Estimating taxable income responses with elasticity heterogeneity

Anil Kumar and Che-Yuan Liang

Journal of Public Economics, 2020, vol. 188, issue C

Abstract: We explore elasticity heterogeneity in the estimation of the elasticity of taxable income (ETI) and propose potentially valid instruments. We show that previously used instruments are not valid and yield weighted averages of ETIs of different taxpayers plus a bias. Using the NBER tax panel for 1979–1990, we find a weighted average ETI of 0.57 when using all available variation in budget set changes provided by the tax reforms in the data. Our results also demonstrate that elasticity heterogeneity is an important explanation for the remarkable divergence of estimates in the previous literature.

Keywords: Elasticity of taxable income; Elasticity heterogeneity; Tax reforms; Panel data (search for similar items in EconPapers)
JEL-codes: D11 H24 J22 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (17)

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Related works:
Working Paper: Estimating Taxable Income Responses with Elasticity Heterogeneity (2017)
Working Paper: Estimating Taxable Income Responses with Elasticity Heterogeneity (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:pubeco:v:188:y:2020:i:c:s0047272720300736

DOI: 10.1016/j.jpubeco.2020.104209

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