Estimating the Elasticity of Taxable Income When Earnings Responses Are Sluggish

Trine Engh Vattø

FinanzArchiv: Public Finance Analysis, 2020, vol. 76, issue 4, 329-369

Abstract: Estimates of the elasticity of taxable income (ETI) are conventionally obtained by stacking three-year overlapping differences in the estimation. This means that the ETI estimate is an average of first-, second-, and third-year effects. The present paper suggests that if gradual adjustment can be expected, the analyst should consider estimating the ETI by a dynamic panel data model. When Norwegian income tax return data for wage earners over a 14-year period (1995-2008) are used in the estimation, an ETI estimate of 0.15 is obtained from the dynamic specification, compared to 0.11 by the conventional approach. Importantly, the conventional approach fails to produce 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)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:mhr:finarc:urn:doi:10.1628/fa-2020-0012

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DOI: 10.1628/fa-2020-0012

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