Trends and Gradients in Top Income Tax Elasticities Across Countries, 1900 to 2014

A new paper by Enrico Rubolino (University of Essex) and Daniel Waldenstrom (Paris School of Economics) forthcoming in International Tax and Public Finance compiles more than a century of data on gross income before taxes and transfers for up to 30 industrialized countries. They estimate a net-of-tax rate regression on the share of total gross income held by a given percentile, yielding an estimate that is intended to show how sensitive income at the top is to top marginal income tax rates. Of course, with such a long time span, the devil of this analysis will be in the details of data construction. I’m going to skip that and just show some of the figures.

How have the raw data of interest evolved over time? Inversely to one another:

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Across the board, tax elasticities have been climbing since the 1980’s.

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The last 40 years have seen a rising tax elasticity through the top 5 percent:

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How have tax elasticities differed over time by major geographies? English speaking countries stand out in recent years.

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There is much more drilling down in the paper. Here is the abstract:

We construct a cross-country dataset spanning 1900–2014 to estimate the tax elasticity of top incomes. Our results show that top tax elasticities vary tremendously over time; they were medium to low before 1950, dropped to almost zero during the postwar era and increased to unprecedented levels since 1980. We document a marked income gradient of increasing tax responsiveness at the top. Tax avoidance, especially income shifting between wage and capital income, appears to be one important driver of these patterns. Wars, financial crises, and country-specific effects and trends also have a bearing on top elasticities.