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Taxing the Unresponsive: The Micro-Macro Puzzle and the Elasticity of Taxable Income

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Abstract

We estimate the elasticity of taxable income (ETI) in Denmark from 1980 to 2022 using a consistent bunching design. Leveraging six distinct tax regimes, we document that behavioral responses depend crucially on employment status and the tax base definition. While employees exhibit negligible responsiveness (ETI ≈ 0.01) across all regimes, the self-employed show larger, variable elasticities (0.05–0.45) that track opportunities for income shifting. For job changers and by the composition of capital income, we show that small employee elasticities reflect institutional constraints on reported income rather than infrequent adjustment, explaining why aggregate bunching elasticities are smaller than macro estimates.

Suggested Citation

  • Bingley, Paul & Lanot, Gauthier, 2026. "Taxing the Unresponsive: The Micro-Macro Puzzle and the Elasticity of Taxable Income," Umeå Economic Studies 1046, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:1046
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    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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