Working Paper: NBER ID: w24531
Authors: Aspen Gorry; R Glenn Hubbard; Aparna Mathur
Abstract: Knowing the elasticity of taxable income (ETI) is crucial for understanding the effects of taxation on taxpayer behavior and consequently on tax revenues. Previous research finds that high-income individuals are the most sensitive to tax policy changes. However, these individuals have more opportunities to defer income to future tax bases by altering the composition of their compensation than lower-income individuals. This paper considers the taxable income elasticity when individuals can shift income across tax bases and thereby defer taxation. We decompose the elasticity of taxable income into a real response as well as an income shifting response. We measure the tax rate on deferred income by the expected tax gain from deferring income using stock options as developed by Hall and Liebman (2000). Our results demonstrate that income shifting is an important component of previous estimates of the ETI. Because shifted income is taxed at future dates, income shifting decreases the welfare loss from personal income taxation associated with previous estimates.
Keywords: Elasticity of Taxable Income; Income Shifting; Tax Policy; Executive Compensation
JEL Codes: G30; H24; H31; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Income shifting (H22) | Elasticity of taxable income (ETI) (H30) |
| Income shifting (H22) | Taxable income response (H24) |
| Real response (Y60) | Taxable income response (H24) |
| Income shifting (H22) | Welfare loss from taxation (H21) |
| Elasticity of taxable income (ETI) (H30) | Deadweight loss of taxation (H21) |
| Tax rates (H29) | Taxable income responses (H24) |