Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income

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

No 2014:1, Working Paper Series, Center for Fiscal Studies from Uppsala University, Department of Economics

Abstract: Given the key role of the taxable income elasticity in designing an optimal tax system there are many studies attempting to estimate this elasticity. A problem with most of these studies is that strong functional form assumptions are used and that heterogeneity in preferences is not allowed for. Building on Blomquist and Newey (2002) we in this paper develop a nonparametric method to estimate expected taxable income as a function of a nonlinear budget set, taking multidimensional heterogeneity and optimization errors fully into account. We reduce the dimensionality of the problem by exploiting structure implied by utility maximization with piecewise linear convex budget sets. We apply the method to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.6 and a significant income elasticity of -0.08.

Keywords: Nonlinear budget sets; nonparametric estimation; additive models; heterogeneous preferences; taxable income (search for similar items in EconPapers)
JEL-codes: C14 C24 H31 J22 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2014-02-03
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Citations: View citations in EconPapers (12)

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Related works:
Working Paper: Individual heterogeneity, nonlinear budget sets and taxable income (2015)
Working Paper: Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income (2015)
Working Paper: Individual heterogeneity, nonlinear budget sets and taxable income (2015)
Working Paper: Individual heterogeneity, nonlinear budget sets, and taxable income (2014)
Working Paper: Individual heterogeneity, nonlinear budget sets, and taxable income (2014)
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