Toward obtaining a consistent estimate of the elasticity of taxable income using difference-in-differences

Caroline Weber ()

Journal of Public Economics, 2014, vol. 117, issue C, 90-103

Abstract: The elasticity of taxable income (ETI) is a central parameter for tax policy debates. This paper shows that mean reversion prevents most estimators employed in the literature from obtaining consistent estimates of the ETI. A new method is proposed that will resolve inconsistency due to mean reversion under testable assumptions regarding the degree of serial correlation in the error term. Using this procedure, I estimate an ETI of 0.858, which is about twice as large as the estimates found in the most frequently cited paper on this subject [13]. The corresponding elasticity of broad income is 0.475.

Keywords: Income tax; Taxable income; Behavioral response (search for similar items in EconPapers)
JEL-codes: H21 H24 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (125)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:117:y:2014:i:c:p:90-103

DOI: 10.1016/j.jpubeco.2014.05.004

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