Do Taxes Matter? Lessons from the 1980s

15 Pages Posted: 6 Jan 2007

See all articles by Joel B. Slemrod

Joel B. Slemrod

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

Date Written: March 1992

Abstract

The response of the economy to two major -- although in important respects offsetting -- tax reforms has been much smaller than ardent supply-side revolutionaries expected, thus suggesting that a reassessment of the grounds for revolt is in order. This paper offers such a reassessment by first discussing how the evidence from the tax reforms of 1981 and 1986 reflects on our understanding of the response to taxation -- with particular reference to savings and capital gains realizations. I then reconstruct a 1992 view about how taxes affect behavior. A unifying theme is that the tax system does much more than alter the relative prices of real variables -- it also provides incentives to misreport income, restructure financial claims, time transactions, change the legal form of organization, and so on. For this reason, observed low tax elasticities of real variables may be due to either low elasticities of substitution or the fact that tax policy changes opportunity sets in complex ways. Disentangling these explanations requires an emphasis on the transaction-based nature of the tax system and the administration and enforcement of tax laws.

Suggested Citation

Slemrod, Joel B., Do Taxes Matter? Lessons from the 1980s (March 1992). NBER Working Paper No. w4008. Available at SSRN: https://ssrn.com/abstract=476151

Joel B. Slemrod (Contact Author)

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

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