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Estimating Taxable Income Responses with Elasticity Heterogeneity

Author

Listed:
  • Anil Kumar
  • Che-Yuan Liang

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.

Suggested Citation

  • Anil Kumar & Che-Yuan Liang, 2016. "Estimating Taxable Income Responses with Elasticity Heterogeneity," Working Papers 1611, Federal Reserve Bank of Dallas.
    • 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. Carina Neisser, 2021. "The Elasticity of Taxable Income: A Meta-Regression Analysis [The top 1% in international and historical perspective]," The Economic Journal, Royal Economic Society, vol. 131(640), pages 3365-3391.
    2. Matthias Krapf & David Staubli, 2020. "The Corporate Elasticity of Taxable Income: Event Study Evidence from Switzerland," CESifo Working Paper Series 8715, CESifo.
    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.
    4. Masayoshi Hayashi, 2021. "Transfer Benefits, Implicit Taxes, and the Earnings of Welfare Recipients: Evidence from Public Assistance Programs in Japan," CIRJE F-Series CIRJE-F-1164, CIRJE, Faculty of Economics, University of Tokyo.
    5. Krapf, Matthias & Staubli, David, 2025. "Regional variations in corporate tax responsiveness: Evidence from Switzerland," European Economic Review, Elsevier, vol. 171(C).
    6. Xavier Dufour-Simard & Pierre-Carl Michaud & Michael Smart, 2025. "Is the elasticity of taxable income mostly an income effect ?," CIRANO Working Papers 2025s-05, CIRANO.
    7. Michaël Sicsic, 2023. "L’élasticité de l’offre de travail et des revenus dans la littérature. Une analyse comparative des méthodes et des résultats sur données microéconomiques," Revue de l'OFCE, Presses de Sciences-Po, vol. 0(4), pages 5-40.
    8. Marie‐Noëlle Lefebvre & Etienne Lehmann & Michaël Sicsic, 2025. "Estimating the Laffer tax rate on capital income: cross‐base responses matter!," Scandinavian Journal of Economics, Wiley Blackwell, vol. 127(2), pages 460-489, April.
    9. Jakobsen, Katrine Marie & Søgaard, Jakob Egholt, 2022. "Identifying behavioral responses to tax reforms: New insights and a new approach," Journal of Public Economics, Elsevier, vol. 212(C).
    10. Soren Blomquist & Anil Kumar & Che-Yuan Liang & Whitney K. Newey, 2022. "Nonlinear Budget Set Regressions for the Random Utility Model," Working Papers 2219, Federal Reserve Bank of Dallas.
    11. Fei Yang & Zhenlin Zhang, 2025. "Economic Drivers of China's Declining Fertility: The Role of Digital Inclusive Finance and Household Debt," Journal of International Development, John Wiley & Sons, Ltd., vol. 37(3), pages 675-696, April.
    12. Sören Blomquist & Jerry A. Hausman & Whitney K. Newey, 2023. "The Econometrics of Nonlinear Budget Sets," Annual Review of Economics, Annual Reviews, vol. 15(1), pages 287-306, September.
    13. Kumar, Anil & Liang, Che-Yuan, 2020. "Estimating taxable income responses with elasticity heterogeneity," Journal of Public Economics, Elsevier, vol. 188(C).
    14. 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.
    15. Dingquan Miao & Håkan Selin & Martin Söderström, 2025. "Earnings Responses to Even Higher Taxes," The Economic Journal, Royal Economic Society, vol. 135(667), pages 838-860.
    16. Hans Schytte Sigaard, 2022. "Labor Supply Responsiveness to Tax Reforms," Economics Working Papers 2022-04, Department of Economics and Business Economics, Aarhus University.
    17. Soren Blomquist & Anil Kumar & Whitney K. Newey, 2024. "Panel Estimation of Taxable Income Elasticities with Heterogeneity and Endogenous Budget Sets," Papers 2501.00633, arXiv.org.
    18. Macnamara, Patrick & Pidkuyko, Myroslav & Rossi, Raffaele, 2024. "Marginal tax rates and income in the long run: Evidence from a structural estimation," Journal of Monetary Economics, Elsevier, vol. 142(C).
    19. Wei Zou & Fei Yang, 2024. "Does City Shape Affect China's Economic Development?," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 32(1), pages 21-56, January.
    20. Sigaard, Hans Schytte, 2023. "Estimating labor supply responses to Danish tax reforms," Journal of Public Economics, Elsevier, vol. 224(C).

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    Keywords

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    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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