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Estimating tax income elasticities using a group-averaged synthetic tax instrument

Author

Listed:
  • Allan Seuri

    (Tampere University)

Abstract

A common approach to estimating the elasticity of income to taxation is to construct an instrumental variable using synthetic tax rates. Individual-level income dynamics threaten the validity of this instrument, but this problem can potentially be mitigated by group-averaging the instrument. In this article I show that rather than imposing an arbitrary minimum threshold for group sizes to avoid small-sample bias, researchers should use leave-one-out group averages. Using CPS data I show that this correction increases the estimate for broad income elasticity.

Suggested Citation

  • Allan Seuri, 2019. "Estimating tax income elasticities using a group-averaged synthetic tax instrument," Economics Bulletin, AccessEcon, vol. 39(3), pages 2137-2141.
    • Handle: RePEc:ebl:ecbull:eb-19-00382
    as

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    References listed on IDEAS

    as
    1. Raj Chetty, 2009. "Is the Taxable Income Elasticity Sufficient to Calculate Deadweight Loss? The Implications of Evasion and Avoidance," American Economic Journal: Economic Policy, American Economic Association, vol. 1(2), pages 31-52, August.
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    3. Weber, Caroline E., 2014. "Toward obtaining a consistent estimate of the elasticity of taxable income using difference-in-differences," Journal of Public Economics, Elsevier, vol. 117(C), pages 90-103.
    4. Paul Goldsmith-Pinkham & Isaac Sorkin & Henry Swift, 2020. "Bartik Instruments: What, When, Why, and How," American Economic Review, American Economic Association, vol. 110(8), pages 2586-2624, August.
    5. Deaton, Angus, 1985. "Panel data from time series of cross-sections," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 109-126.
    6. Devereux, Paul J., 2007. "Improved Errors-in-Variables Estimators for Grouped Data," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 278-287, July.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    instrumental variables; elasticity of taxable income; grouping estimation; leave-one-out;
    All these keywords.

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents

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