How Do Top Earners Respond to Taxation? Own- and Cross-Tax Base Responses, Efficiency, and Inequality

Matias Giaccobasso (), Marcelo Bergolo (), Gabriel Burdin (), Mauricio De Rosa (), Martin Leites () and Horacio Rueda ()
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Matias Giaccobasso: VATT Institute for Economic Research and Finnish Centre of Excellence in Tax Systems Research (FIT)
Marcelo Bergolo: IECON, Universidad de la República
Gabriel Burdin: University of Siena
Mauricio De Rosa: IECON, Universidad de la República
Martin Leites: IECON, Universidad de la República
Horacio Rueda: Tecnologico de Monterrey

No 19077, IZA Discussion Papers from IZA Network @ LISER

Abstract: This paper examines how top income earners respond to changes in the personal labor income tax schedule, uncovering both own- and cross-tax base responses. We exploit a 2012 tax reform in Uruguay that generated quasi-random variation in top marginal rates within the top 1% of the labor income distribution. We use difference-in-differences and administrative records linked at the individual level. We estimate an own-tax base intensive margin elasticity of 0.82 and extensive margin semi-elasticity of 3.36. Extensive margin responses are mostly driven by taxpayers shifting from the personal labor income tax base toward corporate income or capital income tax bases (semi-elasticities of -1.00 and -0.61, respectively). Our estimates suggest that the reform was effective in increasing tax revenues, with efficiency costs representing 31% of the projected increase. However, it had limited impact on inequality, most likely due to its narrow scope and income shifting toward tax bases with lower and flat rates. Overall, our results indicate that policy efforts aiming to reduce inequality by increasing top marginal tax rates should also focus on limiting income shifting opportunities to strengthen their redistributive effects.

Keywords: income taxation; top income earners; tax reform; reported income supply; income-shifting (search for similar items in EconPapers)
JEL-codes: H21 H24 H30 J22 O23 (search for similar items in EconPapers)
Date: 2026-11
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