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<p>Using the universe of firm-level tax returns from Canada, this paper quantifies the responsiveness of small businesses to corporate taxation over the 2001–2019 period. I analyze the extent of bunching in the distribution of taxable income at statutory kink points in the corporate tax schedule and estimate the associated elasticity of corporate taxable income. The location of the kink and the difference in statutory tax rates at the kink changed multiple times during the period, providing a rich setting for evaluating the effects of tax changes. I document significant and persistent bunching behavior at the kink, consistent with tax planning responses. To address identification concerns raised by recent critiques of traditional bunching methods, I apply the novel framework developed by Bertanha et al. (J Econom 237:105512, 2023a), which provides both partial and point identification of elasticity. Estimated elasticities range from 0.10 to 0.79 over the 2001 to 2019, with preferred point estimates between 0.13 and 0.42, declining over time as the kink was moved up the income distribution. The rapid adjustment of firms to changes in kink thresholds, accompanied by increases in capital investment and deductible expenses, suggests that observed bunching is primarily driven by tax planning through reporting behavior, rather than by underlying real economic activity. I also document heterogeneity across different firms ownership structures and provinces.</p>

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Elasticity of corporate taxable income: evidence from Canadian corporate tax kinks

  • 期刊论文

  • 发表日期：

    2025年11月10日

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  • Josip Lesica

摘要

Using the universe of firm-level tax returns from Canada, this paper quantifies the responsiveness of small businesses to corporate taxation over the 2001–2019 period. I analyze the extent of bunching in the distribution of taxable income at statutory kink points in the corporate tax schedule and estimate the associated elasticity of corporate taxable income. The location of the kink and the difference in statutory tax rates at the kink changed multiple times during the period, providing a rich setting for evaluating the effects of tax changes. I document significant and persistent bunching behavior at the kink, consistent with tax planning responses. To address identification concerns raised by recent critiques of traditional bunching methods, I apply the novel framework developed by Bertanha et al. (J Econom 237:105512, 2023a), which provides both partial and point identification of elasticity. Estimated elasticities range from 0.10 to 0.79 over the 2001 to 2019, with preferred point estimates between 0.13 and 0.42, declining over time as the kink was moved up the income distribution. The rapid adjustment of firms to changes in kink thresholds, accompanied by increases in capital investment and deductible expenses, suggests that observed bunching is primarily driven by tax planning through reporting behavior, rather than by underlying real economic activity. I also document heterogeneity across different firms ownership structures and provinces.