Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach

Bertil Holmlund () and Martin Söderström ()
Additional contact information
Martin Söderström: National Institute of Economic Research - NIER

No 3088, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: Recent research on the behavioral effects of income taxes has to a large extent focused on the elasticity of taxable income with respect to the net-of-tax rate, i.e., one minus the marginal tax rate. We offer new evidence on this matter by making use of a large panel of Swedish tax payers over the period 1991-2002. Changes in statutory tax rates as well as discretionary changes in tax bracket thresholds provide exogenous variations in tax rates that can be used to identify income responses. We estimate dynamic income models which allow us to distinguish between short-run and long-run effects in a straightforward fashion. The estimates of the long-run elasticity of income with respect to the net-of-tax rate typically hover in a range between 0.20 and 0.30. The short-run elasticities are in general smaller but less precisely estimated. We use the estimates to simulate the fiscal consequences of a tax reform that reduces the top marginal tax rate by five percentage points. Such a reform turns out to have negligible effects on tax revenues and may even yield a fiscal surplus.

Keywords: marginal tax rates; progressive taxes; earned income; tax reform (search for similar items in EconPapers)
JEL-codes: H24 H31 J22 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-10
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published - published in: B.E. Journal of Economic Analysis and Policy: Contributions to Economic Analysis and Policy, 2011, 11 (1)

Downloads: (external link)
https://docs.iza.org/dp3088.pdf (application/pdf)

Related works:
Working Paper: Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach (2007)
Working Paper: Estimating Income Responses to Tax Changes: A Dynamic Panel Data Approach (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp3088

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().