Measuring Revenue-Maximising Elasticities of Taxable Income: Evidence for the US Income Tax
Victoria University of Wellington Working Paper in Public Finance No. 02/2014
38 Pages Posted: 11 Jan 2014
Date Written: January 9, 2014
A recent review of empirical estimates of the elasticity of taxable income (ETI) concluded that ‘the US marginal top rate is far from the top of the Laffer curve’ (Saez et al, 2012, p.42). This paper provides a detailed examination of the analysis underlying this conclusion, and considers whether other tax rates in the US income tax system are on the ‘right’ side of the Laffer curve. Conceptual expressions for ‘Laffer-maximum’ or revenue-maximizing ETIs, based on readily observable parameters, are presented for individuals and groups of taxpayers in a multi-rate income tax system. Applying these to the US income tax in 2005, with its complex effective marginal rate structure, demonstrates that a wide range of revenue-maximizing ETI values can be expected for individual taxpayers within and across tax brackets, and in aggregate. For many taxpayers these revenue-maximizing ETIs are well within the range of empirically estimated elasticities.
Keywords: Income Tax Revenue; Elasticity of taxable income; revenue elasticity, Laffer Curve
JEL Classification: H24; H31; H26
Suggested Citation: Suggested Citation