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Estimating Taxable Income Responses with Elasticity Heterogeneity

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Abstract

We extend a standard taxable income model with its typical functional-form assumptions to account for nonlinear budget sets. We propose a new method to estimate taxable income elasticity that is more policy relevant than the typically estimated elasticity based on linearized budget sets. Using U.S. data from the NBER tax panel for 1979-1990 and differencing methods, we estimate an elasticity of 0.75 for taxable income and 0.20 for broad income. These estimates are higher than those obtained by specifications based on linearization. Our approach offers a new way to address the problem of endogenous observed marginal tax rates.

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  • Kumar, Anil & Liang, Che-Yuan, 2016. "Estimating Taxable Income Responses with Elasticity Heterogeneity," Working Papers 1611, Federal Reserve Bank of Dallas, revised 02 Mar 2018.
  • Handle: RePEc:fip:feddwp:1611
    DOI: 10.24149/wp1611r2
    Note: The original version of the paper circulated as “The Taxable Income Elasticity: A Structural Differencing Approach."
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    Cited by:

    1. Kumar, Anil & Liang, Che-Yuan, 2016. "Estimating Taxable Income Responses with Elasticity Heterogeneity," Working Papers 1611, Federal Reserve Bank of Dallas, revised 02 Mar 2018.
    2. Neisser, Carina, 2017. "The elasticity of taxable income: A meta-regression analysis," ZEW Discussion Papers 17-032, ZEW - Leibniz Centre for European Economic Research.
    3. Liang, Che-Yuan, 2018. "Taxes and Household Labor Supply: Estimating Distributional Effects of Nonlinear Prices on Multidimensional Choice," Working Paper Series 2018:2, Uppsala University, Department of Economics.

    More about this item

    Keywords

    taxable income; nonlinear budget sets; panel data;

    JEL classification:

    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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