Working Paper: CEPR ID: DP13876
Authors: Miguel Almunia; David Lopez-Rodriguez
Abstract: We study how taxable income responds to changes in marginal tax rates, using as a main source of identifying variation three large reforms to the Spanish personal income tax implemented in the period 1999-2014. The most reliable estimates of the elasticity of taxable income (ETI) with respect to the net-of-tax rate for this period are between 0.45 and 0.64. The ETI is about three times larger for self-employed taxpayers than for employees, and larger for business income than for labor and capital income. The elasticity of broad income (EBI) is smaller, between 0.10 and 0.24, while the elasticity of some tax deductions such as the one for private pension contributions exceeds one. Our estimates are similar across a variety of estimation methods and sample restrictions, and also robust to potential biases created by mean reversion and heterogeneous income trends.
Keywords: Elasticity of Taxable Income; ETI; Personal Income Tax; Mean Reversion; Tax Deductions; Spain
JEL Codes: H24; H31; D63
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Mean reversion and heterogeneous income trends (C22) | Consistency of estimates (C51) |
| Tax reforms in Spain (1999-2014) (H29) | Elasticity of taxable income (ETI) (H30) |
| Net-of-tax rate (H29) | Elasticity of taxable income (ETI) (H30) |
| Self-employed taxpayers (H25) | Elasticity of taxable income (ETI) (H30) |
| Tax deductions (H20) | Elasticity of broad income (EBI) (D31) |
| Private pension contributions (H55) | Elasticity of broad income (EBI) (D31) |