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Maximum Likelihood Bunching Estimators of the ETI

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Abstract

We propose a maximum likelihood method to improve the bunching approach of estimating the elasticity of taxable income (ETI), and derive estimators for several model settings such as bunching with optimization frictions, notches, and heterogeneity in the ETI. Modelling optimization frictions explicitly, our estimators fit the data of several published studies very well. In the presence of a notch, the results can differ substantially from those obtained using the polynomial approach. If there is heterogeneity in the ETI, the elasticity among those who bunch exceeds the average elasticity in the population.

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  • Aronsson, Thomas & Jenderny, Katharina & Lanot, Gauthier, 2021. "Maximum Likelihood Bunching Estimators of the ETI," Umeå Economic Studies 987, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0987
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    1. Bastani, Spencer & Selin, Håkan, 2014. "Bunching and non-bunching at kink points of the Swedish tax schedule," Journal of Public Economics, Elsevier, vol. 109(C), pages 36-49.
    2. Sören Blomquist & Whitney K. Newey, 2017. "The Bunching Estimator Cannot Identify the Taxable Income Elasticity," CESifo Working Paper Series 6736, CESifo.
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    5. Aronsson, Thomas & Jenderny, Katharina & Lanot, Gauthier, 2022. "The quality of the estimators of the ETI," Journal of Public Economics, Elsevier, vol. 212(C).
    6. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
    7. Emmanuel Saez, 2010. "Do Taxpayers Bunch at Kink Points?," American Economic Journal: Economic Policy, American Economic Association, vol. 2(3), pages 180-212, August.
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    9. Jacob A. Mortenson & Heidi R. Schramm & Andrew Whitten, 2019. "The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional IRAs," National Tax Journal, National Tax Association;National Tax Journal, vol. 72(3), pages 507-542, September.
    10. Sören Blomquist & Whitney K. Newey & Anil Kumar & Che-Yuan Liang, 2021. "On Bunching and Identification of the Taxable Income Elasticity," Journal of Political Economy, University of Chicago Press, vol. 129(8), pages 2320-2343.
    11. Raj Chetty & John N. Friedman & Tore Olsen & Luigi Pistaferri, 2011. "Adjustment Costs, Firm Responses, and Micro vs. Macro Labor Supply Elasticities: Evidence from Danish Tax Records," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 126(2), pages 749-804.
    12. 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.
    13. Feldstein, Martin, 1995. "The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 551-572, June.
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    More about this item

    Keywords

    Bunching Estimators; Elasticity of Taxable Income; Income Tax;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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

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