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Tax reforms usually change both tax rates and tax bases. Using a panel of income tax returns spanning the two major U.S. tax reforms of the 1980s and a number of smaller tax law changes, Kopczuk finds that the elasticity of income reported on personal income tax returns depends on the available deductions. This highlights the fact that this key behavioral elasticity is not an immutable parameter but rather can be controlled to some extent by policymakers. One implication is that base broadening reduces the marginal efficiency cost of taxation. The results are very similar for all income categories, indicating that the rich are more responsive to tax rates because tax rules that apply to them are different (their tax base is narrower). The point estimates indicate that the Tax Reform Act of 1986 reduced the marginal cost of collecting a dollar of tax revenue, with roughly half of this reduction attributable to the base broadening and the other half to the tax rate reduction. The analysis in this paper also offers a reconciliation of disparate estimates obtained by previous studies of the tax responsiveness of income.
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Title Annotation:Conferences
Publication:NBER Reporter
Date:Jun 22, 2005
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