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