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Is the elasticity of taxable income mostly an income effect ?

Author

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  • Xavier Dufour-Simard
  • Pierre-Carl Michaud
  • Michael Smart

Abstract

→ Executive summary 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 e ven i n t he p r esence o f 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. → Sommaire exécutif Nous utilisons la variation des taux marginaux d'imposition et des seuils des tranches d'imposition auxquels ils s'appliquent afin d'identifier les effets de substitution et de revenu des réformes fiscales. Nous utilisons un estimateur à triple différence qui exploite la variation des réformes fiscales infranationales, pour lesquelles les réponses comportementales aux impôts sont identifiées même en présence de chocs non observables sur la distribution des revenus. Si les contribuables à haut revenu réagissent davantage aux changements fiscaux, nos résultats suggèrent que cela reflète davantage les effets de revenu ou de visibilité des réformes fiscales que l'hétérogénéité inhérente aux effets de substitution. Nous examinons les implications pour les politiques fiscales redistributives optimales.

Suggested Citation

  • Xavier Dufour-Simard & Pierre-Carl Michaud & Michael Smart, 2025. "Is the elasticity of taxable income mostly an income effect ?," CIRANO Working Papers 2025s-05, CIRANO.
    • Handle: RePEc:cir:cirwor:2025s-05
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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. Felix J. Bierbrauer & Pierre C. Boyer & Emanuel Hansen, 2023. "Pareto‐Improving Tax Reforms and the Earned Income Tax Credit," Econometrica, Econometric Society, vol. 91(3), pages 1077-1103, May.
    5. 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).
    6. Kumar, Anil & Liang, Che-Yuan, 2020. "Estimating taxable income responses with elasticity heterogeneity," Journal of Public Economics, Elsevier, vol. 188(C).
    7. Emmanuel Saez, 2001. "Using Elasticities to Derive Optimal Income Tax Rates," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 68(1), pages 205-229.
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    More about this item

    Keywords

    income and substitution effects; tax salience; optimal progressivity; effets de revenu et de substitution; visibilité de l'impôt; progressivité optimale;
    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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