Estimating the elasticity of taxable income when earnings responses are sluggish

Trine Engh Vattø ()
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Trine Engh Vattø: Statistics Norway, https://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: Estimates of the elasticity of taxable income (ETI) is conventionally obtained by “stacking” three-year overlapping differences in the estimation. In effect, this means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper draws attention to this implication and suggests that if there is gradual adjustment the analyst should rather estimate the ETI by a dynamic panel data model. When using Norwegian income tax return data for wage earners over a 14-year period (1995−2008) in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 for the conventional approach. Importantly, the conventional approach fails to render a long-term elasticity estimate by increasing the time span of each difference.

Keywords: elasticity of taxable income; time frame; tax reform; earnings dynamics (search for similar items in EconPapers)
JEL-codes: H24 H31 J22 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2020-04
New Economics Papers: this item is included in nep-lma, nep-pbe and nep-pub
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Persistent link: https://EconPapers.repec.org/RePEc:ssb:dispap:926

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