| Tax policymakers frequently try to improve understanding about the relationship between tax rates and tax revenue. Changes in marginal tax rates motivate taxpayers to alter their behavior. These behavioral changes may manifest themselves through changes in labor supply, investment strategy, or a host of other responses. The current study analyzes the impact of tax changes during the 1980s on individual tax-motivated behavior.; The study examines three broad categories of taxpayer behavior. The impact of marginal tax rates on taxable wages, portfolio adjustments, and sole proprietorship activity are statistically investigated.; The Ernst & Young/University of Michigan Individual Taxpayer Panel is used as the data source for the study. The panel includes individual taxpayer information that is filed with the Internal Revenue Service. The study analyzes this individual taxpayer information for the years 1979 through 1990. The Random Coefficients Regression (RCR) modeling method is used to statistically analyze the data.; The statistical results indicate that marginal tax rates significantly impact taxpayer behavior. A statistically significant negative association exists between marginal tax rates and taxable wages, taxable dividend and interest income, capital gain income, and sole proprietorship gross receipts. The results should be interpreted with care since other factors, such as life-cycle adjustments during the 12-year sample period, may have also affected the results.; These results are consistent with the growing consensus in the literature that marginal tax rate changes do impact individual behavior. Consequently, tax revenue estimates should not be behaviorally neutral. A better understanding of this taxpayer behavioral linkange with tax rate changes will assist policymakers in formulating efficient and effective reform in the future. |
