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

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Author

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.

Publishing year

2007

Language

English

Pages

563-582

Publication/Series

International Tax and Public Finance

Volume

14

Issue

5

Document type

Journal article

Publisher

Springer

Topic

  • Economics

Keywords

  • tax reform
  • elasticity of taxable income
  • deadweight loss

Status

Published

ISBN/ISSN/Other

  • ISSN: 1573-6970