High-income taxpayers’ apparent responsiveness to tax rate changes may reflect this group’s tendency toward tax avoidance or greater ability to substitute leisure for labor. In a new working paper, Xavier Dufour, Pierre-Carl Michaud, and Michael G. Smart identify salience as another factor that may influence high-income taxpayers’ elasticities of taxable income. More below the fold.

Dufour, Michaud, and Smart define salience in terms of marginal rate reforms’ mechanical effects on total tax liability and average tax rates. For a given change in top marginal rates, a lower threshold (a broader top bracket, essentially) increases total tax liability and thus the reform’s salience, compared to a higher threshold. More income is exposed to the higher top rate (and average tax rates are higher), so the reform is harder to miss.

Using cross-province variation in statutory rates and bracket thresholds in Canada, the authors find that salience accounts for much of the heterogeneity in elasticities of taxable income across the income distribution. The upshot: bracket thresholds affect the perceived “size” of a reform, holding fixed any increase in marginal rates. Accordingly, the overall design of revenue-raising tax reforms, rather than just marginal rates, matters when forecasting behavioral responses.

Xavier Dufour (HEC Montréal), Pierre-Carl Michaud (HEC Montréal) & Michael G. Smart (Toronto, Dept. Econ.), Salience and the Elasticity of Taxable Income: Evidence from Top-Bracket Tax Reforms, Nat’l Bur. Econ. Rsch. Working Paper No. 34731 (Jan. 2026):

We estimate heterogeneous responses to top-bracket tax reforms using a triple-difference design that exploits variation in tax rate changes and the thresholds at which they apply. This strategy identifies behavioral responses even in the presence of unobservable shocks to the income distribution. Higher-income taxpayers respond more to top-rate changes, but our results indicate that this reflects the salience of the reforms—the larger mechanical change in average tax rates at higher incomes—rather than heterogeneity in substitution elasticities. We discuss implications for the revenue and distributional effects of top-bracket tax reforms.