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Taxpayers' Response to Tax Rate Changes: A Canadian Panel Study

Listed author(s):
  • Robert Gagné
  • Jean-François Nadeau
  • François Vaillancourt

Taxpayers may respond to changes in income tax rates in several manners. One way to classify them is to distinguish between behavioural changes (changes in labour supply, changes in the weights of the different types of labour income, changes in saving behaviour, etc.) and income reporting changes (timing, evasion, ...). Consequently, there might not be a perfectly proportional relationship between tax rate changes and tax revenues. This paper presents a methodology for the estimation of 1)income and 2)number of taxpayer elasticities with respect to marginal income tax rates. The model considers shares of total income and number of taxpayer for three income classes: medium ($50,000-$100,000), high ($100,000-$150,000) and highest ($150,000 and more) for a panel of Canadian provinces over the 1972-1996 period and for three sub-periods (1972-1976, 1977-1987, 1988-1996). The results show significant responses to tax rate changes from taxpayers in the high and highest income classes at the end of the period under study (1988-1996). Results obtained from the number of taxpayer share model also indicate that a significant part of the response of taxpayers to tax rate changes is explained by taxpayers moving to lower income classes. Les contribuables sont en mesure de réagir aux changements dans les taux marginaux d'impôt sur le revenu de diverses manières. Ces réactions sont de deux ordres : changement de comportement (offre de travail, types de revenu, épargne, etc.) ou changement dans la manière de déclarer les revenus (report, évasion fiscale, etc.). Par conséquent, il est possible qu'un changement dans les taux d'impôt entraîne un changement non-proportionnel de l'impôt payé. Cette étude propose une méthodologie permettant l'estimation des élasticités du revenu et du nombre de contribuables par rapport aux taux d'impôt. Trois classes de revenus sont retenues pour l'analyse : revenus moyens (50 000 $ - 100 000 $), revenus élevés (100 000 $ - 150 000 $) et revenus très élevés (150 000 $ et plus). La méthodologie proposée est appliquée à un panel de données provinciales au Canada au cours de la période 1972-1996. Des résultats spécifiques sont présentés pour trois sous-périodes (1972-1976, 1977-1987 et 1988-1996). Ces sous-périodes correspondent aux différents régimes fiscaux qu'a connus le Canada entre 1972 et 1996. Les résultats indiquent des réactions significatives des contribuables à revenus élevés et très élevés durant la période 1988-1996. Les résultats obtenus du modèle portant sur le nombre de contribuables indiquent également qu'une part importante de la réaction s'explique par la migration des contribuables entre les classes de revenu.

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Paper provided by CIRANO in its series CIRANO Working Papers with number 2000s-59.

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Length: 22 pages
Date of creation: 01 Nov 2000
Handle: RePEc:cir:cirwor:2000s-59
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  1. Martin Feldstein, 1999. "Tax Avoidance And The Deadweight Loss Of The Income Tax," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 674-680, November.
  2. Saez, Emmanuel, 2003. "The effect of marginal tax rates on income: a panel study of 'bracket creep'," Journal of Public Economics, Elsevier, vol. 87(5-6), pages 1231-1258, May.
  3. Triest, Robert K, 1992. "The Effect of Income Taxation on Labor Supply when Deductions Are Endogenous," The Review of Economics and Statistics, MIT Press, vol. 74(1), pages 91-99, February.
  4. repec:hoo:wpaper:e-90-11 is not listed on IDEAS
  5. Heckman, James J, 1993. "What Has Been Learned about Labor Supply in the Past Twenty Years?," American Economic Review, American Economic Association, vol. 83(2), pages 116-121, May.
  6. Mroz, Thomas A, 1987. "The Sensitivity of an Empirical Model of Married Women's Hours of Work to Economic and Statistical Assumptions," Econometrica, Econometric Society, vol. 55(4), pages 765-799, July.
  7. Hausman, Jerry A., 1985. "Taxes and labor supply," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 1, chapter 4, pages 213-263 Elsevier.
  8. Gerald Auten & Robert Carroll, 1999. "The Effect Of Income Taxes On Household Income," The Review of Economics and Statistics, MIT Press, vol. 81(4), pages 681-693, November.
  9. Rosen, Harvey S, 1976. "Taxes in a Labor Supply Model with Joint Wage-Hours Determination," Econometrica, Econometric Society, vol. 44(3), pages 485-507, May.
  10. Robert K. Triest, 1990. "The Effect of Income Taxation on Labor Supply in the United States," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 491-516.
  11. Thomas MaCurdy & David Green & Harry Paarsch, 1990. "Assessing Empirical Approaches for Analyzing Taxes and Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 25(3), pages 415-490.
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