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Toward obtaining a consistent estimate of the elasticity of taxable income using difference-in-differences

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  • Weber, Caroline E.

Abstract

The elasticity of taxable income (ETI) is a central parameter for tax policy debates. This paper shows that mean reversion prevents most estimators employed in the literature from obtaining consistent estimates of the ETI. A new method is proposed that will resolve inconsistency due to mean reversion under testable assumptions regarding the degree of serial correlation in the error term. Using this procedure, I estimate an ETI of 0.858, which is about twice as large as the estimates found in the most frequently cited paper on this subject [13]. The corresponding elasticity of broad income is 0.475.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:pubeco:v:117:y:2014:i:c:p:90-103
    DOI: 10.1016/j.jpubeco.2014.05.004
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    More about this item

    Keywords

    Income tax; Taxable income; Behavioral response;
    All these keywords.

    JEL classification:

    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies

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