What question did this study set out to answer?

This article explores how changes in income tax rates affect tax revenue and tax multipliers.

May 6, 2026Open Access

The impact of income tax changes on tax revenue

RMRichard McManusCanterbury Christ Church University FOF Gulcin OzkanKing's College - North Carolina DTDawid TrzeciakiewiczLoughborough University

Key Points

This article explores how changes in income tax rates affect tax revenue and tax multipliers.
Utilized a range of empirical frameworks and datasets to analyze tax revenue responses.
Examined the relationship between marginal and average tax rates.
Validated findings using real and new-Keynesian general equilibrium models.
Found that tax revenue falls with increased marginal tax rates, particularly during tax rises.
Identified large tax multipliers consistently in empirical analyses.
Reconciled theoretical and empirical discrepancies regarding tax revenue responses.

Abstract

Abstract This article shows that tax revenue responses to changes in tax rates crucially depend on how the changes affect the marginal tax rate relative to the average tax rate. Using a wide range of empirical frameworks and datasets, we find that tax multipliers are consistently large and tax revenues fall in response to tax rises, particularly when marginal taxes are raised. We validate our empirical findings within canonical real and new-Keynesian general equilibrium models by introducing the wedge between the average and marginal tax rates. Doing so reconciles a significant discrepancy between the theoretical and empirical size of tax multipliers.

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