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

Authors

Emmanuel Saez, University of California - BerkeleyFollow
Joel B. Slemrod, University of Michigan Business SchoolFollow
Seth H. Giertz, University of Nebraska-LincolnFollow

Document Type

Article

Date of this Version

2012

Comments

Published in Journal of Economic Literature 2012, 50:1, 3–50
http://dx/doi=10.1257/jel.50.1.3

Copyright (c) 2012 by the American Economic Association. Used by permission.

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.