TY  - JOUR
AU  - Feldstein,Martin
AU  - Feenberg,Daniel
TI  - The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 5370
PY  - 1995
Y2  - November 1995
UR  - http://www.nber.org/papers/w5370
L1  - http://www.nber.org/papers/w5370.pdf
N1  - Author contact info:
Martin S. Feldstein
President Emeritus
NBER
1050 Massachusetts Avenue
Cambridge, MA  02138-5398
Tel: 617/868-3905
Fax: 617/868-7194
E-Mail: msfeldst@nber.org

Daniel R. Feenberg
National Bureau of Economic Research
1050 Massachusetts Avenue
Cambridge, MA 02138
Tel: 617/588-0343
Fax: 617/868-2742
E-Mail: feenberg@nber.org
M1  - published as Martin Feldstein, Daniel Feenberg. "The Effect of Increased Tax Rates on Taxable Income and Economic Efficiency: A Preliminary Analysis of the 1993 Tax Rate Increases," in James M. Poterba, editor, "Tax Policy and the Economy, Volume 10" MIT Press (1996)

M2  - featured in NBER digest on 1996-04-01
AB  - The 1993 tax legislation raised marginal tax rates to 36 percent from 31 percent on taxable incomes between $140,000 and $250,000 and to 39.6 percent on incomes above $250,000.  This paper uses recently published IRS data on taxable incomes by adjusted gross income class to analyze how the 1993 tax rate increases affected taxable income, tax revenue, and economic efficiency.  Our estimates are based on a difference-in-difference procedure comparing growth of taxable incomes among taxpayers with AGIs over $200,000 to the growth of incomes of lower income taxpayers.  We use the NBER TAXSIM model to adjust for interyear differences in the composition of the two taxpayer groups. The results show that high income taxpayers would have reported 7.8 percent more taxable income in 1993 than they did if their tax rates had not increased.  Because of the high threshold for the increase in tax rates, this decline in taxable income caused the Treasury to lose more than half of the extra revenue that would have been collected if taxpayers had not changed their behavior. The deadweight loss caused by the higher marginal tax rates (including the effects on labor supply and on consumption of goods and services favored by deductions and exclusions) is approximately twice as large as the $8 billion in revenue raised by the 1993 tax rate. Several possible statistical biases could cause the estimated effect of the tax changes to either underestimate or overestimate the true long-run effect.  The paper concludes with a discussion of these problems and of plans for future analysis.
ER  -