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The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?

Author

Listed:
  • Jarkko Harju

    (Government Institute for Economic Research, Finland)

  • Tuomas Matikka

    (Government Institute for Economic Research, Finland)

Abstract

Previous literature shows that income taxation especially affects the behaviour of business owners and entrepreneurs. However, it is still unclear how much of the response is due to changes in effort and other real economic activity, and how much is due to tax avoidance and tax evasion. This is important because the nature of the response largely affects the welfare implications and policy recommendations. In this paper we distinguish between real responses and tax-motivated income- shifting between tax bases using the widely-applied elasticity of taxable income (ETI) framework. We use extensive register-based panel data on both the owner and firm-level, which enable us to carefully distinguish between real effects and income-shifting among the owners of privately held corporations in Finland. Our results show that income-shifting accounts for over two thirds of the overall ETI. As the shifted income is also taxed, this significantly decreases the marginal excess burden of income taxation compared to the standard model in which the overall ETI defines the welfare loss. However, in addition to income-shifting effects, we find that dividend taxation significantly affects the real behaviour of the owners.

Suggested Citation

  • Jarkko Harju & Tuomas Matikka, 2013. "The elasticity of taxable income and income-shifting between tax bases: what is “real” and what is not?," Working Papers 1313, Oxford University Centre for Business Taxation.
    • Handle: RePEc:btx:wpaper:1313
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    File URL: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Docs/Publications/Working_Papers/Series_13/WP1313.pdf
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    References listed on IDEAS

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    Cited by:

    1. Annette Alstadsæter & Martin Jacob & Roni Michaely, 2017. "Do Dividend Taxes Affect Corporate Investment?," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    2. Joerg Paetzold, 2019. "How do taxpayers respond to a large kink? Evidence on earnings and deduction behavior from Austria," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(1), pages 167-197, February.
    3. Doerrenberg, Philipp & Peichl, Andreas & Siegloch, Sebastian, 2017. "The elasticity of taxable income in the presence of deduction possibilities," Journal of Public Economics, Elsevier, vol. 151(C), pages 41-55.
    4. Tuomas Matikka, 2018. "Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland," Scandinavian Journal of Economics, Wiley Blackwell, vol. 120(3), pages 943-973, July.
    5. 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).
    6. Harju, Jarkko & Koivisto, Aliisa & Matikka, Tuomas, 2022. "The effects of corporate taxes on small firms," Journal of Public Economics, Elsevier, vol. 212(C).
    7. Aspen Gorry & Glenn Hubbard & Aparna Mathur, 2021. "The Elasticity of Taxable Income in The Presence of Intertemporal Income Shifting," National Tax Journal, University of Chicago Press, vol. 74(1), pages 45-73.
    8. Matikka, Tuomas, 2014. "Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland," Working Papers 55, VATT Institute for Economic Research.

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    More about this item

    Keywords

    Personal income taxation; Elasticity of taxable income; Business owners; Tax avoidance;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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