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The elasticity of taxable income and income-shifting: what is “real” and what is not?

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  • Jarkko Harju

    (VATT Institute for Economic Research
    CESifo)

  • Tuomas Matikka

    (VATT Institute for Economic Research)

Abstract

Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in real economic activity, and how much is caused by tax avoidance. In this paper, we distinguish between real responses and income-shifting between tax bases. We show that separating income-shifting responses can largely affect the welfare analysis of income taxation. In our empirical example of Finnish business owners, we find that income-shifting accounts for a majority of the overall elasticity of taxable income, which significantly decreases the marginal excess burden.

Suggested Citation

  • Jarkko Harju & Tuomas Matikka, 2016. "The elasticity of taxable income and income-shifting: what is “real” and what is not?," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(4), pages 640-669, August.
    • Handle: RePEc:kap:itaxpf:v:23:y:2016:i:4:d:10.1007_s10797-016-9393-4
    DOI: 10.1007/s10797-016-9393-4
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    More about this item

    Keywords

    Elasticity of taxable income; Income-shifting; Real responses; Excess burden;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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