This paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates (ETI) 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 most of the taxable income elasticities studies to date, both in the United States and abroad, in light of the theoretical and empirical framework we laid out Finally, we discuss avenues for future research

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

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. ( JEL H24, H31, J22)

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This paper develops a method of estimating the coefficient of relative risk aversion (g) from data on labor supply. The main result is that existing estimates of labor supply elasticities place a tight bound on g, without any assumptions beyond those of expected utility theory. It is shown that the curvature of the utility function is directly related to the ratio of the income elasticity of labor supply to the wage elasticity, holding fixed the degree of complementarity between consumption and leisure. The degree of complementarity can in turn be inferred from data on consumption choices when employment is stochastic. Using a large set of existing estimates of wage and income elasticities, I find a mean estimate of g = 1. I also give a calibration argument showing that a positive uncompensated wage elasticity, as found in most studies of labor supply, implies g

https://papers.ssrn.com/sol3/Delivery.cfm/nber_w9988.pdf?abstractid=450889&mirid=5

A New Method of Estimating Risk Aversion

I show existing evidence on labor supply behavior places an upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion (γ) in terms of the ratio of the income elasticity of labor supply to wage elasticity and degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies across states. Using labor supply elasticity estimates, I find a mean estimate of γ ≈ 1, then show generating γ > 2 requires that wage increases cause sharper labor supply reductions. (JEL D81 J22 )

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Preface xvii CHAPTER 1: Introduction 1 PART I: FRAMEWORK CHAPTER 2: An Integrated View 13 CHAPTER 3: The Social Objective 35 PART II: OPTIMAL TAXATION CHAPTER 4: Optimal Income Taxation 53 CHAPTER 5: Elaboration and Extensions 80 CHAPTER 6: Income and Commodity Taxation 122 PART III: GOVERNMENT EXPENDITURES CHAPTER 7: Transfer Payments 151 CHAPTER 8: Goods and Services 179 PART IV: ADDITIONAL ASPECTS OF TAXATION CHAPTER 9: Taxation of Capital 221 CHAPTER 10: Taxation of Transfers 249 CHAPTER 11: Taxation and Social Security 275 CHAPTER 12: Taxation of Families 315 PART V: DISTRIBUTIVE JUSTICE AND SOCIAL WELFARE CHAPTER 13: Welfare 347 CHAPTER 14: Social Welfare Function 370 CHAPTER 15: Other Normative Criteria 391 CHAPTER 16: Conclusion 407 References 417 Index 455

The Theory of Taxation and Public Economics

Research on the distribution of income during the 1980s has identified a trend towards increasing inequality, which may be the continuation and acceleration of trends spanning several decades. This paper explores to what extent behavioral responses to the tax changes during the 1980s may also explain the rising inequality. The 1986 Tax Reform Act is used as a natural experiment to explore the roles played by both taxes and a variety of nontax factors. Our principal finding is that both tax rates and nontax factors appear to have had significant effects on relative income growth during the late 1980s.

The Effect of Income Taxes on Household Income

The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) incorporated the main elements of the Bush Administrati...

The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the Taxable Income Response

This paper discusses integrated proposals for health care reform that combine changes to the tax treatment of employer sponsored insurance to improve incentives with insurance market reforms to address problems in the individual market for health insurance. Combining these two types of measures is essential to slowing the rapid increase in health care costs while taking heed of the potential acceleration of the already ongoing contraction of the employer market that would occur with changes in tax policy alone.

Robert Carroll

Papers

The Effect of Income Taxes on Household Income

The 2001 and 2003 Tax Rate Reductions: An Overview and Estimate of the Taxable Income Response

The Intersection of Tax and Health Care Policy