Marginal tax rates and income in the long run: Evidence from a structural estimation

We estimate a life -cycle model of savings, labor productivity and entrepreneurs to measure the long -run response of income to marginal tax rate cuts in the US. Long -run tax elasticities of income are largest for the richest 1% but are also positive and substantial for other income groups. In equilibrium, entrepreneurs obtain higher returns on wealth. This increases the investment response of rich, high -return entrepreneurs, amplifying their income elasticity to tax cuts. This leads to a reallocation of capital which increases TFP, and generates a boost in wages that magnifies the estimated income response of the bottom 90% as well.