The Economic Growth and Tax Relief Act of 2001 lowered top marginal income tax rates in the US to 35%. This act expired in 2013, leading to an increase in the top marginal income tax rate from 35% to 39.6%. Kawano et al. (2016) use variation from this expiration to estimate its impact on taxable income of individuals subjected to the top marginal income tax rate. Hendren and Sprung-Keyser (2020) translate their estimates into the implied MVPF.
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Hendren and Sprung-Keyser (2020) estimate the MVPF of the 2013 top tax rate change using the equation
where
with \alpha = \frac{E[Y]}{E[Y-y|Y\geq y]} is the Pareto Parameter of the income distribution and \epsilon = \frac{d[E[y]]}{d(1-t)}\frac{1-t}{E[y]} is the elasticity of taxable income with respect to the keep rate, 1-t.
Throughout, Hendren and Sprung-Keyser (2020) measure t as the sum of the federal income tax rate and a 5% state income tax rate assumption. In practice, the reforms are discrete changes in t. To account for this, Hendren and Sprung-Keyser (2020) compute the fiscal externality above separately for the pre- and post-reform tax rates, and then take an average of the two FEs. Appendix F of Hendren and Sprung-Keyser (2020) provides further details and references.
The key additional parameter beyond the elasticity of taxable income is the Pareto parameter of the income distribution. Hendren (2017) finds a value of the Pareto parameter of 1.5.
Kawano et al. (2016) estimate an elasticity of taxable income of 0.12. This implies an MVPF of 1.16, with a confidence interval of [0.873, 1.925].
Saez (2016) also studies the 2013 reform. He directly analyzes the fiscal externality and finds FE = -0.19, which implies an MVPF of 1.23, similar to the 1.16 implied by the estimates of Kawano et al. (2016).
The estimates used to calculate this MVPF may have been updated in a more recent working or published version of the paper.
MVPF = 1.2
Hendren, Nathaniel (2017 a). “Measuring Economic Efficiency Using Inverse-Optimum Weights.” Working Paper 20351, National Bureau of Economic Research. DOI: https://doi.org/10.3386/w20351
Hendren, Nathaniel and Ben Sprung-Keyser (2020). “A Unified Welfare Analysis of Government Policies.” The Quarterly Journal of Economics, 135(3): 1209–1318. DOI: https://doi.org/10.1093/qje/qjaa006
Kawano, Laura, Caroline Weber and Andrew Whitten (2016). “Estimating the Elasticity of Broad Income for High-Income Taxpayers” (October 2016). Available at SSRN: https://ssrn.com/abstract=2852048
Saez, Emmanuel (2016). “Taxing the Rich More: Preliminary Evidence from the 2013 Tax Increase.” Working Paper 22798, National Bureau of Economic Research. DOI: https://doi.org/10.3386/w22798