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The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act

Martin Feldstein
Journal of Political Economy
Vol. 103, No. 3 (Jun., 1995), pp. 551-572
Stable URL: http://www.jstor.org/stable/2138698
Page Count: 22
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The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act
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Abstract

This paper uses a Treasury Department panel of more than 4,000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform. The analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply. The evidence shows an elasticity of taxable income with respect to the marginal net-of-tax rate that is at least one and could be substantially higher. The implications for recent tax rate changes are discussed.

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