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The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenue-increasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this 'Laffer-maximum' or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.
We are grateful to Raj Chetty, for comments on earlier work that led to the development of the ideas in this paper, and to Anita King, Hemant Passi and Jos'e Sanz Sanz for comments on an earlier version. We also acknowledge financial support from Ministry of Research, Science and Technology, Cross Departmental Research Pool project grant CDRP-08-TSY-008, "Evaluating New Zealand Taxpayers' Responses to Tax Changes".
The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.
Table of Contents
- Executive Summary
- 1 Introduction
- 2 The ETI in Multi-rate Tax Structures
- 2 The ETI in Multi-rate Tax Structures (continued)
- 3 Individual revenue-maximising ETIs in New Zealand
- 3.2 Revenue-Maximising ETIs: Single-Earner Households with Children
- 4 Aggregate Values of ETIL
- 4.1 Simulating Changes in Income Tax Rates
- 4.2 Revenue-Raising ETIs
- 5 Conclusions
- Appendix A: Mechanical Elasticities
- Appendix B: The Revenue-Maximising Tax Rate