The ability gradient in tax responsiveness

The Capital Advantage: Comparing Returns to Ability in the Labor and Capital Markets

“…In particular, a positive feedback loop between ability and capital income across 43 These results are partly mechanical, since labor income taxation is progressive by design, while capital income taxation is proportional (in line with the dual income tax structure of the Swedish tax system), and high-ability individuals tend to have both higher labor and capital income. However, high-ability individuals also tend to avoid being subject to the progressive labor income tax code, for example by shifting income from the labor to the capital income tax base, see Bastani and Waldenström (2021). 44 In the appendix section C.2, we provide a complementary analysis using taxes paid as the dependent variable.…”

How Should Consumption Be Taxed?

“…Such a reform has desirable distributional implications provided those who shift are individuals with low welfare weights. Bastani and Waldenström (2021) present empirical evidence that individuals who engage in income-shifting are disproportionally highskilled individuals (which are associated with low welfare weights in typical social welfare functions). 16 To the best of our knowledge, this argument for consumption taxation is novel in the academic literature.…”

“…This implies that among individuals who earn the same labor income, high-skilled individuals will demand goods and services in a different way compared to low-skilled individuals, and therefore differential consumption taxation can, in a similar manner to the previous subsection, discourage high-skilled agents from reducing their labor income in reaction to progressive labor income taxation. More specifically, it will be optimal to impose higher tax rates on goods that are disproportionately preferred by individuals with a 45 Bastani and Waldenström (2021) tackle this problem by studying an empirical setting with a kinked budget set where individuals with different earnings abilities are pooled at the same income level (at the kink point of the labor income tax in Sweden). They show that the individuals who bunch not only have higher ability, as measured by military enlistment scores in young adulthood, but also have higher capital income.…”

Tax Complexity as Price Discrimination

“…While our model focuses on the role of elasticities in the acquisition of tax knowledge, it is clear that other factors such as cognitive ability are important. The findings of Bastani and Waldenström (2021) imply that tax elasticity itself may be increasing with cognitive ability. Relatedly, Alstadsaeter, Kopczuk and Telle (2019) find that networks play an important role in tax avoidance: People are more likely to take advantage of a particular tax avoidance strategy if others in their close family use it too.…”