Estimating the elasticity of taxable income: Evidence from top Japanese taxpayers

This study aims to estimate the elasticity of taxable income (ETI) with regard to the net-of-tax rate, precisely in terms of potential for the margin arising from the behavioral response. We use panel data from top Japanese taxpayers in Tokyo during 1986-1989 and focus on the tax policy changes caused by the 1987-1989 comprehensive tax reform, which substantially reduced the top marginal tax rates. It is found that the ETI with regard to the net-of-tax rate is approximately 0.158-0.226, considerably lower than those for the United States and many European countries. One possible reason for the small ETI estimates is the absence of the behavioral response in terms of choice of deductions in this study.