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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
  • Tuomas Matikka

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 effort and other real economic activity, and how much is caused by tax avoidance and tax evasion. This distinction is important because it affects the welfare implications and policy recommendations. In this paper we distinguish between real responses and tax-motivated income-shifting between tax bases. We show how the explicit inclusion of income-shifting affects the welfare analysis of income taxation. In our empirical example we find that income-shifting accounts for over two thirds of the overall elasticity of taxable dividend income among Finnish business owners. The large income-shifting response significantly decreases the marginal excess burden compared to the standard model in which the overall elasticity defines the welfare loss. However, in addition to income-shifting, we find that dividend taxation significantly affects the real behavior of owners.

Suggested Citation

  • Jarkko Harju & Tuomas Matikka, 2014. "The Elasticity of Taxable Income and Income-Shifting: What is "Real" and What is Not?," CESifo Working Paper Series 4905, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4905
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    References listed on IDEAS

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    Cited by:

    1. repec:kap:decono:v:165:y:2017:i:4:d:10.1007_s10645-017-9303-x is not listed on IDEAS
    2. Neisser, Carina, 2017. "The elasticity of taxable income: A meta-regression analysis," ZEW Discussion Papers 17-032, ZEW - Leibniz Centre for European Economic Research.
    3. Hakan Selin & Laurent Simula, 2017. "Income Creation and/or Income Shifting? The Intensive vs. the Extensive Shifting Margins," Post-Print halshs-01666994, HAL.
    4. Florian Buhlmann & Benjamin Elsner & Andreas Peichl, 2018. "Tax refunds and income manipulation: evidence from the EITC," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(6), pages 1490-1518, December.
    5. Annette Alstadsæter & Martin Jacob & Roni Michaely, 2017. "Do Dividend Taxes Affect Corporate Investment?," NBER Chapters,in: Personal Income Taxation and Household Behavior (TAPES) National Bureau of Economic Research, Inc.
    6. Kristoffer Berg & Thor O. Thoresen, 2016. "Problematic response margins in the estimation of the elasticity of taxable income," Discussion Papers 851, Statistics Norway, Research Department.
    7. Nicole Bosch & Henk-Wim de Boer, 2017. "The Elasticity of Taxable Income for the Self-Employed: Heterogeneity across Reforms and Income Levels," CPB Discussion Paper 354, CPB Netherlands Bureau for Economic Policy Analysis.
    8. Nicole Bosch & Vincent Dekker & Kristina Strohmaier, 2016. "A Data-Driven Procedure to Determine the Bunching Window - An Application to the Netherlands," CPB Discussion Paper 336, CPB Netherlands Bureau for Economic Policy Analysis.
    9. repec:bla:germec:v:19:y:2018:i:2:p:162-189 is not listed on IDEAS
    10. Neisser, Carina, 2018. "The Elasticity of Taxable Income: A Meta-Regression Analysis," IZA Discussion Papers 11958, Institute of Labor Economics (IZA).
    11. repec:kap:itaxpf:v:26:y:2019:i:3:d:10.1007_s10797-018-9525-0 is not listed on IDEAS
    12. Dekker, Vincent & Strohmaier, Kristina & Bosch, Nicole, 2016. "A data-driven procedure to determine the bunching window: An application to the Netherlands," Hohenheim Discussion Papers in Business, Economics and Social Sciences 05-2016, University of Hohenheim, Faculty of Business, Economics and Social Sciences.
    13. Leon Bettendorf & Arjan Lejour & Maarten ’t Riet, 2017. "Tax Bunching by Owners of Small Corporations," De Economist, Springer, vol. 165(4), pages 411-438, December.
    14. Carina Neisser, 2017. "The elasticity of taxable income: A meta-regression analysis," Working Papers 2017/10, Institut d'Economia de Barcelona (IEB).
    15. Rauhanen, Timo & Harju, Jarkko & Matikka, Tuomas, 2016. "The effects of size-based regulation on small firms: evidence from VAT threshold," Working Papers 75, VATT Institute for Economic Research.
    16. Håkan Selin & Laurent Simula, 2017. "Income Shifting as Income Creation? The Intensive vs. the Extensive Shifting Margins," CESifo Working Paper Series 6510, CESifo Group Munich.
    17. Johannes Hermle & Andreas Peichl, 2018. "Jointly Optimal Taxes for Different Types of Income," CESifo Working Paper Series 7248, CESifo Group Munich.
    18. repec:kap:itaxpf:v:26:y:2019:i:3:d:10.1007_s10797-018-9524-1 is not listed on IDEAS

    More about this item

    Keywords

    elasticity of taxable income; tax avoidance; income-shifting; real responses;

    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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