NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance

Raj Chetty

NBER Working Paper No. 13844
Issued in March 2008
NBER Program(s):   LS   PE

Since Feldstein (1999), the most widely used method of calculating the excess burden of income taxation is to estimate the effect of tax rates on reported taxable income. This paper reevaluates the taxable income elasticity as a measure of excess burden when individuals can evade or avoid taxes. In many cases, part of the cost of evasion and avoidance reflects a transfer to another agent in the economy. I show that in such situations, excess burden depends on a weighted average of the taxable income and total earned income elasticities, with the weight determined by the marginal resource cost of sheltering income from taxation. This generalized formula implies that the efficiency cost of taxing high income individuals is not necessarily large despite evidence that their reported incomes are highly sensitive to tax rates.

download in pdf format
   (172 K)

email paper

This paper is available as PDF (172 K) or via email.

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Published: Raj Chetty, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 31-52, August.

Users who downloaded this paper also downloaded these:
Feldstein w5055 Tax Avoidance and the Deadweight Loss of the Income Tax
Saez, Slemrod, and Giertz w15012 The Elasticity of Taxable Income with Respect to Marginal Tax Rates: A Critical Review
Chetty w14399 Sufficient Statistics for Welfare Analysis: A Bridge Between Structural and Reduced-Form Methods
Chetty w15246 The Simple Economics of Salience and Taxation
Slemrod and Yitzhaki w7473 Tax Avoidance, Evasion, and Administration
 
Publications
Activities
Meetings
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us