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Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland

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  • Matikka, Tuomas

Abstract

This paper uses extensive Finnish panel data from 1995–2007 to analyze the elasticity of taxable income (ETI). I use individual changes in flat municipal income tax rates as an instrument for the overall changes in marginal tax rates. This instrument is not a function of individual income, which is the basis for an exogenous instrument in the taxable income model. In general, instruments used in previous studies do not have this feature. Furthermore, I estimate behavioral responses using smaller subcomponents of taxable income, such as working hours, fringe benefits and tax deductions. This 'anatomy' of overall ETI has rarely been studied in the literature. The results show that the average ETI estimate in Finland is 0.35–0.60, depending on the empirical specification and the degree of regional controlling. Subcomponent analysis suggests that neither work effort nor labor supply respond actively to tax changes. In contrast, it seems that fringe benefits and deductions from taxable income might have a larger effect. A new version of this paper has been published in VATT Working Paper series: The Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland, VATT WP 69, 18.12.2015.

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  • Matikka, Tuomas, 2014. "Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland," Working Papers 55, VATT Institute for Economic Research.
  • Handle: RePEc:fer:wpaper:55
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    Cited by:

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    2. J. Malte Zoubek, 2018. "Spatial Productivity Differences and the Optimal Tax Treatment of Commuting Expenses," Volkswirtschaftliche Diskussionsbeiträge 187-18, Universität Siegen, Fakultät Wirtschaftswissenschaften, Wirtschaftsinformatik und Wirtschaftsrecht.
    3. Yu kun Wang & Li Zhang, 2021. "Underground economy and GDP growth: Evidence from China’s tax reforms," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 7(1), pages 87-107.
    4. Doerrenberg, Philipp & Peichl, Andreas & Siegloch, Sebastian, 2014. "Sufficient Statistic or Not? The Elasticity of Taxable Income in the Presence of Deduction Possibilities," IZA Discussion Papers 8554, Institute of Labor Economics (IZA).

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