Trends and gradients in top tax elasticities: cross-country evidence, 1900–2014

Piketty et al. (2014) examine elasticities in a cross-country panel beginning in 1960, but they do this only for two distinct subperiods and only for the top percentile versus the lower nine percentiles in the top income decile. Saez (2017) is one of few studies to examine the tax elasticities of smaller groups within the top percentile but only for one year and in one country (the U.S. in 2013). Jäntti et al. (2015) use cross-country data to estimate tax rate responsiveness, but they do not focus on top incomes. In addition, Roine et al. (2009) and Atkinson and Leigh (2013) run multivariate cross-country panel regressions of top income shares on several variables.

Saez et al. (2012) suggest assuming away income effects in the absence of compelling evidence about significant income effects. Indeed, Gruber and Saez (2002) estimate negligible income effects of tax changes on reported income, implying that the compensated and uncompensated elasticities of taxable income are very similar.

We depart from the Piketty et al. (2014) empirical strategy by including both country fixed effects and country-specific time trends instead of either country fixed effects or a global time trend. This choice is motivated by the observed cross-country heterogeneity in the secular growth in top income shares (i.e., spectacularly large for Anglo-Saxon countries but relatively lower for some Continental European countries and Japan). Hence, by including country fixed effects and country-specific time trends, we aim to simultaneously account for country-specific time-invariant characteristics as well as for the secular growth in inequality experienced by each country.

Scheve and Stasavage (2016) compare the long-run correlation between the statutory top rate and the actual marginal tax rate for a few countries. They find a high correspondence and conclude that the \(\mathrm{MTR}^\mathrm{top}\) can be safely used for historical analyses.

The database also provides standard tax allowances, tax credits, and surtax rates. Further information may be found in the OECD Explanatory Annex: http://​www.​oecd.​org/​ctp/​tax-policy/​Personal-Income-Tax-rates-Explanatory-Annex-May-2016.​pdf. See Online Appendix B for further details.

Some smaller taxes and contributions are not included in the formula due to a lack of comparable information for all countries and time periods. Many of these taxes are so low that they would have hardly any bearing on the main analysis, but, in some cases, their omission is potentially important. For example, we were unable to consistently include social security contributions into the tax computations. Some of these contributions are part of insurance schemes and linked to benefits and should thus not be regarded as income taxes. Omitting them is therefore not problematic. However, other fees are pure taxes and should be part of the tax formula [see Bengtsson et al. (2016), for a discussion of the case of Sweden]. Furthermore, deductions, allowances, and credits that vary by individuals’ characteristics are not included in the calculations.

Namely, we compute a time- and country-varying measure of the tax base as the ratio between broad and taxable income defined for the average-income earner. To compute this indicator, we start from the broad measure of income and then we subtract tax deductions, allowances and credits available at both central and sub-central levels.

Note, however, that once we collapse data over 20-year average periods we have less precise estimates. This is even more problematic over the 2000–2015 period, in which we have fewer observations and, as shown in the figure, relatively larger standard errors.

We also examine shorter time periods and they show similar levels and trends except for the post-1980 era where estimates became sensitive to period length.

We run the analysis using first differences (over one and three years) instead of fixed effects in order to account for unobserved, constant characteristics. These results are generally consistent with our main analysis, with somewhat lower (higher) elasticities in the one-year (three-year) differences (see Table C1). In addition, the online appendix also contains more complete additional results in several dimensions discussed throughout the paper, e.g., using the full country sample rather than the sample of countries observed over the full period and a sample without the dual income countries (see Table C7).

According to the income decomposition provided by WID, on average, the bottom half of the top decile has a share of income from capital around 15% of total income. On the other hand, the capital share increases by more than four times (to around 65%) for the top 0.1.

We have brainstormed other specifications to identify the tax avoidance/income shifting responses, but given our data limitations we have been unable to formulate any variants that work both conceptually and empirically. Our trials included using both top wage and top capital income tax rates in the same regressions, regressing top total income shares or top total income levels on either wage or capital taxes.