Tax Reforms and Intertemporal Shifting of Wage Income: Evidence from Danish Monthly Payroll Records

43 Pages Posted: 28 Oct 2013

See all articles by Claus Thustrup Kreiner

Claus Thustrup Kreiner

University of Copenhagen - Department of Economics

David Dreyer Lassen

University of Copenhagen

Peer Skov

University of Copenhagen

Date Written: October 2013

Abstract

Intertemporal shifting of wage income takes place when income earned in one tax year is paid out in another tax year in order to save taxes. Shifting has implications for the evaluation of the distortionary and distributional effects of taxes and may cause serious bias in empirical estimates of the elasticity of taxable income (ETI) for use in policy analysis. Based on new monthly payroll records for the universe of Danish employees we provide evidence of widespread intertemporal shifting of wage income in response to a tax reform that significantly reduced the marginal tax rates for 1/4 of all employees. Ignoring shifting, we estimate the overall ETI to be 0.1 and find that the ETI is increasing in the earnings level. After controlling for shifting, we obtain negligible ETI estimates at all earnings levels. We show that shifting is concentrated on few individuals spread out evenly across industry sectors, and we provide evidence suggesting that tax salience, liquidity constraints and firm willingness to cooperate in shifting are important factors in explaining shifting behavior.

Keywords: elasticity of taxable income, income shifting, monthly payroll records

JEL Classification: H24, H31

Suggested Citation

Kreiner, Claus Thustrup and Lassen, David Dreyer and Skov, Peer, Tax Reforms and Intertemporal Shifting of Wage Income: Evidence from Danish Monthly Payroll Records (October 2013). CEPR Discussion Paper No. DP9697. Available at SSRN: https://ssrn.com/abstract=2346214

Claus Thustrup Kreiner (Contact Author)

University of Copenhagen - Department of Economics ( email )

Ă˜ster Farimagsgade 5
Bygning 26
1353 Copenhagen K.
Denmark

David Dreyer Lassen

University of Copenhagen ( email )

Peer Skov

University of Copenhagen

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