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Individual heterogeneity, nonlinear budget sets and taxable income

Sören Blomquist, Anil Kumar (), Che-Yuan Liang () and Whitney K. Newey ()
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Whitney K. Newey: Institute for Fiscal Studies and MIT

No CWP21/15, CeMMAP working papers from Centre for Microdata Methods and Practice, Institute for Fiscal Studies

Abstract: Many studies have estimated the effect of taxes on taxable income. To account for nonlinear taxes these studies either use instrumental variables approaches that are not fully consistent or impose strong functional form assumptions. None allow for general heterogeneity in preferences. In this paper we derive the expected value and distribution of taxable income conditional on a nonlinear budget set, allowing general heterogeneity and optimization error in taxable income. We find an important dimension reduction and use that to develop nonparametric estimation methods. We show how to nonparametrically estimate the expected value of taxable income imposing all the restrictions of utility maximization and allowing for measurement errors. We characterize what can be learned nonparametrically from kinks about compensated tax effects. We apply our results to Swedish data and estimate for prime age males a significant net of tax elasticity of 0.21 and a significant nonlabor income effect of about -1. The income effect is substantially larger in magnitude than it is found to be in other taxable income studies.

Keywords: Nonlinear budget sets; nonparametric estimation; heterogeneous preferences; taxable income; revealed stochastic preference (search for similar items in EconPapers)
JEL-codes: C14 C24 H31 J22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe and nep-pub
Date: 2015-05-12
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Related works:
Working Paper: Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income (2015) Downloads
Working Paper: Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income (2014) Downloads
Working Paper: Individual heterogeneity, nonlinear budget sets, and taxable income (2014) Downloads
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