In this chapter, we’ve emphasized that the elasticity of supply is higher in the long run than in the short run. In a lot of cases, this is surely true: If you see that jobs pay more in the next state over, you won’t move there the next week but you might move there next year. But sometimes the short-run elasticity will be higher than the long-run elasticity.

Austan Goolsbee found an interesting example of this when he looked at the elasticity of income of highly paid executives with respect to taxes. In 1993, then President Clinton passed a law raising income taxes. This tax hike was fully expected: He campaigned on it in 1992.

a. What do you expect happened to executive income in the first year of the tax increases?

What about in subsequent years?

Here’s a hint: Top executives have a lot of power over when they get paid for their work: They can ask for bonuses a bit earlier, or they can cash out their stock options a bit earlier. Literally, this isn’t their “labor supply,” it’s more like their “income supply.”

(Source: Goolsbee, Austan. 2000. What happens when you tax the rich? Evidence from executive compensation.

Journal of Political Economy 108(2): 352–378. For a book on the topic written by a leading economist, see Joel Slemrod, ed. 2000. Does Atlas Shrug? Cambridge, MA: Harvard University Press).

b. Goolsbee estimated that the short-run elasticity of “income supply” for these executives was 1.4, while the long-run elasticity of “income supply” was 0.1.

(Note: Goolsbee used a variety of statistical methods to look for these elasticities, and all came to roughly the same result.) If taxes pushed down their take-home income by 10%, how much would this cut the amount of income supplied in the short run? In the long run?

c. You are a newspaper reporter. Your editor tells you to write a short story with this title:

“Goolsbee’s research proves that tax hikes make the rich work less.” Make your case in one sentence.

d. You are a newspaper reporter. Your editor tells you to write a short story with this title:

“Goolsbee’s research proves that tax hikes have little effect on work by the wealthy.”

Make your case in one sentence.

e. Which story is more truthful? pg63