Scandinavian Working Papers in Economics

Umeå Economic Studies,
Umeå University, Department of Economics

No 955: The quality of the estimators of the ETI

Thomas Aronsson (), Katharina Jenderny () and Gauthier Lanot ()
Additional contact information
Thomas Aronsson: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Katharina Jenderny: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden
Gauthier Lanot: Department of Economics, Umeå University, Postal: Department of Economics, Umeå University, S 901 87 Umeå, Sweden

Abstract: Measuring the elasticity of taxable income (ETI) is central for tax policy design. Yet, there are few arguments which support or infirm that current methods are leading to measurement of the ETI that can be trusted. Our first purpose in this paper is to use simulation methods to assess the bias and precision of the prevalent methods used in the literature (bunching methods and IV estimation). Thereby, we aim at (i) explaining the huge differences in empirical results, and (ii) providing arguments in favor of or against using these methods. Our second purpose is to suggest using indirect inference to improve the quality of the measurement. We show that using more of the information available in the data, estimators based on indirect inference principles produce more precise estimates of the ETI than any of the most commonly used methods.

Keywords: Elasticity of Taxable Income; Income Tax; Indirect Inference; IV estimation; Bunching; Monte Carlo simulations

JEL-codes: D60; H24; H31

57 pages, December 21, 2017

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