Income Shifting as Income Creation? The Intensive vs. The Extensive Shifting Margins

41 Pages Posted: 26 Jun 2017

See all articles by Håkan Selin

Håkan Selin

Uppsala Center for Fiscal Studies

Laurent Simula

Ecole des Hautes Etudes en Sciences Sociales (EHESS); Research Group in Quantitative Economics of Aix-Marseilles (GREQAM); Paris Jourdan Sciences Economiques

Date Written: June 08, 2017

Abstract

The public finance literature has modeled income shifting as a decision along the intensive margin even though it involves significant fixed costs, giving rise to an important extensive margin. We show that accounting for this extensive margin has crucial policy implications: the classical distinction between income creation and income shifting breaks down. We make this point in a simple linear tax setting with a population of agents differing in terms of productivities, labor supply elasticities, and costs of income shifting. In the most empirically plausible scenario when people who shift easily are also more elastic in labor supply, giving them a lower tax rate is a good thing. This mechanism may be compared to third degree price discrimination in industrial organization. Numerical simulations suggest that fixed shifting costs have a large impact on optimal taxes. We further demonstrate that the conclusions derived for linear taxes carry over to non-linear tax schedules.

Keywords: Income Shifting, Optimal Taxation, Labor Income Tax

JEL Classification: H210, H240

Suggested Citation

Selin, Håkan and Simula, Laurent, Income Shifting as Income Creation? The Intensive vs. The Extensive Shifting Margins (June 08, 2017). CESifo Working Paper Series No. 6510, Available at SSRN: https://ssrn.com/abstract=2992482 or http://dx.doi.org/10.2139/ssrn.2992482

Håkan Selin (Contact Author)

Uppsala Center for Fiscal Studies ( email )

Box 513
Uppsala, 751 20
Sweden

Laurent Simula

Ecole des Hautes Etudes en Sciences Sociales (EHESS) ( email )

54, boulevard Raspail
Paris, 75006
France

HOME PAGE: http://www.ehess.fr

Research Group in Quantitative Economics of Aix-Marseilles (GREQAM) ( email )

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

Paris Jourdan Sciences Economiques ( email )

48, BD Jourdan
75014 Paris
France

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