The Policy Elasticity

Nathaniel Hendren

Tax Policy and the Economy, 2016, vol. 30, issue 1, 51 - 89

Abstract: This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio to measure the marginal value of public funds corresponding to non-budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, Earned Income Tax Credit (EITC) generosity, food stamps, job training, and housing vouchers.

Date: 2016
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