The Elasticity of Taxable Income in the Presence of Intertemporal Income Shifting
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.
We would like to thank Kevin Hassett, Devon Gorry, Michael Makowsky, Itai Grinberg, Lilian Faulhaber, and participants at Georgetown Law Tax and Public Finance Seminar, for helpful comments, and Grace Finley and Cody Kallen for excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Aspen Gorry & Glenn Hubbard & Aparna Mathur, 2021. "The Elasticity of Taxable Income in The Presence of Intertemporal Income Shifting," National Tax Journal, vol 74(1), pages 45-73.