samlet årgang - Økonomisk Institut - Københavns Universitet

LABOR SUPPLY BEHAVIOR AND THE DESIGN OF TAX AND TRANSFER POLICY 337
tively, taxable income can respond if higher taxes lead to a more aggressive interpretation
of tax rules (e.g., claiming questionable deductions) or tax evasion (understating
income, claiming unjustified deductions). Tax-induced changes in avoidance or evasion
affect government revenue, hence creating efficiency losses in the same way that labor
supply responses do.
This type of reasoning underlies the recent literature on the elasticity of taxable income,
starting with the important paper by Feldstein (1995). While taxation may affect
behavior in a myriad of ways – as suggested by the above comments – the responses
matter for efficiency only to the extent that they change taxable income. While it may be
extremely difficult to estimate each of the responses separately, it is possible to estimate
the elasticity of taxable income based data from individual tax returns. A focus on this
parameter might make intensive responses more important than portrayed in our review
of the empirical labor supply literature.
Indeed, for the United States, the literature has shown that the (intensive) elasticity
of taxable income can be very high at the top of the income distribution (see Saez,
2004 for a recent survey). However, this is a phenomenon occurring only at the extreme
top of the income distribution (top 1%). We are not aware of studies estimating the elasticity
of taxable income for European countries.
Finally, based on the discussion in this section, one might be tempted to conclude
that we do not need to distinguish between different margins of behavioral response.
To estimate the revenue (and hence efficiency) effects, it seems that all we need to
know is the elasticity of taxable income and then apply a marginal tax wedge. However,
this is not entirely correct. An obvious point is that the tax system may involve
several different bases subject to selective tax rates. In this case, different margins of
response can relate to different bases and tax rates, and we then have to distinguish
between different taxable income elasticities to get the revenue and efficiency effects
right. A more subtle point is that, under non-linear tax systems, marginal and discrete
changes in taxable income are taxed differently. As shown in the previous sections on
intensive and extensive labor supply effects, it is important to distinguish between
marginal and discrete effects in the measurement of excess burden. Hence, the discussion
in this section is entirely consistent with the previous conclusions.
4. The evaluation of tax and transfer reforms
Following Harberger (1964), a large numerical literature has attempted to evaluate
the distortions to the labor-leisure choice induced by labor income taxation and the
impact of different tax reforms. The evaluation methods include simple deadweight
loss calculations, Browning (1987, 1995), Computable General Equilibrium models,
Ballard et al., (1985); Ballard (1988), and micro-simulations, Browning and Johnson,