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The elasticity of taxable income (ETI) is a key parameter in income tax analysis, in terms of both efficiency and tax revenue. In this paper, I use Finnish data to analyze the ETI. I use changes in flat municipal income tax rates as an instrument for overall changes in marginal tax rates. This instrument is not a function of individual income, and thus the ETI estimates are less susceptible to bias caused by differential trends across the income distribution. In general, instruments used in previous studies do not have this feature. My preferred estimate for the average ETI is 0.21.

Previous literature shows that income taxation significantly affects the behavior of high-income earners and business owners. However, it is still unclear how much of the response is due to changes in real economic activity, and how much is caused by tax avoidance. In this paper, we distinguish between real responses and income-shifting between tax bases. We show that separating income-shifting responses can largely affect the welfare analysis of income taxation. In our empirical example of Finnish business owners, we find that income-shifting accounts for a majority of the overall elasticity of taxable income, which significantly decreases the marginal excess burden.

The effectiveness of transfer programs in reducing poverty and inequality can be significantly reduced if eligible individuals fail to apply for them. This paper shows that benefit take-up can be influenced by sending targeted letters to the eligible population. We exploit the implementation of the guarantee pension program in Finland, which offered a monthly top-up benefit to low-income pensioners. The Social Insurance Institution sent information on the benefit together with application forms to a portion of the eligible population a month before implementation. We find clear evidence that this simple and inexpensive intervention increased take-up and prompted pensioners to apply sooner.

This study examines income-shifting between tax bases among the owners of privately held businesses. The dual income tax system in Finland offers noticeable incentives for income-shifting between wages and dividends for business owners. The dividend tax reform of 2005 enables us to study how this particular form of tax avoidance reacts to an exogenous change in tax rates. Our results support highly active income-shifting behavior. We find that the income-shifting effect is homogeneous across different owners and firms. However, we find that the size of the tax incentive affects the size of the response, suggesting that costs related to incomeshifting are important.

We study the responsiveness of small- and medium-sized firms to a small-business corporate income tax schedule using population-wide administrative data from South Africa. We find sizeable bunching of firms at the corporate income thresholds where the corporate tax rate increases, implying active responses to corporate income taxes. The observed bunching is very sharp and reacts immediately to changes in the location of the kink points. These observations suggest that a sizeable part of the response is driven by reporting responses rather than real economic behavior. We find indicative evidence that reporting behavior is linked to underreporting of sales and legal tax-planning activities.

We provide an analysis of the revenue-maximizing top earned income tax rate for a country with one of the highest levels of earnings taxation in the world, Finland, and compare it to the current level of taxation. We account for the effect of income-shifting possibilities in the calculations and find that the current top tax rate on earnings in Finland is likely to be below the revenue-maximizing rate. We provide an explicit account of assumptions behind the Laffer curve calculations and demonstrate that policy conclusions depend critically on non-trivial choices regarding, for example, how the current top tax rate is calculated. The assumptions in the Laffer curve calculations need to be made explicit if the calculations are to provide guidance for policy.

We study how different optimization frictions prevent taxpayers from responding to tax incentives. We utilize an income notch created by the study subsidy system for university students in Finland, and analyze a reform that shifted out the location of the notch. In addition to distinctive local bunching responses, we find that the whole earnings distribution shifts out with the notch. This implies that labor market frictions stemming from discrete earnings possibilities prevent a smooth response to tax incentives. This indicates larger welfare effects than observed bunching estimates suggest. Moreover, by utilizing data on secondary school math grades, we find evidence that optimization errors attenuate local responses.

We provide novel evidence of discrete labor supply responses to tax incentives and study the broader implications of discrete rather than continuous labor supply. We utilize an income notch and a reform that shifted the location of the notch in order to study the labor supply mechanisms. We find transparent evidence of discrete labor supply responses, revealing that wage earners even in the part-time labor market can face significant restrictions in their available labor supply choices. As an implication of discrete labor supply, we show that the conventional differencesin-differences and bunching elasticity estimates can be downward-biased when labor supply is discrete.

This paper studies how different behavioral factors affect individual responses to different tax incentives. This is important because different reasons for responding and not responding might have different policy implications and welfare conclusions. Our analysis compares the empirical significance of the inability to respond to tax incentives and unawareness of tax rules. Using population-wide Finnish panel data, we estimate behavioral responses to local changes within the tax and transfer system among similar or even the same individuals. We especially focus on higher education students, who are eligible for a study subsidy. The study subsidy rules create notches in the income tax schedule. We find that Finnish taxpayers in general do not respond at all to small incentives induced by kink points, but students do respond to larger incentives induced by notches. At the same time a large fraction of students do not respond to the notches making them worse off in absolute terms. This is evidence of optimization frictions, which according to subsequent results are partly due to not being aware of the system and partly due to not being able to respond to local tax incentives.

We study how the number of payments within a month affects the consumption behavior of benefit recipients. In Finland, the payment dates of national pension benefits were based on the initial of the recipients’ last name, whereas earnings-related pensions were paid at the beginning of the month. This generates as-good-as-random variation in payment dates and frequencies over the month, providing a unique setup to analyze the causal impact of payment frequency on consumption patterns. We find smoother consumption choices within a month for those with two monthly payments instead of just one. However, we find no impact on the consumption of unhealthy and addictive goods such as alcohol, tobacco and gambling.