Working Paper: NBER ID: w20489
Authors: Kevin Milligan; Michael Smart
Abstract: We estimate the elasticity of reported income with respect to tax rates for high earners using subnational variation across Canadian provinces. We argue this allows for better identification of tax elasticities than the existing literature. We find that elasticities of reported income at the provincial level are large for incomes in the top one percent, but small for lower earners. There are strong indications that the response happens both through earned and capital income. While our estimated elasticities are large, changes in tax rates cannot explain much of the overall long-run trend of higher income concentration in Canada.
Keywords: Taxation; Income Elasticity; Income Concentration; Canada
JEL Codes: D31; H21; H24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in tax rates during the analysis period (H29) | significant shifts in income distribution (D31) |
| Provincial tax policy implications (H29) | relevance of elasticity estimates (C51) |
| Long-term trends in income concentration (D31) | unrelated to tax changes (H29) |
| Elasticity of reported income with respect to marginal tax rates (H31) | responsiveness of income reporting to tax rate changes (H32) |
| Earned income and capital income (E25) | response to taxation (H26) |