Elasticity of Taxable Income and Optimal Taxation: The Brazilian Case

Fábio Castro, Maria Tannuri-Pianto, Rafael Terra and Marcelo Medeiros

Brazilian Review of Econometrics, 2025, vol. 43, issue 1

Abstract: Elevated elasticities in low-income brackets can emerge in tax systems that incentivize shifting the tax base from personal to corporate income due to substantial differentials. We examine the Brazilian case by estimating the elasticity of Taxable Income (ETI) using longitudinal data (2011- 2017) from personal income tax returns and calculating optimal taxation levels. We assess behavioral responses via the natural experiment resulting from inflation. Our estimates indicate income-weighted elasticities of 0.64 and 0.62 for taxable and Gross Income, respectively, and unweighted elasticities of 0.76 for Taxable Income and 0.71 for Gross Income. We observe substantially higher income-weighted elasticities for the lowerincome bracket (1.98 vs. 0.71 at the top). First-bracket income declarants may not have low overall incomes because some receive substantial taxexempt income – particularly dividends – or shift their Taxable Income to corporations. We find significantly higher elasticities for self-employed individuals compared to wage earners, with deductions playing a minor role. Our findings underscore the importance of integrating personal and corporate income tax systems.

Date: 2025
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