Working Paper: NBER ID: w15012
Authors: Emmanuel Saez; Joel B. Slemrod; Seth H. Giertz
Abstract: This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) using tax return data. First, we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis. We discuss what other parameters should be estimated when the elasticity is not a sufficient statistic. Second, we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the United States to illustrate those issues. Third, we provide a critical discussion of most of the taxable income elasticities studies to date, both in the United States and abroad, in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.
Keywords: elasticity of taxable income; marginal tax rates; optimal tax analysis; behavioral responses
JEL Codes: H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Elasticity of taxable income (ETI) (H30) | efficiency costs of taxation (H21) |
| Tax rate changes (H29) | reported incomes (D31) |
| High marginal efficiency cost of taxation (H21) | significant behavioral responses to tax rate changes (H32) |
| Reported incomes responsiveness (H31) | income levels (J31) |
| Tax policy changes (H29) | high-income earners (D31) |
| Tax avoidance strategies (H26) | elasticity of taxable income (ETI) (H30) |
| Income mobility and economic growth (J62) | confounding factors in tax rate changes (H32) |