Marginal Tax Rates and Income: New Time Series Evidence

Karel Mertens and José L. Montiel Olea

No 19171, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Using new narrative measures of exogenous variation in marginal tax rates associated with postwar tax reforms in the US, this study estimates short run tax elasticities of reported income of around 1.2 based on time series from 1946 to 2012. Elasticities are larger in the top 1% of the income distribution but are also positive and statistically significant for other income groups. Previous time series studies of tax returns data have found little evidence for income responses to taxes outside the top of the income distribution. The different results in this study arise because of additional efforts to account for dynamics, expectations and especially the endogeneity of tax policy decisions. Marginal rate cuts lead to increases in real GDP and declines in unemployment. This study also presents evidence that the responses are to marginal tax rates rather than average tax rates. Counterfactual tax cuts targeting the top 1% alone have short-run positive effects on economic activity and incomes outside of the top 1%, but increase inequality in pre-tax incomes. Cuts for taxpayers outside of the top 1% also lead to increases in incomes and economic activity, but with a longer delay.

JEL-codes: E6 E62 H2 H24 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-his, nep-mac, nep-pbe and nep-pub
Note: ME PE
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Citations: View citations in EconPapers (11)

Published as Karel Mertens & José Luis Montiel Olea, 2018. "Marginal Tax Rates and Income: New Time Series Evidence*," The Quarterly Journal of Economics, vol 133(4), pages 1803-1884.

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Related works:
Journal Article: Marginal Tax Rates and Income: New Time Series Evidence* (2018)
Working Paper: Marginal Tax Rates and Income: New Time Series Evidence (2015)
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