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

Jarkko Harju () and Tuomas Matikka ()

International Tax and Public Finance, 2016, vol. 23, issue 4, 640-669

Abstract: 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.

Keywords: Elasticity of taxable income; Income-shifting; Real responses; Excess burden (search for similar items in EconPapers)
JEL-codes: H24 H25 H32 (search for similar items in EconPapers)
Date: 2016
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Related works:
Working Paper: The Elasticity of Taxable Income and Income-Shifting: What is "Real" and What is Not? (2014) Downloads
Working Paper: The Elasticity of Taxable Income and Income-shifting: What is "Real" and What is Not? (2014) Downloads
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Handle: RePEc:kap:itaxpf:v:23:y:2016:i:4:d:10.1007_s10797-016-9393-4