Giertz, Seth (2006): The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis.
Download (146Kb) | Preview
This paper examines alternative methodologies for measuring responses to the 1990 and 1993 federal tax increases. The methodologies build on those employed by Gruber and Saez (2002), Carroll (1998) and Auten and Carroll (1999). Internal Revenue Service tax return data for the project are from the Statistics of Income, which heavily oversamples high-income filers. Special attention is paid to the importance of sample income restrictions and methodology. Estimates are broken down by income group to measure how responses to tax changes vary by income. In general, estimates are quite sensitive to a number of different factors. Using an approach similar to Carroll’s yields elasticity of taxable income (ETI) estimates as high as 0.54 and as low as 0.03, depending on the income threshold for inclusion into the sample. Gruber and Saez’s preferred specification yields estimates for the 1990s of 0.30. Yet another approach compares behavior only in the end years, before and after tax changes, and yields estimated ETIs ranging from 0 to 0.71. The results suggest tremendous variation across income groups, with people at the top of the income distribution showing the greatest responsiveness. In fact, the estimates suggest that the ETI could be greater than 1 for those at the very top of the income distribution. The major conclusion, however, is that isolating the true taxable income responses to tax changes is extremely complicated by a myriad of other factors and thus little confidence should be placed on any single estimate. Additionally, focusing on particular components of taxable income might yield more insight.
|Item Type:||MPRA Paper|
|Original Title:||The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis|
|Keywords:||Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation;|
|Subjects:||H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H21 - Efficiency; Optimal Taxation
H - Public Economics > H2 - Taxation, Subsidies, and Revenue
|Depositing User:||Seth Giertz|
|Date Deposited:||01. Oct 2009 16:13|
|Last Modified:||13. Feb 2013 00:04|
Auten, Gerald and Robert Carroll, “The Effect of Income Taxes on Household Behavior,” Review of Economics and Statistics, November 1999, 81 (4), 681-693.
Carroll, Robert, “Do Taxpayers Really Respond to Changes in Tax Rates? Evidence from the 1993 Act,” Office of Tax Analysis Working Paper 78, U.S. Department of Treasury, 1998.
Feldstein, Martin, “Tax Avoidance and the Deadweight Loss of the Income Tax,” Review of Economics and Statistics, November 1999, 4 (81), 674–680.
Giertz, Seth, “Recent Literature on Taxable-Income Elasticities,” Technical Paper 2004 16, Congressional Budget Office, Washington D.C., December 2004, www.cbo.gov/ftpdocs/60xx/doc6028/2004 16.pdf.
Giertz, Seth, “A Sensitivity Analysis of the Elasticity of Taxable Income,” Working Paper 2005 01, Congressional Budget Office, Washington D.C., February 2005.
Goolsbee, Austan, “What Happens When You Tax the Rich? Evidence from Executive Compensation,” Journal of Political Economy, 2000, 108 (2), 352-378.
Gruber, Jonathan and Emmanuel Saez, “The Elasticity of Taxable Income: Evidence and Implications,” Journal of Public Economics, April 2002, 84 (1), 1–32.
Imbens, Guido, and Tony Lancaster, ‘‘Efficient Estimation and Stratified Sampling,’’ Journal of Econometrics, 1996, 74, 289–318.
Internal Revenue Service, “Individual Income Tax Returns with Positive Adjusted Gross Income (AGI)” Unpublished Statistics of Income data, September 2004, www.irs.gov/pub/irs-soi/02in01ts.xls.
Koenker, Roger and Kevin Hallock, “Quantile Regression,” Journal of Economic Perspectives, 2001, vol. 15(4), 143-156.
Kopczuk, Wojciech, “Tax Bases, Tax Rates and the Elasticity of Reported Income,” Journal of Public Economics, December 2005, 89 (11-12), 2093-2119.
Moffitt, Robert and Mark Wilhelm, “Taxation and the Labor Supply Decisions of the Affluent,” Does Atlas Shrug? The Economic Consequences of Taxing the Rich, Joel Slemrod, ed., New York: Harvard University Press and Russell Sage Foundation, 2000.
Piketty, Thomas and Emmanuel Saez, “Income Inequality in the United States, 1913–1998,” Quarterly Journal of Economics, February 2003, 118 (1), 1–39. Rosen, Sherwin, “The Economics of Superstars,” The American Economic Review, December 1981, 71 (5), 845–858.
Saez, Emmanuel, “Reported Incomes and Marginal Tax Rates, 1960–2000: Evidence and Policy Implications,” Tax Policy and the Economy 18, In Poterba, J. (Ed.), 2004, Cambridge: MIT Press, 117-173.
Saez, Emmanuel and Michael Veall, “The Evolution of High Incomes in Northern America: Lessons from Canadian Evidence,” American Economic Review 95(3), 2005, 831-849.
Sammartino, Frank and David Weiner, “Recent Evidence on Taxpayers' Response to the Rate Increases in the 1990s,” National Tax Journal, September 1997, 50 (3), 683-705.
Slemrod, Joel, “High income families and the tax changes of the 1980s: The Anatomy of Behavioral Response,” 1996, In Feldstein, M., Poterba, J. (Eds.), Empirical Foundations of Household Taxation, Chicago: University of Chicago Press, 169-189.
Slemrod, Joel, “Methodological Issues in Measuring and Interpreting Taxable Income Elasticities,” National Tax Journal, December 1998, 51 (4), 773–788.
Slemrod, Joel and Wojciech Kopczuk, “The Optimal Elasticity of Taxable Income,” Journal of Public Economics, April 2002, 84 (1), 91–112.