The Omnibus Budget Reconciliation Act of 1993 generated an increase in the top marginal income tax from 31% to 39.6%. Caroll (1998) studies the impact of this reform on taxable income and estimates an elasticity of taxable income with respect to the after-tax keep rate of 0.38. The authors note this could be an upper bound if part of the change is due to tax shifting as opposed to real responses.

_________

Hendren and Sprung-Keyser (2020) translate this elasticity into the MVPF of the change in tax rates using the equation

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

where

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

where

\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. Atkinson et al. (2011) find a value of 1.77 for 1993. Combining with the elasticity of taxable income of 0.38 implies an MVPF of 1.85, with a confidence interval of [1.191,4.066].

*The estimates used to calculate this MVPF may have been updated in a more recent working or published version of the paper.*

MVPF = 1.9

$0.5
Net Cost

0.8 Upper Margin
0.2 Lower Margin

$1.0
WTP

Upper Margin
Lower Margin

1.9
MVPF

4.0 Upper Margin
1.2 Lower Margin

Atkinson, Anthony B., Thomas Piketty, and Emmanuel Saez (2011). “Top Incomes in the Long Run of History.” Journal of Economic Literature, 49(1): 3-71. DOI: https://doi.org/10.1257/jel.49.1.3

Carroll, Robert (1998). “Do Taxpayers Really Respond to Changes in Tax Rates? Evidence from the 1993 Tax Act.” Working Paper 79, U.S. Department of the Treasury, Office of Tax Analysis. https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/WP-79.pdf

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

- Category
- Taxes
- Sub-Category
- Top Taxes
- Beneficiary Type(s)
- Adults, Top Income Earners
- Average Age
- 49
- Average Income
- 499532
- Country of Implementation
- United States
- Year of Implementation
- 1993
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- No
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614