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Estimating the elasticity of taxable income when earnings responses are sluggish

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Abstract

Estimates of the elasticity of taxable income (ETI) is conventionally obtained by “stacking” three-year overlapping differences in the estimation. In effect, this means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper draws attention to this implication and suggests that if there is gradual adjustment the analyst should rather estimate the ETI by a dynamic panel data model. When using Norwegian income tax return data for wage earners over a 14-year period (1995−2008) in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 for the conventional approach. Importantly, the conventional approach fails to render a long-term elasticity estimate by increasing the time span of each difference.

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  • Trine Engh Vattø, 2020. "Estimating the elasticity of taxable income when earnings responses are sluggish," Discussion Papers 926, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:926
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    File URL: https://www.ssb.no/en/forskning/discussion-papers/_attachment/417092
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    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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