Bias in Tax Progressivity Estimates

Johannes König

National Tax Journal, 2023, vol. 76, issue 2, 267 - 289

Abstract: Tax progressivity is central in public and political debates when questions of vertical equity are raised. Applied, structural research demands a simple way to capture it. A power function approximation delivers one parameter that captures the residual income elasticity — a summary measure of progressivity. This approximation is accurate, tractable, and interpretable, and hence immensely popular. The most common procedure to estimate this parameter, a log ordinary least squares specification, produces biased and inconsistent estimates. A nonlinear estimator solves this issue and, using different data sets, I find differences in estimates between 6 and 14 percent.

Date: 2023
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