Tax Reforms and Intertemporal Shifting of Wage Income: Evidence from Danish Monthly Payroll Records

TLDR: In this paper, the authors used monthly payroll records for all Danish employees to identify widespread intertemporal shifting of labor income in response to a tax reform that significantly reduced the marginal tax rates for one-fourth of all employees.

Abstract: This paper uses monthly payroll records for all Danish employees to identify widespread intertemporal shifting of labor income in response to a tax reform that significantly reduced the marginal tax rates for one-fourth of all employees. When ignoring shifting, the estimate of the overall elasticity of taxable income equals 0.1, and the elasticity is increasing with earnings. When removing the shifting component, the elasticity is close to zero at all earnings levels. The evidence also indicates that tax salience, liquidity constraints and firm willingness to cooperate in shifting are important factors in explaining shifting behavior. (JEL H24, H31, J22, J31)

Figures

Figure 1. Incentive to Shift One Month’s Salary from 2009 to 2010

Figure 4. Share of Employees Shifting Income

Figure 8. Share of Top Five Wage Earners Shifting Income by Firm Size

Table 5—Importance of Shifting for Estimates of the Elasticity of Taxable Income

Figure 3. Monthly Wages and Income Shifted

Figure 6. Share of Local Government Employees Shifting Income

Full text

American Economic Journal: Economic Policy 2016, 8(3): 233–257
http://dx.doi.org/10.1257/pol.20140233
233
Tax Reforms and Intertemporal Shifting of Wage Income:
Evidence from Danish Monthly Payroll Records
†
By C T K, S L-P,
 P E S*
This paper uses monthly payroll records for all Danish employees
to identify widespread intertemporal shifting of labor income in
response to a tax reform that signicantly reduced the marginal tax
rates for one-fourth of all employees. When ignoring shifting, the
estimate of the overall elasticity of taxable income equals 0.1, and
the elasticity is increasing with earnings. When removing the shift-
ing component, the elasticity is close to zero at all earnings levels.
The evidence also indicates that tax salience, liquidity constraints
and rm willingness to cooperate in shifting are important factors in
explaining shifting behavior. (JEL H24, H31, J22, J31)
T
his paper provides clear empirical evidence of large, widespread intertempo-
ral shifting responses in wage income. Intertemporal shifting of wage income
takes place when income earned in one tax year is paid out in another tax year, so
as to reduce the tax payment of the individual. The incentive to do so is present
whenever marginal tax rates vary over time, for example, because of changes in indi-
vidual circumstances (retirement, marriage, promotion, etc.), because of sunset pro-
visions that automatically change marginal tax rates at some specied future date,
or because of reforms that change the tax system from one year to the next year.
1
Knowledge of intertemporal shifting behavior is therefore relevant for evaluating
the revenue implications of tax reforms and the efciency loss and distributional
impact of the tax system.
1
A recent example of a sunset provision is the American Economic Growth and Tax Relief Reconciliation Act
of 2001 that lowered the top marginal tax rate from 39.6 percent to 35 percent but introduced a clause stating that
the tax cut would expire by 2011. After a two-year extension of the tax cut in 2010, the American Taxpayer Relief
Act of 2012 returned the top marginal tax rate to its 2001 level of 39.6 percent. The Congressional Budget Ofce
(2013) projects that 2013 tax revenue decreases because of shifting of income from calendar year 2013 into late
2012 in anticipation of the higher 2013 tax rate.
* Kreiner: Department of Economics, University of Copenhagen, Øster Farimagsgade 5, DK-1353 Copenhagen
K, Denmark (e-mail: ctk@econ.ku.dk); Leth-Petersen: Department of Economics, University of Copenhagen, Øster
Farimagsgade 5, DK-1353 Copenhagen K, Denmark (e-mail: soren.leth-petersen@econ.ku.dk); Skov: Auckland
University of Technology and Rockwool Foundation Research Unit, Sølvgade 10, 2. tv. DK-1307 Copenhagen K,
Denmark (e-mail: pskov@aut.ac.nz). We are grateful to Morten Appelsø, Raj Chetty, Christian Gillitzer, Hilary
Hoynes, Henrik Kleven, Wojciech Kopczuk, Søren Pedersen, Ray Rees, Emmanuel Saez, Joel Slemrod, Shlomo
Yitzhaki, four anonymous referees, and numerous seminar participants for comments and discussion. We also thank
the Danish tax administration (SKAT) for providing data and the Economic Policy Research Network (EPRN) and
the Rockwool Foundation Research Unit for providing nancial support. Søren Leth-Petersen acknowledges nan-
cial support from the the Danish Council for Independent Research, grant number 0602-01719B.
†
Go to http://dx.doi.org/10.1257/pol.20140233 to visit the article page for additional materials and author
disclosure statement(s) or to comment in the online discussion forum.

234 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY AUGUST 2016
Our empirical analysis is based on new Danish administrative records with
monthly information about wages and salaries of all employees, allowing us to
identify intertemporal income shifting in a way not possible with data measured
at the annual frequency. The identifying variation is provided by a large tax reform
in Denmark, which reduced the highest marginal tax rate on earnings from 63 per-
cent to 56 percent, thereby signicantly changing incentives for the one-fourth of
full-time employees with the highest incomes. The reform was passed in parliament
at the end of May 2009 and changed the tax scheme from 2010 onward, thereby cre-
ating an incentive for high-wage earners to postpone wage payments from the end
of 2009 to the beginning of 2010. This type of income shifting requires the cooper-
ation of the employer, who reports the earnings to the tax authorities, but is possible
without coming into conict with the tax law. The shifting behavior studied here is
therefore a classic example of tax avoidance. This is in contrast to, for example, the
United States, where such activity is not legal and would therefore be classied as
tax evasion.
Our analysis starts with graphical evidence revealing income shifting taking
place around the implementation of the tax reform. We observe a clear negative
spike in reported earnings of high-income individuals in the last months of 2009
and a positive spike in the beginning of 2010, and at the individual level we detect
taxpayers with a signicant drop in reported earnings at the end of 2009 followed
by a jump in the beginning of 2010. We detect no systematic effects in other months
or for a group of middle-income individuals with only negligible changes in incen-
tives, conrming that the observed pattern is driven by income shifting. We obtain
the same picture after controlling for a large number of covariates and also when
looking across industry sectors, showing that shifting behavior is a widespread
phenomenon.
Considering all the individuals with an incentive to shift income, we nd that the
average level of reported wage income is nearly 10 percent higher in January 2010
and correspondingly lower in November and December 2009, revealing large shift-
ing effects even at the macro level. The share of income shifted is steadily increasing
with income. On average, individuals in percentiles 95–99 shifted 15 percent of the
average monthly wage income around New Year 2010, and for the top 1 percent of
wage earners it was close to 30 percent.
Knowledge of intertemporal shifting behavior is relevant for the burgeoning lit-
erature, recently surveyed by Saez, Slemrod, and Giertz (2012), that exploits tax
reforms to identify the elasticity of taxable income (ETI) used to quantify the wel-
fare loss from taxation. It is well-known that short-run income shifting responses
around the implementation of tax reforms may cause the estimate of the ( short-run)
ETI to differ from the ( long-run) elasticity relevant for evaluating the distortionary
effects of taxation (e.g., Slemrod 1998).
When we run a simple difference-in-differences estimation on annual earnings
before and after the reform, we nd an overall ETI of around 0.1. The estimated
ETI is increasing as a function of income from 0 for individuals with the lowest
income levels within the treatment group to 0.25 for the taxpayers in the top 1 per-
cent of the income distribution. We show in different ways, for example, by exclud-
ing December and January observations, that these ETI estimates are almost entirely

VOL. 8 NO. 3 235
kreiner et al.: intertemporal shifting of wage income
due to income shifting responses. After removing the shifting component, short-run
elasticities are close to zero at all earnings levels.
The large income shifting response at the aggregate level is concentrated on a
few taxpayers. Among the employees with an incentive to shift income, we nd
less than 5 percent exploit the opportunity to shift income, but that these individ-
uals shift large amounts. This observed pattern in reported earnings is difcult to
reconcile with intertemporal changes in the timing of work, indicating the observed
movements in income are due to tax avoidance rather than real responses (Slemrod
1995). Moreover, the conclusion concerning bias in ETI estimates from temporary
variation in income is independent of whether the temporary variation is due to tax
avoidance or due to real responses.
The low share of employees engaging in shifting activity may seem surprising
but is consistent with other types of evidence showing taxpayers engage less in tax
avoidance than what is predicted by a standard economic model (Andreoni, Erard,
and Feinstein 1998). There may be different reasons why an employee does not
engage in intertemporal income shifting. First, we nd that shifting is negligible
among government employees, is more common in small private rms than in large
rms, and is much more common among the top-ve earners within a rm. This
may suggest that some employers are less willing to participate in tax avoidance
due to the risk of bad publicity, which limits income shifting to small/medium sized
private rms and top management. Second, we nd that shifting is less pronounced
for individuals with a low level of liquid assets relative to income, consistent with
the explanation that liquidity constraints prevent some tax taxpayers from shifting
income forward.
Third, by conducting a telephone survey of a randomly selected group of indi-
viduals and combining their responses with the register data, we show taxpayer
information and attention are important, in line with recent studies of other types of
behavioral responses to taxation (Chetty, Loony, and Kroft 2009; Chetty, Friedman,
and Saez 2013). Among the survey respondents with an incentive to shift income
only one out of ve is aware of the tax incentive and know it is legal to shift the
wage payments. The results further indicate that income shifting is concentrated
among those who are informed in the treatment group but, on the other hand, less
than 10 percent of the informed individuals actually engage in shifting. To conclude,
the results do not point to a single explanation but rather to several reasons that com-
plement each other in explaining why some employees engage in shifting activities
while others do not.
Previous studies of intertemporal income shifting have looked at annual income
data or aggregate data. Goolsbee (2000) looks at intertemporal income shifting of
the ve highest-paid employees in US public companies in response to the mar-
ginal tax rate increase implemented by President Clinton in 1993. He applies a
standard difference-in-differences setup on annual income but allows tax-reform
variation across treatment and control groups to affect income already in the year
before the reform in order to detect income shifting. The results indicate that most
of the variation in taxable income of these very highly paid individuals seems to
be driven by retiming in the realization of stock options, implying that most of the
ETI is driven by intertemporal income shifting rather than by permanent income

236 AMERICAN ECONOMIC JOURNAL: ECONOMIC POLICY AUGUST 2016
responses. He nds little responsiveness of salary and bonuses to the tax hike. This
is in contrast to Sammartino and Weiner (1997), who nd evidence in aggregate
data of time-adjustments in bonuses due to the 1993 US tax reform. A reason for
this discrepancy may be that it is easier and more valuable for top executives to
change the timing of the realization of stock options rather than bonuses, while
other high-income individuals, who do not have stock options, instead focus their
effort on shifting bonuses and regular wage and salary payments. Our results pro-
vide some support for this conjecture as our income measure only includes wage
income, implying the shifting behavior documented in our study is not related to the
realization of stock options.
Heim (2009) uses a similar approach as Goolsbee but without detecting signif-
icant intertemporal effects in income responses to the US tax reforms in 2001 and
2003, while Giertz (2010) nds evidence of intertemporal shifting effects in response
to the US tax reforms in the 1990s. Compared to these studies, based on annual
income, the monthly frequency of our data offers a unique possibility to obtain a
more precise empirical identication of intertemporal income shifting responses.
The remainder of the paper is organized as follows. Section I describes the
Danish 2010 tax reform, the data sources, and our approach to identify income shift-
ing behavior. Section II describes the empirical results on income shifting, while
Section III analyzes how much of the elasticity of taxable income may be attributed
to temporary income shifting behavior. Finally, Section IV concludes.
I. Description of Policy, Data, and Identication Approach
The analysis is based on the Danish 2010 tax reform that signicantly reduced the
taxation of labor income with the declared goal of stimulating labor supply. The tax
cut on labor income was nanced by decreasing the value of deductions (including
interest payments), reducing business subsidies, and increasing energy and envi-
ronmental taxes, thereby keeping government revenue constant (before behavioral
responses). The reform was proposed on March 1, 2009 , passed in the Danish par-
liament on May 28 the same year, and signed into law taking effect from January 1,
2010 . As is usually the case with tax reforms, the distance between the proposal/
decision and the actual implementation gave taxpayers an opportunity to save taxes
by shifting income across the two tax years.
The reform mainly reduced marginal tax rates on labor income for high-wage
earners. Table 1 displays the different taxes applying to labor income in Denmark
before and after the reform. It consists of so-called labor market contribution, a
regional tax, a church tax and a bottom tax, which apply to all income above a small
standard deduction and give in total a marginal tax rate on labor income of 43.5 per-
cent in 2009 (column 1). In addition to these taxes, high-wage earners with income
above a cutoff of 377,000 Danish kroner (DKK) in 2009 have to pay a middle tax
and a top tax implying that they face a marginal tax rate of 62.8 percent (column 2).
2
2
With an exchange rate of 6 DKK per US dollar, the middle/top tax cutoff of DKK 377,000 corresponds to
around US$63,000.

VOL. 8 NO. 3 237
kreiner et al.: intertemporal shifting of wage income
The tax reform abolished the middle tax bracket altogether and reduced the
bottom tax rate a little, implying that the marginal tax rate for high-wage earners
(
τ
H
)
dropped to 56.0 percent in 2010 (column 4), equivalent to an increase in the
net-of-tax rate, 1 − τ
H
, of 18 percent. For comparison, individuals with income just
below the middle/top tax cutoff faced a marginal tax rate of 42.2 percent after the
reform (column 3), corresponding to an increase in the net-of-tax rate, 1 − τ
L
, of
only 2 percent.
The incentive to shift income was also inuenced by a change in the middle/
top tax income cutoff, which was increased from DKK 377,000 to DKK 424,000
as shown in Table 1. Figure 1 shows how the incentive to shift one month’s salary
from 2009 to 2010 varies with the (average) monthly level of gross taxable earnings
and salaries in 2009. The left panel shows the gain measured in DKK and the right
panel shows the gain measured in proportion to the monthly net-of-tax earnings. For
individuals with monthly incomes below DKK 32,000, the gain from shifting is very
small (less than DKK 1,000). It then increases with earnings due to the change in the
middle/top tax cutoff, and for people with monthly earnings above DKK 35,000, the
incentive is constant at 7 percent of the amount shifted (the slope in panel A), giv-
ing a sizable economic gain corresponding to 18 percent of the monthly net-of-tax
earnings (see panel B). Note that the changes displayed in panel B correspond to the
changes in the net-of-tax rate of 2 percent and 18 percent for individuals below and
above, respectively, the top/middle tax cut-off, with the exception of individuals in
a small income range where the incentive is affected by the change in the middle/
top tax income cutoff.
It was possible to shift payments of income earned in the second half of 2009
into 2010 without coming into conict with the Danish tax law. According to the tax
law, companies have to remit taxes on labor income at the time when income is paid
out to the employees, and wages and salaries have to be paid out no later than six
T 1—M T R  L I
Year 2009 Year 2010
Labor income (LI) in 1,000 DKK: < 377 > 377 < 424 > 424
Tax Tax base
Rate (%) Rate (%)
Rate (%) Rate (%)
Labor market contributions (LMC)
LI 8 8 8 8
Regional tax (RT) LI × (1 − LMC)
32.8 32.8 32.8 32.8
Bottom tax bracket (BT) LI × (1 − LMC)
5.04 5.04 3.67 3.67
Middle tax bracket (MT) LI × (1 − LMC)
0 6 0 0
Top tax bracket (TT) LI × (1 − LMC)
0 15 0 15
Church tax (CT) LI × (1 − LMC)
0.7 0.7 0.7 0.7
Marginal tax rate on labor income 43.5 62.8 42.2 56.0
Notes: The marginal tax rate equals LMC + (1 − LMC) × (RT + BT + MT + TT + CT). These computations
of the marginal tax rates apply to the majority of taxpayers. The regional tax varies a little across municipalities.
The top/middle tax cutoff depends also on the size of net capital income (excluding stock income) but only if it is
positive, and the large majority of taxpayers have negative net capital income. We also disregard the possibility of
transferring unutilized allowances between spouses when computing the middle tax, implying that some married
persons with income in a certain range pay the top tax but not the middle tax.
Source: Website of the Danish Ministry of Taxation (www.skm.dk)

Frequently asked questions

Q1. What are the contributions mentioned in the paper "Tax reforms and intertemporal shifting of wage income: evidence from danish monthly payroll records" ?

This paper uses monthly payroll records for all Danish employees to identify widespread intertemporal shifting of labor income in response to a tax reform that significantly reduced the marginal tax rates for one-fourth of all employees. 

Q2. What are the future works in "Tax reforms and intertemporal shifting of wage income: evidence from danish monthly payroll records" ?

In an extension of this paper, the authors look more closely at year-end tax planning of top managers and their choice of avoidance strategies ( Kreiner, Leth-Petersen, and Skov 2014 ). Nevertheless, it is striking that the authors obtain reasonably large effects in a setting where only one out of five seems to be informed about the possibility of income shifting. Their evidence points to the importance of liquidity constraints and firm cooperation but the authors can not rule out other explanations, for example, tax moral and social norms. For example, standard optimal tax theories call for age-dependency in tax rates ( Banks and Diamond 2011 ), while the possibility of shifting, ceteris paribus, calls for constant marginal tax rates over the life cycle, which removes incentives to shift income payments across time. 

Q3. What percentage of shifters are in the group with the lowest income?

The share of shifters is 1–2 percent in the group with the lowest income, 3 percent in the second group, 5 percent in the third group, and close to 8 percent for the top-1 percent highest paid employees. 

Q4. How many people in the treatment group said it was beneficial to get extra income after January 1?

Only about one-third of the taxpayers state it is most beneficial to obtain extra wage income after January 1, 2010, and most people state it is equally beneficial to get it before or after January 1. 

Q5. How many people in the treatment group were able to point out that it would be beneficial?

only two out of five respondents in the treatment group were able to point out that it would be most beneficial to receive the extra payment after January 1. 

Q6. How many shifters are there in the Danish payroll?

The monthly payroll (eIncome) register from the Danish tax authority (SKAT)Shifting appears to be much more widespread among small firms where 5–6 percent are shifters according to the analysis. 

Q7. How many people in the treatment group were informed of the shifting opportunity?

if the authors define individuals to be aware of the shifting opportunity if they answer both “after January 1” and “legal,” then only 17 percent of the individuals in the treatment group are informed. 

Q8. How does the formula determine the percentage of income shifted?

Using formula (2), it is possible to obtain an estimate of the average income share shifted from 2009 to 2010, but the identification strategy does not fully exploit that intertemporal shifting behavior generates both a decrease in the observed income before the reform and an increase in income after the reform at the individual level.