Journal Article

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

Saez, Emmanuel, Slemrod, Joel, Giertz, Seth H.

2012

Overview

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.

• Publisher: American Economic Association,Assoc
• Subject: 1979-1990 / Adjusted gross income / Capital gains / Consumption / Corporate income taxes / Corporate taxes / Critical theory / Earnings / Economic theory / Economics / Effective income tax rates / Elasticity / Elasticity of demand / Empirical research / Estimated taxes / Externality / Financial research / Fiscal policy / Income / Income elasticity / Income estimates / Income shifting / Income tax / Income taxes / Labor supply / Marginal tax rate / Optimal taxation / Public sector / State income tax / Studies / Tax base / Tax increases / Tax rates / Tax reform / Tax returns / Taxable income / Taxation / U.S.A