The Behavioral Elasticity of Tax Revenue

Abstract

This article presents a measure of the efficiency consequences of changes to tax policies that inform a wide range of tax law debates. Building upon recent extensions to the "elasticity of taxable income" concept, we clarify the relationship among revenue effects, administrative costs, and compliance costs. The resulting measure-the behavioral elasticity of tax revenue (BETR)-captures the change in total resources resulting from marginal changes in tax rates, the tax base, or tax enforcement. We illustrate the BETR's utility through a series of case studies. We also show how the BETR can help policy makers select more efficient redistributive mechanisms.