Behavioral Responses to Tax Rates: Evidence from TRA86 / Martin Feldstein.

By:

Feldstein, Martin

Contributor(s):

National Bureau of Economic Research

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w5000.Publication details: Cambridge, Mass. National Bureau of Economic Research 1995.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper uses the experience after the Tax Reform Act of 1986 to examine how taxes affect three aspects of individual taxpayer behavior: labor supply, total taxable income, and capital gains. The substantial sensitivity of married women's labor supply implies that the efficiency of the tax system could be increased significantly by reducing the marginal tax rates of these women relative to their husbands' marginal tax rates. More generally, the sensitivity of taxable income to the net of tax share implies that lower marginal tax rates would involve much less revenue loss than is traditionally assumed and would bring a much more substantial reduction in the deadweight loss of the tax system. The sharp fall in the real value of realized capital gains since the 1986 rise in tax rates on capital gains confirms earlier research indicating the substantial sensitivity of capital gains realizations to tax rates. A comparison with projections by the Treasury and Congressional Budget Office made in 1988 shows that the current official model greatly understates the sensitivity of capital gains to tax rates.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w5000 (Browse shelf(Opens below))	Not For Loan

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January 1995.

This paper uses the experience after the Tax Reform Act of 1986 to examine how taxes affect three aspects of individual taxpayer behavior: labor supply, total taxable income, and capital gains. The substantial sensitivity of married women's labor supply implies that the efficiency of the tax system could be increased significantly by reducing the marginal tax rates of these women relative to their husbands' marginal tax rates. More generally, the sensitivity of taxable income to the net of tax share implies that lower marginal tax rates would involve much less revenue loss than is traditionally assumed and would bring a much more substantial reduction in the deadweight loss of the tax system. The sharp fall in the real value of realized capital gains since the 1986 rise in tax rates on capital gains confirms earlier research indicating the substantial sensitivity of capital gains realizations to tax rates. A comparison with projections by the Treasury and Congressional Budget Office made in 1988 shows that the current official model greatly understates the sensitivity of capital gains to tax rates.