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Is the Elasticity of Taxable Income Mostly an Income Effect?

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Listed:
  • Xavier Dufour
  • Pierre-Carl Michaud
  • Michael Smart

Abstract

We use variation in marginal tax rates and in tax bracket thresholds at which they apply in order to identify the substitution and income effects of tax reforms. We use a triple-difference estimator that exploits variation from subnational tax reforms, for which behavioral responses to taxes are identified even in the presence of unobservable shocks to the income distribution. While high-income taxpayers respond more to tax changes, our results suggest this reflects much more the income or salience effects of tax reforms, rather than inherent heterogeneity in substitution effects. We discuss the implications for optimal redistributive tax policies.

Suggested Citation

  • Xavier Dufour & Pierre-Carl Michaud & Michael Smart, 2025. "Is the Elasticity of Taxable Income Mostly an Income Effect?," CESifo Working Paper Series 11693, CESifo.
    • Handle: RePEc:ces:ceswps:_11693
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    References listed on IDEAS

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    1. Philipp Doerrenberg & Andreas Peichl & Sebastian Siegloch, 2017. "The Elasticity of Taxable Income in the Presence of Deduction Possibilities," NBER Chapters, in: Personal Income Taxation and Household Behavior (TAPES), National Bureau of Economic Research, Inc.
    2. Gruber, Jon & Saez, Emmanuel, 2002. "The elasticity of taxable income: evidence and implications," Journal of Public Economics, Elsevier, vol. 84(1), pages 1-32, April.
    3. Slemrod, Joel & Kopczuk, Wojciech, 2002. "The optimal elasticity of taxable income," Journal of Public Economics, Elsevier, vol. 84(1), pages 91-112, April.
    4. Jakobsen, Katrine Marie & Søgaard, Jakob Egholt, 2022. "Identifying behavioral responses to tax reforms: New insights and a new approach," Journal of Public Economics, Elsevier, vol. 212(C).
    5. Naomi E. Feldman & Peter Katuš?ák & Laura Kawano, 2016. "Taxpayer Confusion: Evidence from the Child Tax Credit," American Economic Review, American Economic Association, vol. 106(3), pages 807-835, March.
    6. Kumar, Anil & Liang, Che-Yuan, 2020. "Estimating taxable income responses with elasticity heterogeneity," Journal of Public Economics, Elsevier, vol. 188(C).
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    income and substitution effects; tax salience; optimal progressivity;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • 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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