ABSTRACT
Some argue that tax collections do not vary much when top marginal tax rates increase or decrease. In this view, an increase in income tax rates provides such a strong incentive for people to reduce their taxable in come that the tax base shrinks and no additional revenue is generated. For example, a worker facing higher taxes on wages might choose to take some compensation in the form of nonwage benefits, such as more vaca tion time or larger future pensions. Similarly, individuals facing higher tax rates on unearned income might change the composition of their savings (while keeping the level constant) by investing in tax-exempt bonds rather than stocks or corporate debt.
