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

Hansson, Åsa LU (2007) In International Tax and Public Finance 14(5). p.563-582
Abstract
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... (More)
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. (Less)
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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
tax reform, elasticity of taxable income, deadweight loss
in
International Tax and Public Finance
volume
14
issue
5
pages
563 - 582
publisher
Kluwer
external identifiers
  • wos:000248902500003
  • scopus:34548091894
ISSN
1573-6970
DOI
10.1007/s10797-006-9007-7
language
English
LU publication?
yes
id
b8d423e3-9fd7-46ed-a5af-e9eab5585900 (old id 657324)
date added to LUP
2007-12-12 11:17:12
date last changed
2017-05-14 04:11:18
@article{b8d423e3-9fd7-46ed-a5af-e9eab5585900,
  abstract     = {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.},
  author       = {Hansson, Åsa},
  issn         = {1573-6970},
  keyword      = {tax reform,elasticity of taxable income,deadweight loss},
  language     = {eng},
  number       = {5},
  pages        = {563--582},
  publisher    = {Kluwer},
  series       = {International Tax and Public Finance},
  title        = {Taxpayers' responsiveness to tax rate changes and implications for the cost of taxation in Sweden},
  url          = {http://dx.doi.org/10.1007/s10797-006-9007-7},
  volume       = {14},
  year         = {2007},
}