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The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis

Author

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  • Giertz, Seth
Abstract
This paper examines alternative methodologies for measuring responses to the 1990 and 1993 federal tax increases. The methodologies build on those employed by Gruber and Saez (2002), Carroll (1998) and Auten and Carroll (1999). Internal Revenue Service tax return data for the project are from the Statistics of Income, which heavily oversamples high-income filers. Special attention is paid to the importance of sample income restrictions and methodology. Estimates are broken down by income group to measure how responses to tax changes vary by income. In general, estimates are quite sensitive to a number of different factors. Using an approach similar to Carroll’s yields elasticity of taxable income (ETI) estimates as high as 0.54 and as low as 0.03, depending on the income threshold for inclusion into the sample. Gruber and Saez’s preferred specification yields estimates for the 1990s of 0.30. Yet another approach compares behavior only in the end years, before and after tax changes, and yields estimated ETIs ranging from 0 to 0.71. The results suggest tremendous variation across income groups, with people at the top of the income distribution showing the greatest responsiveness. In fact, the estimates suggest that the ETI could be greater than 1 for those at the very top of the income distribution. The major conclusion, however, is that isolating the true taxable income responses to tax changes is extremely complicated by a myriad of other factors and thus little confidence should be placed on any single estimate. Additionally, focusing on particular components of taxable income might yield more insight.

Suggested Citation

  • Giertz, Seth, 2006. "The Elasticity of Taxable Income During the 1990s: A Sensitivity Analysis," MPRA Paper 17603, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:17603
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    References listed on IDEAS

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    1. Austan Goolsbee, 2000. "What Happens When You Tax the Rich? Evidence from Executive Compensation," Journal of Political Economy, University of Chicago Press, vol. 108(2), pages 352-378, April.
    2. Seth H. Giertz, 2005. "A Sensitivity Analysis of the Elasticity of Taxable Income: Working Paper 2005-01," Working Papers 16237, Congressional Budget Office.
    3. Seth H. Giertz, 2004. "Recent Literature on Taxable-Income Elasticities: Technical Paper 2004-16," Working Papers 16189, Congressional Budget Office.
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    13. Slemrod, Joel, 1998. "Methodological Issues in Measuring and Interpreting Taxable Income Elasticities," National Tax Journal, National Tax Association, vol. 51(n. 4), pages 773-88, December.
    14. Giertz, Seth, 2005. "A Sensitivity Analysis of the Elasticity of Taxable Income," MPRA Paper 17601, University Library of Munich, Germany.
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    Cited by:

    1. Seth H. Giertz, 2008. "A Sensitivity Analysis of the Elasticity of Taxable Income: Working Paper 2008-01," Working Papers 19435, Congressional Budget Office.
    2. Holmlund, Bertil & Söderström, Martin, 2008. "Estimating dynamic income responses to tax reforms: Swedish evidence," Working Paper Series 2008:28, IFAU - Institute for Evaluation of Labour Market and Education Policy.
    3. Heim, Bradley T., 2010. "The responsiveness of self-employment income to tax rate changes," Labour Economics, Elsevier, vol. 17(6), pages 940-950, December.
    4. Jukka Pirttilä & Håkan Selin, 2006. "How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993," Working Papers 223, Työn ja talouden tutkimus LABORE, The Labour Institute for Economic Research LABORE.
    5. Xinming Du, 2023. "Symptom or Culprit? Social Media, Air Pollution, and Violence," CESifo Working Paper Series 10296, CESifo.

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    More about this item

    Keywords

    Elasticity of Taxable Income; Behavioral Responses to Taxation; Taxation;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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