Income Elasticity and Inequality
Interdisciplinary Journal of Economics and Business Law, 2016, Vol. 5, Issue 1, pp. 34-44
11 Pages Posted: 17 Jun 2015 Last revised: 27 Jan 2016
Date Written: 2015
Prior empirical work on the elasticity of taxable income indicated top earners vary earnings depending on changes in tax rates reflecting a positive elasticity of taxable income. This paper re-calculated income elasticity also taking into account concurrent changes in income inequality. With this adjustment, the income elasticity of high-income taxpayers was confirmed as positive, but the income elasticity of higher income-taxpayers was found to be neutral. This indicates the taxable income of the higher earners is not sensitive to changes in tax rates because of the relatively low portion of earned income for these taxpayers.
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