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  4. August 2014
  5. The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era

The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era

  • Christina D. Romer
  • David H. Romer
American Economic Journal: Economic Policy
vol. 6, no. 3, August 2014
(pp. 242-81)
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Abstract

This paper uses the interwar United States as a laboratory for investigating the incentive effects of marginal income tax rates. We examine the impact of the large changes in rates in this period on taxable income using time-series/cross-section analysis of data by small slices of the income distribution. We find that the effect operated in the expected direction but was economically small, and that it is precisely estimated and highly robust. We also find suggestive time-series evidence of a positive impact of marginal rate cuts on business formation, but no evidence of an important effect on other indicators of investment.

Citation

Romer, Christina D., and David H. Romer. 2014. "The Incentive Effects of Marginal Tax Rates: Evidence from the Interwar Era." American Economic Journal: Economic Policy, 6 (3): 242-81. DOI: 10.1257/pol.6.3.242

Additional Materials

JEL Classification

  • D31 Personal Income, Wealth, and Their Distributions
  • H24 Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes
  • H31 Fiscal Policies and Behavior of Economic Agents: Household
  • M13 New Firms; Startups
  • N42 Economic History: Government, War, Law, International Relations, and Regulation: U.S.; Canada: 1913-
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