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Estimating the Elasticity of Taxable Income When Earnings Responses Are Sluggish

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  • Trine Engh Vattø

Abstract

Estimates of the elasticity of taxable income (ETI) are conventionally obtained by stacking three-year overlapping differences in the estimation. This means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper suggests that if gradual adjustment can be expected, the analyst should consider estimating the ETI by a dynamic panel data model. When Norwegian income tax return data for wage earners over a 14-year period (1995-2008) are used in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 by the conventional approach. Importantly, the conventional approach fails to produce a long-term elasticity estimate by increasing the time span of each difference.

Suggested Citation

  • Trine Engh Vattø, 2020. "Estimating the Elasticity of Taxable Income When Earnings Responses Are Sluggish," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 76(4), pages 329-369.
    • Handle: RePEc:mhr:finarc:urn:doi:10.1628/fa-2020-0012
    DOI: 10.1628/fa-2020-0012
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    More about this item

    Keywords

    elasticity of taxable income; time frame; tax reform; earnings dynamics;
    All these keywords.

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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