Behavior parameters

Note that logic that uses assumed behavior parameters to compute changes in input variables caused by a tax reform in a partial-equilibrium setting is contained in the response function in the Tax-Calculator behresp module. The complete documentation of that function, including the response equations and the way responses are applied to input variables, is on the Tax-Calculator Behavioral Responses page.

By default Tax-Calculator assumes no behavioral responses to a tax reform, which is the same as saying the behavior parameters (or elasticities) are assumed to be zero by default. The elasticities can be set to non-zero values in a JSON file that is formatted like this.

There are three behavior parameters, none of which has a time dimension (that is, each is a single value that applies to every year being analyzed):

sub: substitution elasticity of taxable income, defined as the proportional change in taxable income divided by the proportional change in the marginal net-of-tax rate (1-MTR) on taxpayer earnings caused by the reform. Must be zero or positive. Empirical estimates in the literature are typically in the 0.1 to 0.4 range.

inc: income elasticity of taxable income, defined as the dollar change in taxable income divided by the dollar change in after-tax income caused by the reform. Must be zero or negative. Values used in practice are typically small in absolute value, in the 0.0 to -0.2 range.

cg: semi-elasticity of long-term capital gains, defined as the change in the logarithm of long-term capital gains divided by the change in the marginal tax rate on long-term capital gains caused by the reform. Must be zero or negative. Be aware that this is not the tax-rate elasticity usually reported in the literature, and that the two differ by roughly a factor of four: the JCT-CBO tax-rate elasticity estimate of -0.792 corresponds to a cg semi-elasticity of about -3.45. Specifying cg equal to a published tax-rate elasticity is a common mistake that generates a much smaller capital-gains response than intended. See the Tax-Calculator Behavioral Responses page for the details of this conversion.

When the elasticities are used in a Python program, they are supplied in a dictionary passed to the response function, and any omitted elasticity is assumed to be zero. When they are used with the tc command-line interface --behavior option, the JSON file must contain all three of the sub, inc, and cg keys.