DP11935 Trends and gradients in top tax elasticities: Cross-country evidence, 1900-2014

Author(s): Enrico Rubolino, Daniel Waldenström
Publication Date: March 2017
Keyword(s): economic history, Income inequality, taxation
JEL(s): D31, H21, H24, H26, N40
Programme Areas: Public Economics, Economic History
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11935

We compile data spanning the period 1900–2014 and up to 30 countries to study long-run patterns in the tax elasticity of top incomes. Our results show that top tax elasticities vary tremendously over time; they were medium-to-low before 1950, virtually zero during the postwar era up to 1980 and have thereafter increased to unprecedented levels. We document a strong income gradient in tax response within the top, underlining the importance to study even small top groups separately. Several mechanisms are investigated. Tax-driven income shifting between wage and capital income is important in the very top. Wars, financial crises, and country-specific effects and trends have bearing on top elasticities whereas standard macroeconomic factors and indicators of “real responses” do not.