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Tax Systems$
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Joel Slemrod and Christian Gillitzer

Print publication date: 2014

Print ISBN-13: 9780262026727

Published to MIT Press Scholarship Online: May 2014

DOI: 10.7551/mitpress/9780262026727.001.0001

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Endogenous Elasticity

Endogenous Elasticity

(p.137) 9 Endogenous Elasticity
Tax Systems

Joel Slemrod

Christian Gillitzer

The MIT Press

This chapter addresses the implications of when a tax base elasticity is endogenous to other tax-system parameters or to actions taken by taxpayers. It develops a formal theoretical model of this issue where the income tax rate elasticity depends on the tax base breadth, which is a policy choice. The analysis shows that in this case the tax rate elasticity is not an exogenous parameter, but is chosen through the choice of tax base breadth, and that therefore there is an optimal elasticity of taxable income that depends on behavioral responses and the social preferences regarding income inequality. Ignoring these issues can lead to sub-optimal policy, for example if income tax rates are chosen assuming that, because of inadequate enforcement, tax rate elasticities are larger than they would be if optimally enforced; the chosen tax rates will be too low.

Keywords:   Endogenous elasticity, Optimal elasticity, Enforcement

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