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Income Creation and/or Income Shifting? The Intensive vs. the Extensive Shifting Margins

Author

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  • Hakan Selin

    (IFAU - Institute for Evaluation of Labour Market and Education Policy)

  • Laurent Simula

    (GAEL - Laboratoire d'Economie Appliquée de Grenoble - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - INRA - Institut National de la Recherche Agronomique - CNRS - Centre National de la Recherche Scientifique - UGA - Université Grenoble Alpes)

Abstract

The optimal tax literature has modelled income shifting as a decision along the intensive margin. However, income shifting involves significant fixed costs, which give rise to an important extensive margin. In this article, we show that the distinction between the intensive and extensive margins has crucial policy implications. We consider a population of agents differing in terms of productivities, labor supply elasticities and costs of income shifting. In the extensive margin model the distinction between income creation and income shifting breaks down and the social planner should not in general combat shifting. In particular, numerical simulations of a linear tax model suggest that the social planner should allow for income shifting if elasticities are heterogeneous in the population. We demonstrate that the qualitative conclusions drawn from the simple linear tax model carry over to a model with two fully non-linear tax schedules.

Suggested Citation

  • Hakan Selin & Laurent Simula, 2017. "Income Creation and/or Income Shifting? The Intensive vs. the Extensive Shifting Margins," Working Papers hal-01505648, HAL.
  • Handle: RePEc:hal:wpaper:hal-01505648
    Note: View the original document on HAL open archive server: https://hal.archives-ouvertes.fr/hal-01505648
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    References listed on IDEAS

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    Cited by:

    1. Bastani, Spencer & Waldenström, Daniel, 2018. "How Should Capital Be Taxed? Theory and Evidence from Sweden," CEPR Discussion Papers 12880, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    Optimal Taxation; Labor Income; Income Shifting;

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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