The Policy Elasticity
Chapter in NBER book Tax Policy and the Economy, Volume 30 (2016), Jeffrey R. Brown, editor (p. 51 - 89)
This paper illustrates how one can use causal effects of a policy change to measure its welfare impact without decomposing them into income and substitution effects. Often, a single causal effect suffices: the impact on government revenue. Because these responses vary with the policy in question, I term them policy elasticities, to distinguish them from Hicksian and Marshallian elasticities. The model also formally justifies a simple benefit-cost ratio to measure the marginal value of public funds corresponding to non-budget neutral policies. Using existing causal estimates, I apply the framework to five policy changes: top income tax rate, EITC generosity, food stamps, job training, and housing vouchers.
Document Object Identifier (DOI): 10.1086/685593This chapter first appeared as NBER working paper w19177, The Policy Elasticity, Nathaniel Hendren
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