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Journal of Economic Literature: Vol. 50 No. 1 (March 2012)

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

Article Citation

Saez, Emmanuel, Joel Slemrod, and Seth H. Giertz. 2012. "The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review." Journal of Economic Literature, 50(1): 3-50.

DOI: 10.1257/jel.50.1.3

Abstract

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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Authors

Saez, Emmanuel (U CA, Berkeley)
Slemrod, Joel (U MI)
Giertz, Seth H. (U NE)

JEL Classifications

H24: Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
H31: Fiscal Policies and Behavior of Economic Agents: Household
J22: Time Allocation and Labor Supply


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