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The Taxable Income Elasticity: A Structural Differencing Approach

Author

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  • Kumar, Anil

    () (Research Department, Federal Reserve Bank of Dallas)

  • Liang, Che-Yuan

    () (Uppsala Center for Fiscal Studies)

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 a 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

  • 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.
  • Handle: RePEc:hhs:uufswp:2015_001
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    References listed on IDEAS

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    6. Feldstein, Martin, 1995. "Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act," Scholarly Articles 2766676, Harvard University Department of Economics.
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    Citations

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    Cited by:

    1. Neisser, Carina, 2017. "The elasticity of taxable income: A meta-regression analysis," ZEW Discussion Papers 17-032, ZEW - Leibniz Centre for European Economic Research.
    2. 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.
    3. Neisser, Carina, 2018. "The Elasticity of Taxable Income: A Meta-Regression Analysis," IZA Discussion Papers 11958, Institute of Labor Economics (IZA).
    4. Carina Neisser, 2017. "The elasticity of taxable income: A meta-regression analysis," Working Papers 2017/10, Institut d'Economia de Barcelona (IEB).

    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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