Alternatives to the Current Maximum Tax on Earned Income

The Maximum Tax on Personal Service Income was intended to reduce the maximum marginal tax rate on earned income to 50 percent. In general it did not achieve this result, although it did lower marginal tax rates on both earned and unearned income. This paper considers the effect of different tax rate structures on the total tax revenue collected from high income taxpayers. The sensitivity of tax avoidance practices to marginal tax rates is estimated using four different specifications. These estimates are then combined with plausible parameter values for income and substitution effects in the supply of labor to produce a range of elasticities of taxable income with respect to tax rates. The NBER Taxsim model is then used to estimate the effects of different rate structures on tax revenue.