The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review
Posted: 5 Mar 2013
Date Written: 2012
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: Suggested Citation