Working Paper: NBER ID: w13844
Authors: Raj Chetty
Abstract: Since Feldstein (1999), the most widely used method of calculating the excess burden of income taxation is to estimate the effect of tax rates on reported taxable income. This paper reevaluates the taxable income elasticity as a measure of excess burden when individuals can evade or avoid taxes. In many cases, part of the cost of evasion and avoidance reflects a transfer to another agent in the economy. I show that in such situations, excess burden depends on a weighted average of the taxable income and total earned income elasticities, with the weight determined by the marginal resource cost of sheltering income from taxation. This generalized formula implies that the efficiency cost of taxing high income individuals is not necessarily large despite evidence that their reported incomes are highly sensitive to tax rates.
Keywords: No keywords provided
JEL Codes: H21; J22; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| taxable income elasticity (H31) | efficiency cost of taxation (H21) |
| taxable income elasticity driven by resource costs (H31) | excess burden (H22) |
| taxable income elasticity driven by transfer costs (H31) | excess burden (H22) |
| marginal resource cost of sheltering income (H31) | weight in excess burden formula (H22) |
| taxable income elasticity and total earned income elasticity (H31) | excess burden (H22) |
| sheltering with only transfer costs (R28) | no efficiency loss (H21) |
| marginal social costs of sheltering differ from private costs (D61) | break equality condition for excess burden calculations (H21) |
| taxable income elasticity (H31) | deadweight loss calculation (H21) |
| sheltering entails both resource and transfer costs (D61) | excess burden determined by weighted average (H22) |
| taxable income elasticity increases (H31) | excess burden may not increase proportionately (H22) |