Individual taxpayer response to tax cuts: 1982–1984: With implications for the revenue maximizing tax rate

Abstract

This paper measures the response of taxpayers to the U.S. personal rate reductions from 1982 to 1984. A baseline income distribution is created to describe what level and distribution could be expected in the absence of tax changes. Comparison of this baseline with actual tax return data shows that at least one-sixth, and probably one-quarter, of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior. The data also show that federal income tax revenue would have been maximized at a tax rate of about 35 percent, and total income tax revenue maximized at a total tax rate of about 40 percent.