Emmanuel Saez on Taxes and Elasticity
What with Emmanuel Saez winning prestigious awards and all, I thought the world might like to know about some of his policy-relevant research. Thus, a consideration of “The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review” with Joel Slemrod and Seth Giertz. The paper is substantially concerned with methodological issues many of which are over my head, so I’ll leave that aside. But they reach the following conclusions.
First, they report that there’s little support for the idea that increases in marginal tax rates harm the economy but reducing people’s incentives to work. Studies, in other words, show low levels of labor supply elasticity with respect to marginal tax rates. But they observe that other forms of economic distortion are possible. And you can get a comprehensive look at them by looking at the comprehensive elasticity of taxable income.
In the US context, there seems to be a fair amount of such elasticity. And the elasticity is concentrated among taxpayers who itemize their deductions, and especially among high-income taxpayers. In part this reflects people shifting their income in time (for example, people filling out 1992 tax forms in early 1993 responded to Bill Clinton’s election in apparent anticipation of higher taxes in the near future by shifting income into 1992) and in part it reflects deduction-seeking behavior. It also seems to be the case that in countries where fewer deductions are available (Canada, for example) elasticity is lower.
The upshot of this is mostly that this entire line of inquiry is not quite as promising for policy analysis as it once appeared (”One attraction of the ETI concept—that it is a sufficient statistic for welfare analysis and therefore one need not inquire into the anatomy of behavioral response—has proven to be overstated”) since the consequences of a change in ETI for welfare is going to depend on where the money goes.
One fairly clear policy implication of this for the modern-day American context, however, is that if you’re trying to raise some extra revenue from wealthy taxpayers it’s probably better to do that by curbing deductions than by raising rates. Among other things, curbing deductions will make it easier to raise rates in an efficient manner down the road. Similarly, there seems to be a fair chance that growth could be boosted significantly by a broad tax reform that eliminates loopholes and lowers rates.
13 Responses to “Emmanuel Saez on Taxes and Elasticity”
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April 25th, 2009 at 2:29 pm
Re-examining deductions, like they did in ‘86, is always a good idea.
April 25th, 2009 at 2:43 pm
Deductions probably ought to be written with automatic sunsets in them, so that they have to prove themselves worth renewing from time to time rather than simply becoming immovable parts of the tax landscape.
Politicians love deductions, as they are a great way to bestow favors. Over time, however, the accretion of endless amounts of them creates nightmarish complexity and distorts economic incentives. Like private automobiles, we ought to be planning to reduce their numbers in the future.
If all deductions had expiration dates, we’d have fewer of them, and the ones we had would have had to demonstrate longterm political viability.
April 25th, 2009 at 3:06 pm
“First, they report that there’s little support for the idea that increases in marginal tax rates harm the economy but reducing people’s incentives to work.”
It has stopped being funny or cute and reached the point of plain unprofessional. It’s as is Matt were a professional chef and had a habit of forgetting to add salt. Eventually I’m going to stop going to his restaurant, which can be very good but sometimes sucks, for the plethora of other restaurants that are consistently good.
April 25th, 2009 at 3:23 pm
Jesus H, do you see no irony that, while complaining about Matt’s spelling issues, you yourself committed that sin?
April 25th, 2009 at 3:36 pm
Just noting that this conclusion runs parallel to a consensus that corporate tax rates could be more effectively higher and less distorting by lowering the tax rates and closing the loopholes.
However, it’s really tough to see Congress choosing technocratic values over the value of leveraging their power to gain support from the wealthy.
There should be some simple aphorism to the effect that every good idea in governance is actually an argument for public campaign finance.
April 26th, 2009 at 12:07 am
Heh! The irony!
Point still holds though. It’s getting ridiculous.
April 26th, 2009 at 1:57 am
Short version of this is that lower marginal rates lead to greater compliance. Likewise fewer loopholes that can be “used” to evade the tax.
April 26th, 2009 at 5:32 am
That kind of tax reform is a great idea, but I’d note that any time there’s a Presidential election, it’s Republicans who deal in rate changes and Democrats who want to add about forty different new deductions. The 2000 campaign had the biggest such contrast, with Bush promising a simple rate cut and Al Gore saying he was gonna cut taxes too, if you did this, that, or the other thing.
Both parties need to mutually agree to cut the deduction crap. Deductions, far from encouraging desirable activities, tends to be lost in fraud(witness the green deductions being taken advantage of by paper companies) or encourages people and businesses to consider things in the context of tax implications rather than what is best for them at that point in time.
Also, it would be nice as well if a certain blogger wouldn’t hold out the hope of lower rates in exchange for less deductions only to say in the same blog post that oh, by the way, those rates will be going up. So what’s in it for any of us?
April 26th, 2009 at 7:00 am
Quite so. It’s the perfect analogy for party philosophy. One grants general amnesty, the other ankle bracelets to restrict movement. The left can’t help themselves. They have to tell people what to do.
April 26th, 2009 at 11:14 am
Get Congress to change the rate more efficiently so they can change them more often, in smaller amounts.
Also, tell Congress it is OK to make the minimum wage go up or down, as long as they do it efficiently, more often and by smaller amounts. And it is OK to adjust the Social Security curves a bit, now and then, to mtch our rel desire to work or retire.
April 26th, 2009 at 11:51 am
“there’s little support for the idea that increases in marginal tax rates harm the economy”
Should I get a prize in economics for realizing that the US was most prosperous and least unequal between 1945 and 1981 when the highest rates were always over 70%?
April 29th, 2009 at 8:26 am
[...] stuff. In the long run, I expect Saez’s work on taxes and elasticity to prove even more influential, as I think it lays out the rationale for an approach to tax reform [...]
April 30th, 2009 at 11:44 am
[...] Emmanuel Saez on taxes and elasticity, by Matthew Yglesias [...]