The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era

Christina D. Romer, David H. Romer

NBER Working Paper No. 17860
Issued in February 2012
NBER Program(s):   DAE   EFG   ME   PE

This paper uses the interwar period in the United States as a laboratory for investigating the incentive effects of changes in marginal income tax rates. Marginal rates changed frequently and drastically in the 1920s and 1930s, and the changes varied greatly across income groups at the top of the income distribution. We examine the effect of these changes on taxable income using time-series/cross-section analysis of data on income and taxes by small slices of the income distribution. We find that the elasticity of taxable income to changes in the log after-tax share (one minus the marginal rate) is positive but small (approximately 0.2) and precisely estimated (a t-statistic over 6). The estimate is highly robust. We also examine the time-series response of available indicators of investment and entrepreneurial activity to changes in marginal rates. We find suggestive evidence of an impact on business formation, but no evidence of an important impact on other indicators.

download in pdf format
   (930 K)

email paper

A non-technical summary of this paper is available in the July 2012 NBER digest.  You can sign up to receive the NBER Digest by email.

Supplementary materials for this paper:

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w17860

The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era” (with David H. Romer), American Economic Journal: Economic Policy, forthcoming. citation courtesy of

Users who downloaded this paper also downloaded these:
Piketty, Saez, and Stantcheva w17616 Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities
Romer and Romer w13264 The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks
Hoynes, Miller, and Schaller w17951 Who Suffers During Recessions?
Trabandt and Uhlig w17862 How Do Laffer Curves Differ Across Countries?
Hamilton w16790 Historical Oil Shocks
NBER Videos

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

Contact Us