Tax reforms and elasticity of taxable income: estimation using the current population survey

Abstract

ABSTRACT Changes in taxable income can capture many of the behavioural responses to changes in tax policies. In this paper, using the publicly available Current Population Survey (CPS) data and analysing two of the most recent tax reforms (Tax Cuts and Jobs Act of 2017 and the American Taxpayer Relief Act of 2012), we provide a new estimate for the elasticity of taxable income with respect to marginal tax rates. As is common in the literature, the paper conducts a panel data analysis and compares taxable income from before and after tax reforms to estimate the elasticity. Using an instrumental variable approach, we find an elasticity of 0.81, a value that is within the range of estimates found in previous studies.