A Sensitivity Analysis of the Elasticity of Taxable Income

Giertz, Seth (2005): A Sensitivity Analysis of the Elasticity of Taxable Income.

Abstract

This paper applies the methods of Gruber and Saez (2002) to a panel of tax returns spanning 1979 through 2001 in order to examine the sensitivity of the elasticities of taxable and broad income to an array of factors. The paper finds that that Gruber and Saez’s approach yields an estimated elasticity of taxable income (ETI) for the 1990s that is about half the size of this paper’s corresponding estimate for the 1980s. In general, the addition of demographic information has little impact on elasticity estimates for the 1980s, but lowers the 1990s estimates, especially for broad income, which is a more encompassing income measure than is taxable income. Finally, the paper finds that weighting regression results by income not only has a substantial impact on the estimates, but also results in overall estimates that are influenced by a small number of predominately high-income filers. For example, excluding 100 of the most influential observations (just 0.2 percent of the sample) lowers the estimated ETI for the 1980s from 0.37 to 0.11.

• Item Type: MPRA Paper
• Language: English
• 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 > H3 - Fiscal Policies and Behavior of Economic Agents > H31 - Household; H - Public Economics > H2 - Taxation, Subsidies, and Revenue

References

Feldstein, Martin S., “Tax Avoidance and the Deadweight Loss of the Income Tax,” Review of Economics and Statistics, November 1999, 4 (81), 674–680.

Feldstein, Martin S., “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act,” Journal of Political Economy, June 1995, 103 (3), 551–572.

Internal Revenue Service, “Individual Income Tax Returns with Positive Adjusted Gross Income (AGI)” Unpublished Statistics of Income data, September 2004, www.irs.gov/pub/irs-soi/02in01ts.xls.

Giertz, Seth H., “Recent Literature on Taxable-Income Elasticities,” Congressional Budget Office, Technical Paper 2004 16, December 2004, www.cbo.gov/ftpdocs/60xx/doc6028/ 2004 16.pdf.

Gruber, Jon and Emmanuel Saez, “The Elasticity of Taxable Income: Evidence and Implications,” Journal of Public Economics, April 2002, 84 (1), 1–32.

Harig, Bob, “The 19th Hole,” The St. Petersburg Times, October 14, 2004, C-8.

Jones, Gregg, “The Nation on State Tax Policy: Everyone Has a Formula for Reform,” The Los Angeles Times, February 25, 2003, A-1.

Kopczuk, Wojciech, “Tax Bases, Tax Rates and the Elasticity of Reported Income,” National Bureau of Economic Research, Working Paper 10044, October 2003, www.nber.org/ papers/w10044.

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,” National Bureau of Economic Research, Working Paper 10273, January 2004, www.nber.org/papers/w10273.

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.