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Income shifting as income creation?

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  • Selin, Håkan
  • Simula, Laurent

Abstract

Income shifting arises as one of the key questions when thinking about the design of a tax system as a whole. We study a simple economy, involving a benevolent policy-maker and a population of agents differing in terms of productivities, labor supply elasticities, and shifting costs. Paying special attention to the cost structure of income shifting, we highlight that when people who shift easily along the extensive margin are also more elastic in labor supply, giving them a lower tax rate is a good thing, and the government should not necessarily combat income shifting. This mechanism may be compared to third-degree price discrimination in industrial organization and works as a form of endogenous tagging. We explore this possibility numerically before showing that our results derived for a policy-maker optimally adjusting two linear tax instruments carry over when two fully non-linear taxes are potentially available.

Suggested Citation

  • Selin, Håkan & Simula, Laurent, 2020. "Income shifting as income creation?," Journal of Public Economics, Elsevier, vol. 182(C).
    • Handle: RePEc:eee:pubeco:v:182:y:2020:i:c:s0047272719301422
    DOI: 10.1016/j.jpubeco.2019.104081
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    Cited by:

    1. Georges Casamatta, 2023. "Optimal income taxation with tax avoidance and endogenous labour supply," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(3), pages 913-939, August.
    2. Doligalski, Paweł & Rojas, Luis E., 2023. "Optimal redistribution with a shadow economy," Theoretical Economics, Econometric Society, vol. 18(2), May.
    3. Spencer Bastani & Sebastian Koehne, 2022. "How Should Consumption Be Taxed?," CESifo Working Paper Series 10038, CESifo.
    4. Escobar, Sebastian & Ohlsson, Henry & Selin, Håkan, 2023. "Giving to the children or the taxman?," European Economic Review, Elsevier, vol. 153(C).

    More about this item

    Keywords

    Income shifting; Taxation; Optimal taxation; Labor income tax;
    All these keywords.

    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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