The elasticity of taxable income and income-shifting: what is “real” and what is not?

Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in real economic activity, and how much is caused by tax avoidance. In this paper, we distinguish between real responses and income-shifting between tax bases. We show that separating income-shifting responses can largely affect the welfare analysis of income taxation. In our empirical example of Finnish business owners, we find that income-shifting accounts for a majority of the overall elasticity of taxable income, which significantly decreases the marginal excess burden.     

The effect of VATs on government balance sheets

The value-added tax, VAT, has become a popular means of raising funds for governments around the world. Countries seeking to reduce variation in tax revenues as well as raise revenue to solve deficits often consider a VAT, and the IMF in particular has become an advocate for the tax for countries seeking tax reform. For all its popularity, its ability to deliver on these promises remains understudied. Countries with a lower cost of raising funds may instead choose to spend more instead of paying down their debts. This paper uses matching techniques to estimate the impact of a VAT on government debts and deficits. The tax is associated with falls in central government debt and deficits as well as expenditures as a share of GDP. There is limited evidence of increases in tax revenue and increases in stability of government spending. The choice of VAT rate is positively correlated with deficit reduction, and the effects of the tax are heterogeneous with respect to the probability of adoption of the treatment and what taxes it is replacing.     

Financial and Housing Wealth,Expenditures and the Dividend to Ownership

For a household, home ownership provides necessary shelter, potential investment returns associated with property appreciation and a hedge against increased housing related cash outlays. In addition to potential appreciation, individual households benefit over time from a housing dividend defined as the difference between the market rent for the individual household’s housing unit and the household’s actual house ownership costs. The purchase of a house can substantially fix a household’s recurring housing related expenditures and generates a hedge (implied housing dividend) that increases with ownership tenure. This expenditure hedge (dividend) to home ownership is documented using pooled, cross-year samples from the Consumer Expenditure Survey (CEX). The housing dividend delivers a non-trivial effect on household non-housing expenditures after controlling for housing value, housing equity, financial assets and income.