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Maximum Likelihood Bunching Estimators of the ETI

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Abstract

We propose a maximum likelihood method to improve the bunching approach of estimating the elasticity of taxable income (ETI), and derive estimators for several model settings such as bunching with optimization frictions, notches, and heterogeneity in the ETI. Modelling optimization frictions explicitly, our estimators fit the data of several published studies very well. In the presence of a notch, the results can differ substantially from those obtained using the polynomial approach. If there is heterogeneity in the ETI, the elasticity among those who bunch exceeds the average elasticity in the population.

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  • Aronsson, Thomas & Jenderny, Katharina & Lanot, Gauthier, 2021. "Maximum Likelihood Bunching Estimators of the ETI," Umeå Economic Studies 987, Umeå University, Department of Economics.
    • Handle: RePEc:hhs:umnees:0987
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    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • 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

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