Income shifting as income creation? The intensive vs. the extensive shifting margins

Håkan Selin and Laurent Simula

No 2017:10, Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: The public finance literature has modeled income shifting as a decision along the intensive margin even though it involves significant fixed costs, giving rise to an important extensive margin. We show that accounting for this extensive margin has crucial policy implications: the classical distinction between income creation and income shifting breaks down. We make this point in a simple linear tax setting with a population of agents differing in terms of productivities, labor supply elasticities, and costs of income shifting. In the most empirically plausible scenario when people who shift easily are also more elastic in labor supply, giving them a lower tax rate is a good thing. This mechanism may be compared to third degree price discrimination in industrial organization. Numerical simulations suggest that fixed shifting costs have a large impact on optimal taxes. We further demonstrate that the conclusions derived for linear taxes carry over to non-linear tax schedules.

Keywords: income shifting; optimal taxation; labor income tax (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2017-06-05
New Economics Papers: this item is included in nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.ifau.se/globalassets/pdf/se/2017/wp2017 ... -income-creation.pdf (application/pdf)

Related works:
Working Paper: Income Shifting as Income Creation? The Intensive vs. the Extensive Shifting Margins (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:ifauwp:2017_010

Access Statistics for this paper

More papers in Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy IFAU, P O Box 513, SE-751 20 Uppsala, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Ali Ghooloo ( this e-mail address is bad, please contact ).