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More realistic estimates of revenue changes from tax cuts

Procedures of revenue estimation of changes in the personal income tax are discussed. Using revenue estimates of the 2006 tax cuts in the personal income tax in Norway as an example, we show that estimates of costs of cuts differ substantially when different effects are brought into consideration. Estimates of revenue effects which take labor supply responses and effects through indirect taxation and corporate taxes into account are presented and contrasted with estimates obtained by current procedures. Our estimates indicate that a substantial part of the initial outlay is returned; approximately 56 percent comes back as increased tax revenues from other tax bases and increased personal income tax following from labor supply adjustments.

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Paper provided by Statistics Norway, Research Department in its series Discussion Papers with number 545.

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Date of creation: May 2008
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Handle: RePEc:ssb:dispap:545
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  1. Thor O. Thoresen & Annette Alstadsæter, 2008. "Shifts in organizational form under a dual income tax system," Discussion Papers 529, Statistics Norway, Research Department.
  2. Rolf Aaberge & Ugo Colombino, 2005. "Designing Optimal Taxes With a Microeconometric Model of Household Labour Supply," Public Economics 0510013, EconWPA.
  3. Gravelle, Jane G., 1995. "Behavioral Feedback Effects and the Revenue-Estimating Process," National Tax Journal, National Tax Association, vol. 48(3), pages 463-77, September.
  4. John Creedy & Guyonne Kalb & Rosanna Scutella, 2003. "Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation," Melbourne Institute Working Paper Series wp2003n21, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.
  5. Diamond, John W. & Moomau, Pamela H., 2003. "Issues in Analyzing the Macroeconomic Effects of Tax Policy," National Tax Journal, National Tax Association, vol. 56(3), pages 447-62, September.
  6. 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.
  7. John Creedy & Alan Duncan, 2001. "Aggregating Labour Supply And Feedback Effects In Microsimulation," Department of Economics - Working Papers Series 823, The University of Melbourne.
  8. Dagsvik, John K, 1994. "Discrete and Continuous Choice, Max-Stable Processes, and Independence from Irrelevant Attributes," Econometrica, Econometric Society, vol. 62(5), pages 1179-1205, September.
  9. John K. Dagsvik & Steinar Strøm, 2004. "Sectoral Labor Supply, Choice Restrictions and Functional Form," Discussion Papers 388, Statistics Norway, Research Department.
  10. N. Gregory Mankiw & Matthew Weinzierl, 2004. "Dynamic Scoring: A Back-of-the-Envelope Guide," NBER Working Papers 11000, National Bureau of Economic Research, Inc.
  11. Richard Blundell & Thomas MaCurdy, 1998. "Labour supply: a review of alternative approaches," IFS Working Papers W98/18, Institute for Fiscal Studies.
  12. Michiel Evers & Ruud A. De Mooij & Daniel J. Van Vuuren, 2005. "What Explains the Variation in Estimates of Labour Supply Elasticities?," CESifo Working Paper Series 1633, CESifo Group Munich.
  13. Rosanne Altshuler & Nicholas Bull & John Diamond & Tim Dowd & Pamela Moomau, 2005. "The Role of Dynamic Scoring in the Federal Budget Process: Closing the Gap between Theory and Practice," American Economic Review, American Economic Association, vol. 95(2), pages 432-436, May.
  14. Benjamin R. Page, 2005. "CBO's Analysis of the Macroeconomic Effects of the President's Budget," American Economic Review, American Economic Association, vol. 95(2), pages 437-440, May.
  15. John K. Dagsvik & Zhiyang Jia, 2006. "Labor Supply as a Choice among Latent Job Opportunities. A Practical Empirical Approach," Discussion Papers 481, Statistics Norway, Research Department.
  16. Alan J. Auerbach, 2005. "Dynamic Scoring: An Introduction to the Issues," American Economic Review, American Economic Association, vol. 95(2), pages 421-425, May.
  17. Hutton, J P & Lambert, P J, 1980. "Evaluating Income Tax Revenue Elasticities," Economic Journal, Royal Economic Society, vol. 90(363), pages 901-06, December.
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