Working Paper Series, Department of Economics, Uppsala University
Estimating Taxable Income Responses with Elasticity Heterogeneity
() and Che-Yuan Liang
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; (follow links to similar papers)
JEL-Codes: D11; H24; J22; (follow links to similar papers)
42 pages, March 29, 2017
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