The Effect of Marginal Tax Rates on Income: A Panel Study of 'Bracket Creep'

Emmanuel Saez

No 7367, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper uses a panel of individual tax returns and the `bracket creep' as source of tax rate variation to construct instrumental variables estimates of the sensitivity of income to changes in tax rates. From 1979 to 1981, the US income tax schedule was fixed in nominal terms while inflation was high (around 10%). This produced a real change in tax rate schedules. Taxpayers near the top-end of a tax bracket were more likely to creep to a higher bracket and thus experience a rise in marginal rates the following year than the other taxpayers. Compensated elasticities can be estimated by comparing the differences in changes in income between taxpayers close to the top-end of a tax bracket to the other taxpayers. These estimates, based on comparisons between very similar groups, are robust to underlying changes in the income distribution, such as a rise in inequality. The elasticities found are higher than those derived in labor supply studies but smaller than those found previously with the same kind of tax returns data.

JEL-codes: H31 J22 (search for similar items in EconPapers)
Date: 1999-09
New Economics Papers: this item is included in nep-lab, nep-pbe and nep-pub
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Citations: View citations in EconPapers (26)

Published as Saez, Emmanuel. "The Effect Of Marginal Tax Rates On Income: A Panel Study Of 'Bracket Creep'," Journal of Public Economics, 2003, v87(5-6,May), 1231-1258.

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Journal Article: The effect of marginal tax rates on income: a panel study of 'bracket creep' (2003)
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