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Measuring Revenue Responses to Tax Rate Changes in Multi-Rate Income Tax Systems: Behavioural and Structural Factors

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  • Creedy, John
  • Gemmell, Norman

Abstract

This paper shows how income changes in response to changes in marginal income tax rates (MTRs) translate into tax revenue changes for the familiar multi-step income tax function used in many countries. Previous literature has focused on the relatively straightforward case of a proportional income tax or the top MTR only. The paper examines revenue responses at both the individual and aggregate levels, and it is shown that for individual MTRs within a multi-rate regime, simple expressions for tax revenue responsiveness can be derived that nevertheless capture the various behavioural and structural responses to income tax reforms involving changes to multiple rates and thresholds. 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.

Suggested Citation

  • Creedy, John & Gemmell, Norman, 2012. "Measuring Revenue Responses to Tax Rate Changes in Multi-Rate Income Tax Systems: Behavioural and Structural Factors," Working Paper Series 2430, Victoria University of Wellington, Chair in Public Finance.
  • Handle: RePEc:vuw:vuwcpf:2430
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    15. Emmanuel Saez, 2004. "Reported Incomes and Marginal Tax Rates, 1960–2000: Evidence and Policy Implications," NBER Chapters, in: Tax Policy and the Economy, Volume 18, pages 117-174, National Bureau of Economic Research, Inc.
    16. Elmendorf, Douglas W. & Furman, Jason & Gale, William G. & Harris, Benjamin H., 2008. "Distributional Effects of the 2001 and 2003 Tax Cuts: How Do Financing and Behavioral Responses Matter?," National Tax Journal, National Tax Association;National Tax Journal, vol. 61(3), pages 365-380, September.
    17. Creedy, John & Gemmell, Norman, 2002. "The Built-In Flexibility of Income and Consumption Taxes," Journal of Economic Surveys, Wiley Blackwell, vol. 16(4), pages 509-532, September.
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    Cited by:

    1. Nazila Alinaghi & John Creedy & Norman Gemmell, 2021. "Designing Personal Income Tax and Transfer Reforms: Alternative Modelling Approaches," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 54(4), pages 445-461, December.
    2. Arrazola, María & de Hevia, José & Romero, Desiderio & Sanz-Sanz, José Félix, 2014. "Personal Income Tax Reforms and the Elasticity of Reported Income to Marginal Tax Rates: An Empirical Analysis Applied to Spain," Working Paper Series 3593, Victoria University of Wellington, Chair in Public Finance.
    3. John Creedy, 2015. "The elasticity of taxable income, welfare changes and optimal tax rates," New Zealand Economic Papers, Taylor & Francis Journals, vol. 49(3), pages 227-248, August.
    4. Creedy, John & Gemmell, Norman & Hérault, Nicolas & Mok, Penny, 2018. "Microsimulation Analysis of Optimal Income Tax Reforms. An Application to New Zealand," GLO Discussion Paper Series 213, Global Labor Organization (GLO).
    5. Mattos, Enlinson & Terra, Rafael, 2016. "Cash-cum-in-kind transfers and income tax function," Textos para discussão 414, FGV EESP - Escola de Economia de São Paulo, Fundação Getulio Vargas (Brazil).
    6. Gemmell, Norman & Hasseldine, John, 2013. "Taxpayers' Behavioural Responses and Measures of Tax Compliance 'Gaps': A Critique," Working Paper Series 2853, Victoria University of Wellington, Chair in Public Finance.
    7. Sanz-Sanz, José Félix, 2022. "A full-fledged analytical model for the Laffer curve in personal income taxation," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 795-811.
    8. John Creedy & Norman Gemmell, 2020. "The elasticity of taxable income of individuals in couples," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(4), pages 931-950, August.
    9. Alinaghi, Nazila & Creedy, John & Gemmell, Norman, 2020. "Designing Direct Tax Reforms: Alternative Approaches," Working Paper Series 9338, Victoria University of Wellington, Chair in Public Finance.
    10. Creedy, John & Gemmell, Norman, 2012. "Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures," Working Paper Series 2431, Victoria University of Wellington, Chair in Public Finance.

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    More about this item

    Keywords

    Income Tax Revenue; Elasticity of taxable income; revenue elasticity;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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