Behavioural Effects of a Top Marginal Income Tax Rate Increase

Abstract

This paper estimates the elasticity of taxable income (ETI) for the top 1% of income earners, utilising a change in taxation in 2013, when a new top tax bracket was added to the earned income tax schedule in Finland. The response of top earners is crucial in determining the revenue-maximising level of top income taxation, and this study contributes to the top income ETI literature by employing a differences-in-differences method comparing changes in income within the same income groups for different time periods. The results suggest that the ETI for top wage earners (0.5) may be higher than found in previous population estimates. This finding is primarily driven by individuals experiencing fewer labour market frictions, such as those who have changed employer or have multiple concurrent employers.nonPeerReviewe