Abstract

Elasticity of taxable income has increasingly become an important subject matter for economists in recent times. This study provides an estimate for the Czech Republic by exploiting panel data for corporate income tax rates between 2004 and 2009. The severity of the tax evasion and avoidance issue in this country triggers a question about the existence of the elasticity itself. The uniqueness of this study also stems from its focus on proportional tax rates while other influential studies examine this subject for progressive taxation. The result of this research supports a hypothesis about indifference between taxable incme decision and the size of the tax rate; about fifty percent of the observations in the sample are not subject to taxation. The high level of tax avoidance could explain such an outcome intensifying the necessity to fight this fiscal policy phenomenon.

Highlights

  • Elasticity of taxable income has become a significant indicator for fiscal policies

  • The aim of this paper is to examine the existence of taxable income elasticity of corporate income tax (CIT) for the Czech economy

  • The outcomes of the above models do not reject the null hypothesis concerning the nonexistence of elasticity of taxable income for the sample of firms in the Czech Republic

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Summary

Introduction

Elasticity of taxable income has become a significant indicator for fiscal policies. It measures the responsiveness of an individual’s taxable income to a percentage change in the tax rate. While individuals and corporations are subject to taxation, there always exist legal ways to minimise taxable income and, by doing so, partially evade taxation. Corporations and higher-income class individuals, who can afford to pay more for tax consulting, are the most pervasive entities of this problem. They can modify their tax-deductible expenses or look for a tax haven and reshape their entrepreneurial plan to achieve the same goal. Vague terms in tax laws and their abundant complexity, often created to help politicians to maximise their personal utilities, is the main source of such a dilemma

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