The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review

79 Pages Posted: 1 Jun 2009 Last revised: 10 Jul 2010

See all articles by Emmanuel Saez

Emmanuel Saez

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research (NBER)

Seth H. Giertz

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Date Written: May 2009

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.

Suggested Citation

Saez, Emmanuel and Slemrod, Joel B. and Giertz, Seth H., The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review (May 2009). NBER Working Paper No. w15012. Available at SSRN: https://ssrn.com/abstract=1412044

Emmanuel Saez (Contact Author)

University of California, Berkeley - Department of Economics ( email )

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Joel B. Slemrod

University of Michigan, Stephen M. Ross School of Business ( email )

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United States
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734-763-4032 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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