Taxing the Unresponsive: The Micro-Macro Puzzle and the Elasticity of Taxable Income

Paul Bingley () and Gauthier Lanot ()
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Paul Bingley: VIVE - The Danish Center for Social Science Research, Postal: Herluf Trolles Gade 11, 1052 Copenhagen K, Denmark., https://www.vive.dk
Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden, https://www.umu.se/handelshogskolan/

No 1046, Umeå Economic Studies from Umeå University, Department of Economics

Abstract: We estimate the elasticity of taxable income (ETI) in Denmark from 1980 to 2022 using a consistent bunching design. Leveraging six distinct tax regimes, we document that behavioral responses depend crucially on employment status and the tax base definition. While employees exhibit negligible responsiveness (ETI ≈ 0.01) across all regimes, the self-employed show larger, variable elasticities (0.05–0.45) that track opportunities for income shifting. For job changers and by the composition of capital income, we show that small employee elasticities reflect institutional constraints on reported income rather than infrequent adjustment, explaining why aggregate bunching elasticities are smaller than macro estimates.

Keywords: Elasticity of Taxable Income; Micro-Macro Puzzle; Third-Party Reporting; Income Shifting; Bunching (search for similar items in EconPapers)
JEL-codes: H24 H26 H31 J22 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2026-05-07
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