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On Bunching and Identification of the Taxable Income Elasticity

Author

Listed:
  • Sören Blomquist
  • Whitney K. Newey
  • Anil Kumar
  • Che-Yuan Liang

Abstract

The elasticity of taxable income is vital when predicting the effect of taxes. Bunching at kinks/notches has been used to estimate this elasticity. We show that when the preference distribution is unrestricted, bunching at a kink or a notch is not informative about the size of the elasticity, and neither is the entire distribution of taxable income. Bunching identifies the taxable income elasticity when the preference distribution is correctly specified across the kink and provides bounds under restrictions on the preference distribution. We find wide bounds in an empirical example based on upper and lower bounds for the preference density.

Suggested Citation

  • 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.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/714446
    DOI: 10.1086/714446
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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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