Taxes and Income Volatility

Research Report

Taxes and Income Volatility

November 24, 2003

Abstract

In a tax system with increasing marginal tax rates, the tax increase from a boost to income is at least equal to the tax reduction from a decline in income and is larger if the change in income crosses a marginal tax bracket. As a result, people with volatile incomes may pay more tax than people with the same average income whose incomes do not fluctuate.

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