The Taxable Income Elasticity: A Structural Differencing Approach

Anil Kumar and Che-Yuan Liang

No 2015:1, Working Paper Series, Center for Fiscal Studies from Uppsala University, Department of Economics

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.

Keywords: taxable income; nonlinear budget sets; panel data (search for similar items in EconPapers)
JEL-codes: D11 H24 J22 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2015-01-07
New Economics Papers: this item is included in nep-pbe and nep-pub
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Citations: View citations in EconPapers (4)

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