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Taxpayers' responsiveness to tax rate changes and implications for the cost of taxation in Sweden

In English

Författare

Summary, in English

Historically, labor supply elasticities have been used to evaluate tax policy and predict tax revenue effects. They are likely to underestimate taxpayers' response to tax rate changes, and hence to underestimate changes in potential tax revenues, however, because they measure only how taxpayers alter hours worked. Taxpayers can also respond to tax rate changes by altering, for instance, their work effort and form of compensation. An alternative measure that accounts for these responses as well as hours worked is the elasticity of taxable income. This paper estimates the elasticity of earned taxable income for Swedish taxpayers using two different approaches and a number of control variables and the 1990/1991 tax reform as a "natural experiment". The preferred elasticity estimates fall in the range of 0.4-0.5, comparable with recent estimates for the U.S. and larger than most of the labor supply elasticity estimates used to evaluate tax policy in Scandinavia previously, which suggests that deadweight losses are two to three times higher than previously thought.

Publiceringsår

2007

Språk

Engelska

Sidor

563-582

Publikation/Tidskrift/Serie

International Tax and Public Finance

Volym

14

Issue

5

Dokumenttyp

Artikel i tidskrift

Förlag

Springer

Ämne

  • Economics

Nyckelord

  • tax reform
  • elasticity of taxable income
  • deadweight loss

Status

Published

ISBN/ISSN/Övrigt

  • ISSN: 1573-6970