The Elasticity of Taxable Income Across Countries

• In Event: Efficiency and Distortions in the Corporate Tax

Abstract

We use administrative tax data from 17 developed and developing countries to calculate the within-country corporate elasticity of taxable income (ETI) and investigate differences between these estimates. We develop a new structural empirical method using the observed distribution of taxable income that exploits the differential tax treatment of business income for firms earning positive and negative taxable income. Our ETI estimates range between 1.9 for Canada and 0.04 for Uruguay, and these differences are much smaller than the range found in the literature (0 to 5). We use our estimates, a large set of predictors, and a random forest estimation to provide out-of-sample ETI estimates for 248 countries and find an average elasticity of 0.59. We then show differences in elasticities across countries are explained by country characteristics (52%), tax system characteristics (31%), and firm characteristics (16%).

Authors

• Katarzyna Bilicka, Utah State University

• Elena Patel, The Brookings Institution

• Nathan Seegert, Northeastern University