 Malas notchesInternational Tax and Public Finance, 2020, vol. 27, issue 4, No 1, 779-804 Abstract: Abstract This paper shows that the sufficient statistic approach to the welfare properties of income (and other) taxes does not easily extend to tax systems with notches, because with notches, changes in bunching induced by changes in tax rates have a first-order effect on tax revenues. In an income tax setting, we show that the marginal excess burden (MEB) of a change in the top rate of tax is given by the Feldstein (Rev Econ Stat 81(4):674–680, 1999) formula for the MEB of a proportional tax, plus a correction term. This formula applies even if there is tax evasion. These correction terms cannot be calculated just from knowledge of the elasticity of taxable income, and quantitatively, they can be large. An application to VAT is discussed; with a calibration to UK data, the MEB of the VAT is roughly three times what it would be if VAT was simply a proportional tax. Keywords: Tax kink; Tax notch; Excess burden; Sufficient statistic (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kap:itaxpf:v:27:y:2020:i:4:d:10.1007_s10797-020-09589-3 Ordering information: This journal article can be ordered from DOI: 10.1007/s10797-020-09589-3 Access Statistics for this article International Tax and Public Finance is currently edited by Ronald B. Davies and Kimberly Scharf More articles in International Tax and Public Finance from Springer, International Institute of Public Finance Contact information at EDIRC. |
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