ELASTICITIES, TAX RATES, AND TAX REVENUE**

ABSTRACT corporating simultaneously several fac-This paper developsa theoreticalanal- tors that havenot beensystematically in-ysisof the responsivenessof tax revenueto vestigated previously, such as the effect a changein tax ratesonlabor income.The of a progressivechangein the rate struc-model incorporatesthree features not si- ture and the way tax preferencesin the multaneouslyconsideredin previouswork: tax basemay shrink the basewithout af-• progressivechangein marginal tax rates; fecting factor supplies.The net result is • noncomprehensivetax base(so higher that the conditions under which lower marginal ratesgive taxpayersincentiveto across-the-boardtax rates will increase convertincomeinto nontaxableforras);and revenue are found to be much less strin-presence of a capital income tax (so if re- gent than suggested by earlier work. duced current earnings leads to lower sav-ing, future capital tax revenues will be re- 1. Background duced). Tax revenue elasticities and the It will be helpful to begin with a brief revenue-maximizing marginal tax rate are discussion of a very simple model of theestimated using a range of parameter val- relationship between tax rates and taxues. The central finding is that tax reve- revenue. 2 Assume that the only tax is anue is likely to be less responsive to higher proportional tax on wage income levied attax rates than previous estimates suggest. rate t, that the market wage rate is fixed