The Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland

Tuomas Matikka

No 69, Working Papers from VATT Institute for Economic Research

Abstract: The elasticity of taxable income (ETI) is a key parameter in income tax analysis both in terms of efficiency and tax revenue. This paper uses Finnish panel data to analyze ETI. I use changes in flat municipal income tax rates as an instrument for overall changes in marginal tax rates. This instrument is not a function of individual income, which is the basis for an exogenous instrument. In general, instruments used in previous studies do not have this feature. My preferred estimate for the average ETI is 0.16. The preferred specification includes extensive regional and individual controlling. Earlier version of this paper was published in February 2014 ("Taxable income elasticity and the anatomy of behavioral response: Evidence from Finland" Government Institute for Economic Research (VATT) Working Papers 55).

Keywords: elasticity of taxable income, income taxation, Labour market, Työmarkkinat, 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, J220 - Time Allocation and Labor Supply (hours of work, part-time employment, temporary workers, work sharing, absenteeism, quits, work-life balance), (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-pbe, nep-pub and nep-ure
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Citations: View citations in EconPapers (4)

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Journal Article: Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland (2018)
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