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Tax Rates and Revenue Changes: Behavioural and Structural Factors

This paper examines the elasticity of tax revenue with respect to a marginal rate change, at both the individual and aggregate level. The roles of the elasticity of taxable income (the behavioural effect on taxable income of a tax rise) and the revenue elasticity (the structural effect on revenue of a change in taxable income) are highlighted. The revenue elasticity is the central concept in examining fiscal drag, but it has an additional role in the context of the revenue effects of tax changes when incomes respond to rate changes. Illustrations are provided using changes to the New Zealand income tax structure in the 2010 Budget. This reduced all marginal tax rates while leaving income thresholds unchanged.

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File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2011/11-05/twp11-05.pdf
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Paper provided by New Zealand Treasury in its series Treasury Working Paper Series with number 11/05.

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Length: 20
Date of creation: Dec 2011
Date of revision:
Handle: RePEc:nzt:nztwps:11/05
Contact details of provider: Postal: New Zealand Treasury, PO Box 3724, Wellington, New Zealand
Phone: +64-4-472 2733
Fax: +64-4-473 0982
Web page: http://www.treasury.govt.nz

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  1. Iris Claus & John Creedy & Josh Teng, 2010. "The Elasticity of Taxable Income in New Zealand," CAMA Working Papers 2010-21, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  2. Martin Feldstein, 1993. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the1986 Tax Reform Act," NBER Working Papers 4496, National Bureau of Economic Research, Inc.
  3. Emmanuel Saez & Joel Slemrod & Seth H. Giertz, 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 50(1), pages 3-50, March.
  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. Giertz, Seth H., 2007. "The Elasticity of Taxable Income over the 1980s and 1990s," National Tax Journal, National Tax Association, vol. 60(4), pages 743-68, December.
  6. Don Fullerton, 1980. "On the Possibility of an Inverse Relationship between Tax Rates and Government Revenues," NBER Working Papers 0467, National Bureau of Economic Research, Inc.
  7. Creedy, John & Gemmell, Norman, 2005. "Wage growth and income tax revenue elasticities with endogenous labour supply," Economic Modelling, Elsevier, vol. 22(1), pages 21-38, January.
  8. Koen Caminada & Kees Goudswaard, 1996. "Progression and revenue effects of income tax reform," International Tax and Public Finance, Springer, vol. 3(1), pages 57-66, January.
  9. Adam Wagstaff & Eddy van Doorslaer, 2001. "What Makes the Personal Income Tax Progressive? A Comparative Analysis for Fifteen OECD Countries," International Tax and Public Finance, Springer, vol. 8(3), pages 299-316, May.
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