working Papers 5218, National Bureau of Economic Research, Inc.
  10. 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.
  11. Feenberg, D.R. & Poterba, J.M., 1992. "Income Inequality and the Incomes of Very High Income Taxpayers: Evidence from Tax Returns," Working papers 92-16, Massachusetts Institute of Technology (MIT), Department of Economics.
  12. Emmanuel Saez, 1999. "The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'," NBER Working Papers 7367, National Bureau of Economic Research, Inc.
  13. Joel Slemrod, 1992. "Taxation and Inequality: A Time-Exposure Perspective," NBER Working Papers 3999, National Bureau of Economic Research, Inc.
  14. Joel Slemrod & Wojciech Kopczuk, 2000. "The Optimal Elasticity of Taxable Income," NBER Working Papers 7922, National Bureau of Economic Research, Inc.
  15. Blundell, Richard & Macurdy, Thomas, 1999. "Labor supply: A review of alternative approaches," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 27, pages 1559-1695 Elsevier.
  16. Murphy, Kevin M & Welch, Finis, 1992. "The Structure of Wages," The Quarterly Journal of Economics, MIT Press, vol. 107(1), pages 285-326, February.
  17. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May.
  18. Christian, Charles W. & Frischmann, Peter J., 1989. "Attrition in the Statistics of Income Panel of Individual Returns," National Tax Journal, National Tax Association, vol. 42(4), pages 495-501, December.
  19. 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.
  20. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
  21. Emmanuel Saez, 1999. "Do Taxpayers Bunch at Kink Points?," NBER Working Papers 7366, National Bureau of Economic Research, Inc.
  22. Topel, Robert H, 1994. "Regional Labor Markets and the Determinants of Wage Inequality," American Economic Review, American Economic Association, vol. 84(2), pages 17-22, May.
  23. Lindsey, Lawrence B., 1987. "Individual taxpayer response to tax cuts: 1982-1984 : With implications for the revenue maximizing tax rate," Journal of Public Economics, Elsevier, vol. 33(2), pages 173-206, July.
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