The Economic Growth and Tax Relief Act of 2001 led to a reduction in the top marginal income tax rate from 39.6% to 35%. Heim (2009) studies the impact of this tax change on the taxable income of those subject to the top marginal income tax rate. Hendren and Sprung-Keyser (2020) use these estimates to compute the MVPF of this policy change.

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Hendren and Sprung-Keyser (2020) estimate the MVPF of top tax rate changes 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 1.66 for 2001. Heim (2009) estimates an elasticity of taxable income of 0.22. This implies an MVPF of 1.37, with a confidence interval of [0.918, 2.862].

MVPF = 1.4

$0.7
Net Cost

1.1 Upper Margin
0.4 Lower Margin

$1.0
WTP

Upper Margin
Lower Margin

1.4
MVPF

2.9 Upper Margin
0.9 Lower Margin

Taxable Income: Evidence from a New Panel of Tax Returns.” Journal of Policy Analysis and Management: The Journal of the Association for Public Policy Analysis and Management, 28(1), 147-163. DOI: https://doi.org/10.1002/pam.20406

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

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
- 572569
- Country of Implementation
- United States
- Year of Implementation
- 2001
- Empirical Method
- Difference in Differences
- Research Type
- Secondary
- Peer Reviewed
- Yes
- MVPF Publication Link
- academic.oup.com/qje/article/135/3/1209/5781614