Elasticity of taxable income in Oregon

TaxProf Blog discusses the lower-than-expected returns from raising rates on the top brackets in Oregon.

Neither the discussion at the link nor the counter-discussion linked to at the bottom of the TaxProf blog post really satisfy. The TaxProf blog post focuses on long-term explanations for a short-term change in tax revenues. In the short run, one would not expect lots of residential or small business mobility, but one would expect reductions in consulting income as well as responses related to the timing of capital gains realization, the coding of business income and the like. Sorting out the short- and long-run responses to tax rate changes is hard, and something the literature is not very good at (and sometimes seems to forget entirely).

In contrast, the second of the two counter-views linked to by the tax prof seems to assume that the entire change is due to the recession, with no behavioral response at all. It offers no evidence for this view, which is inconsistent with the broader literature in public finance. Surely there is some mechanical effect of the recession, but it seems unlikely to be all or even most of the story.

More generally, one of the basic results in public finance is that you want to tax things that do not change much in response to the taxes, because the resulting distortions in individual choices that result are then small. Raising the top brackets is doing exactly the opposite of this, as there is pretty good evidence that the elasticity of taxable income increases with income.

Via: instapundit