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Elasticity of Taxable Income: Evidence from Changes in Municipal Income Tax Rates in Finland
Author(s) -
Matikka Tuomas
Publication year - 2018
Publication title -
the scandinavian journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.725
H-Index - 64
eISSN - 1467-9442
pISSN - 0347-0520
DOI - 10.1111/sjoe.12236
Subject(s) - taxable income , economics , adjusted gross income , income elasticity of demand , gross income , differential (mechanical device) , labour economics , econometrics , revenue , income tax , passive income , tax revenue , elasticity (physics) , income distribution , state income tax , public economics , tax reform , accounting , mathematics , mathematical analysis , inequality , engineering , aerospace engineering , materials science , composite material
Abstract The elasticity of taxable income (ETI) is a key parameter in income tax analysis, in terms of both efficiency and tax revenue. In this paper, I use Finnish data to analyze the 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, and thus the ETI estimates are less susceptible to bias caused by differential trends across the income distribution. In general, instruments used in previous studies do not have this feature. My preferred estimate for the average ETI is 0.21.