Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income

Uppsala Center for Fiscal Studies Working Paper 2014:1

45 Pages Posted: 23 Apr 2014

See all articles by Soren Blomquist

Soren Blomquist

Uppsala University - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Anil Kumar

Federal Reserve Bank of Dallas - Research Department

Che-Yuan Liang

Uppsala University - Department of Economics

Whitney K. Newey

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 31, 2014

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

JEL Classification: C14, C24, H31, H34, J22

Suggested Citation

Blomquist, Soren and Kumar, Anil and Liang, Che-Yuan and Newey, Whitney K., Individual Heterogeneity, Nonlinear Budget Sets, and Taxable Income (January 31, 2014). Uppsala Center for Fiscal Studies Working Paper 2014:1, Available at SSRN: https://ssrn.com/abstract=2427653 or http://dx.doi.org/10.2139/ssrn.2427653

Soren Blomquist

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden
+46 18 471 1102 (Phone)
+46 18 471 1478 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Anil Kumar

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

Che-Yuan Liang (Contact Author)

Uppsala University - Department of Economics ( email )

Box 513
SE-75120 Uppsala
Sweden

Whitney K. Newey

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

50 Memorial Drive
E52-262D
Cambridge, MA 02142
United States
617-253-6420 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
32
Abstract Views
558
PlumX Metrics