Explore how income tax rate changes affect both government revenue and taxpayer behavior. You will map out the relationship between rates and revenue for high earners, estimate behavioral responses using the Elasticity of Taxable Income (ETI), and identify when higher rates actually collect less revenue.
What you will learn
Compute the static revenue effect of a rate change using IRS data
Apply the ETI to estimate behavioral offsets
Understand when the behavioral offset dominates (revenue-maximizing rate)
Explain why estimates differ across individuals and across ETI assumptions
0 of 2 exercises complete at the undergraduate level. Saved in this browser.
1. Static Revenue: 2pp Rate Increase on Top Earners
Explore
The top marginal income tax rate applies to income above $400,000. There are roughly 1.8 million filers in this bracket, with average taxable income of about $1.2 million.
Using the static formula:
ΔRevenue = ΔRate × (Avg_Income − Threshold) × Num_Filers × 10 years
Set the rate change to 2 percentage points (0.02) and estimate the 10-year static revenue gain in billions. Enter your answer below.
2. Behavioral Offset: The ETI in Action
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Taxpayers respond to higher rates by reducing taxable income: deferring bonuses, increasing retirement contributions, sheltering income through deductions. The Elasticity of Taxable Income (ETI) measures this response.
The standard ETI used by CBO is 0.25. The behavioral offset formula is:
Offset = −ETI × 0.5 × Static_Revenue
Given your static estimate from Exercise 1, calculate the behavioral offset and the net revenue effect. Enter the final (net) 10-year revenue change.
Submission
Undergraduate · 0 of 2 complete
Name not given · The Laffer Curve: Revenue and Incentives
1. Static Revenue: 2pp Rate Increase on Top Earners Not attempted
2. Behavioral Offset: The ETI in Action Not attempted
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