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

MVPF=\frac{1}{1+FE}

where

FE = \frac{-t}{1-t}*\alpha*\epsilon_{eti}

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

$0.9
Net Cost

1.2 Upper Margin
0.5 Lower Margin

$1.0
WTP

Upper Margin
Lower Margin

1.2
MVPF

1.9 Upper Margin
0.9 Lower Margin

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

- Category
- Taxes
- Sub-Category
- Top Taxes
- Beneficiary Type(s)
- Adults, Top Income Earners
- Average Age
- 49
- Average Income
- 737931
- Country of Implementation
- United States
- Year of Implementation
- 2013
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614