Estimating the Elasticity of Personal Income Tax to Gross Earnings from Income Tax Statements in Greece: Implications for Tax Buoyancy

Abstract

Using data from income tax statements aggregated at the regional level we estimate the elasticity of income tax to gross earnings over the period 2005–2010. Controlling for time and regional effects we find an elasticity of 2.45, which is 45% larger compared to earlier OECD studies. Relying on Girouard and Andre (2005) findings we translate this into an elasticity of income tax with respect to output gap, which ranges from 2.205–2.45, substantially above recent IMF estimates (see Belinga et al 2014). Based on this evidence, and the IMF estimations for the narrowing of the output gap in 2014–2016, we compute that the gains from PIT related buoyancy effects can range from 1653.1 million euro to 1845.6 million euro (or 0.87–0.97% of GDP) over the period 2014–2016, compared to the baseline scenario (of 1338.7 million or 0.70% of GDP) that relies on the OECD elasticities. However, the tax data at hand could underestimate the true elasticity of income tax relative to earnings and the gains from buoyancy that could be realized in future years in view of the fact that they do not reflect the dramatic changes that took place in the subsequent years (increase in tax burden on account of extraordinary taxes, abolition of tax exemption etc. that increased the progressivity of the tax system).