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Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Blomquist, Sören & Kumar, Anil & Liang, Che-Yuan & Newey, Whitney K., 2014. "Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income," Working Paper Series, Center for Fiscal Studies 2014:1, Uppsala University, Department of Economics.
    • Handle: RePEc:hhs:uufswp:2014_001
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    Citations

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    Cited by:

    1. Chernozhukov, Victor & Fernández-Val, Iván & Newey, Whitney K., 2019. "Nonseparable multinomial choice models in cross-section and panel data," Journal of Econometrics, Elsevier, vol. 211(1), pages 104-116.
    2. Claudia Keser & David Masclet & Claude Montmarquette, 2020. "Labor Supply, Taxation, and the Use of Tax Revenues: A Real-Effort Experiment in Canada, France, and Germany," Public Finance Review, , vol. 48(6), pages 714-750, November.
    3. Kumar, Anil & Liang, Che-Yuan, 2015. "The Taxable Income Elasticity: A Structural Differencing Approach," Working Paper Series, Center for Fiscal Studies 2015:1, Uppsala University, Department of Economics.
    4. Victor Chernozhukov & Jerry A. Hausman & Whitney K. Newey, 2019. "Demand Analysis with Many Prices," NBER Working Papers 26424, National Bureau of Economic Research, Inc.
    5. Soren Blomquist & Whitney K. Newey, 2017. "The bunching estimator cannot identify the taxable income elasticity," CeMMAP working papers 40/17, Institute for Fiscal Studies.
    6. Bertanha, Marinho & McCallum, Andrew H. & Seegert, Nathan, 2023. "Better bunching, nicer notching," Journal of Econometrics, Elsevier, vol. 237(2).
    7. 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.
    8. Leonard Goff, 2022. "Partial Identification from Bunching at Kinks and Notches," Papers 2205.10310, arXiv.org, revised Sep 2026.
    9. Kumar, Anil & Liang, Che-Yuan, 2020. "Estimating taxable income responses with elasticity heterogeneity," Journal of Public Economics, Elsevier, vol. 188(C).
    10. Daniel Wilhelm, 2018. "Testing for the presence of measurement error," CeMMAP working papers CWP45/18, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
    11. Einav, Liran & Finkelstein, Amy & Schrimpf, Paul, 2017. "Bunching at the kink: Implications for spending responses to health insurance contracts," Journal of Public Economics, Elsevier, vol. 146(C), pages 27-40.
    12. Jerry A. Hausman & Whitney K. Newey, 2016. "Individual Heterogeneity and Average Welfare," Econometrica, Econometric Society, vol. 84, pages 1225-1248, May.
    13. Liang, Che-Yuan, 2014. "Distribution-Free Structural Estimation with Nonlinear Budget Sets," Working Paper Series, Center for Fiscal Studies 2014:4, Uppsala University, Department of Economics.
    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. Einav, Liran & Finkelstein, Amy & Schrimpf, Paul, 2019. "Reprint of: Bunching at the kink: Implications for spending responses to health insurance contracts," Journal of Public Economics, Elsevier, vol. 171(C), pages 117-130.
    16. 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.
    17. Gregory Cox, 2018. "Almost Sure Uniqueness of a Global Minimum Without Convexity," Papers 1803.02415, arXiv.org, revised Feb 2019.
    18. Christopher Dobronyi & Christian Gouri'eroux, 2020. "Consumer Theory with Non-Parametric Taste Uncertainty and Individual Heterogeneity," Papers 2010.13937, arXiv.org, revised Jan 2021.
    19. 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.
    20. Jerry Hausman & Whitney K. Newey, 2014. "Individual Heterogeneity and Average Welfare," CeMMAP working papers 42/14, Institute for Fiscal Studies.
    21. Myunghyun Song, 2024. "Identification and Inference in General Bunching Designs," Papers 2411.03625, arXiv.org, revised Feb 2025.
    22. Blomquist, Sören & Simula, Laurent, 2019. "Marginal deadweight loss when the income tax is nonlinear," Journal of Econometrics, Elsevier, vol. 211(1), pages 47-60.
    23. Sören Blomquist, 2023. "Evaluating the Discrete Choice and BN Methods to Estimate Labor Supply Functions," CESifo Working Paper Series 10827, CESifo.
    24. Hernández-Pizarro, Helena M. & Nicodemo, Catia & Casasnovas, Guillem López, 2020. "Discontinuous system of allowances: The response of prosocial health-care professionals," Journal of Public Economics, Elsevier, vol. 190(C).
    25. Richard Blundell, 2017. "What Have We Learned from Structural Models?," American Economic Review, American Economic Association, vol. 107(5), pages 287-292, May.

    More about this item

    Keywords

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    JEL classification:

    • C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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