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

Posted: 5 Mar 2013

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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Multiple version iconThere are 2 versions of this paper

Date Written: 2012

Abstract

This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates 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 selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out. Finally, we discuss avenues for future research.

Keywords: taxable income elasticity, tax policy, efficiency

JEL Classification: JEL H24, H31, J22

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 (2012). Journal of Economic Literature, Vol. 50, No. 1, 2012. Available at SSRN: https://ssrn.com/abstract=2228766

Emmanuel Saez

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

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4631 (Phone)
510-642-6615 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Joel B. Slemrod

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

701 Tappan Street
Room R5396
Ann Arbor, MI 48109-1234
United States
734-936-3914 (Phone)
734-763-4032 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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