Top Tax Rate Increases from the Omnibus Budget Reconciliation Act of 1993

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.

MVPF SUMMARY

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

where

where

is the Pareto Parameter of the income distribution and

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.