The Tax Ladder: methodology and sources

However, in a 2012 review of the literature, leading scholars argued 'the best available estimates range from 0.12 to 0.40.'

the elasticity captures not only the hours of work response, but also all other behavioral responses to marginal tax rates

the optimal top tax rate using the current taxable income base ... would be τ*=1/(1+1.5 x 0.57)=54 percent while the optimal top tax rate using a broader income base ... would be τ*=1/(1+1.5 x 0.17)=80 percent.

This approach is based on empirical research suggesting that taxable income elasticities are lower for lower-income taxpayers than for higher-income taxpayers.

An established view is that the revenue maximizing top tax rate for the US is approximately 73 percent. In contrast, the revenue maximizing top tax rate is approximately 49 percent in our quantitative human capital model.

The preferred persistent elasticity estimate is –0.72 and is statistically significant and robust to a number of sensitivity tests.

-1.20 with a standard error of 0.35

The prevailing wisdom among some in the scorekeeping community (e.g., Tax Policy Center, Tax Foundation, Penn Wharton Budget Model) has been that the revenue-maximizing capital gains rate is around 30 percent

We find that the elasticity of revenues with respect to the tax rate over a ten-year period is -0.5 to -0.3, indicating that capital gains tax cuts do not pay for themselves, and that a 5 percentage point rate increase would yield $18 to $30 billion in annual federal tax revenue. Our long-run estimates yield revenue-maximizing capital gains tax rates of 38 to 47 percent.

A key issue in current research and policy is the size of fiscal multipliers when the economy is in recession. We provide three insights. First, using regime-switching models, we find large differences in the size of spending multipliers in recessions and expansions with fiscal policy being considerably more effective in recessions than in expansions.

We investigate whether US government spending multipliers are higher during periods of economic slack or when interest rates are near the zero lower bound. Using new quarterly historical US data covering multiple large wars and deep recessions, we estimate multipliers that are below unity irrespective of the amount of slack in the economy. These results are robust to two leading identification schemes, two different estimation methodologies, and many alternative specifications. In contrast, the results are more mixed for the zero lower bound state, with a few specifications implying multipliers as high as 1.5.

spent 20 to 40 percent of their rebates on nondurable goods during the three-month period ... roughly two-thirds of their rebates ... responses are larger for households with low liquid wealth or low income

The marginal propensity to consume (MPC) is 48 percent on average. We also find substantial heterogeneity in the distribution, as households with low cash-on-hand exhibit a much higher MPC than affluent households

the overall substitution elasticity ranges from 0.17 to 0.37, with a central estimate of 0.27

substitution elasticities for the total population that range from 0.1 to 0.3

hours elasticity ... ranges from -0.1 to 0.2 … Estimates of the participation elasticity for lower-income taxpayers eligible for the EITC range from 0.3 to 1.2 … the total substitution elasticity (including both hours and participation effects) appears to range from 0.1 to 0.3 for men and single women and from 0.2 to 0.4 for married women … substitution elasticities tend to be smaller for primary earners with higher earnings because, for them, the effects on participation are smaller … For the bottom 10 percent of earners, the participation component of the elasticity is 0.22, giving them a total substitution elasticity of 0.47

25 percent of corporate income taxes are borne by domestic labor and 75 percent are borne by owners of domestic capital

CBO's approach is to allocate 75 percent of corporate income taxes to owners of capital in proportion to their income from interest, dividends, rents, and adjusted capital gains... CBO allocates the remaining 25 percent of corporate income taxes to workers in proportion to their income from labor.

82% of the corporate income tax burden is distributed to capital income and 18% is distributed to labor income.

investment returns (dividends, interest, capital gains, etc.) bear 80 percent of the burden, with wages and other labor income carrying the remaining 20 percent.

These studies appear to show that labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.

the budgetary impact of the economic changes was estimated to offset between 1 percent and 22 percent of the revenue loss from the tax cut over the first five years and add as much as 5 percent to that loss or offset as much as 32 percent of it over the second five years.

According to models that account for both supply-side and demand-side effects, those effects might offset somewhat less than 15 percent of the revenue loss over the first five years.

the overall budgetary effects of changes in economic growth are projected to reduce the deficit by $385 billion during the budget window.

On average, these models estimated that economic growth effects (the 'dynamic effects') will only offset about a quarter of the 10-year revenue loss associated with the TCJA. ... Excluding the Tax Foundation, which is an outlier in these estimates, drops the average offset to less than 20%.

TCJA extension would create dynamic feedback sufficient to offset between 1 percent and 14 percent of its static cost over a decade.

tax cuts rarely if ever fully pay for themselves. Because taxes capture only a fraction of income and some spending grows with income, a policy would need to produce $5 to $6 of economic activity for every $1 of cost to be self-financing.

it is almost certainly true that the TCJA meaningfully reduced revenue from where it would have been absent the TCJA.

CBO estimated that the tax act would increase the primary deficit by $1.8 trillion … the feedback is estimated to lower the cumulative primary deficit by about $550 billion … raised projected debt-service costs by roughly $600 billion … The act therefore increases the total projected deficit over the 2018–2028 period by about $1.9 trillion.

2018-2027 -$2,209 -$1,786 -$2,038 $2,387 $1,941 $2,238

the plan would decrease federal revenues by $1.47 trillion on a static basis and by $448 billion on a dynamic basis

we are now working on adding capital gains responses

Include accrued capital gains in the last income tax return of decedents — 10-year total (2025–2034): -$536.1 billion

Option 51. Change the Taxation of Assets Transferred at Death | 197 to 536

Option 56. Reduce Tax Subsidies for Employment-Based Health Benefits | 521 to 965

Conventional primary deficit change (10-Yr): -$835.7B; Dynamic primary deficit change (10-Yr): -$505.9B

options to remove the excess benefit while maintaining the 20 percent tax benefit could raise between $46B and $178B over the 10-year budget window

Option 49. Eliminate or Limit Itemized Deductions | 736 to 3,424

Repeal MID — $495 billion

Option 52. Eliminate the Tax Exemption for New Qualified Private Activity Bonds | 43

Option 47. Raise the Tax Rates on Long-Term Capital Gains and Qualified Dividends by 2 Percentage Points | 103

We estimate the returns to IRS audits of taxpayers across the income distribution. We find an additional $1 spent auditing taxpayers above the 90th income percentile yields more than $12 in revenue, while audits of below-median income taxpayers yield $5.

an extra hour spent auditing a taxpayer earning over $5 million generated roughly $4,900 in recommended additional tax—compared to $650 for audits of taxpayers earning around $200,000.

A $20 billion rescission would reduce revenues by $44 billion and increase the cumulative deficit by $24 billion

Together these reductions total just over $860 billion over the 2026-2035 budget window.

By the end of 2025, the total reduction in staffing amounted to 27,636 employees

Gross Tax Gap: $696 billion

Net Tax Gap: $606 billion

Voluntary Compliance Rate: 85.0%

Net Compliance Rate: 86.9%

Fall of calendar year 2025—new tax gap estimates and projections (delayed)

Nonfiling: $63 billion (9% of gross) / Underreporting: $539 billion (77% of gross) / Underpayment: $94 billion (14% of gross)

Items Subject to Substantial Information Reporting and Withholding $9 1% 2% | Items Subject to Substantial Information Reporting $22 3% 6% | Items Subject to Some Information Reporting $71 10% 19% | Items Subject to Little or No Information Reporting $179 26% 47%

$117 billion in underreporting, comprising 17% of the gross tax gap and 31% of individual income tax underreporting

more than $160 billion lost annually is from taxes that top 1 percent choose not to pay

$15.6 billion in revenue

revenue of $87.7 billion over 10 years

more than 28,000 taxpayers had aggregate IRA account balances of $5 million or more

the proposed wash-sale restrictions would raise $16.8 billion over a decade

crypto and other such digital assets are exempt, hence why many consider it a 'loophole'

$1 trillion in profits booked in tax havens ... 35% of all the profits booked by multinational companies outside of their headquarter country ... The equivalent of nearly 10% of corporate tax revenue collected globally.

342 companies included in this study paid an average effective income tax rate of just 14.1 percent

The Joint Committee on Taxation (JCT) estimates that the CAMT will generate additional revenues of $222.2 billion from FY2023 through FY2031.

$74 billion over the FY2022-FY2031 period

Tobacco tax: $9.5 billion / Tax on corporate stock repurchases: $8.5 billion / Alcohol tax: $8.1 billion / Other excise taxes: $6.5 billion

Exclusion for Retirement Savings and Pension Contributions | $355 billion

Lower Rates for Dividends and Long-Term Capital Gains | $252 billion

Exclusion for Employer-Sponsored Health Insurance | $240 billion

Thus, for example, the income tax exclusion for employer-paid health insurance is included, but the Federal Insurance Contributions Act ("FICA") tax exclusion for employer-paid health insurance is not treated as a tax expenditure in this report.

"Stepped-Up Basis" for Capital Gains at Death | $73 billion

Pass-Through Business Income Deduction | $76 billion

Charitable Contributions Deduction | $78 billion

State and Local Tax Deduction | $60 billion

$261.1 billion over 2025 to 2029

$7.8 billion

CBO estimates that Public Law 119-21 will result in a net increase in the unified budget deficit totaling $3.4 trillion over the 2025-2034 period

Resources for households in the lowest decile of the income distribution would decrease by about $1,600 per year (in 2025 dollars)…That amounts to 3.9 percent of their income

Resources would increase, on average, over the projection period by about $12,000 for households in the highest decile, amounting to 2.3 percent of their projected income.

Option 49. Eliminate or Limit Itemized Deductions | 736 to 3,424

the tax would raise around $2.75 trillion over the ten-year budget window 2019-2028 ... about 75,000 American households (less than 0.1%)

2.1 trillion over the standard 10-year budget window (2022-2031)

$25 billion is a rough back-of-the-envelope number

We would be surprised if the $25-billion-a-year figure we suggest was not a significant underestimate.

Switzerland reaps far more than other nations, taking in revenues equal to 1% of GDP.

It would cut taxes by an average of about $6,100, or about 8.5 percent of after-tax income. On average, households at all income levels would receive tax cuts, but the highest-income households would receive the largest cuts, both in dollars and as a percentage of income.

Gross Tax Gap: $696 billion

2026 | $184,500

the Joint Committee on Taxation estimated that these expansions and modifications to the CTC will cost $109.5 billion over the next decade.

Child poverty, calculated by the Supplemental Poverty Measure (SPM), fell to its lowest recorded level in 2021, declining 46% from 9.7% in 2020 to 5.2% in 2021

the national child SPM rate was its lowest ever at 5.2%

The rate increased to 12.4% in 2022

and 13.7% in 2023

13.4 percent of children living in poverty

the maximum amount of the credit allowed under § 24(a) is $2,200

the amount used in § 24(d)(1)(A) to determine the amount of the credit under § 24 that may be refundable is $1,700

By eliminating the strong work incentives in the previous CTC, we estimate that the proposal would reduce employment by approximately 1.5 million workers, which would diminish the proposal's effect on child poverty and eliminate its effect on deep child poverty altogether.

We estimate that providing subsidies to all who are eligible would increase the total amount of subsidies paid by $118 billion, to a total of $168 billion.

The reduction in the rate from 14.7 percent to 12.8 percent amounts to 6.4 million people moving from below poverty to above poverty because of the increased resources from housing subsidies.

We estimate that at current levels of housing assistance, 14.7 percent of the population is below the SPM poverty level

the poverty rate would fall to 12.8 percent with full funding and use of housing vouchers

We estimate that about 25 percent of households eligible for housing assistance currently receive it.

About 4.4 million households currently receive housing assistance and we estimate that this would increase by 13.2 million to a total of 17.6 million with full funding and use of housing vouchers.

About 4.4 million households currently receive housing assistance and we estimate that this would increase by 13.2 million to a total of 17.6 million with full funding and use of housing vouchers.

The offer of a long-term rent subsidy reduced use of emergency shelters in months 21 to 32 after random assignment by more than three-quarters

The offer of a long-term rent subsidy reduced use of emergency shelters in months 21 to 32 after random assignment by more than three-quarters

a carbon tax that started at $49 per metric ton of carbon dioxide equivalent (mt CO2-e) in 2019 and increased to $70 in 2028

a carbon tax that started at $49 per metric ton of carbon dioxide equivalent (mt CO2-e) in 2019 and increased to $70 in 2028

$2,962 billion

The TDM estimates that the poorest decile would experience almost a 9 percent increase in average after-tax income compared to a 1 percent decrease in average after-tax income for the top income decile.

The TDM estimates that the poorest decile would experience almost a 9 percent increase in average after-tax income compared to a 1 percent decrease in average after-tax income for the top income decile.

The lowest income decile is estimated to have a 0.8 percent decrease in after-tax income because of the carbon tax and the magnitude of this percentage change in after-tax income rises with income through the 9th decile.

reducing the top individual rate from 50 to 28 percent

reducing the top individual rate from 50 to 28 percent

the top corporate rate from 46 to 34 percent

the top corporate rate from 46 to 34 percent

Overall, the Act was revenue-neutral, with the individual tax system receiving a $120 billion tax cut over five years and the corporate side getting a $120 billion tax increase

Top tax rate cuts are associated with top one percent pretax income shares increases but not higher economic growth.

We find tax cuts for the rich lead to higher income inequality in both the short- and medium-term. In contrast, such reforms do not have any significant effect on economic growth or unemployment.

changes over the past 65 years in the top marginal tax rate and the top capital gains tax rate do not appear correlated with economic growth

looking only at the first year effect throws out about 95 percent of the outcome

An additional 0.8 percent of the residential tax base that landed in the top bracket left California in 2013.

For each 1 point increase in the tax rate, we find that the net migration rate decreases 0.8 per thousand population