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http://ssrn.com/abstract=1022502
 
 

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Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach


Bertil Holmlund


Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Institute for the Study of Labor (IZA)

Martin Söderström


Uppsala University - Department of Economics

October 2007

CESifo Working Paper No. 2121
IZA Discussion Paper No. 3088

Abstract:     
Recent research on the behavioral effects of income taxes has to a large extent focused on the elasticity of taxable income with respect to the net-of-tax rate, i.e., one minus the marginal tax rate. We offer new evidence on this matter by making use of a large panel of Swedish tax payers over the period 1991-2002. Changes in statutory tax rates as well as discretionary changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. The estimates of the long-run elasticity of income with respect to the net-of-tax rate typically hover in a range between 0.20 and 0.30. The short-run elasticities are in general smaller but less precisely estimated. We use the estimates to simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform turns out to have negligible effects on tax revenues and may even yield a fiscal surplus.

Number of Pages in PDF File: 39

Keywords: marginal tax rates, progressive taxes, earned income, tax reform

JEL Classification: H24, H31, J22

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Date posted: October 18, 2007  

Suggested Citation

Holmlund, Bertil and Söderström, Martin, Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach (October 2007). CESifo Working Paper No. 2121; IZA Discussion Paper No. 3088. Available at SSRN: http://ssrn.com/abstract=1022502

Contact Information

Bertil Holmlund (Contact Author)
Uppsala University - Department of Economics ( email )
SE-75120 Uppsala
Sweden
+46 18 471 1122 (Phone)
+46 18 471 1478 (Fax)
HOME PAGE: http://www.nek.uu.se/faculty/holmlund/index.html
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Institute for the Study of Labor (IZA)
P.O. Box 7240
Bonn, D-53072
Germany
Martin Söderström
Uppsala University - Department of Economics ( email )
Box 513
SE-75120 Uppsala
Sweden
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