Econometrica: Oct 1963, Volume 31, Issue 4
A Note on the Built-in Flexibility of the Individual Income Tax
Paul E. SmithEconomists are generally agreed that higher rate levels have increased the automatic stabilizing properties of the federal personal income tax in the United States. Nonetheless, empirical attempts at estimating the degree of built-in tax flexibility have largely concentrated upon the response of income tax yield to changes in the tax base while disregarding such feedback effects as are apt to occur in a system of simultaneous equations representing the American economy. This paper specifies an econometric model for the U. S., estimates the coefficients of the structural equations, and utilizes the results to calculate the amount of built-in flexibility attributable to the federal income tax since World War II.
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