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Taxable Income Elasticity and the Anatomy of Behavioral Response: Evidence from Finland

Tuomas Matikka ()

No 55, Working Papers from VATT Institute for Economic Research

Abstract: This paper uses extensive Finnish panel data from 1995–2007 to analyze the elasticity of taxable income (ETI). I use individual changes in flat municipal income tax rates as an instrument for the overall changes in marginal tax rates. This instrument is not a function of individual income, which is the basis for an exogenous instrument in the taxable income model. In general, instruments used in previous studies do not have this feature. Furthermore, I estimate behavioral responses using smaller subcomponents of taxable income, such as working hours, fringe benefits and tax deductions. This 'anatomy' of overall ETI has rarely been studied in the literature. The results show that the average ETI estimate in Finland is 0.35–0.60, depending on the empirical specification and the degree of regional controlling. Subcomponent analysis suggests that neither work effort nor labor supply respond actively to tax changes. In contrast, it seems that fringe benefits and deductions from taxable income might have a larger effect. A new version of this paper has been published in VATT Working Paper series: The Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland, VATT WP 69, 18.12.2015.

Keywords: Personal income taxation, Elasticity of taxable income, Deadweight loss, Taxation, Verotus, Taxation and Social Transfers, Julkisen talouden rahoitus ja tulonsiirrot, H210 - Taxation and Subsidies: Efficiency; Optimal Taxation, H240 - Personal Income and Other Nonbusiness Taxes and Subsidies; includes inheritance and gift taxes, H310 - Fiscal Policies and Behavior of Economic Agents: Household (effects on labor supply), (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2014
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