How do Top Earners Respond to Taxation? Evidence from a Tax Reform in Uruguay

119 Pages Posted: 14 Jan 2022 Last revised: 14 Jun 2022

See all articles by Marcelo Bergolo

Marcelo Bergolo

Universidad de la Republica - Instituto de Economía; IZA Institute of Labor Economics

Gabriel Burdin

University of Leeds - Faculty of Business; IZA Institute of Labor Economics

Mauricio De Rosa

Instituto de Economía - Universidad de la República; Paris School of Economics

Matias Giaccobasso

University of California, Los Angeles (UCLA) - Anderson School of Management; Universidad de la Republica - Instituto de Economía

Martin Leites

Universidad de la República

Horacio Rueda

Universidad de la Republica - Instituto de Economía; University of Houston - Department of Economics

Date Written: June 11, 2022

Abstract

In this paper, we analyze how top income earners (TIEs) respond to changes in personal income taxation. Using an unprecedented combination of administrative records from the Tax and Social Security Agencies that covers most sources of personal income, we exploit a unique reform to Uruguay’s progressive labor income tax schedule that generated quasi-random variation in the marginal tax rates affecting labor income earners in the top 1% of the distribution. Using a difference-in-differences design, we estimate the elasticities on the intensive, extensive, and income shifting margins to changes in the labor income tax rates. Our preferred specification estimates an intensive margin elasticity of 0.577, which is partially explained by a real labor supply adjustment through fewer hours worked. Responses on the extensive margin are larger. Our preferred estimates indicate an extensive margin semi-elasticity of 2.479, which is mostly driven by shifts from the labor to the corporate income tax base (with a semi-elasticity of -1.967). Based on a simple model that allows individuals to choose between different tax bases, we estimate that the efficiency costs of the reform are, at most, 31.3% of the projected tax revenue.

Keywords: Income taxation, top income earners, tax reform, reported income supply, income-shifting

JEL Classification: H21, H24, H30, J22, O23

Suggested Citation

Bergolo, Marcelo and Burdin, Gabriel and De Rosa, Mauricio and Giaccobasso, Matias and Leites, Martin and Rueda, Horacio, How do Top Earners Respond to Taxation? Evidence from a Tax Reform in Uruguay (June 11, 2022). Available at SSRN: https://ssrn.com/abstract=4007698 or http://dx.doi.org/10.2139/ssrn.4007698

Marcelo Bergolo (Contact Author)

Universidad de la Republica - Instituto de Economía ( email )

Montevideo
Uruguay

HOME PAGE: http://www.marcelobergolo.com

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Gabriel Burdin

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Mauricio De Rosa

Instituto de Economía - Universidad de la República ( email )

Montevideo
Uruguay

Paris School of Economics ( email )

Paris
France

Matias Giaccobasso

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Universidad de la Republica - Instituto de Economía ( email )

Montevideo, Montevideo
Uruguay

Martin Leites

Universidad de la República ( email )

Avenida 18 de Julio 182
Montevideo, 11100
Uruguay

Horacio Rueda

Universidad de la Republica - Instituto de Economía ( email )

Uruguay

University of Houston - Department of Economics ( email )

Houston, TX 77204-5882
United States

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