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Marginal tax rates and income in the long run: Evidence from a structural estimation

Patrick Macnamara, Myroslav Pidkuyko and Raffaele Rossi

Journal of Monetary Economics, 2024, vol. 142, issue C

Abstract: We estimate a life-cycle model of savings, labor productivity and entrepreneurs to measure the long-run response of income to marginal tax rate cuts in the US. Long-run tax elasticities of income are largest for the richest 1% but are also positive and substantial for other income groups. In equilibrium, entrepreneurs obtain higher returns on wealth. This increases the investment response of rich, high-return entrepreneurs, amplifying their income elasticity to tax cuts. This leads to a reallocation of capital which increases TFP, and generates a boost in wages that magnifies the estimated income response of the bottom 90% as well.

Keywords: Marginal tax rate changes; Elasticity of taxable income; Life-cycle; Entrepreneurs; Structural estimation (search for similar items in EconPapers)
JEL-codes: E62 H21 H24 (search for similar items in EconPapers)
Date: 2024
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Working Paper: Marginal Tax Rates and Income in the Long Run: Evidence from a Structural Estimation (2022) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:142:y:2024:i:c:s0304393223001010

DOI: 10.1016/j.jmoneco.2023.09.001

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