Tax sheltering cost among high-income taxpayers: Evidence from an Australian tax policy change

We present empirical evidence on the cost of tax sheltering among high-income taxpayers within
progressive income tax systems. Exploring a unique personal income tax policy change in Australia, we
use “bunching” around the top tax threshold to estimate costs of tax sheltering and the Elasticity of
Taxable Income (ETI). Our findings reveal substantial behavioural responses to tax changes among
high-income taxpayers, particularly those with greater flexibility in income adjustment, suggesting that
tax sheltering behaviours play a pivotal role in their responses. When accounting for these costs, the
estimated ETI significantly increases, emphasizing the necessity of considering tax sheltering in tax
policy analysis. We contribute to the ongoing discourse on optimal tax policy design and its impact on
economic behaviour. Our findings have important implications for the policy debates on whether highincome
individuals should be taxed at higher rates.