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Lockwood, Ben (2019) Malas notches. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1206). (Unpublished)
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Official URL: https://warwick.ac.uk/fac/soc/economics/research/w...
Abstract
This paper shows that the sufficient statistic approach to the welfare properties of income (and other) taxes does not easily extend to tax systems with notches, because with notches, changes in bunching induced by changes in tax rates have a first-order effect on tax revenues. In an income tax setting, we show that the marginal excess burden (MEB) of a change in the top rate of tax is given by the Feldstein (1999) formula for the MEB of a proportional tax, plus a correction term. These correction terms cannot be calculated just from knowledge of the elasticity of taxable income and quantitatively, they can be large. An application to VAT is discussed; with a calibration to UK data, the MEB of the VAT is roughly three times what is would be if VAT was simply a proportional tax.
Item Type: | Working or Discussion Paper (Working Paper) | ||||
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Subjects: | H Social Sciences > HJ Public Finance | ||||
Divisions: | Faculty of Social Sciences > Economics | ||||
Library of Congress Subject Headings (LCSH): | Tax incentives, Taxation -- Econometric models, Value-added tax -- Econometric models | ||||
Series Name: | Warwick economics research papers series (WERPS) | ||||
Publisher: | University of Warwick. Department of Economics | ||||
Place of Publication: | Coventry | ||||
ISSN: | 0083-7350 | ||||
Official Date: | July 2019 | ||||
Dates: |
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Number: | 1206 | ||||
Institution: | University of Warwick | ||||
Status: | Not Peer Reviewed | ||||
Publication Status: | Unpublished | ||||
Access rights to Published version: | Open Access (Creative Commons) |
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