Four Empirical Essays on Responses to Income Taxation

Sammanfattning: This thesis consists of four self-contained essays.Essay I (with Jukka Pirttilä) uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating the labour and capital income tax base since the reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.Essay II (with Sören Blomquist). To a large extent it is still unknown how the different components of aggregate taxable income react to changes in marginal tax rates. In this study, we have access to a unique panel data set that combines individual level register and survey data. This enables us to estimate both the elasticity of hourly wage rates and the elasticity of taxable earnings with respect to the net-of-tax rate. The estimates indicate that the response to tax rates that operate via the wage rate is important. Essay III. The 1971 individual tax reform affected work incentives of different wives differently depending on the pre-reform earnings of the husband. In this study a representative panel of 18,069 wives is used to evaluated the labour supply effects of the reform. The preferred estimated elasticity of the employment probability, conditional on switching employment status between 1969 and 1975, with respect to the ‘first-dollar’ net-of-tax rate (1-the marginal tax rate) is estimated to 0.26. The corresponding non-labour income elasticity amounts to -0.65. Essay IV. The purpose of this paper is to estimate the tax price elasticity and virtual income elasticity of contributions to tax-favoured pension savings accounts on a population of self-employed individuals. To this end I exploit a unique total data base over the Swedish population that covers the years 1999 to 2005. The empirical analysis is complicated by the fact that pension contributions and tax prices are determined simultaneously. When instrumental variables are used to address this endogeneity problem, I find that the self-employed significantly increase their contributions to tax-favoured pension savings accounts when tax prices decrease and virtual income increases. I obtain a tax price elasticity of -0.53 and a virtual income elasticity of 0.11. On the contrary, OLS produces estimates with signs that conflict with standard consumer theory.