8 - Responses of taxable income Flashcards
what is taxable income equation
ordinary income + realised capital gains - deductions
what is ETI
taxable income elasticities
what are the 2 reasons of looking at ETI
instead of hours/participation elasticities
- policy
- total behavioural response
- captures labour supply and tax avoidance,evasion - data availability
- precisely measured in tax return data
what have been some tax rate changes
mainly happened at the top
thatcher cut top rate from 83 - 60
- historically tax rates were a lot higher in 20th century - been cut a lot
how have top pretax incomes responded to changes in net of tax rate
- plotting top MTR through time with top 1% reported income share
- 1913-2013
- U shaped
- strong response of top 1% income share - drops a lot when MTR increased in 1930 - increases a lot when MTR falls in 1983
- not as strong of a response for 1-5 top income share
- do see evidence of drops in MTR - increasing top 1% income share
does this evidence of MTR drops increasing top 1%
is it causal
- but we see increases in top income share even after MTR is stable?
- so maybe something else is affecting it
what are the 2 methods use to estimate exact elasticities of taxable income
- how does income shares change due to net of tax changes
- tax reform episode
- full time series regression
what is tax reform episode
diff in diff
what is the assumption
percentage change in quantity of top income share relative to percentage change in net of tax rate
- assume absent of tax change - the 2 shares before and after would have been the same
- treatment = top 1% income shares
- control = top 5-1% income shares
what is full time series approach
regression of log income share on net of tax rate in different years
* add time controls
* assumption = error term is not related to net of tax rate for e to be unbiased
Kleven (2014)
what did they find
- treatment = large tax cut and small tax cut
- control = no
- elasticities for labour income were larger for larger tax changes
- small labour income elasticities
what are the 2 main forms of tax avoidance
- intertemporal substitution
- income shifting
what is intertemporal substitution
shifting income overtime to take advantage of tax changes
- if tax rates decreases next year - shift income from this year into next
what is income shifting
- shifting income to another tax base that is taxed less
- shift business profits from corporate tax base to individual tax base
how does tax avoidance effect tax revenue
- reduces revenue if moved to lower tax bases
what is evidence of intertemporal shifting
TRA 86 -
* reduced tax rate on ordinary income
* increase tax rate on capital gains
- means in 86 saw a surge in realised capital gains, and then depressed capital gains in 87
- people realising their gains this year instead of next year
what are the 2 kinds of businesses and how are they taxed differently
- corporation
- taxed twice
- profits are taxed and then profits taxes again when redistributed to share holders (dividends/realised capital gains) - unincorporated
- profits are taxed once
what is evidence for income shifting
TRA 86
- incentive to switch from corporate income to personal income because of higher MTR in corporate
is there a relationship with pre tax top 1% income shares and top tax rates MTR
world data
1960-4
what is the graph used axis
x axis = top MTR
y axis = 1% income share
- little correlation
- strong variation in top MTR for different countries
is there a relationship with pre tax top 1% income shares and top tax rates MTR
world data
2005-9
- negative relationship
- the higher top MTR - the lower top 1% income share
what can we learn from looking at countries top 1% income shares and top MTR
- lower top tax rates are necessary but not sufficient for surge in top incomes
- countries where tax rate was cut a lot and didnt see any increase in top income
what are the 3 economic effects of taxing the top 1%
- supply side
- reduced labour, reduced tax revenue
- reduces efficiency
- policy: dont make top tax rate too high - tax avoidance/evasion
- avoid and evade more
- policy: eliminate loopholes - rent seeking
- top earners extract more pay when tax rates are low
- policy: increase tax rates
Saez 2017
- charitable giving
what do they want to test
- do the top 1% tax avoid through increasing charitable donations
- charity = tax deductable
- more incentive to give when tax rates are high
Saez 2017
- charitable giving
what do they find
what did they expect to find
- top 1% should give more to charity when tax rates are high
- so charitable giving and reported income should move in opposite directions
- however find that they both grow together
evidence for
rent seeking
US data and CEO
- US - top 1% incomes grow fast after 1975
- bottom 99% grow slow after 1975
- consistent with rent seeking
- CEO pay across countries negatively related with top tax rates
Miller pope 2019
responses of company owners to changes in personal taxes
- evidence of intertemporal shifting
- taxable income shifts across time
- large tax induced retained profits - held as cash
what is the migration concern with high tax rates
worried that top skilled individuals will migrate to low tax countries
- no longer get revenue from top earners
Kleven 2014
migration concern
what do they do
- Denmark tax data
- diff in diff
- scheme = immigrants with high earnings taxed at much lower rate than normal for 3 years
- treatment = immigrants above eligilibilty earnings threshold
- control = immigrants below eligibility earnings threshold
Kleven 2014
migration concern
what do they find
- lower tax rate incentive doubled the number of highly paid foreigners in Denmark compared to the control
what does ETI depend on
tax avoidance and evasion
- depends on enforcement
