Various methods have been used to incorporate tax rate changes into the tax
equation. Some economists, building on the early work by Groves and Kahn,
convert all tax data to reflect the same tax rate and tax base before estimating
a tax equation, while, more recently, Singer and others have used additive
dummy variables in allowing for tax rate changes. In this paper a theoretical
model showing that changes in tax rates affect both the slope and the intercept
of the tax equation is developed. Empirical work, based on the fiscal history
of Louisiana, is then presented to support the implications of the theoretical
model.
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