Revenue-Maximising Elasticities of Taxable Income in Multi-Rate Income Tax Structures

Abstract

The empirical literature on the elasticity of taxable income (ETI) sometimes questions whether estimated values are consistent with being on the revenueincreasing section of the Laffer curve, usually in the context of a single rate tax system or for top marginal rates. This paper develops conceptual expressions for this ‘Laffer-maximum’ or revenue-maximising ETI for the multi-rate income tax systems commonly used in practice. Using the New Zealand income tax system in 2010 to illustrate its properties, the paper demonstrates that a wide range of revenue-maximising ETI values can be expected across individual taxpayers, across tax brackets and in aggregate.