TY  - JOUR
AU  - Goolsbee,Austan
TI  - It's Not About the Money: Why Natural Experiments Don't Work on the Rich
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6395
PY  - 1998
Y2  - February 1998
UR  - http://www.nber.org/papers/w6395
L1  - http://www.nber.org/papers/w6395.pdf
N1  - Author contact info:
Austan Goolsbee
Booth School of Business
University of Chicago
5807 S. Woodlawn Avenue
Chicago, IL 60637
Tel: 773/702-5869
Fax: 773/702-0458
E-Mail: goolsbee@chicagobooth.edu
AB  - An influential literature on the effects of marginal tax rates on the behavior of the rich has claimed that the elasticity of taxable income with respect to the net of tax share is very high possibly exceeding one.  These high estimated elasticities imply that cutting taxes on the rich does not lose much revenue possibly increases it and that progressivity generates a large amount of deadweight loss.  To identify this elasticity, these studies have conducted  natural experiments' comparing the rich to other income groups and assuming that they are the same except for changes in their tax rates.  This paper tests the natural experiment assumption using alternative data on the compensation of a panel of several thousand corporate executives and finds it to be false.  Relatively, the very rich have incomes which trend upward at a faster rate are more sensitive to economic conditions, and are more likely to be in a form whose timing can be shifted in the short run.  Interpreted broadly, these facts might reduce existing elasticity estimates by as much as 75%.  The paper also suggests ways of improving existing methods.
ER  -