Estimating Taxable Income Responses with Elasticity Heterogeneity

42 Pages Posted: 11 May 2017

See all articles by Anil Kumar

Anil Kumar

Federal Reserve Bank of Dallas - Research Department

Che-Yuan Liang

Uppsala University - Department of Economics

Date Written: March 29, 2017

Abstract

We explore the implications of heterogeneity in the elasticity of taxable income (ETI) for tax-reform based estimation methods. We theoretically show that existing methods yield elasticities that are biased and lack policy relevance. We illustrate the empirical importance of our theoretical analysis using the NBER tax panel for 1979-1990. We show that elasticity heterogeneity is the main explanation for large differences between estimates in the previous literature. Our preferred, newly suggested method yields elasticity estimates of approximately 0.7 for taxable income and 0.2 for broad income.

Keywords: elasticity of taxable income, elasticity heterogeneity, tax reforms, panel data, preference heterogeneity

JEL Classification: D11, H24, J22

Suggested Citation

Kumar, Anil and Liang, Che-Yuan, Estimating Taxable Income Responses with Elasticity Heterogeneity (March 29, 2017). Available at SSRN: https://ssrn.com/abstract=2966022 or http://dx.doi.org/10.2139/ssrn.2966022

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

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