Top Marginal Income Tax Rate Increases in 2013 from Expiration of the Economic Growth and Tax Relief Act of 2001

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.

MVPF SUMMARY

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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.