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Tax Avoidance and the Deadweight Loss of the Income Tax

Tax Avoidance and the Deadweight Loss of the Income Tax Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption. The full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure, excludable income, and deductible consumption are a Hicksian composite good. Microeconomic estimates imply a deadweight loss of as much as 30% of revenue or more than ten times Harberger's classic 1964 estimate. The relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed $2 per $1 of revenue. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Review of Economics and Statistics MIT Press

Tax Avoidance and the Deadweight Loss of the Income Tax

The Review of Economics and Statistics , Volume 81 (4): 7 – Nov 1, 1999

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References (13)

Publisher
MIT Press
Copyright
© 1999 President and Fellows of Harvard College and the Massachusetts Institute of Technology
ISSN
0034-6535
eISSN
1530-9142
DOI
10.1162/003465399558391
Publisher site
See Article on Publisher Site

Abstract

Traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption. The full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure, excludable income, and deductible consumption are a Hicksian composite good. Microeconomic estimates imply a deadweight loss of as much as 30% of revenue or more than ten times Harberger's classic 1964 estimate. The relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed $2 per $1 of revenue.

Journal

The Review of Economics and StatisticsMIT Press

Published: Nov 1, 1999

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