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3 - Public > 8 - Responses of taxable income > Flashcards

8 - Responses of taxable income Flashcards

1
Q

what is taxable income equation

A

ordinary income + realised capital gains - deductions

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2
Q

what is ETI

A

taxable income elasticities

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3
Q

what are the 2 reasons of looking at ETI
instead of hours/participation elasticities

A
  1. policy
    - total behavioural response
    - captures labour supply and tax avoidance,evasion
  2. data availability
    - precisely measured in tax return data
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4
Q

what have been some tax rate changes

A

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
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5
Q

how have top pretax incomes responded to changes in net of tax rate

  • plotting top MTR through time with top 1% reported income share
A
  • 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
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6
Q

does this evidence of MTR drops increasing top 1%

is it causal

A
  • but we see increases in top income share even after MTR is stable?
  • so maybe something else is affecting it
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7
Q

what are the 2 methods use to estimate exact elasticities of taxable income

  • how does income shares change due to net of tax changes
A
  1. tax reform episode
  2. full time series regression
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8
Q

what is tax reform episode
diff in diff
what is the assumption

A

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
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9
Q

what is full time series approach

A

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

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10
Q

Kleven (2014)
what did they find
- treatment = large tax cut and small tax cut
- control = no

A
  • elasticities for labour income were larger for larger tax changes
  • small labour income elasticities
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11
Q

what are the 2 main forms of tax avoidance

A
  1. intertemporal substitution
  2. income shifting
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12
Q

what is intertemporal substitution

A

shifting income overtime to take advantage of tax changes

  • if tax rates decreases next year - shift income from this year into next
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13
Q

what is income shifting

A
  • shifting income to another tax base that is taxed less
  • shift business profits from corporate tax base to individual tax base
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14
Q

how does tax avoidance effect tax revenue

A
  • reduces revenue if moved to lower tax bases
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15
Q

what is evidence of intertemporal shifting

A

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
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16
Q

what are the 2 kinds of businesses and how are they taxed differently

A
  1. corporation
    - taxed twice
    - profits are taxed and then profits taxes again when redistributed to share holders (dividends/realised capital gains)
  2. unincorporated
    - profits are taxed once
17
Q

what is evidence for income shifting

A

TRA 86
- incentive to switch from corporate income to personal income because of higher MTR in corporate

18
Q

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

A

x axis = top MTR
y axis = 1% income share

  • little correlation
  • strong variation in top MTR for different countries
19
Q

is there a relationship with pre tax top 1% income shares and top tax rates MTR

world data

2005-9

A
  • negative relationship
  • the higher top MTR - the lower top 1% income share
20
Q

what can we learn from looking at countries top 1% income shares and top MTR

A
  • 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
21
Q

what are the 3 economic effects of taxing the top 1%

A
  1. supply side
    - reduced labour, reduced tax revenue
    - reduces efficiency
    - policy: dont make top tax rate too high
  2. tax avoidance/evasion
    - avoid and evade more
    - policy: eliminate loopholes
  3. rent seeking
    - top earners extract more pay when tax rates are low
    - policy: increase tax rates
22
Q

Saez 2017
- charitable giving
what do they want to test

A
  • do the top 1% tax avoid through increasing charitable donations
  • charity = tax deductable
  • more incentive to give when tax rates are high
23
Q

Saez 2017
- charitable giving
what do they find
what did they expect to find

A
  • 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
24
Q

evidence for
rent seeking

US data and CEO

A
  • 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
25
Q

Miller pope 2019
responses of company owners to changes in personal taxes

A
  • evidence of intertemporal shifting
  • taxable income shifts across time
  • large tax induced retained profits - held as cash
26
Q

what is the migration concern with high tax rates

A

worried that top skilled individuals will migrate to low tax countries
- no longer get revenue from top earners

27
Q

Kleven 2014
migration concern
what do they do

A
  • 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
27
Q

Kleven 2014
migration concern
what do they find

A
  • lower tax rate incentive doubled the number of highly paid foreigners in Denmark compared to the control
28
Q

what does ETI depend on

A

tax avoidance and evasion
- depends on enforcement

3 - Public (10 decks)

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