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Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income

Listed author(s):
  • Blomquist, Sören

    ()

    (Uppsala Center for Fiscal Studies)

  • Kumar, Anil

    (Dallas Federal Reserve)

  • Liang, Che-Yuan

    ()

    (Uppsala Center for Fiscal Studies)

  • Newey, Whitney K.

    (Department of Economics, MIT)

Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. A problem with most of these studies is that strong functional form assumptions are used and that heterogeneity in preferences is not allowed for. Building on Blomquist and Newey (2002) we in this paper develop a nonparametric method to estimate expected taxable income as a function of a nonlinear budget set, taking multidimensional heterogeneity and optimization errors fully into account. We reduce the dimensionality of the problem by exploiting structure implied by utility maximization with piecewise linear convex budget sets. We apply the method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.

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Paper provided by Uppsala University, Department of Economics in its series Working Paper Series, Center for Fiscal Studies with number 2014:1.

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Length: 37 pages
Date of creation: 03 Feb 2014
Handle: RePEc:hhs:uufswp:2014_001
Contact details of provider: Postal:
Department of Economics, Uppsala University, P. O. Box 513, SE-751 20 Uppsala, Sweden

Phone: + 46 18 471 25 00
Fax: + 46 18 471 14 78
Web page: http://www.nek.uu.se/
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