Working Paper: CEPR ID: DP9697
Authors: Claus Thustrup Kreiner; Søren Leth Petersen; Peer Ebbesen Skov
Abstract: Intertemporal shifting of wage income takes place when income earned in one tax year is paid out in another tax year in order to save taxes. Shifting has implications for the evaluation of the distortionary and distributional effects of taxes and may cause serious bias in empirical estimates of the elasticity of taxable income (ETI) for use in policy analysis. Based on new monthly payroll records for the universe of Danish employees we provide evidence of widespread intertemporal shifting of wage income in response to a tax reform that significantly reduced the marginal tax rates for 1/4 of all employees. Ignoring shifting, we estimate the overall ETI to be 0.1 and find that the ETI is increasing in the earnings level. After controlling for shifting, we obtain negligible ETI estimates at all earnings levels. We show that shifting is concentrated on few individuals spread out evenly across industry sectors, and we provide evidence suggesting that tax salience, liquidity constraints and firm willingness to cooperate in shifting are important factors in explaining shifting behavior.
Keywords: Elasticity of Taxable Income; Income Shifting; Monthly Payroll Records
JEL Codes: H24; H31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Danish tax reform (H29) | timing of income recognition (E25) |
| Danish tax reform (H29) | income shifting (H22) |
| income earned in one tax year (H24) | paid out in another (G35) |
| tax reform announcement (H26) | incentive to shift income (H26) |
| January 2010 reported wage income (J31) | December 2009 income shifting (H22) |
| shifting behavior (C92) | elasticity of taxable income (H30) |