Publication
Elasticity of Taxable Income – December 2018
From Department of Finance; Office of the Revenue Commissioners
Published on
Last updated on
The paper, published as part of the Joint Research Programme between the Department of Finance, the ESRI and the Revenue Commissioners, makes novel use of Irish tax record data to examine how tax-payers manage their taxable income in response to changes in their marginal tax rate. This relationship is captured through a parameter known as the elasticity of taxable income (ETI). The ETI measures how individual tax-payers adjust their taxable income in response to changes in the amount of income which they retain after taxation (known as the net-of-tax rate).
Different tax payer categories and those on different income levels respond differently to changes in their marginal tax rates. Self-assessed tax payers are found to be relatively more responsive, as are high income earners and middle-aged tax payers.
The paper estimates a central ETI of 0.168, meaning that for each 1 percent decrease in the marginal net-of-tax rate, taxable income falls by 0.168 percent on average. This lies in the bottom half of the international range, which may be due to Ireland-specific factors such as a relatively smaller level of tax deductions and reliefs in Ireland compared to elsewhere, a high degree of income tax compliance and labour market frictions for PAYE earners in particular.
