The actual income tax rate on a taxpayer is endogenous, i.e. it depends upon his income. So any regression explaining income (or labor supply or charitable giving...) in terms of after-tax prices should be wary of using the actual tax rate directly as an explanatory variable. But variation in state tax laws across states and years is exogenous to individual labor supply and realization decisions. So an instumental variable that depends only on the state law (or, to a lesser extent, on the year), and not on the individual has the potential to be a valid instrument.
Sometimes the maximum income tax rate by state and year is a nice independent variable in a cross-state tax-price regression. Although not representative of typical marginal rates, it is representative of tax rates on property income and it is independent of individual decisions.
Available here is a list of tax rates by year and state for the maximum state tax. It is calculated from a run of the TAXSIM model.
This calculation was done for Josh Lerner of the Harvard Business School, and reports the maximum tax rate for an additional $1000 of income on an initial $250,000 of wage income. The taxpayer is assumed to be married and filing jointly. No personal deductions are included except for the state income tax on the federal return and the federal tax on the state return (where allowed). To avoid a simultaneous determination, the calculation is merely iterated to a fixed point. This deductibility would be the main difference between these rates and the maximum bracket rate which might be published in a summary of state tax laws.
If you suspect any case has been calculated incorrectly, please extract that case (or a exemplar, if there are many cases) and email it to me with a statement of how you think the tax calculation ought to have been made. I will get back to you within a couple of days with an explanation or a fix.
This paper and this URL (http://www.nber.org/~taxsim)should be cited if any results from TAXSIM are circulated or published.
Daniel Feenberg
NBER
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Cambridge MA 02138
617-588-0343
feenberg@nber.org