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

Jarkko Harju, Tuomas Matikka

Research output: Contribution to journalArticleScientificpeer-review

32 Citations (Scopus)

Abstract

Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in real economic activity, and how much is caused by tax avoidance. In this paper, we distinguish between real responses and income-shifting between tax bases. We show that separating income-shifting responses can largely affect the welfare analysis of income taxation. In our empirical example of Finnish business owners, we find that income-shifting accounts for a majority of the overall elasticity of taxable income, which significantly decreases the marginal excess burden.

Original languageEnglish
Pages (from-to)640-669
Number of pages30
JournalINTERNATIONAL TAX AND PUBLIC FINANCE
Volume23
Issue number4
DOIs
Publication statusPublished - 1 Aug 2016
Externally publishedYes
Publication typeA1 Journal article-refereed

Keywords

  • Elasticity of taxable income
  • Excess burden
  • Income-shifting
  • Real responses

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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