Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance

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Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance

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Title: Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance
Author: Chetty, Nadarajan
Citation: Chetty, Raj. 2009. Is the taxable income elasticity sufficient to calculate deadweight loss? The implications of evasion and avoidance. American Economic Journal: Economic Policy 1(2): 31-52.
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Abstract: Martin Feldstein's (1999) widely used taxable income formula for deadweight loss assumes the marginal social cost of evasion and avoidance equals the tax rate. This condition is likely to be violated in practice for two reasons. First, some of the costs of evasion and avoidance are transfers to other agents. Second, some individuals overestimate the costs of evasion and avoidance. In such situations, excess burden depends on a weighted average of the taxable income and total earned income elasticities, with the weight determined by the resource cost of sheltering income from taxation. This generalized formula implies the efficiency cost of taxing high income individuals is not necessarily large despite evidence that their reported incomes are highly sensitive to marginal tax rates.
Published Version: doi:10.1257/pol.1.2.31
Terms of Use: This article is made available under the terms and conditions applicable to Open Access Policy Articles, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#OAP
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:9748527

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  • FAS Scholarly Articles [7374]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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