Reported Incomes and Marginal Tax Rates, 1960–2000: Evidence and Policy Implications

This paper uses income tax return data from 1960 to 2000 to analyze the link between reported incomes and marginal tax rates. Only the top 1 percent of income earners show evidence of behavioral responses to taxation. The data display striking heterogeneity in the size of responses to tax changes over time, with no response either short-term or long-term for the very large Kennedy top income tax cuts in the early 1960s, and striking evidence of responses, at least in the short term, to the tax changes since the 1980s. The 1980s tax cuts generated a surge in business income reported by high-income individual taxpayers, due to a shift away from the corporate sector, and the disappearance of business losses for tax avoidance. The Tax Reform Act of 1986 and the recent 1993 tax increase generated large short-term responses of wages and salaries reported by top income earners most likely because of retiming in compensation to take advantage of the tax changes. It is unlikely, however, that the extraordinary trend upward of the shares of total wages accruing to top wage income earners, which started in the 1970s and accelerated in the 1980s and especially the late 1990s, can be explained solely by the evolution of marginal tax rates.