On Bunching and Identification of the Taxable Income Elasticity

Sören Blomquist, Whitney Newey, Anil Kumar and Che-Yuan Liang

Journal of Political Economy, 2021, vol. 129, issue 8, 2320 - 2343

Abstract: The elasticity of taxable income is vital when predicting the effect of taxes. Bunching at kinks/notches has been used to estimate this elasticity. We show that when the preference distribution is unrestricted, bunching at a kink or a notch is not informative about the size of the elasticity, and neither is the entire distribution of taxable income. Bunching identifies the taxable income elasticity when the preference distribution is correctly specified across the kink and provides bounds under restrictions on the preference distribution. We find wide bounds in an empirical example based on upper and lower bounds for the preference density.

Date: 2021
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Related works:
Working Paper: On Bunching and Identi?cation of the Taxable Income Elasticity (2019)
Working Paper: On Bunching and Identification of the Taxable Income Elasticity (2017)
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