Tax sheltering cost among high-income taxpayers: Evidence from an Australian tax policy change

Abstract

We present empirical evidence on the cost of tax sheltering among high-income taxpayers within progressive income tax systems. Exploring a unique personal income tax policy change in Australia, we use "bunching" around the top tax threshold to estimate costs of tax sheltering and the Elasticity of Taxable Income (ETI). Our findings reveal substantial behavioural responses to tax changes among high-income taxpayers, particularly those with greater flexibility in income adjustment, Suggesting that tax sheltering behaviours play a pivotal role in their responses. When accounting for these costs, the estimated ETI significantly increases, E.mphasizing the necessity of considering tax sheltering in tax policy analysis. We contribute to the ongoing discourse on optimal tax policy design and its impact on economic behaviour. Our findings have important implications for the policy debates on whether high-income individuals should be taxed at higher rates.